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              SPEECH BY JEAN-CYRIL SPINETTA
        AT THE AIR TRANSPORT WORLD CONFERENCE IN
                       WASHINGTON

                                    23 February 2005



Ladies and Gentlemen,

It’s both a privilege and a pleasure to be here today to talk to you about Air France and what
the magazine “Air Transport World” calls a Winning Strategy.

Air France has come a long way since its last recapitalization by the
French government, approved by the European Commission back in 1994. The capital
injection was indispensable to the recovery of Air France, and the fact that we have
announced profits every year since 1997, is proof of this.

These good results were achieved - and sustained - in spite of the worst crisis ever
experienced by the air transport industry. I would like to start with this point. These results
can be put down to the implementation of a new strategy aimed at capitalizing on our many
assets. This will be my second point. And my last point will be how we intend to pursue
this winning strategy thanks to the Air France-KLM merger.

Regarding the crisis I just mentioned, since the beginning of 2001, global air transport has
lost 35 billion dollars, and has therefore wiped out, in the space of 4 years, more than it had
earned in the last fifteen years.


According to IATA experts, we can only return to a healthy financial situation in 2005, if
the oil price averages 36 dollars a barrel over the full year. Considering the price of the
barrel today, we are hardly likely to meet this target this year. The truth is that the transport
industry worldwide is virtually bankrupt. Even though European airlines such as Air
France-KLM continue to post profits, their margins are ridiculously small.

The surprising thing about this situation is that no-one really seems to care. Everyone
agrees that an economy with no air transport makes no sense. They also agree that air

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transport is the backbone of the global economy, but no-one really draws any conclusions
from an economic standpoint.

So what exactly causes this situation? After a little more than 10 years in this business, I
think the first reason is that there is an enormous disparity between the reality of our
business, where competition is ruthless, and its perception by the general public and
politicians, who are convinced that network carriers function as monopolies. So where does
this disparity come from? Certainly because, when you are in Frankfurt, you virtually only
see Lufthansa’s planes, in Heathrow British Airways’ planes and in Paris Air France’s
planes. So people’s immediate perception is one of a monopoly. What they forget is that
we don’t manage routes but networks.

For people living in major French cities such as Marseilles and Lyon, when you want to go
to New York, it makes no difference if you go through Frankfurt with Lufthansa, Paris with
Air France, or London with British Airways. In terms of distance and cost, it amounts to
the same thing. So, since deregulation, European citizens are totally free to choose the
airline they want to travel with.

At a meeting a few years ago with the chairmen of the biggest European airlines and the top
management of the civil aviation authorities, one of the directors reproached us for having a
monopoly. Another of them complained that we weren’t profitable. I told them that the
only logical conclusion to be drawn from both remarks, was that European CEOs must be a
bunch of idiots. Because it’s no small feat to lose money in a monopolistic situation. I said
that this was perhaps true in Europe, but that, since all the other airlines on the other
continents didn’t seem to be doing much better, the assumption was that CEOs worldwide
were also a bunch of idiots. While not being impossible, this was nevertheless a rather bold
statement.

The second main reason for the poor results of airlines is that the huge investments
theoretically necessary to set up and sustain an airline does not prevent new carriers from
springing up everywhere. Normally, in a very capital-intensive business, the level of
investment required considerably limits – if not totally – access to the market by new
competitors. For example, ask your banker to finance a great idea you might have to set up
a new car manufacturing company. At best, he will take you for a dreamer. At worst he’ll
have you locked up.

On the other hand, try and set up a new airline. You’ll always find bankers who are
interested, because the funds they give you, are guaranteed by a mobile asset – the aircraft –
which is the collateral for your loan. The true problem in our business is that our assets are
mobile, which makes it very easy to set up new airlines.




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This means that it is practically impossible or at least very difficult to limit overcapacity in
our business. Like any industry, what limits our economic performance is overcapacity. In
the steel industry, when you close a factory or if your competitors go bankrupt, you have
effectively reduced capacity. In our business, the aircraft and slots which are no longer in
use are immediately snapped up by others, and the overcapacity situation continues.

If I add a more recent element to this, which is the total transparency of fares for customers
thanks to online shopping, we have all the right conditions to make air transport one of the
most competitive – if not the most competitive – markets in the world.

Unfortunately, regulators are always convinced of the contrary. They spend their time,
particularly in Europe, imagining how to make market access even easier for new entrants,
whereas it is already far too easy.

Six years ago, an airline like EasyJet hardly existed, while today it ranks second in Europe
by number of passengers carried on intra-European routes. There is no other example of
such fast growth in a capital-intensive business such as ours.

