##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 20-F o
    
    REGISTRATION STATEMENT PURSUANT
TO SECTION 12 (b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended March 31, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ________ to ________ Commission File Number 1-4059 Koninklijke Luchtvaart Maatschappij N.V.  KLM Royal Dutch Airlines
(Translation of Registrants name into English) The Netherlands
(Jurisdiction of incorporation or organization) 55 Amsterdamseweg, Amstelveen, The Netherlands
(Address of principal executive offices) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common shares, par value 2 euro




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Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None Indicate the number of outstanding shares of each of the issuers classes of
capital or common stock as of the close of the period covered by the annual
report. 46,809,699
    
    Common shares8,812,500
    
    Cumulative preference shares A7,050,000
    
    Cumulative preference shares C1,312.5
    
    Priority shares
 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. x Yes                       o No Indicate by check mark which financial statement item the registrant has
elected to follow. o Item 17                       x Item 18




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KLM ROYAL DUTCH AIRLINES Annual Report on Form 20-F
to the Securities and Exchange Commission
for the fiscal year ended March 31, 2004 TABLE OF CONTENTS  
 PageWarning about Forward-Looking Statements
    
    
    2Presentation of Information and Exchange Rates
    
    
    2Part I.
    Item 1.
    Identity of Directors, Senior Management and Advisors
    
    
    3Item 2.
    Offer Statistics and Expected Timetable
    
    
    3Item 3.
    Key Information
    
    
    3Item 4.
    Information on the Company
    
    
    9Item 5.
    Operating and Financial Review and Prospects
    
    
    24Item 6.
    Directors, Senior Management and Employees
    
    
    36Item 7.
    Major Shareholders and Related Party Transactions
    
    
    45Item 8.
    Financial Information
    
    
    46Item 9.
    The Offer and Listing
    
    
    47Item 10.
    Additional Information
    
    
    48Item 11.
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    58Item 12.
    Description of Securities Other than Equity Securities
    
    
    59Part II.
    Item 13.
    Defaults, Dividends Arrearages and Delinquencies
    
    
    59Item 14.
    Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    59Item 15.
    Controls and Procedures
    
    
    59Item 16.
    Reserved
    
    
    60Item 16A.
    Audit Committee Financial Expert
    
    
    60Item 16B.
    Code of Ethics
    
    
    60Item 16C.
    Principal Accountant Fees and Services
    
    
    60Item 16D.
    Exemptions from the Listing Standards for Audit Committees
    
    
    61Item 16E.
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    61Part III.
    Item 17.
    Financial Statements
    
    
    61Item 18.
    Financial Statements
    
    
    61Item 19.
    Exhibits
    
    
    61Signatures
    
    
    62EXHIBIT 1.1EXHIBIT 12.1EXHIBIT 12.2EXHIBIT 13.1EXHIBIT 13.2
  1




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WARNING ABOUT FORWARD-LOOKING STATEMENTS This Form 20-F contains, and the Company and its representatives may make,
forward-looking statements within the meaning of the U.S. Private Securities
Litigation Act of 1995, either orally or in writing, about KLM Royal Dutch
Airlines and its business. Forward-looking statements generally can be
identified by the use of terms such as ambition, may, will, expect,
intend, estimate, anticipate, believe, plan, seek, continue or
similar terms. These forward-looking statements are based on current
expectations, estimates, forecasts, projections about the industries in which
we operate, managements beliefs, and assumptions made by management about
future events. Any such statement is qualified by reference to the following
cautionary statements. These forward-looking statements involve known and
unknown risks, uncertainties and other factors, many of which are outside of
our control and are difficult to predict, that may cause actual results to
differ materially from any future results expressed or implied from the
forward-looking statements. The risks in part relate to KLMs combination with
société Air France, which was effected in May 2004. For further information
regarding the combination, see Item 4.A  Information on the Company  History
and development of the company. Forward-looking statements are not guarantees
of future performance and involve risks and uncertainties including:  
    
    the risk that Air France and KLM will not be integrated successfully and expected synergies and cost savings will not be
fully achieved or achieved within the expected time frame;  
    
    the ability to develop an integrated strategy for the combined Air France-KLM group;  
    
    the airline pricing environment;  
    
    competitive pressure among companies in our industry;  
    
    general economic conditions;  
    
    changes in the cost of fuel or the exchange rate of the euro to the U.S. dollar and other currencies;  
    
    governmental and regulatory actions and political conditions, including actions or decisions by courts and regulators or
changes in applicable laws or regulations (or their interpretations), including laws and regulations governing the
structure of the combination, the right to service current and future markets and laws and regulations pertaining to the
formation and operation of airline alliances;  
    
    developments affecting labor relations or our airline partners;  
    
    the outcome of any material litigation;  
    
    the future level of air travel demand;  
    
    future load factors and yields for Air France and KLM;  
    
    industrial actions or strikes by KLM employees, Air France employees or employees of our suppliers or airports;  
    
    the effects of terrorist attacks, the possibility or fear of such attacks and the threat or outbreak of epidemics,
hostilities or war, including the adverse impact on general economic conditions, demand for travel, the costs of security,
the cost and availability of aviation insurance coverage and war risk coverage and the price and availability of jet fuel;
and  
    
    changing relationships with customers, suppliers and strategic partners. Developments in any of these areas, as well as other risks and uncertainties
detailed from time to time in the documents we file with or furnish to the U.S.
Securities and Exchange Commission (SEC), could cause actual outcomes and results to
differ materially from those that have been or may be projected by us or on our
behalf. We caution that the foregoing list of important factors is not
exhaustive. Additional information regarding the factors and events that could
cause differences between forward-looking statements and actual results in the
future is contained in our Securities and Exchange Commission filings,
including this annual report on Form 20-F. For further discussion of these and
other factors, see Item 3 - Key Information - Risk Factors, Item 4
-Information on the Company, Item 5 - Operating and Financial Review and
Prospects and Item 11 - Quantitative and Qualitative Disclosures about Market
Risk. We do not undertake any obligation to update or revise any
forward-looking statement, whether as a result of new information, future
events or otherwise. 
 PRESENTATION OF INFORMATION AND EXCHANGE RATES Unless otherwise specified or the context requires otherwise, us, we, our
and the Company refer to KLM and its consolidated subsidiaries. References to dollars, U.S. dollars and $ are to United States dollars,
references to euro and EUR are to the currency introduced at the start of
the second stage of the Economic and Monetary Union pursuant to the Treaty
establishing the European Economic Community as amended by the treaty on the
European Union (E.U.). U.S. dollar amounts presented are unaudited and have been translated solely for
your convenience at and for the year ended March 31, 2004, from euro into U.S.
dollars at an exchange rate of $1.2316 per 1.00, the closing buying rate
published by Bloomberg. For information regarding the rate of exchange between
euro and U.S. dollars, see Item 3.A  Key Information  Selected financial
data  Exchange rates. We do not represent that the U.S. dollar amounts
presented in the U.S. dollar convenience translation or any amounts translated
from euro into other currencies could have been converted from euro at the
rates indicated. 2




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PART I: 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS Not applicable. 
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. 
 ITEM 3. KEY INFORMATION A. Selected financial data The selected consolidated financial data presented below for the respective
fiscal years ended March 31, 2004, March 31, 2003, and March 31, 2002 has been
derived from our audited consolidated financial statements and the related
notes appearing elsewhere in this annual report. The selected consolidated
financial data for the respective fiscal years ended March 31, 2001, and March
31, 2000 has been derived from our audited consolidated financial statements
not included in this annual report. Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the Netherlands (Netherlands GAAP),
which differ in certain respects from accounting principles generally accepted
in the United States (U.S. GAAP). Note 28 to our consolidated financial
statements provides a description of the applicable differences between
Netherlands GAAP and U.S. GAAP and a reconciliation of net income and
shareholders equity to U.S. GAAP. Unless otherwise indicated, all amounts in this report are expressed in
millions of euro. Selected financial data presented in accordance with Netherlands GAAP Fiscal year ended March 31,In millions of euro, except share and per share data
    
