KLM reported an operating loss of EUR 76 million for the third quarter ending December 31, 2001, compared to…
KLM reported an operating loss of EUR 76 million for the third quarter ending December 31, 2001, compared to an operating profit of EUR 46 million last year. The net loss for the quarter amounts to EUR 94 million (EUR 2.02 per common share), a yearon- year deterioration of EUR 98 million.
Operating Result for the nine-month period ending December 31, 2001 was a EUR 30 million profit (previous year EUR 347 million). The net loss for this period amounts to EUR 48 million or EUR 1.06 per common share (previous year a net profit of EUR 165 million or EUR 3.49 per common share).
KLM was able to adapt swiftly and adequately to substantial changes in its operating environment. Despite this challenging environment, KLM employees remained focused on ensuring that passengers enjoy their flight with a reliable and efficient airline. It is a credit to the organization`s resilience and flexibility that it was able to respond to the decline in demand for especially passenger travel after the September 11 events. Through a variety of actions the negative impact on the bottom line was less than initially foreseen and we were able to
achieve a positive free cash flow said Leo van Wijk, President and Chief Executive Officer of KLM.
MANAGING THE AVIATION CRISIS
The actions that have been taken, which are on top of a cost reduction program already in hand, include a combination of short and long term measures. These have had a significant effect on the results for this quarter.
In order to balance supply and demand, overall capacity (ATKs) was cut by on average 6 percent during the third quarter. KLM Company reduced passenger capacity (ASKs), by 11 percent (9 percent for KLM Group), while cargo capacity was maintained at the same level as last year. Overall capacity was reduced by cutting frequencies or by operating smaller aircraft, enabling KLM to maintain its global network and preserve its flexibility.
As part of KLM`s ongoing strategy to optimize its network and take advantage of opportunities, frequencies and capacity were increased on some high-yielding routes.
As cargo demand remained firmer than passenger demand, KLM was able to use to its advantage the flexibility that its fleet of combi-aircraft provides.
In order to restore confidence in flying and stimulate traffic, KLM successfully launched several fare promotions. A variety of actions, including effective revenue management and increased sales and marketing efforts, resulted in an increase of manageable passenger yield (excluding currency effects) of 2 percent. This was achieved despite fare discounting and the widespread decrease in demand for business class travel.
Notwithstanding the fact that a high proportion of KLM`s cost base is fixed in the short term, the organization was able to reduce its operating expenses by 9 percent through focused cost management. KLM and the unions also agreed upon postponement of the 2 percent wage increase scheduled for December 1, 2001 till April 1, 2002.
During the third quarter the number of full time equivalent staff was reduced by approximately 1,200 through the combination of recruitment freeze, the termination of temporary contracts, a substantial reduction in the number of agency staff and natural attrition. Furthermore, during this quarter an equivalent of around 1,100 FTE (affecting approximately half of the KLM workforce in the Netherlands) joined a collective reduction of working time over a period of eight weeks.
Also for the longer term, KLM and the unions have agreed a number of structural measures to increase company-wide productivity and further improve organizational flexibility.
FINANCIAL PERFORMANCE
Group Operating revenues were EUR 277 million or 16 percent lower than in the third quarter last year, reflecting the sharp fall in demand particularly for passenger operations. Group traffic revenues were down by EUR 222 million (14 percent) year on year, with other revenues down EUR 55 million.
Traffic revenues of other consolidated companies decreased by only 7 percent, as KLM benefited from the accelerated growth in the low-cost segment through its brands buzz and Basiq Air.
KLM Company passenger traffic decreased by 15 percent on a capacity reduction of on average 11 percent, resulting in a drop in load factor of only 3.9 percentage points to 73.3 percent. The fall in both passenger traffic and capacity was most pronounced on the North Atlantic route area where traffic decreased by 31 percent and capacity by 28 percent. Traffic to and from Asia Pacific and Middle East / South Asia also declined substantially. Traffic on the route area Europe was less affected, while the route areas Africa and Central and South Atlantic remained strong throughout the quarter.