Until regulators realize this specific characteristic of our industry, the situation for all
airlines will remain precarious.

But this should certainly not be an excuse to sit back and do nothing. Airlines must first
restructure their business and capitalize on their assets. This is what Air France has done
since 1996.

Which brings me to my second point – capitalizing on our assets.

Air France’s main asset is France itself. It is magnificently located at the heart of economic
Europe. This position is not quite as advantageous since the recent enlargement of Europe,
but it’s still and will remain, a privileged position in the long term. In fact when you look at
Europe today, only 4 countries can ever hope to have major hubs: England with London,
Germany with Frankfurt and maybe Munich tomorrow, Netherlands with Amsterdam and
France with Paris. The other countries will always be penalized by a less central geographic
position.

Air France’s other main asset is the size of its domestic market, with over 60 million
inhabitants and the extraordinary concentration of population, wealth and decision-making
power in the Paris region.
Apart from which, France in general and Paris in particular, are probably the world’s most
popular tourist destinations.




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If you combine all these factors, you rapidly reach the conclusion that France, especially
Paris – and consequently Air France – have key role to play in the future of European air
transport.

So our strategy was very simple. All we had to do was to make the most of these assets.
Consequently, our strategy at Air France has been to develop along three paths:
First to scrupulously respect the fundamentals of our business.
Secondly to reduce costs.
Thirdly to build an efficient alliance system.

Regarding fundamentals, I strongly believe that each business has its own rules which must
be fully respected before taking on more adventurous strategies. The first of these rules for
a network carrier is to build an efficient hub. The French Government helped us a great
deal when it decided in 1997 to build 2 additional runways at Paris-Charles de Gaulle,
making a total of 4 today. This gives us huge capacity for future developments.

KLM was the first European airline to understand that an efficient hub was the key to
growth and profitability. They were followed by British Airways and then Lufthansa. Air
France was the last to understand its importance. In setting up our hub, we drew on the
expertise of two of your fellow citizens, Steve Wolf (formerly CEO of United) and Rakesh
Gangwal (former VP Scheduling of United). I must say that they played a decisive role in
implementing the hub system at Air France.

Today our Paris-Charles de Gaulle hub is definitely the most important hub in Europe,
ahead of London and Frankfurt. It offers over 16,000 weekly connecting flights in under
two hours.

Thanks to the number of international passengers who fly through Paris with Air France,
more than 50% of our sales are made outside the French market. This shows that a hub
system can improve your attractiveness on all markets, by extending catchment areas.

Some say that the hub system is no longer relevant, because it is increasingly challenged on
the domestic U.S. market. This is probably true for the U.S., where the major hubs link up
domestic flights, but certainly not for Europe. This is because, in Europe, the major hubs
connect short and medium-haul flights with international long-haul flights. The difficulties
for U.S. hubs stem from the fact that a hub organization is perfect for low traffic flows but
totally unsuited to heavy traffic flows.

If we take a concrete example, it’s obvious that the airline which offers direct flights
between two main U.S. cities will win out over the airline which only offers a connection
through a major hub. Because they overlooked this fact, U.S. carriers have rolled out the



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red carpet for low-cost carriers, which were able not only to offer more attractive fares but
also a more convenient product.

In Europe, the hub model is, in my opinion, here to stay for the next few decades, because
traffic flows between most of the European capitals and international destinations will
remain relatively limited.

In addition to building our hub, we restructured our network and also introduced other
American methods of airline management into the Company, such as a highly efficient
Revenue Management system and an attractive frequent flyer program.

On all these points, we were the last to get going. But as is often the case when one is
lagging behind, when you actually get down to it, you end up by taking the lead.

Of course, to make the most of these assets, you need to be an attractive proposition for
your customers. To be able to offer them the service they are entitled to expect, Air France
has totally reworked its products and services since 1994. Most people forget, but we were
actually the first airline worldwide to introduce lie-flat beds in First Class. We have
continued to renew our products, and recently launched a new First and, above all, a new
Business Class with lie-flat beds. We also have a very modern coach class with the latest
technological developments.

Just a brief word about our fleet. Our determination to offer our customers the best possible
product is reflected in the total renewal of our fleet. Today, we offer one of the youngest
medium and long-haul fleets in the world. For example, on our long-haul routes, we
operate a mixed fleet of Airbus A340s and A330s and Boeing 777-200s and 300s. On top
of this, we will be taking delivery of our first Airbus A380s in 2007, and the first route we
will fly them on is between Paris and New York.