    2004
    
    2003
    
    2002
    
    2001
    
    2000Total assets
    
    
    8,037
    
    
    
    8,165
    
    
    
    8,943
    (1)
    
    
    8,590
    
    
    
    8,647Assets less current liabilities
    
    
    6,181
    
    
    
    5,975
    
    
    
    6,851
    (1)
    
    
    6,533
    
    
    
    6,404Long-term debt
    
    
    4,228
    
    
    
    3,971
    
    
    
    4,417
    
    
    
    3,686
    
    
    
    3,712Stockholders equity
    
    
    1,487
    
    
    
    1,476
    
    
    
    1,992
    
    
    
    2,061
    
    
    
    2,019Capital stock
    
    
    125
    
    
    
    125
    
    
    
    125
    
    
    
    125
    
    
    
    125Operating revenues
    
    
    5,877
    
    
    
    6,485
    
    
    
    6,532
    
    
    
    6,960
    
    
    
    6,296Operating income (loss)(2)
    
    
    120
    
    
    
    (484
    )
    
    
    (94
    )
    
    
    277
    
    
    
    (18
    )Net income (loss)
    
    
    24
    
    
    
    (416
    )
    
    
    (156
    )
    
    
    77
    
    
    
    337Net income (loss) per common share(3),(4):Basic
    
    
    0.50
    
    
    
    (9.26
    )
    
    
    (3.46
    )
    
    
    1.63
    
    
    
    7.21Diluted
    
    
    0.50
    
    
    
    (9.26
    )
    
    
    (3.46
    )
    
    
    1.63
    
    
    
    7.21Dividend declared per common share
    
    
    
    
    
    
    0.10
    
    
    
    0.20
    
    
    
    0.60
    
    
    
    Dividend declared per common share (in dollars)
    
    
    
    
    
    
    0.12
    
    
    
    0.25
    
    
    
    0.74
    
    
    
    Average number of common shares outstanding
(in thousands):Basic
    
    
    44,188
    
    
    
    45,071
    
    
    
    45,682
    
    
    
    46,133
    
    
    
    46,569Diluted
    
    
    44,301
    
    
    
    45,071
    
    
    
    45,682
    
    
    
    46,133
    
    
    
    46,569
  (1)
    
    The March 31, 2002 balance sheet included a 100 million deferred tax
liability presented under provisions. For comparative purposes, and
consistent with Netherlands GAAP, we have reclassified this liability as a
negative deferred tax asset under financial fixed assets, since KLMs
overall tax position turned into a deferred tax asset during the fiscal
year ended March 31, 2003.(2)
    
    Operating income (loss) under Netherlands GAAP has been adjusted
retroactively to reflect the changed accounting rules effective for KLM as
of April 1, 2003 with respect to the presentation of extraordinary items.(3)
    
    After taking into account the rights of holders of priority shares,
cumulative preference shares A and cumulative preference shares C and
based on the weighted average number of shares outstanding during the
year.(4)
    
    The figures for each of the fiscal years ended March 31, 2000, 2001 and
2002 have been restated to exclude shares held by KLM. 3




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Selected financial data presented in accordance with U.S. GAAP Fiscal year ended March 31,In millions of euro, except share and per share data
    
    2004
    
    2003
    
    2002
    
    2001
    
    2000Total assets
    
    
    10,317
    
    
    
    10,382
    
    
    
    11,306
    (1)
    
    
    10,934
    
    
    
    10,641Assets less current liabilities
    
    
    8,392
    
    
    
    8,148
    
    
    
    9,214
    (1)
    
    
    8,304
    
    
    
    7,840Long-term debt(2)
    
    
    4,551
    
    
    
    4,446
    
    
    
    4,981
    
    
    
    4,496
    
    
    
    4,362Stockholders equity
    
    
    2,869
    
    
    
    2,827
    
    
    
    3,220
    
    
    
    3,229
    
    
    
    3,081Capital stock
    
    
    125
    
    
    
    125
    
    
    
    125
    
    
    
    125
    
    
    
    125Operating revenues
    
    
    5,877
    
    
    
    6,367
    
    
    
    6,412
    
    
    
    6,869
    
    
    
    6,286Operating income (loss)(3)
    
    
    191
    
    
    
    (244
    )
    
    
    86
    
    
    
    458
    
    
    
    731Net income (loss)
    
    
    62
    
    
    
    (267
    )
    
    
    (2
    )(4)
    
    
    154
    (4)
    
    
    510
    (4)Income (loss) from continuing operations(5)
    
    
    62
    
    
    
    (234
    )
    
    
    28
    
    
    
    209
    
    
    
    530Income (loss) from discontinued operations(5)
    
    
    
    
    
    
    (33
    )
    
    
    (30
    )
    
    
    (55
    )
    
    
    (20
    )Net income (loss) per common share(6),(7):Basic
    
    
    1.37
    
    
    
    (5.97
    )
    
    
    (0.08
    )
    
    
    3.30
    
    
    
    10.91Diluted
    
    
    1.36
    
    
    
    (5.97
    )
    
    
    (0.08
    )
    
    
    3.30
    
    
    
    10.91Income (loss) from continuing operations per
common share:Basic
    
    
    1.37
    
    
    
    (5.23
    )
    
    
    0.57
    
    
    
    4.49
    
    
    
    11.34Diluted
    
    
    1.36
    
    
    
    (5.23
    )
    
    
    0.57
    
    
    
    4.49
    
    
    
    11.34Income (loss) from discontinued operations per
common share:Basic
    
    
    
    
    
    
    (0.74
    )
    
    
    (0.65
    )
    
    
    (1.19
    )
    
    
    (0.43
    )Diluted
    
    
    
    
    
    
    (0.74
    )
    
    
    (0.65
    )
    
    
    (1.19
    )
    
    
    (0.43
    )Dividend declared per common share
    
    
    
    
    
    
    0.10
    
    
    
    0.20
    
    
    
    0.60
    
    
    
    Dividend declared per common share (in dollars)
    
    
    
    
    
    
    0.12
    
    
    
    0.25
    
    
    
    0.74
    
    
    
    Average number of common shares outstanding
(in thousands):Basic
    
    
    44,188
    
    
    
    45,071
    
    
    
    45,682
    
    
    
    46,133
    
    
    
    46,569Diluted
    
    
    44,301
    
    
    
    45,071
    
    
    
    45,682
    
    
    
    46,133
    
    
    
    46,569
  (1)
    
    Total assets and assets less current liabilities as of March 31, 2002
have been reduced by 853 million mainly to exclude net non-current
deferred tax liabilities.  (2)
    
    As of March 31, 2004 KLM presents deferred credits with respect to
benefits regarding financial lease arrangements for aircraft under the
line item Long-term debt in the balance sheet in accordance with
Accounting Principles Board Opinion no. 21. The figures for the fiscal
years ended March 31, 2000, 2001, 2002 and 2003 have been restated.  (3)
    
    Operating income (loss) under U.S. GAAP has been reclassified to reflect
the inclusion of results on sale of holdings and results on sale of
assets, which had been previously recognized in separate line items called
results on sale of holdings and results on sale of assets. This
reclassification resulted in the following changes in operating income
(loss): a decrease of 36 million for the year ended March 31, 2003; an
increase of 19 million for the year ended March 31, 2002; an increase
of 31 million for the year ended March 31, 2001 and an increase of
456 million for the year ended March 31, 2000.  (4)
    
    As explained in note 28 to KLMs annual consolidated financial
statements, KLM adopted Statement of Financial Accounting Standards (SFAS)
142 on April 1, 2002. Under SFAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized, but instead tested for
impairment at least annually. If this amortization had been excluded from
results for prior periods, net income (loss) and earnings per share would
have been increased by 7 million (0.15 per share) for the year
ended March 31, 2002; 11 million (0.24 per share) for the year
ended March 31, 2001 and 13 million (0.28 per share) for the year
ended March 31, 2000.  (5)
    
