1. Cost-to-serve analysis First output of high-over top-down approach February 2009

2. 170840-36 AFKL Cargo- Steering committee 2-Commercial- 100204 v 0204-V4.ppt 2 Agenda Introduction Output of AF-KL combined Output by airline Product profitability Client profitability (optional) Next steps

3. 170840-36 AFKL Cargo- Steering committee 2-Commercial- 100204 v 0204-V4.ppt 3 Approach High-level cost analysis in a two weeks timeframe Analysis done together with Mike Zwart (KL) and Pascale van Brussels (AF) Breakdown of MA table costs to the most appropriate level Operation, Commercial (Sales & CSO) and Overhead Costs are allocated to products sub-segments Directly based on accounting information and indirectly through allocation keys Goal 1.Get a first sense of product costs to serve –to calculate absolute and relative product profitability –to derive client profitability 2.Understand the key cost drivers and question the way AF-KL sells and delivers its products Key assumptions Analysis done for each airline based on the MA table 08/09 08/09 as the base year, in line with ongoing projects (08/ 09) Same allocation method used between AF & KL Assumed that direct costs per product is comparable between KL and AF –Used to allocate direct cost to products on AF side For indirect allocation of cost the same driver is used between AF& KL Costs are calculated per RTK as well as KG, because: RTK takes into account the distance KG is more focused on Sales and Operational effort To get a view on the cost-to-serve by product a product profitability analysis has been done All analyses will be shared with Cap Gemini who will get to a more granular level of detail These analysis have been performed with data limitations and under time constraint – Shortcuts were taken but analysis give fair general direction Source: AF-KL & BCG analysis validated with Mike Zwart and Pascale van Brussels

4. 170840-36 AFKL Cargo- Steering committee 2-Commercial- 100204 v 0204-V4.ppt 4 Product profitability is based on operating revenues and total cost-to-serve Operational costs Commercial costs Trucking costs Other costs Traffic revenues Other revenues Operating revenues Cost-to-serve costs Operating margin Capacity costs Contribution margin Labour costs and external charges from hub and outstations Labour costs and external charges from sales region and product organization Costs which are related to trucking Overhead costs (IT, HR, Mgmt etc) Traffic revenues including surcharges Other revenues Capacity costs

5. 170840-36 AFKL Cargo- Steering committee 2-Commercial- 100204 v 0204-V4.ppt 5 Non-financial costs and benefits are not included in this analysis In a fixed capacity business the products bringing the maximum volume don't bring direct margin but contribute the amortization of fixed costs Giving high priority to a product ‘mechanically’ lowers quality of service for others… Dimension product has the lowest priority … and results in additional costs relating to non-performance… Mainly resulting from off-loading and informing the client … and to indirect operational constraints Giving flexibility to clients results in more difficult planning and need to over book The breadth of the offering also creates complexity costs and inefficiencies e.g. a booking takes longer when the CSO has to choose between 90 non prioritized products than if the offering was simple Source: Interviews, BCG analysis These non-financial costs and benefits should be taken into account in decision making

6. 170840-36 AFKL Cargo- Steering committee 2-Commercial- 100204 v 0204-V4.ppt 6 For each cost bucket an allocation method is used Cost bucket Direct product related costs In operations In commercial Operational labor costs Documentation Warehouse handling Ramp handling Operational external charges Third party handling Other Commercial costs CSO Sales Force Trucking costs Capacity costs per flight type Overhead costs Allocation method to sub-segment Directly allocated to the relevant product sub-segment Split between overlapping product sub-segments is based on FTE distribution and/or transported weight –Direct costs of AF are based on KL ratios Cost split between 3 activities based on FTE distribution 1 Only allocated to relevant products based on shipments Only allocated to relevant products based on actual weight –KL FTE split used for AF Costs split based on detailed accounting information Operational labor costs distribution Actual weight distribution Cost split based on FTEs corrected for salary differences Number of bookings Number of shipments covered by contracts Total trucked weight (trucked RTK are not registered) –Trucking cost of AF are based on KL ratios Total RTKs per flight type –Capacity cost of AF are based on KL ratios and AF estimation Based on operating revenue or actual weight Direct product costs Indirect product costs 1. Cost split for AF based on KL ratios Source: AF-KL & BCG analysis validated with Mike Zwart and Pascale van Brussels These analysis have been performed with data limitations and under time constraint – Shortcuts were taken but analysis give fair general direction

