LA/- w9q - LA!15 L-159 No. L-159 RESTRICTED This report is restricted to use within the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOIDMENT TECHNICAL REPORT on the ROVALT. nTTTGT-T ATPTI.TTR PPROJI;GlT NETHERLANDS FILE Cuurtr February 15, 1952 Loan Department Royal Dutch Airlines Project - Netherlan(ds 1. This memorandum covers the comments of the Engineering Staff con- cerning the +e.hn"-al a.nd business aspecta of a roject si.mj ±.[ri by the Royal Dutch Airlines (KLM) as a basis for a loan from the ;,ank. The comments are based on docents received from KLM, discussions ,rt1, representatiyes of the company, and some supp'lementary statistical irformation obtained from l6oca'l sourcles. 2. Th'1-,e present V'Aj- 4fleet cons4stus of 6_8 _aircra-ft,'8ov!>car Lockheed #749 Constellations vihich have been in service since 1947. In addi'-onI 7 are Douglas DC-6 aircraf't purchased in 19'8 ard 12 are Corar t#240 planes which were added to the fleet in the same year. The remaining aircrat are DC-4, ,-24 DC-3, and 'akota types which have been in service since 1945 and 1946. Except in the Caribbean area in which the older air- craftb hcavp been used ew lusively, zM equipment at present compares favorably with that of other intercontinental airlines and, as a result, the company has been able to main'ain a strong competitiv e postio, irn the iJternat onal field. 3. The company is now'f faced vith the necessity of increasing the capc- city of the fleet in order to handle thle estimated increase in traffic over the next four to five years and, at the same time, maintain its competitive position with respect to the speed and comfort of the aircraft which will be in operation. It must also provide for lower operating costs in anticipation of lower passenger fares and freight rates, To meet these needs, orders were placed in 1950 for 7 Douglas DC-6B and 9 Lockheed #1049C aircraft, the former to be delivered in 1952, the latter in 1L53. Orders have recently been placed for 6 Convair #/340 aircraft and 1 Douglas DC-6A Liftmaster, delivery on which is expected to be completed by the end of 1953. 4. The selection of aircraft for the modernization pror-.m of the company was made after careful study of all available types which had bee. proven in service as well as those vfhich are in the course o_ development, The trend in transport aircraft design is in the direction of larger planes vwhich will carry greater payloads at higher speeds and, at the same time, provide fuel and other operating economies over existing types. The airc:^aft selected by KLM represent the ma muir advances -which have been made to da-te in civilian transport aircraft which have been proven in service over a "e-son9l peldo-;euTs1.brne out b- the fa-t that- substar.tia:! orders for these types are the only ones of consequence on hand with U.S. manu-facturers for delivery to both U.S. and foreign civilian airlines. The Constellations will be equipped wfith compound engines to provide greater fuel economies and the frames of all nev planes are designed to permit the installa- tion of gas turblines at such time as this type of engine has been established as dependable for civilian transport service, Since the existinz fleet is composed entire:Ly of aircraft of U.S. manufacture, the continued use of such aircraft fits into the existing service facilities of the company and con- siderably simplifies the stocking of spare parts and instrwnents. It seeris, therefore, that the aircraft on order have been rationally selected as to 2 - type and size and that these aircraft are the most modern and efficient of those -which have been proven to be dependable in actualiservice. 5 The oompoqition of the I5MU fleet at nresPAt and as anticinated on the completion of delivery of the new pianes is given belouri with the est:Lmated available ariial eapaciy+r in ton kilometers, based on r a sanJardnfmhter of flying hours per type per year. Dype Number of Yearly Capacity in Number of Yearly Capacity in Planes ,II+m llions ton - h man millirns tn -km 1951 1954 L 749 Constellation 18 115 9 61. L 1049 - - 9 10). DC-6 7 46 7 46 DC-6A - - 1 14 DC-6B - - 7 55 Convair #240 12 27 12 27' Convair #340 6 16 DC-4 and C-54 10 43 3 15 DC-3 and Dakota 20 9 10 5 Auster ) 1 - -- Photo-plane) - - 1 Totals 68 240 65 340 The 1954 fleet represents the minimum number of planes which are expected to be in service. Actually two additional L 749 Constellations may be retained for service carrying tourist class passengTers, Also, disposal of DC-h and DC-3 aircraft will depend on conditions prevailing at the time that the Convair #340 planes are placed in service. 