    For comparative purposes, we restated our figures to reflect our former
U.K. low fare business Buzz as a discontinued operation effective April 1,
1999. KLM sold Buzz to Ryanair on April 11, 2003. Under U.S. GAAP, Buzz is
considered a discontinued operation as from April 1, 2003.  (6)
    
    After taking into account the rights of holders of priority shares,
cumulative preference shares A and cumulative preference shares C and
based on the weighted average number of shares outstanding during the
year.  (7)
    
    The figures for each of the fiscal years ended March 31, 2000, 2001 and
2002 have been restated to exclude shares held by KLM. Dividends For the 1999/2000 fiscal year, no dividend was paid. For the 2000/2001 fiscal
year a dividend of 0.60 per common share was paid in cash. For the
2001/2002 fiscal year a dividend of 0.20 per common share was paid in cash.
For the 2002/2003 fiscal year, a dividend of 0.10 per common share was paid
in cash. For the 2003/2004 fiscal year, no dividend was paid. 4




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Exchange rates The following table sets forth the closing buying rates published by Bloomberg
for the euro for each of the last five fiscal years: Fiscal year ended March 31,
    
    
    
    
    
    
    
    
    
    Period
    
    Average(U.S. dollars per euro)
    
    High
    
    Low
    
    End
    
    rate (1)2000
    
    
    1.0887
    
    
    
    0.9524
    
    
    
    0.9574
    
    
    
    1.02382001
    
    
    0.9650
    
    
    
    0.8271
    
    
    
    0.8773
    
    
    
    0.90792002
    
    
    0.9277
    
    
    
    0.8364
    
    
    
    0.8717
    
    
    
    0.88472003
    
    
    1.1054
    
    
    
    0.8750
    
    
    
    1.0915
    
    
    
    0.99392004
    
    
    1.2842
    
    
    
    1.0695
    
    
    
    1.2316
    
    
    
    1.1761
  (1)
    
    Average of the closing buying rates on the last day of each month during the fiscal year The following table sets forth the high and low closing buying rates published
by Bloomberg for the euro for each of the last six months: Month
    
    Highest
    
    Lowest(U.S. dollars per euro)
    
    rate
    
    rateFebruary 2004
    
    
    1.2827
    
    
    
    1.2420March 2004
    
    
    1.2827
    
    
    
    1.2099April 2004
    
    
    1.2364
    
    
    
    1.1842May 2004
    
    
    1.2264
    
    
    
    1.1822June 2004
    
    
    1.2322
    
    
    
    1.2006July 2004
    
    
    1.2452
    
    
    
    1.2018
 On
August 30, 2004, the closing buying rate was 1.00 =
$1.2048 B. Capitalization and indebtedness Not applicable. C. Reasons for the offer and use of proceeds Not applicable. D. Risk factors Key risks to our company and the airline industry as a whole are outlined
below. The risks we face are not limited to the risks listed here. Some risks
are not yet known to us and some risks that we currently do not believe to be
material to our operations could prove to be material at a later date. All of
these risks can materially affect our business, revenues, operating income, net
income, net assets, liquidity and capital resources. Risks Related to the Airline Industry Future terrorist attacks, the threat of attacks or regional instability may
worsen conditions in the airline industry The terrorist attacks in the United States on September 11, 2001 had a
significant negative effect on market conditions around the world. Airlines, in
particular, experienced significant revenue losses and incurred substantial
additional costs, principally as a result of a decrease in demand for air
travel, significantly higher costs of insurance and passenger and aircraft
security, and decreases in the resale prices of some types of aircraft.
Regional instability following hostilities in Iraq has had a material adverse
effect on the airline industry. Any future terrorist attack, military action,
or the threat of attacks or action, in the Middle East or elsewhere, could
result in a general reduction in airline passenger traffic and prices for
airline travel, newly imposed air traffic restrictions in affected regions and
an increase in fuel or insurance costs, all of which could have a material
adverse effect on our business. Medical epidemics or threats or fears of epidemics may adversely affect our
business Passenger volumes may significantly decrease in the event of a medical epidemic
or threat or fear of an epidemic. For example, the outbreak of SARS in 2003
resulted in a sharp reduction in air traffic and revenue related to Asia. The
prolonged existence of a medical epidemic, or the perception that an outbreak
has not been contained or may occur again in the future, may have a material
adverse effect on the demand for our air services to or from affected
countries. 5




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Insurance costs may increase significantly, while the amount of available
insurance coverage may be limited further Following the terrorist attacks on September 11, 2001, insurance premiums for
airlines increased significantly, especially for risks relating to terrorism.
In addition, in the immediate aftermath of September 11, 2001, insurance
companies renegotiated insurance coverage for certain risks relating to war and
other hostilities, charging substantially higher rates and limiting coverage to
a uniform amount of $50 million. As a result, the State of the Netherlands
offered coverage to airlines, at a charge, for loss amounts that exceeded the
insurance coverage available in the market for war and other hostilities. In
the event of further terrorist attacks or acts of war, government support
similar or comparable to the coverage that was made available in the immediate
aftermath of September 11, 2001 may not be made available, insurance premiums
may be increased further or insurance may be made available only with
additional limitations on coverage. Any failure to obtain adequate insurance
coverage or insurance coverage on financially acceptable terms would materially
adversely affect the business, financial condition and results of our
operations. Government support of airlines may have a distorting effect on competition in
the airline industry Following the events of September 11, 2001, a number of countries took measures
to help airlines extend coverage for damage caused to third parties on the
ground as a result of terrorist acts, since the coverage available in the
insurance market was limited. The State of the Netherlands offered airlines,
for a charge, an extension of coverage for loss amounts that exceeded the
insurance coverage available in the market. From November 1, 2002, The State of
the Netherlands phased out this additional coverage at the direction of the
European Commission, and European airline companies were required to obtain
insurance coverage from private insurance companies. The United States,
however, passed legislation permitting federal authorities to maintain
government guarantees in favor of U.S. airline companies covering damage caused
to third parties on the ground, passengers, crew and aircraft, at cost levels
substantially below those borne by European airlines. Added to the substantial
subsidies received from U.S. federal authorities and the costs of new security
measures assumed by the U.S. federal authorities following the events of
September 11, 2001, the reduced insurance costs paid by U.S. airlines have
offered, and continue to offer, U.S. airlines a significant competitive
advantage over their European competitors, particularly on routes over the
North Atlantic. Similar measures taken by governmental authorities in the
future may have a material adverse effect on our business. High fixed costs and low profit margins may limit KLMs growth The airline industry is characterized by low gross profit margins and high
fixed costs. The expenses of each flight do not vary significantly with the
number of passengers or amount of cargo carried and, therefore, a relatively
small change in the number of passengers or in the pricing or mix between
business class traffic and economy class could have a significant effect on our
operating and financial results. Accordingly, a minor shortfall from expected
business levels could have a material adverse effect on our financial
performance. The airline industry is by nature cyclical and seasonal, which may cause our
results to vary widely Our businesses are highly sensitive to local, regional and international
economic conditions. Our business, financial condition and results of
operations will be subject to changing economic and political conditions
prevailing from time to time in the principal markets throughout the world.
Because both business and leisure airline travel is discretionary, we tend to
experience severe adverse financial results during general economic downturns.
In addition, during an economic downturn, KLM may also be required to accept
delivery of new aircraft that it has agreed to purchase even if the new
aircraft are not required for its current operations, or may be unable to
dispose of unnecessary aircraft on financially acceptable terms. The airline industry tends to be seasonal in nature. The demand for scheduled
airline services is lowest during the winter months, which generally results in
seasonal fluctuations in revenues and results of operations. Our results of
operations for the interim periods of any financial year may not be indicative
of its results of operations for the full year. Changes in international, regional and local regulation and legislation could
significantly increase our costs of operations or reduce our revenues Our operations are subject to a high degree of international, European and
national regulation covering most aspects of its operation, including traffic
rights, fare setting, operating standards (the most important of which relate
to safety, security and aircraft noise), airport access and slot availability. Additional laws and regulations and additional or increased taxes, airport and
navigation rates and charges have been proposed from time to time that could
significantly increase our cost of operations or reduce our revenues. The
ability of European carriers to operate international routes is subject to
change because the applicable arrangements between European and foreign
governments may be amended from time to time, or because appropriate slots are
not available. 6