7. 170840-36 AFKL Cargo- Steering committee 2-Commercial- 100204 v 0204-V4.ppt 7 Agenda Introduction Output of AF-KL combined Output by airline Product profitability Client profitability (optional) Next steps

8. 170840-36 AFKL Cargo- Steering committee 2-Commercial- 100204 v 0204-V4.ppt 8 Key learnings and implications from product cost analysis Key learnings Overall, value add products are more profitable than Dimension Because of higher yield, similar or lower capacity costs and only slightly higher variable costs Same logic applies for industries are apparently some are more profitable than others Primary cause for Dimension loss making is the use of more expensive full freighters with no premium However need to acknowledge that Dimension is by far the main contributor to the airline as a whole Implications Need to base the targeting and pricing strategy on an analysis of the cost to serve By product and by industry Need to derive from the cost analysis the implications on the delivery model In particular: Are we able to value the main deck capacity and/or to operate general cargo with a lower cost to serve ? Resource allocation must be decided based on possible impact (rather than historically) Used different metrics for different management decisions Margin by product/industry: e.g. delivery model (re)-design Contribution to the airline as a whole (excluding FF capacity costs): e.g. belly network definition Contribution to the cargo business (including FF capacity costs): e.g. resource allocation

9. 170840-36 AFKL Cargo- Steering committee 2-Commercial- 100204 v 0204-V4.ppt 9 Operating margin per product is highly contrasted… Dimension appears to be making losses 25 M € -22 M € Operating margin fiscal year 08/09 1 (€/ 1000 RTK) RTK (B) EQCOH 91 M € 100 7 M € 12 -50 -263 M € 50 0 150 0 MAIL VAR 200 Key messages Three main drivers explain differences between products operating margin 1.Yield is the highest for Equation (0.43 € per RTK), high for Variation and Cohesions, and the lowest for Dimension 2.Capacity costs, which represent 68% of total costs, are higher for Dimension, which uses a lot of main deck capacity 3.Variable costs-to-serve per RTK, are only slightly higher for value add products AF-KL had a loss of € 162 M in fiscal year 08/09, mainly due to a negative margin on DIM Explanation of main differences in products operating margins -18% Operating margin as total operating revenues 35%23%3%-3% 1. Operating margin consists of operating revenues minus operating expenses including capacity-, commercial, overhead and operations costs (excluding corporate overhead) Source: AF-KL & BCG analysis based on KL and AF data of 08/09

10. 170840-36 AFKL Cargo- Steering committee 2-Commercial- 100204 v 0204-V4.ppt 10 … as it is contrasted between industries Illustration for Variation products Operating margin fiscal year 08/09 1 (€/ 1000 RTK) -100 300 200 100 0 Wheels Fashion 14 M € Pharma -2 M € Safe 2 -17 M € Big DGR -66 M € Fresh 0.0 RTK (B) 400 2.5 24 M € Live Secure 9 M € Aerospace 12 M € 4 M € 1. Operating margin consists of operating revenues minus operating expenses including capacity-, commercial, overhead and operations costs (excluding corporate overhead) Source: AF-KL & BCG analysis based on KL and AF data of 08/09 AF-KL Variation had a loss of € 22 M in fiscal year 08/09, mainly due to Fresh Explanation of main differences in products operating margins Same explanation as in previous slide Backup

11. 170840-36 AFKL Cargo- Steering committee 2-Commercial- 100204 v 0204-V4.ppt 11 Yield differences are primarily driven by level of service offered Average yield per product segment differs 1...... driven by differences in services offered CohesionDimension Total operating revenues 1 (€/ 1000 RTK) VariationMailEquation +83% +12% 1. Include traffic revenues as well as other revenues Source: AF-KL & BCG analysis based on KL and AF data of 08/09 Product with specific handling operations 10 sub-segments focused on specific needs of sectors Basic airport-to-airport delivery product for all commodities Trucking is included depending on route Including consolidation if needed High priority product for cargo up to 70kg Cargo > 70kg can also get high priority (Equation heavy) Tailor-made tripartite contract Customized contract between forwarder, shipper and airliner with guaranteed pricing and capacity 2.04 Price/ kg 3.312.12 2.59

