One-On-One: CEO Airs European View

As chairman of the Association of European Airlines during a time of industry upheaval, KLM Royal Dutch Airlines CEO Leo van Wijk is engaged in discussions that may reshape aspects of the ailing airline sector on both sides of the Atlantic. BTN editors David Jonas and David Meyer last month met with him to discuss several industrywide and KLM-specific topics.

BTN: What is AEA's current focus?

Leo van Wijk: We still are dealing with the aftereffects of Sept. 11, particularly in the security and insurance areas, where we have a lot of dealings with the European Commission. On the security issue, the U.S. is pushing very hard for a further stepping up of security measures and that will not necessarily be followed by the European governments and endorsed by the EC. I have been involved in dialogue with people at the U.S. State and Transportation departments. I have spoken with the Homeland Security advisor so President Bush can get the European perspective. We have done more than the Americans have ever done domestically, and seen how difficult it is to integrate into the overall process and make sure the overall process is not going to collapse. And the U.S. now is trying to cope with that, where they do not have the infrastructure available and the know-how developed.

If you see the processes at the airport, there still is a lot of disruption for the passengers. We have been able throughout the years to learn to cope with that, both in checking passengers and bags and adjusting the infrastructure. In particular, all the baggage that goes to North America is being screened, and we are expanding that to full checks for all baggage by year-end.

BTN: There is a big controversy in the U.S. in terms of who should provide the funding for various security initiatives. The airlines are asking Congress for help. What is the AEA viewpoint and how does it differ from that of the EC?

van Wijk: It is even more complicated in Europe. Our opinion, like that of the U.S. carriers, is that fighting off terrorism is beyond the normal domain of security. There is a public responsibility that is passed on to the airlines and airports, but you cannot keep the airlines fully responsible for picking up the tab. In that respect, Northwest Airlines CEO Richard Anderson, who now is chairman of the Air Transport Association executive committee, and myself have intense ongoing dialogue. There is absolutely no difference in our opinions that the governments do have to play a role in picking up a substantial part of the costs.

The EC is, in principle, in agreement that it is a security issue and that public security and safety could be jeopardized by terrorist acts. But the EC does not have the power to rule that governments have to pay for it. There are totally different opinions among the member states. That puts us at a non-level playing field with the United States. We will be back in a nanosecond if something happens in Iraq, because you will see policies revoked. Unless governments step in, aviation would come to a grinding halt. It is very unfortunate because the international traveler is very much helped by a level playing field, or at least a standard application of measures both in security and insurance. Now, the transparency for the customer is completely gone. Since we deal with customers, we have to explain why you pay $5 here, $2 there and maybe $7 elsewhere. It is too difficult to explain, and even if you were able, the customer would not be happy.

BTN: What is the current state of European aviation deregulation?

van Wijk: Europe is in a situation where deregulation has been implemented in a totally different way than it had been in the United States, where it was done overnight 25 years ago. Europe decided only in the late 1980s to go for liberalization step by step. It has been fully implemented, but has not matured yet in the marketplace. In the U.S., it has led to emergence of hub-and-spoke systems, the introduction of no-frills carriers, hyper-competition, consolidation, Chapter 11 situations, etc. The EC sees consolidation as an absolute requirement because the industry is too fragmented with all the flag carriers. At the same time, competition policies are opposed to that and want to increase competition. Europe seems to be at odds as to what the end game is going to be.

Secondly, mergers and acquisitions have not taken place in Europe for the mere reason that we still are operating in an international environment where the nationality clauses prevent them. Even if it is allowed in Europe, almost all carriers are operating in an international domain where the bilateral situations still prevent you from implementing it. So, we cannot rationalize the industry in the way it has been in the U.S. Europe has to come up with a consistent policy.

The third element: If we look at the U.S. situation, currently overshadowed by Sept. 11 and the economic downturn, the real question is, "Is the end result in the U.S. aviation industry a situation you want to have?" If Europe goes down that path, do we really want that, and more likely than not, end up in that situation? If you look at the U.S., it is absolutely clear that further consolidation is going to take place, even though not in full. United-US Airways and Delta-Northwest-Continental basically reduces to three major carriers. In order to eliminate overcapacity and considering competition from low-cost carriers, will they cut off spokes from their network and leave communities not being served properly? Is that what you want in Europe?

Against that background, as chairman I have started asking my colleagues, "If we look to the policy that the EC has drafted last year, which does not address this issue, should we as carriers jointly bring that to the forefront and start a dialogue with the Commission, asking how it sees the future of aviation in Europe?" We had a discussion yesterday with the presidents committee to prepare a discussion for the assembly in mid-November where this report is being presented. It is too early to draw many conclusions, but if you want to follow the path of the U.S. and see further consolidation, then you must align the competition policies. But you also must ask yourself whether the external elements not being controlled within Europe will put boundaries on the effects it can have. You may end up with a situation that is far from ideal. In the process of consolidation, you may destroy more than you gain.