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Risks Related to our Business Substantial competition from other major airlines, high-speed rail travel and
low-cost airlines may harm our business The airline industry is highly competitive and prone to price discounting. On
April 1, 1997, the air travel market in the European Union was fully
liberalized and, as a result, any European airline is able to compete with us
in the European market. Liberalization of the European market and the resulting
competition among carriers has led to a general decrease of airfares and an
increase in the number of competitors in many lines of business. We currently
face, and will continue to face, substantial competition from other carriers.
This competition is likely to increase further. With respect to short-haul and medium-haul flights in or from the Netherlands
and other European countries, we currently face, and will continue to face,
competition from providers of alternative forms of transportation. In
particular, we have faced increasing competition from low-cost airlines that
have become significant competitors in the European airline industry in recent
years. The percentage of routes on which we compete with carriers having
substantially lower operating costs has grown significantly over the past
decade. Such competition is likely to continue at this level or intensify in
the future. Moreover, the increase in pricing transparency resulting from the
use of the Internet has enabled consumers to obtain more easily the lowest fare
on any given route. Continued or increased competition from other carriers,
including low-cost airlines, could have a material adverse effect on our
business, financial condition, and results of operations. We may be adversely affected by high aircraft fuel prices After labor costs, fuel costs are expected to constitute the single largest
portion of our operating costs. For the year ended March 31, 2004, fuel costs
represented 13.1% of our operating expenses. The price of aircraft fuel is
strongly correlated to the price of Brent crude oil. From January 1,1998
through August 25, 2004, the price of petroleum has fluctuated between a low of
$9.64 per barrel and a high of $45.14 per barrel. The price of Brent crude on
the International Petroleum Exchange was $42.35 per barrel on August 25, 2004,
a high level by historical standards. Aircraft fuel costs may be affected by a
number of factors, including fluctuations in the euro/dollar exchange rate,
political events, war or the threat of war, and the coordinated pricing
decisions of producer cartels such as OPEC. We manage this risk by hedging
against the price of petroleum, as no market exists to hedge aircraft fuel.
Notwithstanding the application of hedging policies and possible adjustments in
fares across the industry during periods of sustained high fuel prices, high
aircraft fuel costs have had a material adverse effect on our business,
financial condition and results of operations in the past, and may have such an
effect on us in the future. Fluctuations in foreign exchange rates and increases in interest rates may
negatively affect our results Given
the international nature of our business, we receive a large part of
our
revenues and incur an even larger part of our expenses in foreign currencies,
particularly dollars, and are exposed to fluctuations in the exchange rates
between those currencies and the euro. If the dollar were to increase in value
against the euro, our costs would rise more rapidly than our revenues,
negatively affecting profitability. KLM is also exposed to increases in interest rates. At March 31, 2004, 42% of
our long-term debt had variable rates of interest. A significant increase in
interest rates could substantially increase the cost of this debt, adversely
affecting our financial results. The failure of an alliance to develop or the decision by other members not to
participate fully or to withdraw from an alliance could have a material adverse
effect on our business The maintenance and development of alliances and other strategic relations is
critical to our business. In connection with the combination with Air France
and subject to KLM meeting the admission criteria, it is expected that KLM will
become a member of the SkyTeam alliance in fiscal year 2004/2005. Air France is
a member of the SkyTeam alliance with Delta Air Lines, Korean Air, Aeroméxico,
CSA Czech Airlines, and Alitalia. In addition, KLM and Northwest Airlines have
a transatlantic joint venture, and KLM has cooperation agreements with
Continental Airlines, all of which existed prior to our combination with Air
France. The success of these alliances depends in part on the actions and
strategic plans of the other airlines over which we have little control. Our
failure to meet the SkyTeam admission criteria, the failure of an alliance to
develop or the decision by other members not to participate fully or to
withdraw from an alliance altogether could have a material adverse effect on
our business. Our development of new routes depends on access to a limited number of slots
at international airports that may be withdrawn if not sufficiently used Our ability to add additional flights to our existing schedules will be
constrained, in part, by the availability of slots at the worlds main
airports. In the European Union, air carriers must generally use an allocated
slot at a minimum of 80% of the level of use during the period the slot was
assigned. Following our combination with Air France, we may lose flight slots
granted to it should it not use those slots at an 80% level. In addition, in
connection with the combination, Air France and KLM have committed to the
European Commission to make slots available under certain circumstances to a
competitor wishing to introduce a new competing passenger air service on routes
between Amsterdam on the one hand, and Bologna, Bordeaux, Lyon, Marseilles,
Milan, Paris, Rome, Toulouse and Venice on the other hand. 7




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Compliance with environmental regulations may affect our existing or future
operations and result in additional costs The airline industry is subject to environmental laws and regulations and will
be subject to further environmental laws and regulations in the future. These
environmental laws and regulations relate to, among other things, aircraft
noise and aircraft engine emissions, the use and handling of hazardous
materials, air emissions and environmental contamination clean-up. In recent
years, Dutch, E.U. and U.S. regulatory authorities have issued a number of
directives and other regulations including regulations relating to aircraft
noise and age. These requirements impose high fees, taxes and substantial
ongoing compliance costs on airlines, particularly as new aircraft brought into
service will have to meet the environmental requirements during their entire
service life. We expect to incur expenditures on an ongoing basis to comply
with such regulations. Compliance with these laws could restrict our ability to
modify or expand facilities or continue operations, or could require us to
install costly pollution control equipment or incur other significant expenses,
including remediation costs. Financing may not be available to us on acceptable terms in the future Because the airline industry is by its nature capital intensive, we have
incurred significant indebtedness and capital commitments to finance our
ongoing operations. We have been able to finance our operations and capital
needs in part because our main assets, aircraft, have been attractive as
security to lenders and other financiers. However, there can be no assurance
that aircraft or any other assets held by us will continue to provide
attractive security for lenders. Any prolonged restriction on our ability to
raise money in the market in the future could adversely affect our ability to
borrow, which could in turn have an adverse impact on our business and results
of operations. Unfavorable outcomes of lawsuits may weaken our liquidity position We are involved in various legal actions for which we have not recorded
provisions in our financial statements. In particular, we are one of three
major European airlines that, along with several U.S. airlines, are being sued
in a class-action case brought by travel agents in the United States in respect
of an alleged illegal agreement in restraint of trade under the Sherman
Antitrust Act. The amount of damages sought from the defendant airlines in
respect of the claims amounts to $17.5 billion, which could triple under
legislation covering illegal agreements. This case was decided in favor of the
airlines on October 30, 2003, but the plaintiffs have appealed the decision.
Unfavorable outcomes of this or other actions could have a material adverse
effect on the our results of operations and weaken our liquidity position. See
note 13 to our consolidated financial statements. High labor costs or an inability to conclude future collective labor agreements
on satisfactory terms may decrease our operating margins Wage rates have had and will continue to have a significant effect on our
operating results. Our profitability could suffer if we are not able to conclude
future collective labor agreements on satisfactory terms with our employees.
For the year ended March 31, 2004, labor costs represented 33.1% of our
operating expenses. Labor disruptions could result in reduced revenues and increased costs for us If
we are not able in the future to renew our collective labor agreements or
other key agreements with our employees in a satisfactory way, or if any
strike, work stoppage or work slowdown occurs, our business, financial
condition and results of operations could be adversely affected. Disruption of air traffic control and other airport services may have a
material adverse effect on our business Our operations rely upon the services of third parties such as those provided
by air traffic controllers and public safety officials, and we use the services
of third parties such as handling and private security agents in the ordinary
course of our business. We have no direct control over the activities of these
third parties and could be directly affected by any change, interruption or
termination of their activities. Any interruption in the normal business
activities of these third parties, such as operational malfunctioning or a
series of prolonged strikes, or an increase in airport or rental fees charged
in connection with the use of these services, could have a material adverse
effect on our business, financial condition and results of operations. Risks Related to the Combination with Air France The integration of Air France and KLM may be difficult and expensive The combination with Air France involves the integration of two large and
complex businesses that previously operated independently. The achievement of
expected synergies from the combination require the integration of various
aspects of the businesses of Air France and KLM. Air Frances and KLMs goal in integrating their operations is to increase the
revenues and earnings of the combined businesses through cost savings,
including announced restructuring, plans and operational benefits, and to
increase the combined groups ability to satisfy the demands of its customers.
In so doing, the combined group may encounter substantial difficulties in
integrating its operations, and could even incur substantial costs as a result
of, among other things:  
    
