Alitalia and KLM Alliance Leads Industry Into New Era

AMSTERDAM, Netherlands (PROTEXT) - Alitalia and KLM are pleased to announce that following the Master Co-operation Agreement, the Passenger Joint Venture Agreement, and the Cargo Joint Venture Agreement, signed in November last year, both parties' respective Boards have now approved the Alliance Settlement Agreement. SUMMARY * Alliance to become effective on November 1, 1999 * Unprecedented depth of co-operation between two European major airlines -- Creation of the number one European airline network in terms of passengers carried -- Single, unified management structure for both Passenger and Cargo Joint Ventures, governed by a Joint Alliance Board -- Joint fleet decisions, including joint investment in new aircraft * Joint Venture profit sharing formula agreed -- 50:50 on the basis of Adjusted EBITDAR(a) - ensuring the alignment of the operating and economic interests of the parties -- KLM contribution of Euro 100 million to Alitalia's investment in the Malpensa hub development * Alitalia and KLM to continue the study of further financial, organisational and legal integration, within the authority of their respective Boards, with the objective to implement such integration before April 1, 2002. INTRODUCTION Alitalia and KLM today announce further major steps in their alliance agreement which will deliver an unprecedented depth of co-operation. Alitalia and KLM last night reached final agreement with respect to the earnings sharing formula for their Passenger and Cargo Joint Ventures, set forth in the Settlement Agreement which will be signed today, which, subject to the relevant regulatory approval requirements, renders effective the Master Co-operation Agreement signed by the partners on November 27, 1998. The alliance between Alitalia and KLM will result in the full integration of their global networks, revolving around the three hubs of Amsterdam Schiphol, Milan Malpensa and Rome Fiumicino airports, positioning their Joint Venture as Europe's largest airline in terms of passengers carried in 1998, serving 377 destinations in 87 countries. The two airlines will fully integrate their respective network organisations, including key functions such as network planning, sales, marketing, and revenue management under a single, unified management structure. Alitalia and KLM will jointly undertake all decisions and related investments with respect to future fleet development. The earnings of the Alliance will be shared on an equal basis aligning the operating and economic interests of the parties. KLM will contribute towards the initial cost and investment already incurred by Alitalia in connection with the launch of the Malpensa hub, by paying Alitalia an amount of Euro 100 million. Commencement of the Alliance fulfils key elements in both partners' stated strategy of becoming the leading European Union carrier with significant transfer traffic, as well as a strong domestic market, operating around highly efficient hubs, with the Alliance's key strategic partners both in the Americas and Asia. Commenting on the Alliance, Domenico Cempella said: "For some time now in Europe we have been witnessing a series of alliances and mergers, but none of these have created a new model for business in Europe. They have either simply created commercial agreements or resulted in small airlines being absorbed by larger ones. "I believe that the Alliance between Alitalia and KLM on the other hand, represents a completely new industrial model for air transport in Europe which is based on an unprecedented depth of co-operation between two companies. Two companies whose strengths lie in their complementary structures and standing: perfectly matched fleets, networks and market positioning as well as culture. There is, therefore, a significant difference between this Alliance and all the others. "With the first stage of the Master Co-operation Agreement having been put into action the two companies have created the conditions for Alitalia and KLM to be seen by the market as a single company. The customer will experience no difference whether he travels with Alitalia or KLM and this will certainly be an incentive for both companies to aim for the highest levels of service and products. The efficiency and productivity of both companies will improve as a result and so too will competitiveness -- to the benefit of customers, shareholders and employees." Commenting on the depth of co-operation, Leo van Wijk said: "This agreement marks a step-change in the evolution of airline alliances and will benefit customers by delivering the most complete integration of commercial passenger and freight operations in our industry. Both partners fully realise that better alignment of supply and demand in this capital- and labour-intensive industry is the key to profitability and creation of shareholder value. Many of the world's alliances operate on the basis of loose commercial links. Our agreement goes well beyond this and will enable us to deliver the quality, cost-savings, and flexibility that must be the hallmark of successful alliances. We have already pioneered and delivered unprecedented levels of co- operation with our strategic partners and together with Alitalia will continue to seek new horizons." The partners currently envisage that, subject to the relevant regulatory clearances being achieved, commencement of joint operations and economic sharing will begin as of November 1, 1999. The parties will communicate, by the end of September, the organisational structure and the principles of the governance of the Alliance. Further detail relating to the agreement reached between Alitalia and KLM is set out below. Scope and terms of the Alliance Pursuant to the Master Co-operation Agreement signed on November 27, 1998, the two airlines have entered into a Settlement Agreement that governs the sharing of economic results of the respective Passenger and Cargo Joint Ventures. Furthermore, the airlines have agreed that the Joint Ventures will be operated under a single, unified management structure (the "Network Organiser"), governed by a Joint Alliance Board. The alliance will include each partner's own airline operations, and the subsidiary airline operations of Alitalia Team and Alitalia Express, and KLM cityhopper. All other consolidated and non-consolidated holdings are excluded from the scope of the Joint Ventures. The Joint Venture structure is based on operational, commercial and economic integration at the level of the Network Organiser -- the highest value added function of the airline business. Activities within the Network Organiser will include network planning, marketing, distribution, sales and revenue management. Each airline will separately manage its own Capacity- and Service Provider activities and will provide capacity and services