KLM Royal Dutch Airlines Reports Operating Income Of NLG 209 Million for the Fiscal Year Ended March 31, 2000 Better Than Expected Fourth Quarter Performance AMSTELVEEN, Netherlands, May 17 /PRNewswire-AsiaNet/ -- KLM today reports an Operating Income of NLG 209 million for the Fiscal Year ending March 31, 2000, compared to NLG 425 million last year. Operating results were adversely affected by near record level fuel prices resulting in a NLG 261 million or 22 percent increase in fuel expense, and excess industry capacity which produced a profusion of low fares in the market, particularly in the first half of the year. The net positive effect of currency exchange rates on Operating Income was NLG 95 million. Fourth Quarter Operating Income saw a NLG 55 million year-on-year improvement, despite fuel expenses which were an unprecedented 67 percent, or NLG 173 million, higher than in the comparable quarter last year, partly due to an increase in fuel consumption of NLG 22 million (absent a price related increase in fuel expense of NLG 151 million, the improvement in operating income would have been NLG 206 million). The improvement in operating income was the result of a load factor increase of nearly 2 percentage points and a 7 percent improvement in yield, a 14 percent improvement in passenger revenues and a 21 percent improvement in cargo revenues. Yield, before exchange rates effects, for the first time in 7 quarters showed a year-on-year increase again, of 1 percent. On the expense side, the first results of our focus on manageable costs were realised, evidenced by a 2 percent decrease in operating expenses and a 3 percent decrease in unit costs (excluding fuel price and exchange rate effects). Our unequivocal commitment to reduce unit costs further is evidenced by Operation Baseline. Net Income for the Fiscal Year amounts to NLG 743 million or NLG 15.79 per common share. This compares to a net income of NLG 456 million or NLG 8.85 (1) per share for the Fiscal Year ended March 31, 1999. A one-time provision of NLG 250 million (NLG 163 million net of tax) was taken for restructuring charges related to Operation Baseline. The fiscal years ending March 31, 2000 and 1999 included non-recurring net gains of NLG 1,023 million (2), and NLG 261 million (3), respectively. Part of last years' and substantially all of this years non-recurring net gains have been applied towards a NLG 1,015 million or NLG 15.65 per share capital redemption and 3 for 4 reverse split and share reduction program, which was completed in October of 1999. Net Income before extraordinary items was NLG 8 million, or NLG 0.09 per share. Against this background the Board of Managing Directors and the Supervisory Board of KLM Royal Dutch Airlines will, in line with our dividend policy, propose to the Annual General Meeting of Shareholders not to declare a dividend for this Fiscal Year. Financial Performance Operating revenues saw an increase of NLG 549 million or 4 percent for the year. Although the Fiscal Year saw an extremely difficult start, with year-on-year yields showing substantial declines, the extent of the decline has progressively decreased each quarter. Improved demand allowed the company to increase cargo tariffs and to raise passenger fares, driven in part by the need to seek to balance near record level fuel prices, in part in response to strengthening demand. Consequently, a NLG 351 million revenue gain resulting from strong traffic growth, most notable in the second half of the Fiscal Year, more than offset a yield-related revenue dilution of NLG 259 million experienced during the first half of the year. The greatest year-on-year revenue improvement occurred on the Asia Pacific routes, where revenue was up 18 percent on a 6 percent increase in capacity. After a challenging first three-quarters of the fiscal year -- experiencing significant over-capacity -- North Atlantic routes are now beginning to show a recovery in revenue performance as over capacity is shrinking. Fourth quarter North Atlantic revenues rose by 8 percent. Operating expenses rose by 6 percent. Near record fuel prices increased the cost of fuel by NLG 261 million, or 22 percent. Currency exchange rates had a negative impact of NLG 329 million on total operating expenses. Excluding unfavourable fuel price and exchange rate effects, operating expenses increased by 2 percent for the year, in line with a capacity increase of 2 percent. Taken into account in this years operating expenses is a NLG 100 million reduction in the company's contribution to the Pilots' Pension Fund. Discussions regarding a structural, longer term agreement are in progress. In the fourth quarter the first results of our focus on manageable costs were achieved, evidenced by a 2 percent decrease in operating expenses (excluding fuel and currency effects). Financial Items and Tax Financial Income and Expense showed an increase of NLG 66 million due to higher interest rates. Result of Holdings was the same as last year, however with significant differences on individual holding level. Both Kenya Airways and Braathens showed higher-than- previous year net results. Result on the sale of assets and holdings was lower than last year. This year, KLM and several of its group companies sold a second tranche of their holding in Equant, which yielded a book profit of NLG 125 million. The tax charge is negatively affected by NLG 34 million, caused by prior-year and several other adjustments. Operational Performance Operational performance saw a marked improvement versus last year. We succeeded in improving on-time performance by several percentage points. The new state-of-the-art Operations Control Center, a new team-based organisation at the Schiphol hub, and a revised approach to scheduling played an essential role in this development. Furthermore, we posted significantly improved results in luggage