It goes without saying that respecting fundamentals is of no use unless you are able to
simultaneously reduce your costs, and improve your bottom line. Since 1998, we have
implemented a series of 3-year cost-savings plans, with very aggressive targets. These
plans are very practical. We have identified hundreds of areas where we can reduce costs.
Our managers know exactly what the targets are. And we have a regular reporting system
to check that these targets are being met.

I’d like to add one thing here. The need to reduce costs and to improve our competitiveness
will be more and more important. We have learned from the U.S. experience that we must
not allow too big a gap to grow between our costs and those of low-cost carriers. Don’t
delude yourselves. More and more, customers will opt for the cheaper fares, and the
transparency of fares revealed by online shopping will accelerate this trend. Our challenge
is to make sure it won’t be achieved at the expense of our customers.


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But network carriers can only do so much, if they remain isolated. Why is this? Because
your customers’ needs are infinite in terms of destinations, especially for business
travellers. I often take the world tyre manufacturer Michelin, as an example.

Their Head Office is located in a medium-sized French town – Clermont Ferrand – and their
main factory is in Greenville in North Carolina. The only way to offer Michelin employees
a comfortable trip is to combine your network with that of one of your U.S. partners, in our
case Delta Air Lines. And I could give you many such examples.

I am convinced that multinational companies, established on all the world’s main markets,
will want to work with a limited number of suppliers for the travel requirements of their
management. And it is only possible to meet this need if you work in an alliance scheme.

What is probably the most strategic move I made was to fight for the total liberalization of
air traffic relations between France and the U.S. Until 1998, the situation was blocked.
U.S. carriers could not expand their services to Paris, and the same applied to us. We could
have considered that this situation protected us, especially in the fast-growing environment
of Paris-Charles de Gaulle with its two additional runways, which provided enormous
potential in terms of available slots. We did exactly the opposite, and regarded the opening
of the French market as a good opportunity for us and not a risk. In 1998, a new agreement
was signed between France and the U.S., which was not exactly an Open Skies agreement
but definitely one that opened up the market. This paved the way for an agreement with
Delta Air Lines in 1999, which was a prelude to the launching of our SkyTeam alliance in
June 2000 with Korean Airlines and AeroMexico. In 2002, a true Open Skies agreement
was signed by our two governments, which enabled us to obtain anti-trust immunity in our
partnership with Delta.

I must say that the results of this Open Skies policy have been extremely beneficial for Air
France.

In 1998, we only offered services to seven U.S. destinations. Today we operate to thirteen
U.S. gateways and, thanks to our agreements with Delta, we can sell our customers an Air
France ticket to over 100 American cities.

Today, with the membership of CSA and Alitalia in 2001 and above all, KLM, Northwest
and Continental in 2004, SkyTeam has become the benchmark alliance, especially on the
North Atlantic. This is a tremendous asset for all of us, particularly during crisis periods,
when alliances act as buffers, for example after the 9/11 attacks. They enable their
members to reduce the size of their fleets and range of services without spoiling their
product, and at the same time they protect their networks. They give their members the
chance of growing at a relatively low cost. As a conclusion, I would say that an efficient


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alliance means a bigger market share, a bigger slice of the customer pie and bigger and
better revenues.

The results of all these efforts have enabled us to pursue a profitable growth strategy over
the years. In 1997 British Airways was the leading airline in Europe with a 23% market
share, followed by Lufthansa with 16% and Air France with only 13%. This gap seemed to
be a permanent fixture at the time. In 2002 and still today, the three airlines are neck and
neck with 17% market share. This represents a complete break with the past.

And when I say “profitable growth”, it’s not just a figure of speech. In the last 8 years, we
have been the only European airline to constantly post profits, even if I find them
insufficient.

I’d like to end this second part of my talk on a humorous note. As I’m sure you know, the
ancestors of the French were the Gauls, who lived under the constant fear that the sky
would fall on their heads. We haven’t changed much. When we want to achieve
something, we tend to focus on the difficulties involved rather than the advantages to be
gained. As you know, our industry is a people business. This means that my constant
priority was and still is to restore self-confidence to our people. Everything we have done
could only have been achieved by keeping our people’s morale at a very high level.

So what’s next? How can we pursue and reinforce this winning profitable growth strategy?

The answer is very simple. By making a success of our merger with KLM.

Two questions come to mind: Why did we merge and what will be our common strategy for
the future?

I’d like to go back briefly over the reasons behind the AF-KLM merger, and what allowed
us to successfully complete a project that was neither a gift from the gods, nor an easy ride.