12. 170840-36 AFKL Cargo- Steering committee 2-Commercial- 100204 v 0204-V4.ppt 12 7 42 COH Total operating costs and revenues 08/09 (€/ 1000 RTK) Yield 1 Capacity costs Overhead costs Commercial costs Operational costs 13 6 36 DIM 3 31 41 EQ 3 6 57 8 VAR 46 8 Trucking costs MAIL 14 277 282 271 274 295 13 6 36 83 DIM 3 31 41 106 EQ 3 6 57 98 MAIL 8 8 46 92 VAR 14 7 42 95 COH Cost-to-serve relatively similar compared to differences in yields (I) 1. Total operating revenues divided by total number of RTKs Source: AF-KL & BCG analysis based on KL and AF data of 08/09, insights Mike Zwart 82% Capacity costs as % of total revenues 41%49%69%66%

13. 170840-36 AFKL Cargo- Steering committee 2-Commercial- 100204 v 0204-V4.ppt 13 10 121 29 55 1 40 Total operating costs and revenues 08/09 (€/ 1000 RTK) 13 11 94 0 33 5 27 188 47 77 19 39 14 29 258 157 36 7 8 355 274 71 379 26 70 VAR FreshVAR FreshVAR FreshVAR Fresh 94 20 VAR LiveVAR LiveVAR LiveVAR Live 153 33 5 27 188 VAR FashionVAR FashionVAR FashionVAR Fashion 186 47 77 19 VAR Big DGRVAR Big DGRVAR Big DGRVAR Big DGRVAR Big DGRVAR Big DGRVAR Big DGRVAR Big DGRVAR Big DGR 87 39 14 29 258 VAR Aero- spaceVAR Aero- spaceVAR Aero- spaceVAR Aero- spaceVAR Aero- spaceVAR Aero- spaceVAR Aero- spaceVAR Aero- spaceVAR Aero- space 276 157 36 7 VAR PharmaVAR PharmaVAR PharmaVAR PharmaVAR Safe 2VAR Safe 2VAR Safe 2VAR Safe 2VAR SecureVAR SecureVAR SecureVAR SecureVAR WheelsVAR WheelsVAR WheelsVAR Wheels 13 11 71 127 83 1 55 274 40 215 379 121 26 83 355 8 10 29 Cost-to-serve relatively similar compared to differences in yields (II) 1. Total operating revenues divided by total number of RTKs Source: AF-KL & BCG analysis based on KL and AF data of 08/09, insights Mike Zwart Overhead costs Capacity costs Yield 1 Operational costs Commercial costs Trucking costs Analysis done on aggregated level Next step should be to make a split on a commodity level (eg. Flowers, Fish etc) Backup

14. 170840-36 AFKL Cargo- Steering committee 2-Commercial- 100204 v 0204-V4.ppt 14 Costs are divided between approx. 2/3 of capacity and 1/3 of variable costs 1. Operating costs consists of operational, commercial, overhead and capacity costs Source: AF-KL & BCG analysis based on KL and AF data of 08/09 25 232 10 18 19 11 106 1,235 MAIL 150 250 24 50 72 300 200 160 109 434 2 1 11 34 7 10 2 6 19 119 36 177 84 8 52 20 VAR 100 17 0 105234 COHDIM Total operating costs 1 (€/ 1000 RTK) EQ Weight (B RTK) Capacity costs Commercial costs Operational costs Trucking costs Other costs

15. 170840-36 AFKL Cargo- Steering committee 2-Commercial- 100204 v 0204-V4.ppt 15 Capacity cost is the highest for Dimension because it uses the most full freighters Dimension covers 62% of total capacity costs and has a high cost per RTK Main explanation of the cost difference per RTK is the difference in used flight types Used flight type differs between products Dimension and Cohesion use FF twice more than Variation, Equation and Mail ~50% of Dimension and Variation RTKs are shipped by FF vs < 25% for other products On average capacity costs per RTK for FF are ~30% higher than for Belly/ Combi –~0.22/ RTK vs ~0.17/ RTK Dimension absorbs ~74% of the full freighter capacity costs 575 M € of the total FF capacity costs (774 M €) is covered by Dimension 789 COH 0 100 150 250 182 176 RTK (B) 173 194 200 160 M € 200 1235 M € (62%) DIM Capacity costs per RTK (€/ 1000 RTK) 11 434 M € VAR 106 M € EQ 52 M € 24 MAIL 110356 50 Note: Capacity costs for AF are determined based on a KL split (%) between flight types Source: AF-KL & BCG analysis based on KL and AF data of 08/09 We would need to achieve more than €0.05/RTK price premium to cover the FF costs

