KLM has made impressive leaps in efficiency since it launched its cost control programme in 1991. But with the sizeable efficiency boost in the last financial year driven more by expansion than by productivity measures, the carrier is now facing a future of diminishing gains.

The carrier is keen to put the efficiency increases of the financial year ending 31 March 1995 within the context of the cumulative gains of its Competitive Cost Levels Program, launched four years ago. This is not surprising. Since 1991, labour productivity has leapt a massive 57 per cent, unit costs have dropped 20 per cent and fleet utilisation is up 11 per cent.

Gains over the last year made a significant contribution to this figure with labour productivity rising 11 per cent and unit costs falling 6 per cent to DFl 0.70 ($0.48) from DFl 0.75 per ATK. But Hans Bruggink, KLM's executive vice president and corporate controller, admits most of these benefits arose from expansion. While capacity rose 8 per cent against a 10.5 per cent growth in traffic in 1994/5, staff levels went up by just 0.5 per cent.

But he stresses efficiency improvements over the last year also came from 'the continuous programme of outsourcing non-core activities, a major reorganisation of cargo and the maturing of the three wave system at Schiphol.'

Outsourcing at KLM takes a number of forms, from the establishment of separate profit centres - the catering unit was set up as a 100 per cent-owned subsidiary at the end of 1993; to the disposal of non-core assets - the carrier sold its stake in the Golden Tulip hotel chain last year.

KLM cargo, meanwhile, was reorganised into different business units, with specialised teams focusing on specific freight requirements. 'This improves both quality and productivity,' claims Bruggink. The carrier has also outsourced over half of its cargo handling units around the globe, contributing to the reduction in unit costs. KLM has gone into partnership with third parties internationally to enable the handling units 'to handle the market and not just KLM.' The carrier has found partners for 50 units and is looking to do the same with the remaining 40 around the world.

The carrier is also keeping up pressure on unit costs by renegotiating service contracts 'worth billions of guilders a year. 'If we can get 5 per cent off each contract that makes a big difference,' Bruggink stresses. But he highlights the barriers the carrier faces at those European airports monopolised by state-run companies. 'We are focusing on airport handling costs in Europe but we can only negotiate lower prices where the services have been privatised.' He believes there is room for unit costs to fall another 10 per cent over the next three years.

The introduction of the three-wave system at KLM's Schiphol hub is still working its way through the carrier in efficiency terms, says Bruggink. The main aim of the rescheduling is to flatten out the productivity peaks and ensure labour is fully utilised over the day. But the carrier made no improvements in fleet utilisation last year due to the phasing out of the Airbus A310s, the replacement of four DC-10s with five MD-11s and unscheduled heavy maintenance on the carrier's F100 fleet.

However, Bruggink says utilisation will improve when the carrier finishes introducing the fourth wave at Schiphol, which is 50 per cent complete already. This extra wave will boost the use of the Boeing 737s and Bruggink calculates that, with the replacement of A310s by the longer range B767-300ERs and the addition of a planned fifth wave, total utilisation will increase by some 10 per cent over the next three years.

But Bruggink sees no more savings coming on the marketing side. He believes load factors, which averaged 73 per cent last year, have reached their upper limit and says yield will continue to decline. He suggests the way forward on European flights under one hour is a two-class configuration with a no-frills tourist class. 'We have to fine-tune the product to the market segment that is growing.'

So far KLM has 'done the easy things,' says Bruggink, although he is quick to underline that nothing is 'easy' when it comes to cost-cutting. He says further efficiency gains can only come from changing the actual work processes, particularly in cargo and maintenance. Bruggink believes he can still get another 8 to 9 per cent increase in productivity by March next year, but 'in future this will taper off gradually.' Unit costs in the first quarter to June 1995 are already DFl 0.07 below the same quarter the year before, at DFl 0.66 per ATK.

One of the most significant measures of KLM's achievement is that staffing levels have only been cut by 7 per cent since the carrier started attacking costs in 1991.

Source: Airline Business