    loss of key employees;
    
    inconsistencies in standards, controls, procedures and policies,
business cultures and compensation structures between Air France and
KLM and the need to implement, integrate and harmonize various
business-specific operating procedures and systems, as well as the
financial, accounting, information and other systems of Air France and
KLM; and
    
    diversion of managements attention from their other responsibilities
as a result of the need to deal with integration issues. 8




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The diversion of management attention and any difficulties encountered from
integrating the respective businesses of Air France and KLM could increase our
costs or reduce our revenues, earnings and operating results. KLM may not successfully implement, and adapt to its new corporate governance
arrangements established as part of the combination As part of their combination, Air France and KLM established a series of new
corporate governance arrangements relating to the combined operating companies
corporate structure. Among other things, these arrangements include the
establishment of a Strategic Management Committee that determines the combined
groups common position with respect to all major strategic decisions relating
to commercial, financial, technical and operational matters. The combined group
must respect the assurances given to KLM and the State of the Netherlands in
accordance with the framework agreement. Furthermore, a new holding company
will be established over the operating companies Air France and KLM. The
combined groups management, KLMs Board of Management or KLMs Supervisory
Board may not successfully adapt to this new environment, and they may find it
difficult and time-consuming to implement the new corporate governance
arrangements. Legally binding assurances given to KLM and the State of the Netherlands in
connection with the combination could limit the ability of the combined group
to take beneficial actions In connection with our combination with Air France, Air France and KLM granted
assurances to the State of the Netherlands. These assurances have a term of
five or eight years from completion of the combination, depending on the
assurance in question. The State assurances are intended to preserve the
network quality of KLM at Schiphol airport, which, according to the State of
the Netherlands, is a matter of public interest for the Netherlands, and
include certain binding commitments by both Air France and KLM. In addition,
Air France and KLM have agreed to another set of assurances designed to
preserve KLMs independence, to a degree. These assurances could limit KLMs
ability to respond to changes in the competitive or economic environments in
which it operates, and could therefore have a material adverse effect on KLMs
business and financial condition. Certain countries may challenge our operation of scheduled air services Although we have entered into arrangements with the State of the Netherlands
designed to guard against it, a country to which we operate scheduled air
services may restrict or terminate, or may threaten to restrict or terminate
our services if they conclude that a substantial part of the share capital of
KLM is not demonstrably Dutch-owned, or that KLM is not effectively controlled
by Dutch nationals. This may negatively affect our business and financial
condition. 
 ITEM 4. INFORMATION ON THE COMPANY A. History and development of the company Koninklijke Luchtvaart Maatschappij N.V., commonly known by its trade name,
KLM, is a public limited liability stock corporation organized in 1919 under
the laws of the Netherlands. Our registered office is at Amsterdamseweg 55,
1182 GP Amstelveen, the Netherlands. We may be contacted via telephone at +31
20 649 9123. We have operated continuously as a corporate entity longer than
any other scheduled airline. Since 1929 the State of the Netherlands has owned
a substantial interest in our issued share capital. However, we have been
managed and operated as a private business enterprise at all times since our
organization. We are an international airline operating worldwide. Our home base is Amsterdam
Airport Schiphol, one of the most modern major airports in the world. Through
close cooperation with European and intercontinental network and route
partners, we offer passengers and airfreight shippers more than 132,000
city-pair connections throughout the world directly or via one or more
airports. Combination with Air France KLM forms part of the Air France-KLM group. The concept around which Air France
and KLM decided to combine their businesses is one group, two airlines. The
objective of this concept is to respect the identity, brand and cultures of the
two airlines while achieving common results of operations. On October 16, 2003,
we entered into a framework agreement with société Air France in which we
agreed to combine with Air France. 9




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KLM shareholding before the combination The following chart illustrates KLMs organizational structure prior to the
combination: (KLMS ORGANIZATIONAL STRUCTURE CHART)  *
    
    Included 2,621,542 common shares held by KLM. For a description of the rights attached to KLM common shares, priority shares,
cumulative preference shares A, cumulative preference shares C and preference
shares B, see Item 10.B  Additional Information  Memorandum and articles of
association  Share capital. The offer and acquisitions of KLM shares To effect the combination, on April 5, 2004, Air France made an offer to
acquire all of our outstanding common shares, including our New York registry
shares. Under the terms of the offer, holders of our common shares were offered:  
    
    11 Air France shares and 10 Air France warrants in exchange for every 10 KLM common shares tendered, and
    
    11 Air France American depositary shares (ADSs) and 10 Air France
American depositary warrants (ADWs) in exchange for every 10 KLM New
York registry shares tendered. Each Air France ADS represents one Air
France share, and each Air France ADW represents one Air France warrant. Air France made the offer to KLM shareholders in the United States pursuant to
a Schedule TO filed with the SEC on April 5, 2004, and a prospectus on Form
F-4, in which the terms of the offer and the framework agreement were
described, filed with the SEC on April 30, 2004. The offer was declared
unconditional on May 4, 2004, following which a subsequent offer period
commenced. As of May 21, 2004, when the subsequent offer period ended,
approximately 96% of KLMs common shares had been tendered in the offer.
Pursuant to the framework agreement Air France also purchased all of our
outstanding priority shares and purchased depositary receipts representing all
of our cumulative preference shares C. KLMs current position in the combined group Air France and KLM agreed in the framework agreement to structure the combined
group in a way they believe will address the issue of protecting KLMs
international traffic rights during an interim period of the first three years
of the combination. Under these interim shareholding arrangements, Air Frances
ownership of, and voting rights in, KLM are limited to 49% of KLMs nominal
share capital until May 6, 2007. During this period, Air France directly owns
all of our priority shares and a number of common shares representing, together
with the priority shares, 49% of our nominal share capital and voting rights. In addition to its 49% direct holdings in our common and priority shares, Air
France owns depositary receipts representing 22% of our common shares. These
depositary receipts carry the economic rights, but not the voting rights, of
the underlying common shares. The underlying common shares are held by
Stichting Administratiekantoor KLM (SAK I), a foundation incorporated under
Dutch law. Air France also owns depositary receipts purchased from Rabobank
Nederland Participatiemaatschappij B.V. representing our cumulative preference
shares C. These receipts carry the economic rights, but not the voting rights,
of the underlying cumulative preference shares C. 10




