KLM sells its low cost subsidiary buzz to Ryanair

KLM Royal Dutch Airlines today announced that they have signed an agreement for the sale of buzz, KLM Group's low cost subsidiary, to Ryanair. KLM will sell its 100% shareholding in buzz with a value to KLM of approximately € 30 million.

By mutual agreement, buzz will be transferred once regulatory authorities have approved the transaction. Parties are aiming for this transfer to take place on or before April 1, 2003.

KLM's decision to sell buzz follows a strategic review of this business in light of the increasing competition in the European low cost arena over the last few months. As indicated in late October 2002, buzz was aiming for rapid growth to maintain its' position as the 3rd largest player in Europe in this market  segment. In order to finance the expansion, KLM has indicated that it was considering partnership approaches from a number of interested parties, which included the possibility of an outright sale.

KLM believes that attaining satisfactory profitability for a standalone buzz would have been difficult to achieve. The emergence of a significant number of new entrants in the already competitive low cost arena will continue to lead to increasing price competition. In addition, the traditional network carriers, in their response to changing consumer demands, have started to focus on the  low-cost customer as well by reforming their current European product and pricing strategies. Against this background, KLM's Board of Managing Directors has concluded that the plans of buzz are best served with a link up with the Irish low cost carrier Ryanair.

Highlights of this transaction include:

- Ryanair will buy the entire issued share capital of Buzz for a total of €23.9m (£14.95m). Since Buzz will have €19m (£11m) of cash on completion the net cost of this purchase is less than €5m.

- The acquisition will be funded from Ryanair’s existing cash deposits which presently exceed €1.05 billion, so the cost is nominal to Ryanair.

- In the year to 31 March 2003 Buzz will fly just under 2m passengers, generating revenues of €140m, with a forecast double digit PBT loss.

- Buzz currently operates a network of 21 routes from London Stansted to points in Germany, Holland, France and Spain, as well as two French domestic routes. The company will operate a fleet in Summer 2003 of 6 x BAe 146 aircraft and 6 x Boeing 737-300’s.

- As part of the transaction KLM have agreed to take back all of the remaining BAe146 aircraft at the end of the financial year (31/3/04). We currently plan that these will be replaced by more efficient Boeing 737’s.

- The management believe that by applying Ryanair’s low fares/low cost formula, the traffic in Buzz can be increased this year from under 2m to over 4m passengers and the operating losses will be eliminated and profitability achieved.

- The acquisition is expected by the Directors of Ryanair to make a positive contribution to Ryanair’s earnings per share in the coming financial year (end 30 March 2004).

- This acquisition, which has been approved by the Boards of KLM and Ryanair, is expected to be completed, subject to regulatory approval on 1 April next.

Michael O’Leary, Chief Executive of Ryanair said: “The timing of this acquisition is  opportunistic. Since Ryanair is growing strongly by rolling out our lowest fare services all over Europe, the last thing we need is the distraction of an acquisition. However there are a number of features of Buzz which makes this a favourable move at this time including:

- Buzz operates 21 routes from London Stansted which is Ryanair’s main UK base, thereby making it’s turnaround easy to manage.

- The acquisition of Buzz allows Ryanair to further expand at Stansted, London’s third main airport, and is a timely strategic move.

- The cost of the Buzz acquisition is nominal at a net cash cost of under €5m, which will be a bargain if we can- as we expect - turn it around in one year.

- Buzz’s operation suffers from two structural cost problems, (1) an inappropriate expensive fleet and (2) expensive congested airports. Ryanair can and will resolve both problems within 12 months.

- Ryanair will significantly rationalise Buzz’s operations by closing a number of high cost unprofitable routes and operating the remaining routes at increased frequency, lower fares and much lower costs.

- Buzz’s BAe-146 fleet will be redelivered without cost to KLM within the year, to be replaced by significantly more efficient Boeing 737’s.

“I am confident that this significant and timely rationalisation will eliminate these losses in Buzz over the coming year. With a change of aircraft fleet Buzz will be in a position to match Ryanair’s low fare, profitable growth from 2004 onwards.

“Customers of Buzz can look forward to new routes, increased frequency, larger aircraft and significantly lower air fares from 1 April onwards. We will be announcing details of this reorganisation including new routes, frequencies, lower fares and timetables before the end of February as we implement our plan to transform Buzz into a growing, profitable operation.

“Since the Buzz acquisition will not take place until 1 April at the earliest, the current Buzz losses will have no impact on Ryanair’s full year earnings forecasts. Whilst it has been our policy to avoid acquisitions, this opportunity, at this nominal cost is the type of offer which we could not refuse. The financial cost is small and the diversion of management time will be minimal since Buzz is based at our main UK base. We have a simple and effective plan to turn it around by delivering lower fares, rapid traffic growth and Ryanair type profitability once the BAe146 fleet has been returned to KLM. I am confident that Buzz will thereafter make a proportionate and significant contribution to Ryanair Holdings’ revenues and profitability.

Following the study on low cost, KLM had already decided not to integrate buzz with BASIQ AIR, the low cost label of Transavia airlines. The KLM Group will therefore remain active in the low cost - low fare market through leisure carrier Transavia airlines which continues to increase its' focus on the activities under the BASIQ AIR label. BASIQ AIR currently serves 13 European destinations from Amsterdam Airport Schiphol and 2 of those from Rotterdam Airport. BASIQ AIR sells her services with direct booking through a call center and via www.basiqair.com. Apart from the flights to BASIQ AIR destinations, Transavia will continue to concentrate on other charter and scheduled flights for the leisure market, using Schiphol as its home base.

Notes

buzz was founded in 1999 by KLM uk as a separate low cost business next to KLM uk's feeder activities for KLM. After the successful turn-around from a traditional carrier to a low cost carrier, buzz now holds a number three position in the European low cost segment with a strong position in the United Kingdom, France and Germany. buzz currently operates a fleet of 8 British Aerospace 146 aircraft and 6 Boeing 737 aircraft.

BASIQ AIR was started in December 2000 by Transavia airlines as a price label with flights to two destinations. For the BASIQ AIR flights Transavia uses Boeing 737 aircraft. The BASIQ AIR destinations flown by Transavia departing from Amsterdam are Alicante (also from Rotterdam), Barcelona, Madrid, Malaga (also from Rotterdam), Palma de Mallorca, Seville, Bordeaux, Marseilles, Nice, Milan, Naples, Pisa and Faro.