Milica Milo eviVladica Mitri

or e PopoviMiroslav TominZoran PeroviPetar Ili

IIM Euro Business SchoolUniversity of Novi SadTrg Dositeja Obradovi a 621000 Novi SadSerbia & Montenegro

May 2004

October 7th 1919 - Foundation of KLM May 17th 1920 - London-Amsterdam - First KLM flight.December 1934 - Amsterdam-Batavia - First transatlantic KLM flight1989 Acquisition of 20% shares in Northwest AirlinesNovember 1993 more than a million passengers per year

January 6th 1926 Founded bymerger of two companiesScheduled flights on April 6th

with fleet of 162 aircraftFirst transatlantic service in 19341992/97 step by step privatization (MRO, IT cargo)1997 Star AllianceLufthansa, Air Canada, SAS, Thai Airways, United Airlines

To secure long-term competitivenessTo be the first choice passenger and cargo airline and provider of maintenance services , Enhancing the shareholder value, Dynamic and stimulating working environment, Participating in mutually beneficial partnerships

Objectives

Partnerships/alliances, No-frills business model, Cost and revenue mgmt., Increasing flexibility, Long-term safeguarding of infrastructural requirements

Strengthening the standalone positionParticipating in global alliance

Strategy

Best performance, Creating value, Setting benchmarks, Shouldering responsibility, Keeping a balance

Generating value by striving to attain excellence and by participating in the worlds most successful airline alliance

Mission/Vision

terrorist attacksSARS

terrorist attacksSARS

Threats

sector investing increase in engineering and maintenance & cargoincreasing the proportion of electronic booking

long term focusOpportunities

no R&Dpoor catering serviceunsatisfactory customer

(passenger) service

Weaknesses

comfortable connections between many even relatively small airports

innovative projectspunctualityenvironmental-friendly

Strengths

This chart is composed from 3 variables: percentage of growth, revenue in , and percentage of total revenue from different activities.

R & D

Environmentalprotection

Organizationalstructure

Activities

Globalpresence

Growthstrategy

CompetitiveAssessment

The short-term efforts will concentrate on restoring the company s earning capacity by increasing productivity and further reducing the cost base.New service concepts and cost structures that satisfy the differing priorities of business and leisure passengers must be introduced.There will have to be a fundamental redesign of the network organization s cost structure.Seeking participation in alliances to achieve economies of scale enhance market profile and so gain a better position in the value chain.

Focusing on value creating concepts to safeguard and enhance Lufthansa s appeal to the financial market.Investments, acquisitions or on-going projects are only undertaken or continued if their return is greater than the cost of the invested capital.

Pasenger services Cargo services

Engineering &maintenance

Charters and low cost/fare scheduled flights

Pasenger services

Logistics

Cargo

IT services Leisure travel

Catering

MRO

Board of Managing Directors

Personnel &Organization

CorporateInformation Office

CorporateControl

Shared Services

Facility Services

Security Services

Arbo ServicesCorporate Center

General Secretariat

Legal Services

Finance

Internal Audit

Corporate Strategy & Business Development

Government & Industry Affairs

Corporate Communications

Investor Relations

Corporate Procurement & Fleet Development

Passenger Business

CabinCrew

FlightOperations

NetworkGroundServices

Commercial

OperationsControl &

FleetServices

KLC /KLC uk

Charter /Low CostBusiness

Subsidiaries100%

KASKESKCSKFS

OthersEngineering &Maintenance

Business

CargoBusiness

Transavia

Holdings

MartinairKenya Airways

TUIOthers

Supervisory Board

Executive Board

Corporate control functionsand service funcions

LufthansaGerman Airlines

Strategic Business Segments

Service andFinancial Companies

DeutcheLufthansa AG

LufthansaCargo AG

LufthansaTeclink AG

LSG SkyChefs Group

Thomas CookAG

LufthansaSystemsGroup GmbH

Passegerbussines

Logistics MRO Catering Leisure Travel IT Services

The average age of fleet

Fuel consumption to carry one passenger over 100 km

Emission reduction (CO2, NOx, CO)

Noise emission reduction

Optimizing the transport network

Energy consumption in buildings *****

**

****

*****

** ***

*** **

AERONET coordination of European research projects on aviation issues.MOSAIC continuous measurements of climate-relevant trace gases at cruising altitude.CARIBIC civil aircraft for the regular investigation of the atmosphere.CORAXX optimizing an important model in atmospheric chemistry.Quiet Traffic project to lower

traffic-related noise emissions.DOSMAX continuous measurement of radiation at cruising altitude during increased solar activity.

NONE

R & D

Environmentalprotection

Organizationalstructure

Activities

Globalpresence

Growthstrategy

CompetitiveAssessment

A merger between KLM and Air France would change the landscape of the European aviation industry. The new air carrier would surpass the two most profitable airlines in Europe Lufthansa and British Airways, and possibly even American Airlines. Another consequence of this merger would be price wars. Air France would now be able to cut fares and this would trigger increased competition on the European market. In the long term, we believe Air France will absorb other smaller European airlines to become one of the world s biggest airlines.

DUE TO:strong regulations in the environment protectionsfuel price increaseincrease in price for the security measures

THERE WILL BE A SMALLER GROWTH IN THE AIR TRAFIC.

Travel growth will vary widely between different markets

2004Engineering & Maintenance sectors showing a small but steady increase Cargo sector is stablePassenger sector is experiencing a slight decreaseOther activities are decreasing.

2010Consolidation of airline industry by merging into a few major alliancesDecline of short-distance flights in favor of alternative, ground transportation.

Competitive positioning of Alliances

2004

Star Alliance oneworld Sky Teem Others

2010

Star Alliance oneworld Sky Teem

By 2010 we expect all other airlines to join one of the major alliances leaving only Star Alliance, One world and Sky team at the end. We expect Lufthansa to remain the leader of Star alliance,

where KLM would be completely absorbed by Air France the leader of Sky Team.

www.lufthansa.comwww.klm.comwww.iata.orgwww.airfrance.comwww.cnn.comThe EconomistThe Motley FoolYahoo FinanceMcKinsey Quarterly

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