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The underlying cumulative preference shares C are held by Stichting
Administratiekantoor Cumulatief Preferente Aandelen C KLM (SAK II), another
foundation incorporated under Dutch law. KLM established SAK I and SAK II in accordance with the framework agreement as
part of the effort to protect KLMs international traffic rights during the
interim period. Each of SAK I and SAK II are managed by a board of three
independent persons, one of whom was appointed by Air France, one by KLM and a
chairman will be appointed jointly by the appointees of Air France and KLM. A
majority of the board members of each foundation, including the chairman, will
be Dutch nationals and residents. The decisions of each foundations board must
be by unanimous consent. The State of the Netherlands owns cumulative preference shares A equal to 14.1%
of the voting rights in KLM and economic rights equivalent to 6% of the nominal
value of the cumulative preference shares A it holds. The State of the
Netherlands has agreed to decrease its ownership in KLM proportionally to any
decrease of the French States ownership in Air France, by selling and
transferring the relevant cumulative preference shares A to Air France or, if
the transfer occurs before May 6, 2007, to SAK I, which in turn shall issue the
corresponding depository receipts to Air France. If it chooses, the State of
the Netherlands may sell and transfer, and Air France will be obligated to buy,
cumulative preference shares A in addition to those required by any decrease in
the French state shareholding. After May 6, 2007, Air France will be able to
purchase cumulative preference shares A from the State of the Netherlands
directly. The following chart illustrates the current structure of the Air France-KLM
group: (AIR FRANCE-KLM GROUP CHART) In addition to changes in the holdings of our shares, the combination has also
affected where they are listed, our governance, our alliances and our
operations. See Item 5  Operating and Financial Review and Prospects, Item
6  Directors, Senior Management and Employees, Item 7  Major Shareholders
and Related Party Transactions and Item 9  The Offer and Listing. Prior
to the combination, we held a number of our shares in treasury that
were tendered in the exchange offer for shares and warrants of Air
France-KLM. At the date of this annual report, we held 909,894 shares
and 2,454,439 warrants of Air France-KLM for general corporate
purposes, which represented less than 1% of the outstanding ordinary
shares and slightly more than 5% of outstanding warrants,
respectively. Air France-KLM group structure following the combination In the framework agreement, Air France and KLM envisaged that the combined
group will ultimately be structured as one listed holding company, Air
France-KLM, holding 100% of the nominal share capital and voting rights in two
principal operating subsidiaries, KLM and AFOP. AFOP will be a newly formed
French subsidiary to which Air France will transfer its assets, liabilities,
businesses and operations. This transfer, or hive down, is intended to enable
AFOP to carry out the businesses and operations previously conducted by Air
France under the same terms and in the same manner as Air France. 11




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Air France-KLM will own:  
    
    directly, all of the KLM priority shares and the number of KLM common
shares representing, together with the priority shares, 49% of the
nominal share capital and voting rights in KLM,
    
    depositary receipts representing KLM common shares in excess of 49%
of the nominal share capital and voting rights of KLM and carrying the
economic rights, but not the voting rights, of the underlying KLM common shares,
    
    depositary receipts representing the cumulative preference shares C
carrying the economic rights, but not the voting rights, of the
underlying cumulative preference shares C. In accordance with the State of the Netherlands agreement to decrease its
ownership in KLM proportionally to any decrease of the French States ownership
in Air France, the State of the Netherlands will own KLM cumulative preference
shares A to the extent that any such reductions in ownership have not been
made. After May 6, 2007, Air France-KLM may, at its sole discretion, resolve to
cancel all or part of the depositary receipts held by SAK I and SAK II and
become the direct holder of the underlying shares. SAK I will own KLM common
shares, and SAK II will own KLM cumulative preference shares C to the extent
that the depositary receipts have not been cancelled. As soon as Air France-KLM and its affiliates, other than KLM, hold directly for
their own account at least 95% of the issued share capital of KLM, Air France
intends to institute proceedings against the remaining minority shareholders of
KLM in accordance with the squeeze-out provisions under Section 2:92a of the
Dutch Civil Code, in order to force those minority shareholders to transfer
their KLM ordinary shares to Air France. Because the KLM shares held by SAK I
and SAK II and represented by depositary receipts issued to Air France are not
deemed directly held by Air France for its own account, and because of the
shares held by the Dutch State of more than 5% of the issued share capital of
KLM, it will not be possible for Air France to commence any squeeze-out until
at least May 6, 2007. Air France  KLM reserves the right to force out the
aforementioned minority shareholders by way of a legal merger, a legal split or
otherwise. Capital expenditures For a discussion of our capital expenditures during the 2003/2004 fiscal year,
see Item 5.B  Operating and Financial Review and Prospects  Liquidity and
capital resources  Cash flows for the fiscal year ended March 31, 2004. B. Business overview We have four core activities: passenger transport, cargo transport, airframe,
engine and component maintenance and the operation of charters and
low-fare
scheduled services. These activities are performed by our Passenger business,
Cargo business, Engineering & Maintenance business and Charter/Low-cost
business, respectively. We and our partners serve more than 400 cities in 85
countries on six continents. Business segments The
table below sets forth the relative financial importance of each of our
business segments (in millions of euro). For an historical overview of the
financial performance of our business segments see note 25 to our consolidated
financial statements. Engineering
    
    
    
    
    
    
    
    
    
    Elimination
    
    TotalOperating income per business
    
    
    
    
    
    
    
    
    
    &
    
    Charter /
    
    
    
    
    
    of inter-
    
    consoli-2003/2004
    
    Passenger
    
    Cargo
    
    Maintenance
    
    Low-cost
    
    All other
    
    segments
    
    datedOperating revenues from
external customers
    
    
    4,107
    
    
    
    1,014
    
    
    
    258
    
    
    
    427
    
    
    
    71
    
    
    
    
    
    
    
    5,877Intersegment revenues
    
    
    16
    
    
    
    18
    
    
    
    547
    
    
    
    0
    
    
    
    218
    
    
    
    (799
    )
    
    
    0Operating revenues
    
    
    4,123
    
    
    
    1,032
    
    
    
    805
    
    
    
    427
    
    
    
    289
    
    
    
    (799
    )
    
    
    5,877Operating expenses
    
    
    3,936
    
    
    
    961
    
    
    
    789
    
    
    
    411
    
    
    
    459
    
    
    
    (799
    )
    
    
    5,757Operating income
    
    
    187
    
    
    
    71
    
    
    
    16
    
    
    
    16
    
    
    
    (170
    )
    
    
    
    
    
    
    120
 Passenger business Our Passenger business is the largest and most visible part of KLM. In fiscal
year 2003/2004 almost 19 million passengers chose to fly KLM for a variety of
reasons. Our Passenger business focuses on improving customer loyalty and
profitability by offering differentiated products to its various customers
segments in a growing worldwide network together with its partners. Our basic
philosophy is offering value for money to our different customer segments. The industry is extremely competitive and characterized by almost continuous
overcapacity. In addition, events such as the Iraq war and the SARS epidemic
heavily influenced industry supply and demand during fiscal year 2003/2004. 12




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In continental Europe low-cost competition has changed the competitive scene.
It is creating additional demand for point-to-point segments while reducing
yields for the network carriers. In response, we have developed a competitive
response strategy aimed at increasing revenues and cutting costs. This includes
more pricing transparency to various customer segments and increased seating in
the Select Class cabin on KLM flights from five abreast to six abreast
connected to adjusted tariffs. We have also simplified our catering product for
Economy Class in order to lower our operating costs. KLM cityhopper is a special network partner engaged chiefly in providing
capacity on a number of KLMs European connections. In addition KLM cityhopper
provides a limited number of private charter flights. In fiscal year 2003/2004
KLM cityhoppers activities were integrated into those of KLM cityhopper uk
in order to optimize operations, reduce complexity and to further increase the
contribution to KLM Group results. On intercontinental routes the competitive environment is increasing as the
various alliances further develop. On the highly competitive North Atlantic
routes, passenger numbers are gradually returning to pre-September 11, 2001
levels. On Asian routes, traffic has almost returned to its pre-SARS level.
African destinations, as in previous years, were not affected by the
developments in other regions. Services to East and West Africa and to South
Africa have recorded a stable demand. The primary economic goal for our Passenger business is to structurally lower
its cost base. All commercial and operational activities have been
fundamentally reviewed on cost efficiency, increasing productivity, added value
and customer benefit. All such measures have been implemented as part of a
structural cost reduction program, including the positive effects of part of
our fleet-renewal program (replacing the 747-300 aircraft with 777), with the aim
to structurally reduce our cost per unit by 10% within three years. In the
first year of this program (fiscal year 2003/2004) a reduction of 3% was realized. On the operational end we have fundamentally improved the productivity and
quality of our passenger handling (specifically at Schiphol airport, our hub in
Amsterdam) by heavily increasing the availability of self-service check-in
facilities (including baggage drop-off points) for both European and
intercontinental passengers. The Passenger business also engages in other activities ancillary to our air
transport operations. We operate tax-free shops at Schiphol airport and engage
in on-board sales of a variety of products and we render services in respect to
computerized hotel and flight reservation systems. Cargo business Our Cargo business is a leader in the airfreight market, commanding a strong
position in European freight flows to North Atlantic and Asia. Our Cargo
businesss strategy is to serve primarily larger shippers by offering their
forwarders an optimal supply chain product. KLM Cargo is one of the leading
providers of