6. The cost of the new aircraft now on order is as foloi-fs: Total Cost of Plane Plus Number Description Spare Parts in $ 7 Douglas DC-6B 10,374,000 9 Lockheed Constellation ,Y1049C 17.032.000 Douglas Liftmaster 1.,500, 000 6 Convair #340o -. ,on.ci0o Total 33; [06J.noo Tn the above estimates. orices include allowance for maximum esealation vihich applies only on orders for the DC-6A and Convair aircraft and amounts to about 10n Arrangements have been mAde for the sale of 7 Constellation #749 aircraft from the present fleet to Lockheed for a total of :;i3,450,000. The net cost or the new planesn'and Qpare parts will, ll erefore, be $29,956,50nn Payments through 1951 have totalled $613l4t100, leaving a balance of $23,642,400 to #7e 9 paira fn t an.d some I+ ircr m b sdin 193 which wionuld'la= tion #749 aircraft and soane DC1-4 aircraft maay be sold in 1953 which would oro- -3- vide about k12,000,000 to be applied against the cost of the nevw Constella- tions. This would reduce the balance to be paid in these ve4rs to about 622,500,000. No account has been taken of possible sales of DC-3 aircraft. 7. .Five of the new Constellations will be placed in servnice on the Ner; York-Ai.msterdam route. These Dlanes vill be fitted with seats to hanclle tourist class, regular class and an extra fare class vwhich vill be provided aith siesta or sleeperette accommodations. Theme planes are e mnected to handle all of the anticipated iMLd passenger traffic on this route al~ong writh a substantial volume of mail and freight traffic. The remaining four newr Constellations will be used on the Far East and African routes in conjunc- tion with DC-6 and #749 Constellations. 8. The utilization of the new rG-6B aircraft has nnt yet been definitely established but it is likely that these planes vill be placed in seerrie on the Amsternram.-South American and WIent. Tnrii in ront.esj re- placing #749 Corstellations and DCe6 aircraft, The Liftmaster wvill be used for freial-ht. setrv'e hbetwneen Aqn.'te12 nrl Yor}c. Tlhe% v.^mrair ;,3t planes will be placed in service on European lines, replac:Lng 6 Convair #1240 planes~'~ irnlveh are-~ merpe+te ~ b~ +.¶~to be tr.ansferred +t- + theY"H' Gi and in turn, replace DC.3 and DC-4 aircraft. 9. PrIor to world Wliar I;, like other airlines throughout the worlcl, V=T requ-;red7nA a,ho nnttr+4 ia eoverevrnwert subsidy ir, ordera, +oa ,.ttrnn nar.c+4r.e expenses. Following the war, with a rapidly expanding fleet, the company ,,rn e l a1 +o a ov,n -n-cll -pera+ing v.f- + ,-n+vil 1 010 4r -4n the t-roubla 4i Indonesia seriously reduced earnings as a result of the supspension of the Amerdr ta^_A_a_ To,^+ s ie, ffiha .Q'4 4-,,-I 4 ,rn mA ,;eene 1-r 4-1- A.-,1., +4-- u v -c . .Vv - WAv 994 Pw iV cv. ,,vrz -s.Jn 0 Ymmm bJ. Vhe ae a laaw iwnJ.JA s of the guilder in September 1949, Thich resulted in a great';er .roportional than ln revenues. The company rece-ved a government subsidy of 37.2 million guilders in 1949, of whihLch 10 million guld%ers il.La VVr..L hGve two pay back bDef-ore 1z60 if, thI-ere are sufL-'Leicie. profits. These funds, in addition to the use of about 2.5 million guilders fromJ resenves I0J. , oof0se aLn opeJran .LUJ Ulo . o UfJU Jabout .71 ,lLon L guldeJ.r0 incurred during that year. I. 1950, in spite of the highest income in the hist-+ vn of +t,h con-.anny -r, opera.+lng 1 of ohonvU 't 0 - 11.3ion Eglu-1AAders ras encountered. This lc-s was offset by reducing certain reserves and other items. 10. Gross revenues for 1951 are estimated to reach about 227 million guilders. Expenses, including depreciation, are estimated at 210 million guilders, giving a net income belore taxes of about 17 million guilders. These estimates appear to be conservative, based on the latest information available. 