KLM Royal Dutch Airlines has reacted to British Airways' high-profile attempt to slash its operating costs by calling for a wholesale structural change in the airline or face downsizing.

KLM president Pieter Bouw has reversed his policy of avoiding headline targets by announcing plans to improve its operating performance by DFl1.5 billion (US$880 million) over three years. Two-thirds would come from cost savings and the balance from revenue enhancements.

'The impact of economies of scale is getting less and less and we have to restructure,' Bouw tells Airline Business. 'We have set a landmark figure and we are aiming for a new KLM which is a lot less complex. The organisation will be more and more result driven and we have to accelerate the process started in 1991.'

Bouw highlighted the need to cut employee costs and refocus on outsourcing when announcing the project, dubbed Focus 2000. This followed a 45 per cent drop in operating profits to DFl333 million in the second quarter to 30 September. Second quarter costs climbed by 15 per cent - including a 27 per cent rise in fuel - while unit costs rose by 9.6 per cent.

The plan calls for a freeze on European capacity, though Bouw does not rule out a growth through affiliates, a process which the unions have opposed. KLM pilots agreed earlier this year to allow codeshares to account for 25 per cent of KLM operations in Europe and North Africa. KLM is close to these limits in 1996, but the agreement is reviewed annually. 'We have to be realistic,' says Bouw. 'There will be heavy discussions but it is a matter of survival. The alternative is that we may have to shrink.'

Benno Baksteen, president of the VNV pilots union, argues there is little room to trim operational costs after existing cuts of 21 per cent over the last three years. 'There are no hidden reserves [as] KLM is already close to industry benchmarks.'

Baksteen believes the change of tack may be aimed at placing pressure on employees but hopes it may also signal a cultural shift in management style. 'The target is not a solid figure; the real purpose is to change the company around,' he says. One possibility would be to consolidate KLM's cargo operations into Martinair, whose costs are 10 per cent lower.

BA has been criticised for linking its restructuring programme to the unrealistic demands of the financial community and Bouw defends KLM's target of a return on equity of 14 per cent. 'BA gave a clear indication of the competitive dynamics we face,' he argues.

Focus 2000 involves a consultation period running until January and, aside from the focus on reducing labour costs, includes a project called Mercurious aimed at strengthening KLM and its partners' purchasing power. 'This covers everything from aircraft to paper clips,' says a source close to the project.

Bouw refuses to be drawn on the progress of alliance talks though he has identified the need for a European partner. 'We are ready and as far as we are concerned [we'd like it to happen] as soon as possible, within the next two years.'

KLM has been widely linked with Iberia, but one airline source does not discount the renewed talks with Swissair, following Delta's link with Air France (see p14). Iberia's network may be complimentary to KLM's, but cultural differences could still see KLM join with Swissair instead.

Doug Cameron

Source: Airline Business