air cargo

services, forming an essential and integral part of
the total logistic chain, adding value by focusing on connectivity in network
together with partners and offering a differentiated product portfolio based on
continuous feedback from customers, with a strong focus on operational
excellence and on-time performance. Our Cargo business has a global network of
more than 115 customer service offices that maintain contacts with customers. Engineering & Maintenance business Our Engineering & Maintenance business offers a complete package of
maintenance services, ranging from engine, component and airframe overhaul to
total aircraft care. It is one of the three largest aircraft maintenance
companies affiliated to an airline in Europe. The Engineering & Maintenance
businesss main customer is KLM, which accounts for approximately 60% of its
operating revenues. Charter/Low-cost business Transavia, a 100% subsidiary, specializes in the operation of charter flights
and scheduled low fare flights. Transavia has a strong position and a good
reputation in The Netherlands. It concentrates on regular flights from
Schiphol and Rotterdam airports to popular vacation destinations around the
Mediterranean. KLM cityhopper also provides a limited number of private
charter flights. All other business This segment includes other business activities ancillary to our air transport
operations, especially inflight catering activities and medicare services.
Furthermore, IT expenses and overhead costs are presented in this segment. For
a further discussion of the segment All other business we refer to Item 5A.
 Operating and Financial Review and Prospects  Operating Results. 13




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Selected operating statistics In fiscal year 2003/2004, we carried more than 23 million passengers and
529,000 tons of cargo, and provided engineering and maintenance services to
more than 20 airlines. Measured by international revenue ton-kilometers, KLM
ranks sixth among the 270-plus members of the International Air Transport
Association (IATA), an association which includes most other major
international air carriers. We operate a modern fleet of 188 aircraft. As of
March 31, 2004, we had 34,529 employees, of whom 30,367 were employed in the
Netherlands and 4,162 abroad. Fiscal year ended March 31,2004
    
    2003
    
    2002(1)CapacityAvailable ton-kilometers (in millions) (2)
    
    
    12,836
    
    
    
    12,952
    
    
    
    12,859Available seat-kilometers (in millions)(3)
    
    
    72,099
    
    
    
    74,825
    
    
    
    74,051Available freight ton-kilometers (in millions) (4)
    
    
    6,028
    
    
    
    5,852
    
    
    
    5,817Kilometers flown (in millions)
    
    
    341
    
    
    
    349
    
    
    
    370Hours flown (in thousands)
    
    
    446
    
    
    
    454
    
    
    
    455TrafficRevenue passengers and baggage (in millions of ton-kilometers) (5)
    
    
    5,775
    
    
    
    5,935
    
    
    
    5,840Revenue cargo (in millions of ton-kilometers) (6)
    
    
    4,392
    
    
    
    4,197
    
    
    
    4,050Total revenue ton-kilometers (in millions) (7)
    
    
    10,167
    
    
    
    10,132
    
    
    
    9,890Passenger kilometers (in millions)
    
    
    57,784
    
    
    
    59,417
    
    
    
    58,447Weight of cargo carried (in millions of kilograms)
    
    
    529
    
    
    
    511
    
    
    
    501Average distance flown per passenger (in kilometers)
    
    
    3,043
    
    
    
    3,057
    
    
    
    3,567Load factor (%) (8)
    
    
    79.2
    
    
    
    78.2
    
    
    
    76.9Passenger load factor (%) (9)
    
    
    80.1
    
    
    
    79.4
    
    
    
    78.9Cargo load factor (%)
    
    
    72.9
    
    
    
    71.7
    
    
    
    69.6Yield (in euro cents)Yield per revenue passenger kilometer (10)
    
    
    6.7
    
    
    
    7.1
    
    
    
    7.3Yield per revenue cargo ton-kilometer (11)
    
    
    21.9
    
    
    
    24.2
    
    
    
    25.0Yield per revenue ton-kilometer (12)
    
    
    47.4
    
    
    
    51.5
    
    
    
    53.4
  (1)
    
    As of April 1, 2002, traffic and capacity figures comprise KLM, KLM
cityhopper B.V. and KLM cityhopper uk Ltd. As of April 1, 2002, KLM
cityhopper uk Ltd. acts solely as a capacity provider for the KLM
operation.(2)
    
    Available ton-kilometers is calculated as the number of tons (2,240 lbs)
of capacity available for the carriage of passengers, baggage and cargo
multiplied by the aggregate distance flown.(3)
    
    Available seat-kilometers is calculated as the number of seats available
for sale multiplied by the aggregate distance flown.(4)
    
    Available freight ton-kilometers is calculated as the number of tons
(2,240 lbs) of capacity available for the carriage of cargo multiplied by
the aggregate distance flown.(5)
    
    Revenue passengers and baggage is calculated as the number of tons of
passengers including baggage carried, multiplied by the aggregate distance
flown.(6)
    
    Revenue cargo is calculated as the number of tons of cargo carried,
multiplied by the aggregate distance flown.(7)
    
    Revenue ton-kilometer is calculated as the number of revenue tons of
passengers, baggage and cargo carried, multiplied by the aggregate
distance flown.(8)
    
    Load factor is the total number of revenue ton-kilometers carried,
expressed as a percentage of available ton-kilometers.(9)
    
    Passenger load factor is calculated as the revenue passenger-kilometers
expressed as a percentage of available seat-kilometers.(10)
    
    Yield per revenue passenger kilometer is calculated as the total
passenger traffic revenue divided by total passenger kilometers.(11)
    
    Yield per revenue cargo ton-kilometer is calculated as the total cargo
traffic revenues divided by total revenue cargo ton-kilometers.(12)
    
    Yield per revenue ton-kilometer is calculated as the total passenger and
cargo traffic revenues divided by total revenue ton-kilometers. 14




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##### Table of Contents



Operating revenues by category of activity Fiscal year ended March 31,In millions of euro
    
    2004
    
    2003
    
    2002(1)Traffic revenuePassengers
    
    
    3,852
    
    
    
    4,210
    
    
    
    4,267Cargo
    
    
    963
    
    
    
    1,017
    
    
    
    1,016Charter/Low-cost
    
    
    382
    
    
    
    553
    
    
    
    543Total traffic revenue
    
    
    5,197
    
    
    
    5,780
    
    
    
    5,826Other revenue:Aircraft maintenance related services
    
    
    221
    
    
    
    280
    
    
    
    273Cargo and mail handling
    
    
    35
    
    
    
    40
    
    
    
    39Tax-free sales
    
    
    111
    
    
    
    115
    
    
    
    107Aircraft handling
    
    
    119
    
    
    
    105
    
    
    
    92Miscellaneous
    
    
    194
    
    
    
    165
    
    
    
    195Total other revenue
    
    
    680
    
    
    
    705
    
    
    
    706Total operating revenues
    
    
    5,877
    
    
    
    6,485
    
    
    