Passenger yield declined by only 1 percent (manageable yield increased by 2 percent). During the course of the quarter, both traffic -economy as well as business class- and yield developed positively. Whereas cargo industry traffic decreased by approximately 10 percent, KLM Company cargo traffic was down by only 3 percent in the third quarter. Capacity levels were unchanged from last year. As a result, load factor fell by 1.5 percentage points to 72.5 percent. Cargo yield decreased by 9 percent (6 percent excluding currency effects). The 6 percent fall in manageable
yield was mainly due to a shift in type of shipments and lower traffic levels on high yielding Asia Pacific routes.
KLM Company unit revenues were 9 percent below prior year levels (6 percent excluding currency effects), mainly reflecting the fall in load factors.
Group Operating expenses including fuel costs decreased by EUR 155 million (9 percent) year on year. Fuel costs declined by EUR 74 million (25 percent) as a result of lower volumes as well as a decrease in jet fuel prices.
Manageable costs were reduced by EUR 73 million (6 percent). The cost of handling and work by third parties, and commercial costs decreased by 24 percent and 26 percent respectively. These decreases were in part due to lower traffic volumes. Other operating expenses were lowered by the EUR 27 million received from the Dutch Ministry of Transport as compensation for the damages incurred following the closure of U.S. airspace between
September 11 and September 14, 2001.
KLM Company unit costs decreased by 3 percent. Since this decrease was smaller than the overall capacity reduction of 6 percent, manageable company unit cost, including fuel and currency, showed an increase of 2 percent.
Net Financial Expenses showed a year-on-year decrease in the third quarter of EUR 7 million as a result of lower interest rates as well as the implementation of new accounting policies regarding derivatives (SFAS 133) as from April 1, 2001.
Results of holdings showed a loss of EUR 10 million for the third quarter, which is mainly due to KLM`s 50 percent holding in Martinair.
The negative Result on Sale of Holdings of EUR 13 million mainly relates to the sale of KLM`s stake of 30 percent in Braathens.
FINANCIAL POSITION
Despite the net loss of EUR 94 million, KLM reported a positive cash flow from operating activities of EUR 123 million (last year EUR 161 million) mainly due to active management of working capital. Scheduled repayments of long term loans exceeded financing proceeds of new fleet in this quarter. This new aircraft financing was completed at attractive pre-September 11 terms and conditions. Also the sale of our stake in Braathens was completed, which resulted in a positive contribution to the company`s cash position. As a result, KLM`s cash position in this quarter increased by EUR 38 million to EUR 1,472 million. EUR 1,128 million of this amount is included under cash and marketable securities, whereas EUR 344 million of AAA bonds and long term deposits is included under Financial Fixed Assets.
Net debt as a percentage of equity, amounted to 92 percent on December 31, 2001, which was virtually the same as the end of the previous quarter. Equity decreased while KLM`s net debt position improved mainly as a result of a higher liquidity position.
We are pleased to be able to report a cash position which is significantly better than we had anticipated. It is the result of measures taken to respond to the fall in demand as well as several actions taken to strengthen our financial position. KLM is competitively positioned, operationally as well as financially, to successfully withstand the current downturn in the aviation industry said Rob Ruijter, Chief Financial Officer of KLM.
OPERATIONAL PERFORMANCE
Operational integrity continued to show a marked improvement by comparison to the corresponding quarter last year. The arrival punctuality of KLM flights at its hub Schiphol improved by 4 percent, ranking KLM as the number one hub-and-spoke carrier in Europe in terms of on-time performance. Departure punctuality also improved by approximately 4 percent, despite bad weather conditions in December as well as the delays caused by tightened security measures after September 11.
PRODUCT DEVELOPMENT
In response to the decline in demand for business class travel, particularly in Europe, KLM will reduce the capacity of business class seats by increasing the number of economy class seats.
Improvement of the World Business Class product will continue. On intercontinental flights the pitch and recline for seats in the World Business Class of the B767 will be enlarged. Improvements were already introduced for the World Business Class of the MD11 and B747 approximately a year ago. These reconfigurations will be completed by this summer.
OUTLOOK
An improvement in trading conditions was noticeable in the latter part of the third quarter. This continued in January. We will, however, be prudent in adding back capacity. The traditionally loss making fourth quarter will show a deterioration in operating loss but the decline will be less pronounced than that experienced in the previous quarter.
Theodore is the Co-Founder and Managing Editor of TravelDailyNews Media Network; his responsibilities include business development and planning for TravelDailyNews long-term opportunities.