16. 170840-36 AFKL Cargo- Steering committee 2-Commercial- 100204 v 0204-V4.ppt 16 61 M € 38% 106 M € 24% 0 208 M € (17%) 452 M € (37%) 575 M € (47%) COH % split 20 80 DIM 60 40 100 Total capacity costs (M €) 5002,0001,500 Belly FF MAIL 1,000 18% 79% EQ 0 22% VAR 69% 9% Combi 72 M € 17% 256 M € 59% 3% 18 M € 11% 82 M € 51% Dimension absorbs 74% of the total capacity costs of the full freighters Total costs (M €) Costs per RTK 1 774 882 331 0.22 0.17 Note: Allocation of the capacity costs of AF is partly based KL distribution of flight types and validated with high-over AF assumptions 1. Costs also takes the costs for under capacity into account (when load factor is higher price per RTK will be lower) Source: AF-KL & BCG analysis based on KL and AF data of 08/09 Backup Influenced by load factor

17. 170840-36 AFKL Cargo- Steering committee 2-Commercial- 100204 v 0204-V4.ppt 17 RTK (B) 100 3 Contribution margin M € 400 +10 M € 12 -63 M € 0 COH DIMCOH DIMCOH DIMCOH DIMEquation HeavyEquation HeavyEquation HeavyEquation Heavy 0 €/ 1000 RTK +0.3 M € 4 300 200 DIM As a result of upselling when Dimension sells at a high price it is branded with a different name Note: Assumption is made that the cost-to-serve for Equation Heavy is comparable to that of Dimension because it is handled in the same way (only with higher loading priority) Source: AF-KL & BCG analysis based on KLM data 08/09 KLM only Backup Commercial costs Trucking costs Operational costs Capacity costs Other costs

18. 170840-36 AFKL Cargo- Steering committee 2-Commercial- 100204 v 0204-V4.ppt 18 Variable cost-to-serve differs in a ~25% range between products Need to re-define the delivery model for Dimension to make it profitable AF-KL cost to serve differ mainly driven by operational and commercial costs Explanation of main differences Operational differences are driven by the additional costs for special services Equation and mail have their own operations at SPL as well as at CDG (directly allocated) Some Cohesion and Variation products need specialized handling, monitoring and material –Eg. monitoring, environtainers, vault employees In total the operational costs of Cohesion is lower than Variation driven by Cohesion Dimension Difference in commercial costs driven by high number of shipments for Equation and special sales force for Variation and Cohesion Equation has very high CSO costs due to the high number of bookings Mail, Cohesion and some Variation products have additional dedicated sales reps Trucking is mainly done for dimension and cohesion products 6 Total operating costs (€/ 1000 RTK) 36 MAIL 8 92 46 6 3 106 57 98 83 VARCOH 95 EQ 106 41 31 42 7 3 DIM 83 27% Overhead costs Operational costs Commercial costs Trucking costs Source: AF-KL & BCG analysis based on KL and AF data of 08/09, insights Mike Zwart 236432353265305 Total revenues/ 1000 RTK

19. 170840-36 AFKL Cargo- Steering committee 2-Commercial- 100204 v 0204-V4.ppt 19 High cohesion cost-to-serve amortized by average shipment size and distance flown Dim & Coh have on average longer flight distance...... and weight per shipment also differs between products...... resulting in different cost- to-serve amortizations per shipment Average distance per shipment (x 1000 km) COHVARMAILEQDIM Average weight per shipment (kg) COHVARMAIL ? EQDIM Average RTK per shipment (K RTK) COH 13,275 VARMAIL ? EQDIM Backup Source: AF-KL & BCG analysis based on KL and AF data of 08/09

