Sir Kamran Maqbool
Question: 1: Why do you think KLM won the Gartner 2004 CRM Excellence Award? Introduction
KLM Royal Dutch Airlines is an international airline operating worldwide with home base Amsterdam Airport Schiphol, The Netherlands, as most incumbents of the European airline industry, had been facing declining yields (i.e. the revenue per seat) and increasing competitive pressures during the last years. Some of the main reasons behind this were
Increase competition due to the deregulation in the airline industry: KLM, as most incumbents of the European airline industry, was facing declining revenue per seat and increasing competitive pressure during the last several years because of deregulation in the European airline industry and unfavorable economic conditions. In December 1992 the European Union passed legislation to deregulate the airline industry. The directive that was issued implied that any European carrier could fly from any destination to any destination and demand landing slots. Opening up Europe’s skies brought about newly energized competition in the European airline industry, not least due to the entrance into the market of low cost carriers such as Ryan air and easy Jet. The latter airlines put enormous pressure on the profit margins of the traditional airlines, making them engage in major cost cutting programs.
Unfavorable economic conditions: Unfavorable economic conditions, triggered by external events such as the terrorist attacks of 11 September 2001, the SARS epidemic in Asia during 2003, and the start of the war in Iraq in 2003, exerted further pressure on the airline industry.
Decreasing trend in passengers: Decreasing passenger numbers led to excess capacity in terms of fleet and personnel. Airlines badly felt the impact of their high fixed costs. Whether a plane was parked on the ground or flying with a cabin full of paying passengers, lease or loan payments had to be paid. Declining passenger numbers directly impacted bottom line profitability. Moreover, since the terrorist attacks of 11 September 2001, all aspects of aviation security were tightened. New security regulations forced airlines to invest further in both in-flight and on-the-ground security measures. All of these factors weighed heavily on the airline’s costs
RESPONSE OF KLM TO ABOVE CHALLENGES
In response, KLM in 2003/2004 set out to reduce its internal cost base structurally by €650 million by April 2005. This cost cutting exercise would enable KLM “to provide a better product at lower cost and so make up for the declining operation margins in the aviation industry.” For KLM this cost control program was the most comprehensive ever. It was to be implemented through a combination of process change, productivity gains, and product improvements. This need for cost cutting, however, did not imply that KLM chose to become a low cost/price carrier. In fact, quite the opposite was true. It knew that cost reduction alone would not guarantee profitability. As it stated in its 2003/2004 Annual Report [KLM, 2004], KLM’s strategic orientation would be geared towards differentiating itself from its competition by forging “a more direct relationship with its customers.”
KLM decided to focus strategically on customer relationship management (CRM) as a way to differentiate the airline. The decision to invest was based on the following market factors: Increased Buyer Power: Today’s customers are increasingly knowledgeable about travel products, and have the tools to evaluate the market more easily. Deregulation and growing competition: Opening European skies to any airline based in the EU have already brought a new wave of low cost competitors. Extending deregulation could result in more direct...