as required by the Network Organiser. Capacity Providers will be managed separately, supplying both fleet and flight crews. The existing fleet of both partners will be operated for the benefit of the Joint Venture. Decisions and investments with respect to new aircraft will be undertaken jointly. Service Providers will also be managed separately, providing services such as engineering and maintenance, handling and catering. The profit sharing agreement forms an integral part of the Master Co- operation Agreement, which commenced in November last year with an initial term of 10 years, and which will be automatically renewed unless either of the parties gives three years notice. Sharing formula Alitalia and KLM have agreed to share their earnings at the level of Adjusted EBITDAR(a) of the Network Organiser. The partners believe that EBITDAR represents the most appropriate measure of both airlines profitability and cash generating ability. To reflect the full equality between the partners and to ensure the full alignment of the economic interests, sharing will take place on a 50:50 basis. The Board of Directors of Alitalia and the Supervisory Board of KLM, as advised by their respective financial advisors, have deemed this arrangement to be fair, having regard to the historic and expected contributions, relative values of the businesses contributed to the Joint Ventures and in view of the strategic and financial benefits expected to be gained by the partners. All revenues and costs of the airline operations included in the scope of the Alliance, excluding corporate overhead, will be shared. The Capacity Providers of each company will provide existing fleet to the Network Organiser at no charge while flight crews will be charged at cost. The Service Providers will charge the Network Organiser either on the basis of actual costs incurred or at prevailing market rates, e.g. engineering and maintenance. Furthermore, proceeds from future sale of fleet will be shared by the partners on a 50:50 basis, thus ensuring a full alignment of all economic interests with respect to fleet decisions. In addition, excessive increases in labour costs, above pre- set benchmarks, will be borne by each partner separately, as well as the consequences of an abnormal level of production interruptions due to internal reasons. Finally, any potential advantages arising from pension fund surpluses built up before the effective date of the Alliance will not be shared by the parties. KLM and Alitalia have agreed that during an initial implementation period from November 1, 1999 until March 31, 2001, only the adjusted EBITDAR's of each partner in excess of Euro 450 million will be shared in any given year. Malpensa investment The multi hub strategy of the Alliance is strengthened by the addition of Malpensa, which has significant growth potential, and which gives the Alliance strategic access to the wealthy Northern Italian region. In order to compensate Alitalia for costs already incurred by Alitalia in launching Malpensa as a hub, KLM agreed to pay to Alitalia, on the later of 31 December 1999 and the effective date, the sum of Euro 100 million. Fleet -- efficient capital management With immediate effect, all future fleet decisions by Alitalia and KLM will be undertaken jointly. While the partners have committed to make the existing fleet available to the alliance with no charge for ownership costs, with regard to new fleet, Alitalia and KLM undertake to share the investment on an equal basis. For this purpose, the partners will study and strive for the most appropriate structure to achieve such full sharing, preferably through a fleet company. Principal benefits Alitalia and KLM believe that the partners' respective stakeholders will receive major benefits from the agreement: Customers Customers will benefit through interacting with a single interface. Through three integrated hubs, the partners will offer a wide range of seamless connections to customers, reinforced by joint standards of service and quality, allowing passengers and cargo customers to enjoy a seamless, One-ticket-to-the-World product and service experience. Employees Alitalia's and KLM's employees form the foundation of our success and will be critical for the transformation of the partners into one global airline. The Alliance will provide our employees with greater opportunities as we secure a stronger competitive position in the industry. Shareholders The synergies estimate made at the signing of the Master Co- operation Agreement has been confirmed. Within the next three years following the commencement of the alliance, the partners expect annual synergies of Euro 400 million, at the level of operating income. Synergy benefits will be derived through revenue enhancement, improved deployment of assets, and greater potential for cost reduction through full integration of network organisations. North Atlantic tri-partite Agreement It is expected that Alitalia, KLM and Northwest Airlines will shortly finalise the agreement providing for Alitalia's inclusion in the North Atlantic Agreement between KLM and Northwest, thus further enhancing a major alliance spanning across the North Atlantic. Further integration In accordance with the provisions of the Master Co-operation Agreement, Alitalia and KLM have further agreed that they shall continue the study of further financial, organisational and legal integration, within the authority of the respective Boards, with the objective to implement such integration before April 1, 2002. Alitalia and KLM have agreed to embed within the sharing formula financial incentives in order to achieve such integration before this date. Financial advisors Credit Suisse First Boston acted as financial advisor to Alitalia and provided a fairness opinion to its Board of Directors. ABN AMRO and J.P. Morgan acted jointly as financial advisors to KLM and provided a fairness opinion to its Supervisory Board. Communication An analyst presentation is available via Alitalia's and KLM's respective web-sites. These can be accessed via: www.alitalia.it and www.investorrelations.klm.com. (a) Earnings Before Interest, Tax, Depreciation, Amortisation and Rentals, before corporate overhead charges and after depreciation and rentals of non-fleet assets. ots Original Text Service: Alitalia and KLM Internet: http://www.newsaktuell.de Contact: Corporate Communications of Alitalia, +39-06-6562-2123; or Corporate Communications of KLM, Dutch media, +31-20-649-4545; or Mark Herbert of Bell Pottinger Financial, Global media, +44-171- 353-9203 Web site: http://www.alitalia.it http://www.investorrelations.klm.com http://www.klm.com Subscribers please note that material bearing the slug "PROTEXT" is not part of CTK's news service and is not to be published under the "CTK" slug. 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