Klm: A Flying Dutchman Faces Crosswinds

Can its new pilot steer it out of trouble?

When Germany's Lufthansa felt the raw crosswinds of deregulation this spring, it handed the controls to a Yankee who had been with the airline for less than six years.

Swissair, trying to climb out of a four-year nosedive, has named an American Airlines veteran to take over as chief executive beginning in 1998. Now, KLM Royal Dutch Airlines is breaking the pattern. After seeing its profits plummet in 1996, the embattled carrier will on Aug. 5 install as its new president Leo van Wijk, the 50-year-old chief operating officer who has worked at KLM since he graduated from college.

The company old-timer is getting off to a good start. After years of wrangling, KLM announced on July 30 that it would sell its stake in America's Northwest Airlines Inc., replacing its current operating partnership with a 10-year cooperation agreement. The deal gives KLM a profit of around $800 million on its original $400 million investment in Northwest. That would be enough to buy back all of the Dutch government's remaining 25% stake in the national carrier--and give a boost to KLM shares, which have trailed the Amsterdam stock index average so far this year.

But van Wijk isn't home free. Before deregulation, high European airfares allowed KLM to pay generous salaries and benefits while its cargo operations, efficient Schiphol Airport hub, and nimble operating partnership with Northwest kept it flying high. But now, like Europe's other airlines, KLM faces ferocious price competition. Last year, for instance, it was forced to slash its one-way Amsterdam-London ticket price to a rock-bottom $50. Van Wijk needs to cut costs and forge a link with a major European carrier to boost its market share on the Continent. And he must hurry. Lufthansa, Swissair, and British Airways have already kicked off cost-cutting plans. Says Andrew Barker, airline analyst at SBC Warburg in London: "KLM has been a bit slow in getting down to work."

PAY SLASH. The new KLM chief has pledged to slash $500 million annually in costs by the year 2000. His goal is to raise return on equity to 14% from an anemic 6% last year, when operating profits fell 57%, to $118 million. Some savings will come from freezing fleet expansion and outsourcing operations such as catering and maintenance. But van Wijk wants employees, particularly pilots, to cough up at least $200 million in pay or benefit cuts.

So far, KLM's pilots are resisting major concessions. Van Wijk wants a 20% wage cut, because he says the average $175,000 salary for a KLM 747 captain is a fifth more than that at BA or Lufthansa. The pilots have published a report disputing that claim and want instead to see layoffs at company headquarters. Any wage cuts, they add, must be offset by stock compensation and a seat on the supervisory board. "The pilots are playing tough," says Thijs Berkelder at James Capel & Co. in Amsterdam. "So van Wijk must show himself to be a tough negotiator."

HOME ALONE. Besides dealing with the pilots, van Wijk must shore up his European position. Unlike Lufthansa or British Airways, KLM has a home market, and the airline has only 7% of the European market. Van Wijk has said it needs double that to survive in the coming Continental dogfight. It recently took control of low-cost Air UK and could use it to grow both in Britain and the Continent. But "KLM needs to get more Europeans into Schiphol and transfer them to their long-haul routes," says one analyst in Amsterdam. Adds van Wijk: "We need a major European partner to do that."

Attractive European partners, however, are rare. Spain's Iberia recently signed up with BA. Swissair and Alitalia are two other recently mentioned possibilities, but the Swiss are allied with Delta Airlines Inc., a direct conflict with KLM's Northwest alliance. And Alitalia remains a weak, state-owned operation. Despite failed courtships in the past, KLM's most promising mate still may be BA. If antitrust pressures crush BA's deal with American Airlines, van Wijk may try to build a merger with the British carrier.

As a teenager, van Wijk played soccer for the youth team of the premier Dutch professional squad, Ajax. By contrast, his predecessor, Pieter Bouw, unwinds by rowing on the canals near Amsterdam. "Van Wijk is more a street fighter," says one longtime KLM observer. To deal with his fliers, van Wijk will need all the street smarts he can muster.

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