BTN: At least you have easy issues to deal with! So, broadly, how is business?

van Wijk: We are doing much better on this side of the Atlantic. However, it still is not good enough. If you look at the traffic levels, Europe has recovered quite nicely and is running at a small growth compared with 2000. The North American market still is way down, more than 10 percent from the end of 2000 and no immediate signals that it will improve on short notice. You can differentiate within the U.S. and see that Continental and Northwest, for example, make losses not as big as the Big Three.

BTN: What is your expectation of when business will return to what we used to call normal?

van Wijk: Call Bush!

BTN: Looking at KLM specifically, how are you adapting to the changing needs of corporate clients?

van Wijk: It has been clear to me for a long time that Europe sooner or later will adjust itself to what we have seen in the United States. Certainly for the shorter trips, premium class traffic would be diminished by corporate travel policies. It has been tested in times of economic decline in the past, but then you always saw it coming back when the economy was up again. It was more like a short-term cost-cutting measure than a fundamental change in behavior. My expectation was, and so far it has been confirmed, that Sept. 11, the economic downturn, the bursting balloon of the Internet companies, etc., gave many companies the opportunity to structurally change their travel policies. There are very few first class tickets being sold in the United States. Those cabins are filled with mileage upgrades. That is finally going to spill over into Europe. While overall traffic and business-related traffic in Europe is back to levels of two years ago, the fare types being used have changed dramatically and have come down significantly. We did adjust immediately after Sept. 11 the number of business class seats because I was convinced that it is not going to come back.

BTN: KLM has been proactive in pushing more efficient e-commerce channels. Please explain your strategic direction as it pertains to the Internet.

van Wijk: In view of our deep alliance with Northwest, which handles all of our U.S. sales, we also benefit from experiences there. Based on those experiences, we can bring those developments early on to the European domain. It is an advantage of the alliance that may not be visible to the customer. But we have been quick to use the Internet as a communications mode to our customers and to use it for booking for individual customers. Of course, we participate in Opodo. Through Northwest, we participate in Orbitz, but we also have decided to offer Internet-type products to corporate customers. In particular, with Philips Electronics, we have gone through a test project that has been very successful and now allows them to use the Internet for direct dealings with us. After the test phase, they decided that this is how they want to do business and they do not need the services of a travel agent, in that respect, as much as in the past.

I am not saying we can do exactly the same things as a travel agent, but apparently, for a number of major customers in the U.S. and here now in Europe—global companies—you can't shield the developments they see. It is Philips' travel policy, and the manager of their travel, that said, "This is what we want. Airline, can you deliver it?" It is not us pushing it so much, but of course we are aware of what has happened. It is up to the corporation to decide whether they want an intermediary, whether the added value is really what they want and at what cost.

Major corporations will be looking into saving cost and if it is the travel agent, how to remunerate. It cannot all come out of the commission structure anymore. That change was already underway, but it is being reevaluated because of the new products that airlines put into the market and the way they serve corporate accounts.

BTN: In the United States, American Airlines through its EveryFare program is attempting to shift GDS costs to the agencies. How do distribution costs factor into the value equation?

van Wijk: Historically, the travel agent acted on behalf of the airline, stimulating traffic and doing the distribution activities. That is where the GDSs came in. But now, the question is, "Who is going to pay for it, what is the added value and for whom? Is it added value for the airlines?" With the Internet, you can ask whether that is true, or is it more important for travel agents to make their business more efficient? Also, if they increase CRS charges to the extent that they are no longer marginal, but a significant part of your distribution costs, everybody has to look closely at the role of intermediaries. If the CRSs make enormous amounts of money, where the whole value chain does not produce much money, you have to scrutinize.

BTN: At least they should share the pain.

van Wijk: They should; some are willing. You cannot avoid the fundamental question: "What is the added value and do we really need it?" That creates tensions in the historic relations and it certainly is not a situation in all cases where we don't need travel agents. We have been realistic in assuming that it cannot stay as it has been and we need to jointly find solutions without anyone saying, "Historically, my position is this, so I am entitled to this." In any evolutionary process, that is not going to be helpful.

BTN: Regarding alliances, there is the KLM-Northwest partnership, then there is the proposed Continental-Delta-Northwest trilateral. KLM in the past has been in talks with British Airways and more recently with Air France regarding possible SkyTeam inclusion. Can you sort all that out for us?

van Wijk: Not at the moment! It is more likely than not that you will have a smaller number of alliances that have full coverage than a larger number. With the current picture, it is quite clear that it is set at a maximum of three major global alliances. There is no place for a number four. For the "Wings" alliance, the likelihood that we can create a number four is slim. But you cannot rule it out. Is Star Alliance stable? With United in shambles, it could be a problem. Is Oneworld really going to take off? Will immunity come in the end or not? But it looks like there really will be three in the end. Continental, Delta and Northwest getting together seems to predict that a teaming up of Wings with SkyTeam is more likely than not. But I cannot tell you exactly what will happen because options still are open.