11. In estimating future revenues, the company assumes that it wil. continue to handle about 3-1/2% of the total world air traffic daring the next three years. The volume Of traffic handled by the corapany has shown an annual increase of about 17% in the years ;9048-951. For estimating purposes, however, the annua' increase for the company has been taken at 14% over the next three years, vwhich compares with an average increase of 13% in total world traffic for all airlines during the post-.war period. The available capacity of the flights made in 1950 was abolut 190 million ton-cilometers and these flights were loaded to about 65% of capacity. Comparable figures for 1951 are estimated at 226 million rand 67,. respecti.velyo .In 1 J m4,, iS est- a e that uthe available cLVc-.Ly o.;. tIhe L- t VV.Lv.ll reach 350./million ton-kilometers and that 67% of this capacity will be ut.Lj.4L;W1zedU as pa;.rL oade I2 Th Ml aLs prbe --rue-Le -wit the- --ucino s-e-- over the short term is the effect of tourist fares on traffic volume. .Such lares, inivolvinig a reduction of about 275% from present levels, Wll be in effect on May 1J, 1952 on the North Atlantic route and parts of the European network. Alhso, recent reports indiciate that competition may reduce freight rates by as much as 25% in the near future on this route. In 1950, the average revenue per ton!-klometer realized by KUI Was 1.55 guilders and i.n 1951 is estimated at 1.4? guilders, It is estimated to drop to 1.37 guil.ders in 1954. The reduction estimated between 1951 and 1954 amounts to only a-bout 8% and is probabJy unrealistic if tourist rate traffic develops in substantial volume. However, the-extent to whicn such traffic will represent additional business cannot be accurately estimated but lower average revenues per ton- kilometer should be compensated, at least in part, by improved utilization of available capacity. The following table gives the development of tra-fic since 1946, the utilization of capacity and revenues, along with estimates through 1954- Ca-oacity Traffic Revenue Revenue per Year Availablef Sold Utilization in millions of ton-km in guilders in millicons ton-an % guilders 2/ 1946 59.0 43.1 73.1 68.1 1.58 1947 98.5 63,6 64.6 96.7 1.50 1948 161 1 99,9 62.0 145.1 1.45 1949 146.5 88.3 60.3 130.0 1.47 1950 189,7 123.3 65.0 188.5 1.53 1951 226.0 152.0 67.0 227.0 1.49 1954 350e0 230.0 67.0 315.0 1.37 13. .Operating expenses of the company showed a definite lowier trend during the period 1946-1948 in terms of the unit cost of operation per ton- kilometer of available capacity. In 1949, due to the puspension of Indonesian flights and the devaluation of the guilder, the unit cost increased substan- tially. In 1951, thi8 cost is expected to reach the level obtained in l9Ld3t The followv,ng table showrs the trend in operating costs during the post-war period with estimates for 1954, This figure differs from that given in the table on page 2 by 10 million ton4kilometers. Since the. companay exPects 'to decrease the utilization of the abcraft above the-standard number of flight hours as used for the table on oa.e 2 (e.q. 3100 flight hours per year for the.L 7L9 insteadi of the standard number of 3000 hours per year). It-has been used in the financial.calculations submitted bv th .comDanv:and is. retained for this purpose. Actual.y, the capacity in operation is expected to be somewhlat arnt±.r than thla. timatedr 2/ Traffic revenue is less than total revenue shown on pags 2 by the income similar items. Grn Lni tv Onperntina FypnPses- Gos+ per tonr-km inn rm]iHe-rq Year Available Sold in millions of Available Sold in milionsI torn->m miiI r 1446 59.0 h3.l 68A8 1.17 1r60 1947 98.5 63.6 105.5 1.07 1.66 I o).R 1-l I 00 0 I 0 I 0), 1949 146.5 88.3 176.8 1.21 2.02 1950 JI9 7 123.3 197 7 104 1.60 1951 226,0 152.0 210.0 .93 1.38 _L 7 -.195L~v 4,'i 'v'0 2 0 r 12 .L4* T1hi cUJL±pJl1y lU..L.LUwO Lthe consO-4vaivV pLa,i.Uc Vof depreciati,ng flight equipment over a period of five years to a value of 10% of the orig- n cos D. Thi1bs proceduu-re Ihlas Ubeen used ini arr.-iilng al t the etlimated oU.etr-cLU- ing expenses for 1954. Direct flying costs are now about 70% of total operat- ing costs and this proportion should decrease after new aircraft come into service. It seems that the cost estimated for 1954, .8 guilders per ton.