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News > International
KLM plans low-cost carrier
September 22, 1999: 10:07 a.m. ET

Dutch airline remolds U.K. unit to meet growing low-cost competition
By Staff Writer Mark Odell
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LONDON (CNNfn) - KLM Royal Dutch Airlines disclosed plans Wednesday to launch its own London-based, low-cost airline in what analysts said is a defensive move to protect its U.K. operations from low-fare rivals.
     KLM plans to spin off a fleet of eight aircraft from its British unit to create a so-called "no-frills" airline, called buzz, operating from London's Stansted airport.
     The airport is the base of KLM UK and has increasingly become the focus of the main carriers in the low-cost boom, which is starting to spread to Europe from the U.K.
     "This is more of a defensive move," Jonathan Wober, airline analyst at Deutsche Bank in London, told CNNfn.com.
     Competitive pressures started to mount on KLM UK when Europe's largest low-fare carrier, Ryanair, began operating out of Stansted four years ago.
    
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buzz will start operations in early 2000

     Last year, British Airways decided to tap into the fast- growing low-fare segment of the market by launching its own "no-frills" carrier based at Stansted, called Go.
     The other major low-cost carrier, easyJet, also is set to launch operations from Stansted, although the majority of its flights use Luton airport.
     Floris van Pallandt, chief executive of KLM UK, denied the creation of buzz is a knee-jerk reaction to protect the carrier's market, insisting that the airline is merely reacting to the changing demands of passengers.
     "I don't think this is a defensive move. Any product needs to be geared to the needs of the consumer," van Pallandt told CNNfn.com.
     But analysts noted that Go, in particular, is starting to attract a significant amount of the more profitable business traffic on its flights. On average, low-cost airlines carry around 30 percent business traffic.
     Van Pallandt admitted that buzz will be aimed more at the business market. The five routes KLM UK will transfer to buzz currently carry around 60 percent business traffic. "We hope to keep it around those levels," he said.
     KLM's new unit also will add two destinations from Stansted and initially will serve seven European destinations, including Frankfurt, Milan and Paris.
     Operations are due to start next January or February and will be funded internally by KLM UK, including 7.5 million pounds ($12 million) seed money.
     Van Pallandt predicted the operation will be profitable in its second year.
     He wouldn't disclose further expansion plans, saying only that the eight aircraft will suffice to carry its target of more than one million passengers in its first year.
     The low-fare segment in Europe is forecast to grow rapidly in the next few years. Estimates vary, but Salomon Smith Barney forecasts the market will double in terms of passenger numbers to around 20 million by 2002.
     KLM is only the second major carrier in Europe, after British Airways, to take the plunge and embrace the low-cost concept.
     "The low-cost carriers are obviously having an impact on the major airlines in terms of pricing," Deutsche Bank's Wober said.
     Low-fare start-ups tend to expand any market they enter rather than take share from incumbents, according to airline analysts. But the lower prices can have a damaging effect on the larger, higher-cost carriers. Any attempt to match the cut-price fares will quickly eat up any profits the major airlines might generate on a route.
     KLM aims to refocus the core KLM UK business on feeding business passengers into its Amsterdam hub, connecting with the Wings airline alliance that it heads with Northwest Airlines (NWAC) and Alitalia.
     KLM shares were almost 1 percent lower in Amsterdam. Back to top

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.