handling and in consumer satisfaction. Capital Redemption and Share Reduction Program After the above mentioned NLG 1 billion capital redemption and share reduction program, the number of shares outstanding has been reduced by 50 percent in just over two years. This, together with other initiatives, has led to a decrease in cost of capital of several percentage points over the past three years. Alliances KLM continued to build upon its successful alliances with Northwest, Kenya Airways, Braathens and several other carriers. To date, the KLM-Northwest alliance is the most advanced in the industry. We have been more successful than any other airline in obtaining regulatory approvals for our alliances. Much time and effort was invested in shaping our alliance with Alitalia. It is with regret that, on April 28, 2000, KLM had to decide to end this alliance in view of the risks associated with continued uncertainty regarding the long term growth potential of Malpensa, and the timing of the privatisation of Alitalia. Our experience with Alitalia has strengthened us in our belief that the rationalisation which is needed in the airline industry can only be achieved through true mergers. On December 30, 1999 KLM paid EUR 100 million to Alitalia to compensate Alitalia for costs incurred in launching the Malpensa hub. According to contract, upon termination, this amount has to be transferred back to KLM. Consequently, EUR 100 million is reported under accounts receivable. KLM has a strong reputation in Engineering and Maintenance. To be able to grow and capitalise on our success in this area, we entered into a joint venture based alliance with United Technologies Corporations' units Pratt & Whitney (engines) and Hamilton Sundstrand (components). On May 4, 2000, a Memorandum of Understanding was signed regarding the establishment of a new entity wherein all of KLM's current engineering and maintenance business will be incorporated. Both UTC and KLM will participate in this entity, which has significant growth potential, and which has the objective to secure a leading position in nose-to-tail airframe, component and engine maintenance services. Strategy Implementation Despite the fact that the Fiscal Year has seen significant challenges, we have not wavered in implementing our strategy, aimed at delivering value by continuously improving operational and financial performance. As we continued our commitment to invest in our product, we completed a NLG 60 million World Business Class product upgrade. As a result, passenger appreciation has increased significantly. We entered the low-cost market by launching a new brand, "buzz", based in the UK. With a growth-rate of 25 percent per annum, the low-cost market is the fastest growing market segment in Europe. This new venture also demonstrates our commitment to continue to explore new market opportunities, and to add to our revenue streams through the Internet. The Internet has become a focal point in our distribution strategy. On May 11, 2000 we joined forces with other major airlines to create the first European multi-airline, on-line travel portal, which is expected to significantly reduce distribution costs. Our effort to deliver sustainable responsible performance has been awarded by an ISO 14001-certificate, the first such certification awarded to an airline ever. We have completed an environmental risk assessment globally, and will expand our care for the environment to all the countries in which we operate. After a prolonged period of uncertainty, the future expansion of Schiphol Airport is now secured by a new body of environmental and safety standards agreed upon by the Dutch Government in December of 1999. One of the pre-conditions for realising the growth potential created by the upturn in world economic activity however, is the alignment of European Air Traffic Control systems. Baseline Ninety percent of all Baseline proposals, representing more than 95 percent of the cost reduction target, have been agreed to by the Works Council and are now being implemented. Nearly 2600 jobs will be eliminated. In line with our reduced capacity growth, two 747 aircraft will be sold, which is expected to result in a bookprofit. Management and Works Council have an open and constructive dialogue, evidenced by additional cost efficiency proposals submitted by the Works Council to the Board of Managing Directors. Outlook Even though the competitive environment is improving as the industry is showing more restraint in capacity growth, we do expect industry conditions to remain challenging for some time. Fuel prices still give cause for concern. Our fuel requirements for the current Fiscal Year are hedged at a level of approximately 40 percent. We expect the impact of the fuel price to be most pronounced during the first half of the Fiscal Year 2000/2001. However, when taking into account the current market trends coupled with the Baseline cost reductions, we are confident that the beginning of the structural improvement in group operating income first seen in the fourth quarter of the fiscal year under review is the foundation for an improvement in Operating Income for the Fiscal year ending March 31, 2001. Amstelveen, May 17, 2000 The Board of Managing Directors (1) Adjusted for the effects of the reverse share split and the distribution of stock dividend (2) NLG 898 million extraordinary gain on the sale of Galileo, and a NLG 125 million result of the sale of part of the company's holding in Equant (second tranche) (3) Result of the sale of Holdings in Frans Maas and Unijet and a first tranche of our holding in Equant SOURCE KLM Royal Dutch Airlines NOTE TO EDITORS: Financial and Statistical Data can be found at http://investorrelations.klm.com/ CONTACT: KLM Investor Relations, +31-20-649-3099, or KLM Media Relations, +31-20-649-4545/ Web site: http://investorrelations.klm.com/