- kilometer of available capacity, is reasonably conservative. Direct flying costs, exclusive of depreciation, should decrease by !5o-`20% through the use of larger and more efficient aircraft. increased dep-eciation Wvill abso:rb 60-70% of this reduction giving net reduction of about 5-10% over present costs. wiith total estimated operating expenses of 282 mllion -guilders before taxes in 1.954 and a revenue of 1.37 guilders per ton-kilometer, about 207 million ton-kilometers must be sold by the company to break even. Esti- mated ton-kilometers to be sold amounts to 230 million, so a difference of 23 million ton-kilometers or 10y% represents the profit margin in these esti- mates. 15. Operating expenses in 1950, including depreciation, which were payable in hard currency represented about 37.5% of the total. Hiard currency revenues covered all direct hard currency expenses but covered only about 17% of dep˘eciation, leaving a hard currency deficit equivalent to about 19 million guilders ($5 million). In 1951, about 70% of depreciation in addi_ tion to all hard currency operating expenses should be covered, leaving a hard currency deficit of about 7 million guilders ($2.0 million). The propor- tion of hard currency revenues in the traffic revenues of the company is esti- mated to increase from 27% in 1950 to 34% in 1954, due largely to the estimated increase in passenger and freight traffic betweep Amsterdan and the Amer-icas* Also, it is estimated that hard currency expenditures vail be reduced to 34% of total expenses through the use of larger and more efficient aircraft and the reorganization of service facilitiaso If all of these assumptions are realized, a profit in hard currency after depreciation is estimated to reach the equ-ivalent of 10 million guilders (W3 million) in 1954. It is believed, however, that the-estimated increase in traffic on the New York-,Amsterdam route is probably the most optimistic assumption of any used in projecting earnings of the company over the short term, 16. ]MM wvas founded in 1919 as a limited liability company, financed entirely by private capital, In 1929, the government acquired a majority holding in the.company which has increased to about 95% 'at the present time, However. the corporate structure of the company has not been altered and it continues to operate substantially as originally organized, except for govern- ment control of major expenditures and the rate structure.' The managemenit - 6 - of the company is entrusted to a Board of Directors, the smallest majority of wJhich are nom-nAted hb; the government. ainr cisions of the Directors require approval by the Board of Control; four of ius fourteen members are also nomninated y the govrernmeniit. Tlhe chairm.ann of each Boare is- howPver- selected from the private shareholders. Management personnel of the company are a--n ed bykit t}he Pnar' -df Tli wni-+.rto-c onvA r?n in+- ;nir' lili nnwr m"Ort+ r-Anro.. sentatives of the government. The president, Albert Plesman, has held his of air transport. 17. The company was originally capitalized at about 1 million guilders. TII.Ls hlas bUeen Uradu'"'Jy lncrease.l to abA'2 r-iL±onL gu"'Lers up) to t4e1 present time. Direct government participation amounts to :L16 million guilders vith additional participation of 5' m -i-on guilders by- - Nh-n RaiU-w-ays. The government, under a separate lawr, may grant or guarantee loans to Eud up to i5 million guilders and may further guarantee interest and principal payme-nts on an additional amount of 50 million guilders. The company has, to date!, contracted obligations of about io.6 million guiriders, ail of Wvhich are guar- anteed by the government under these arrangements. 18. -A balance sheet of the company as of August 31, 1951 is given in Table I. Total assets are carrie4 at about z57 mlllion guilders, of which about 118.5 million guilders are current. Current liabiLities amount to about 79.1 millionl guilders providing net working capital of about 39.4 million guilders. 19o Summary profit and loss statements for 1950 and estimates for 1951 and 1954 are given in Table II. These statements show total income and expenses and, in addition, a breakdovm of these items into hard and soft currencies. 