The merger was possible because Air France and KLM shared the same vision of our
industry’s future, and the same view of the means to achieve our objectives.

The conviction we shared was that the days of the airline industry in its present shape are
numbered. Why?

Because the organization of the air transport industry in Europe reflects a legal framework
that has been left behind by the construction of the European Union, and the emergence of a
pan-European market that is increasingly regulated, not at national, but at European Union
level.



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Because this organization has led to the fragmentation of the sector with national champions
in each member state, which is detrimental to the European airline industry. The airlines
are already structurally fragile and will be increasingly faced with competition from U.S.,
Asian or other competitors in the future. Why? Because there is no doubt that further
deregulation will come sooner or later and take place on a global scale.

The need for consolidation in Europe has been obvious for years, but attempts to
consolidate have failed, because the models they used may be good for other industries, but
not for our own. Governments continue to see our industry as being strategic, and with
good reason. There is also a very strong sense of national identity.

At Air France, as at KLM, we have been able to see our joint project through, because we
have taken this unavoidable reality into consideration. Consolidation is necessary, even
inevitable, but it cannot be accepted by governments and public opinion, unless it respects
national identities and takes national, economic and social interests into account.

This is what prompted us to build a project that surprised the financial community at the
beginning, but which is the only acceptable solution in today’s Europe: one group but two
different airlines, each with their own brands, products and flags.

So what will be our strategy for the future?

Air France and KLM have not joined forces simply to be able to boast of being number one
worldwide. This is not an end in itself, but a means to an end. Our goal is to go out and be
successful as a group for the greater benefit of both our companies. Our merger is an
offensive rather than a defensive move.

Why is this?

First, because we work in a fast-growing sector, where growth has been forecast at 4 to 5%
for the next few years.

Secondly because we work in a very large market – Europe – that is rapidly expanding for
two reasons. First, it has just enlarged to 25 countries and around 500 million inhabitants,
and secondly it is nowhere near as mature as the North American market.

Our goal is therefore very simple. It is to win market share from competitors, especially
British Airways and Lufthansa, but of course, not at the expense of our profitability.

This means that we will constantly seek to boost our competitiveness and productivity in
order to make our growth as profitable as possible, and enable us to adapt to the changing
business climate.


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Secondly, we will take advantage of the combined strengths of our two airlines, their weight
in the marketplace, their complementary assets and synergies, the professionalism of their
workforces and, above all, their hubs.

In the future we believe that no European airline will be able to reinforce its position on the
European Single Market of 500 million consumers, if its organized around only one hub.
All European carriers will have to learn to work on a multi-hub system. Here Air France-
KLM will benefit from being able to build on two hubs which have already reached critical
mass.

When we were discussing our agreement, we had identified a potential of between 400 and
500 million euros of synergies over the next 5 years – 50% in costs and 50% in revenues. 6
months after completion of the merger, we raised our estimate of potential synergies to 600
million euros. In addition, the speed at which we are achieving these synergies is much
faster than we anticipated. This means that, after one year, our strategic vision is not only
the right one but one that is surpassing our expectations.

I now come to my conclusion. I said earlier that deregulation would continue to evolve.
This is especially true on the North Atlantic routes. As you know, negotiations between the
EU and the US are under way for a more complete liberalization on this market. And we
think that, like the Open Skies policy, this is more an opportunity than a risk.

Several studies have demonstrated in recent years that traffic would be stimulated and
significantly more opportunities offered to the travelling public, if the regulatory framework
moved beyond the present bilateral regime between the U.S. and EU Member States.

Air France and KLM remain committed in the longer term to the broad concept of an Open
Aviation Area, where every carrier licensed and established in the EU and the US is able to
operate freely between any pair of cities, while enjoying a level playing field from a
regulatory point of view.

However such a goal should eventually be achieved through a multi-phase approach. It is
our belief that a certain degree of realism should be accepted by both sides in these
negotiations, if we want to conclude a mutually satisfactory first phase agreement in the
near future. So let’s not focus on endless discussions around tricky issues of no interest
such as “cabotage” and try to move this process forward.
We are committed to contributing positively to this process, and have presented to our
Authorities, elements that we believe can
be realistically included in a first phase, short-term agreement between the European Union
and the United States of America.



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The market between Europe and the U.S. will remain the number one world market for a
long time. This means that the future of U.S. and European airlines depends on the
dynamism of this market. It is therefore up to us, through a new regulatory framework, to
create the conditions for further profitable growth.




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