20. 170840-36 AFKL Cargo- Steering committee 2-Commercial- 100204 v 0204-V4.ppt 20 Even though Dimension operational margin is low it is by far the main contributor to the business 400 3 300 200 210 Contribution margin 1 (€/ 1000 RTK) 100 0 RTK (M) 9876111054 168 M € VAR 412 M € COH 77 M € MAIL 196 M € EQDIM 972 M € Need to assess the real cost to serve in order to define the pricing strategy 1. Contribution margin = total operating revenues minus total operating expenses excluding capacity costs Source: AF-KL & BCG analysis based on KL and AF data of 08/09

21. 170840-36 AFKL Cargo- Steering committee 2-Commercial- 100204 v 0204-V4.ppt 21 Even though Dimension operational margin is low it is by far the main contributor to the belly/ combi MAIL 187 M € RTK (M) DIM 397 M € Contribution margin 1 (€/ 1000 RTK) 400 300 EQ 200 100 0 987654321110 COH 10 86 M € VAR 306 M € 75 M € Need to assess the real cost to serve in order to define the pricing strategy 1. Contribution margin = total operating revenues minus total operating expenses excluding capacity costs Source: AF-KL & BCG analysis based on KL and AF data of 08/09

22. 170840-36 AFKL Cargo- Steering committee 2-Commercial- 100204 v 0204-V4.ppt 22 Other costs 1 -75 Rethinking our commercial model should help us approach the profitability issue -84 -36 -232 DIM -434 -72 -18 -20 -109 VAR -160 -25 -11 Capacity costs -34 COH -106 -19 -2 -19 -24 -6 MAIL Other costs Trucking costs Commercial costs Operation costs -1,235 -177 EQMAIL 1,501 DIM 631 VAR 244 COH 260 EQ 107 Total 08-09 costs 2,978 M € Total 08-09 revenues 2,742 M € -236 M € Charge for the costs that are incurred Lower cost-to- serve through rationale use of the fleet Create a general cargo product to capture revenues Develop existing business with more efficient use of current resources 1 3 5 4 1. Corporate overhead Lower cost-to- serve through rethinking the service level 2 Cargo

23. 170840-36 AFKL Cargo- Steering committee 2-Commercial- 100204 v 0204-V4.ppt 23 General cargo product can save up to 18% of costs and becomes profitable Trucking 14 Capacity costs Other costs Commercial costs Operational costs 5 32 277 EXTENDED DIMEXTENDED DIMEXTENDED DIMEXTENDED DIM 1 4 31 249 Average DIMAverage DIMAverage DIMAverage DIM 3 21 226 BASIC DIMBASIC DIMBASIC DIMBASIC DIM -18% Total operating costs excluding trucking (€/ 1000 RTK) Price difference between most basic and average dimension product is ~18% at KLM Cost difference is mainly driven by capacity costs Cost differences between basic and extended version of dimension are driven by: 1.Use of flight type: Belly vs FF (74%) Capacity costs are reduced because belly has a lower cost per RTK than FF –At KL € 0.16 vs € 0.20 per RTK 2.Degree of preparation of the shipment (22%) Warehouse handling costs are reduced at hub and outstation if shipment is already palletized (60% of total €90 per tonnes) 2 3.Use of service model for bookings (4%) CSO costs are reduced when clients book online (€10 per booking) 3 Loose/ bulk cargo shipped by FF and booked by CSO Consolidated cargo shipped by belly and booked online 1. Assumed that 25% of dimension is currently booked online and 15% of shipments is already consolidated (based on interviews) 2. Assumed that consolidated shipment saves 60% of warehouse handling costs at hub (labor costs) and 25% at outstation (external charges costs) 3. Assumed that e-booking saves 80% of CSO labor costs and 20% CSO related costs Source: AF-KL and BCG product profitability analysis based on finance data fiscal year 08/09 Back-of-the-envelope calculation for only KLM Avg. price = 236 (excl. trucking)

24. 170840-36 AFKL Cargo- Steering committee 2-Commercial- 100204 v 0204-V4.ppt 24 Agenda Introduction Output of AF-KL combined Output by airline Product profitability Client profitability (optional) Next steps

25. 170840-36 AFKL Cargo- Steering committee 2-Commercial- 100204 v 0204-V4.ppt 25 Next steps Next steps for KLM Detail cost categories and related allocation keys based on improved understanding of the allocation of Sales Flow Model Validate direct and indirect costs with related product VPs and controllers Next step for AF Detail cost categories based on internal accounting data Validate current assumptions and update it with AF data First draft