20. The cash position of the company through the period 1951-1954 is given in Table III. These calculations show that, without regard for currencies, the company is and will be in a strong cash position and that borrovwing is not necessary to carry out the modernization p:rogram. The estimated cash on hand at the end of 1954, equivalent to about 3.5 months operating expenses, is more than adequate to cover normal operation. Since additions to depreciation reserves are estimated at 34 million guilders (09 million) and payments of dividends and taxes are estimated at 25 million guilders (:A6.6 million), it is evident, that if the estimates are realized, the company could assume substantial a4ditional obligations vithout seriously affecting the cash position. 21. Conclusiona i) The types and sizes of aircraft now on order by KLM appear to be weU selected for the modernization of the companyts fleet. ii) The number of aircraft on order is in line with the esti- mated expansion of traffic over the next four years; con- sidering the contemplated retirement of some existing aircraft. -7- iii) The estimated expansion of the over-all traffic to be handled by the comparn (14% per year) over the next three years, is in line with post-war experience and is considered to be.reasonable The estimated increase in the NIew York-Amsterdam traffic appears to be most ontimistin asqsmntion adontecd hv thR nomnaynr in esti- mating future earnings. iv) Total operating expenses are conservatively estimated but the reduction. in the proportion of ha crlii -r ^nwna +Hn expenditures may be somewhat optimistic. v) If there is no serious business recession in the U.S. and Europe anda nwo sear.i4ous det eriorat+ion i. +i e t *n+ente-rrational situation, the coTnpany should show.'net profits over the life- of tL1he 4ne-0plne and bard currer.cy earing shud be adequate to cover all operating expenses payable in h-ard-I- c., Ae.y ir.luil 4eb se-4ic an d.ep reciati;on. LIC61 %A I J. ± IZUAej .6ALL~1r WU V U I VL % ' G611U 1 U4AJJ v's L.. Jine R^.mbert IFebur--uary 14, 197v2) TABLE I Royal Dutch Airlines Summary Balance Sheet as of August 31, 1951 in millions oF guilders Assets Liabilities Flight equipment (depreciated value) 75.6 Capital and reserves 149.2 Fixed assets (depreciated value) 34.2 Profit 7.5 Participation in other companies 17.2 Insurance reserv_ (omin risk) 10.1 Investment of Insurance Reserve and Long term debts 11.2 other securities 11.5 Accounts payable and other Annniints receivable 50.6 liabilities 52.2 Glash and in banks 65.7 Prepayments of fares 26.8 Ot.her 2Ssets 11 2 257.0 257.0 Aircraft on order 79.8 0bligations in resnpect of air- craft on order 79.8 TABLE II Profit and Loss Account 1/ -(estimates) 1950 I 1951 1954 kota.1 Hard Soft 4 Total Hard Soft Total Hard. Soft Traffic Revenue 188 | 51 137 227! 671 260 3151 07 '08 Operating Expenses 163 47 116 249 67 L82 Operating Income 1/25 I 4 t /21 f45 , 18 /27 I66 C b 426 Depr. Flight Equipment 23 23 i- 25| 25 - 291 2 Other $ Depreciation { | __ Interest IBRD Loan ! I - - I1 1 Non $ Depreciation [2 | 2 3t1 3i4 4__- - _____ Income before taxes rI L 9 Pl P 17 L 7 P 24 ]? 32 P 10 iP 22 Provision for taxes - - -1 201 *, 20 t j- - - -' g - *' ji Net Result I L 19 P 19 P 17 L 7 P 24 p 12 P 10 1P 2 P profit: L " loss 1/ Does not include management, maintenance for other airlines and similar income and expenses but only to operations of the companyts aircraft. Pro memoria. MA-ITT.', -rrr ;(n millions of guilders). 1951 1952 1953 , 1S54 iL z I J /- /_& Balance at.the begirning of the year i31 - 6 - 61 - Earned Profit (after depreciation 2 - before taxes) 17 22 27 - 32 Depreciation on flight equipment 25 28 - 37 - 30 Other Depreciation 3 3 - 3 4 | - Prepayments on Turbo-Prop. |j_ _ _ |10 Investments in Flight Equipment 2 45 43 Investments in Stocks 2 3 3 Other Investments 4 _ - 5 5 5 Debtors/Creditors,. etca | 2 ! 8 - 3i 3 Investment of increase of Insuran l ll Reserve 3 4 - 3 _ 4 Amortization Certificates or Dividends l o 10 10 - 10 Prepayment on Taxes - _ _ - 10 - 20 IBRD Loan funds 1/ - _ 15 _ 112 -.1 - I Amortization on IBRD Loan 1/ - - I - * - - I - 5eO Balance at the end of the year 66 | 6o 61 '67 1/ Based on a loan af $7 million at h-1/1A. effective MLarch lj IQ0- dishihrsed in proportion to payments made on aircraft, amortization in ten equal semi-annual payent.s of principajl starting Januar 1 19 .