    6,532
 Rates and tariffs Passenger tariffs on our international routes are generally established in
consultation with members of the IATA Passenger Tariff Coordinating
Conferences, which include most international airlines. Our tariffs sometimes
need the expressed or implied approval of the governments concerned. Most of
the Netherlands bilateral agreements with foreign countries provide for
foreign government approval of our fares, rates and charges for routes covered
by those agreements. Within the E.U. and within the European Common Aviation
Area, approval by the governments concerned is automatic if fares fall within
certain agreed-upon ranges. The laws of some of the countries that we service, such as Canada and the
United States, require us to publish and file with those countries
aeronautical authorities our general pricing policies, tariffs showing
passenger fares, freight rates and other charges. We endeavor to base our pricing policy on market requirements as much as
possible. In addition to devoting considerable attention to the demands of our
most important sub-market, the business travel market, we make use of
promotional fares, which substantially increase our total revenues. In the
freight sector, we aim to achieve a rate structure suited to the needs of the
freight industry. We also charter aircraft to third parties for their individual use, or for
purposes of group travel, at prices that we determine in accordance with
government regulations. We determine our compensation for transporting Dutch and foreign mail
internationally on the basis of rates established by the Universal Postal
Union, a body composed of representatives of the postal systems of the various
countries of the world. 15




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##### Table of Contents



Geographical data We conduct worldwide operations. We break down our traffic revenues and yield
by geographic market in the following tables: Fiscal year ended March 31,2004
    
    2003
    
    2002(1)(in millions of ton-kilometers)TrafficEurope
    
    
    1,019
    
    
    
    1,034
    
    
    
    939North Atlantic
    
    
    2,448
    
    
    
    2,582

    
    
    
    2,649Asia Pacific
    
    
    3,553
    
    
    
    3,366
    
    
    
    3,240Central and South Atlantic
    
    
    1,267
    
    
    
    1,271
    
    
    
    1,301Middle East and South Asia
    
    
    745
    
    
    
    760
    
    
    
    799Africa
    
    
    1,135
    
    
    
    1,119
    
    
    
    962Total
    
    
    10,167
    
    
    
    10,132
    
    
    
    9,890
 Fiscal year ended March 31,2004
    
    2003
    
    2002(1)(in millions of euro)Traffic revenueEurope
    
    
    1,364
    
    
    
    1,505
    
    
    
    1,176North Atlantic
    
    
    914
    
    
    
    1,032
    
    
    
    1,118Asia Pacific
    
    
    1,121
    
    
    
    1,200
    
    
    
    1,317Central and South Atlantic
    
    
    490
    
    
    
    535
    
    
    
    572Middle East and South Asia
    
    
    390
    
    
    
    413
    
    
    
    335Africa
    
    
    536
    
    
    
    542
    
    
    
    494Total scheduled services
    
    
    4,815
    
    
    
    5,227
    
    
    
    5,012Subsidiaries revenue (mainly Transavia Airlines)
    
    
    382
    
    
    
    553
    
    
    
    814Total
    
    
    5,197
    
    
    
    5,780
    
    
    
    5,826
 (in euro cents)Yield per revenue ton-kilometerEurope
    
    
    134
    
    
    
    146
    
    
    
    125North Atlantic
    
    
    37
    
    
    
    40
    
    
    
    42Asia Pacific
    
    
    32
    
    
    
    36
    
    
    
    41Central and South Atlantic
    
    
    39
    
    
    
    42
    
    
    
    44Middle East and South Asia
    
    
    52
    
    
    
    54
    
    
    
    43Africa
    
    
    47
    
    
    
    48
    
    
    
    51Average yield
    
    
    47
    
    
    
    52
    
    
    
    53
  (1)
    
    As of April 1, 2002, traffic and capacity figures are comprised of KLM,
KLM cityhopper B.V. and KLM cityhopper uk Ltd. As of April 1, 2002, KLM
cityhopper uk Ltd. acts solely as a capacity provider for the KLM
operation. Seasonality Our operations are affected by the seasonality associated with the airline
industry. Due to a greater demand for air travel during the summer months,
revenue in the first and second quarters of our fiscal year is generally
greater than the revenue in the third and fourth quarters of the fiscal year.
Our results of operations generally reflect this seasonality, but these results
are also affected by numerous other factors that are not necessarily seasonal,
such as fare levels, fuel prices, weather, air traffic control delays, foreign
currency exchange rates and general economic conditions. Fuel supplies We purchase most of our fuel pursuant to local fuel supply contracts, which
generally have terms varying from one to two years. The prices of fuel set
forth in these contracts fluctuate with market indicators and are subject to
periodic adjustment. We cannot predict the extent to which fuel prices may
fluctuate or fuel shortages may occur in the future. From January 1,1998
through July 31, 2004, the price of petroleum has fluctuated between a low of
$9.64 and a high of $41.78 per barrel. See Item 11  Quantitative and
Qualitative Disclosures about Market Risk  Quantitative disclosures about
market risk  Commodity risks (fuel prices). Insurance We procure insurance to cover our operational risks. Following the events of
September 11, 2001, European governments temporarily assumed responsibility for
underwriting risks that could no longer be properly insured in the market. As
of November 1, 2002, we replaced all of our insurance in the market at
competitive rates. 16




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Security Since the terrorist attacks of September 11, 2001, all aspects of aviation
security around the world have been tightened. The effectiveness of the
measures used for tightening airport and airplane security is not universally
accepted. A growing number of voices are calling for more sophisticated
detection methods that will prevent possible attacks on the ground rather than
physical barriers and security personnel in the aircraft. In the past
fiscal
year, KLM made significant investments to comply with applicable security
regulations. We have made adjustments in the security of our planes, such as
the fortification of cockpit doors, as well as adjustments in the security on
the ground, including check-in procedure. Whereas the U.S. government
reimburses security costs incurred by U.S. airlines, neither it nor the
European Union or other European governments provides similar support for
European airlines. This has had a distorting effect on competition between U.S.
and European airlines. The European aviation industry and the European
authorities are currently in the process of establishing a joint approach to
this issue. Marketing and sales As of March 31, 2004, we maintained sales organizations in 67 countries
worldwide staffed by KLM personnel. In the U.S., Canada and Mexico, we are
represented by our partner Northwest Airlines. In another 41 countries we have
appointed general sales agents, mainly in countries where we do not offer air
transport services. Through our participation in IATA our tickets are sold by
approximately 46,000 sales agents. Travel agent commissions vary depending on
the country and/or market segment in question and range from zero to 9% of the
fare price or are set by the IATA traffic conferences based on the type of
transportation sold and the country of sale destination. Some agents have
contracts with us that provide for incentive commission. During the 2003/2004
fiscal year, sales agents accounted for approximately 91% of our total gross
air transportation sales. However, our commercial organization also focuses on effectuating the shift
from the traditional indirect distribution via travel agents to a more direct
distribution making use of various internet-based applications. This channel
shift puts pressure on our traditional relationships with travel agents and we
are in a continuous process of restructuring this relationship while also
approaching our customers directly via our in-house e-business programs. The
number of direct internet bookings is rising rapidly. Including those made by
virtual agents on the internet, the percentage of online bookings has already
passed the 10% threshold. We aim to increase this percentage in the following
years to 40% of total revenue by 2008. Cooperation with Northwest Airlines We operate our transatlantic routes between the Netherlands and the United
States under a far-reaching alliance with Northwest Airlines, Inc., which
offers our customers seamless travel options between North America and Europe,
Africa, Middle East / South Asia, and India. The KLM-Northwest alliance was originally established in 1989. In September
1992, the United States and the Netherlands agreed to expand their bilateral
Air Transport Agreement to create an open skies environment. This agreement
authorizes the carriers of both countries to provide air transportation between
any U.S.-Netherlands city pair and to operate connecting services to any third
country that has granted the reciprocal right to do so. Based primarily on the
open-entry market created by this expansion, KLM and Northwest petitioned the
U.S. Department of Transportation for immunity from the United States antitrust
laws for the KLM-Northwest Commercial Co-operation and Integration Agreement
and were granted that immunity in January 1993. The antitrust immunity allows
KLM and Northwest to act jointly in most commercial operations involving the
North Atlantic, including cost and revenue sharing, pricing, yield management,
scheduling, product integration, marketing, market allocation, advertising,
purchasing and cost reduction activities. KLM and Northwest expanded their alliance in September 1997 by entering into an
Enhanced Alliance Implementation Agreement providing for a minimum term of 13
years. Under this enhanced alliance agreement, the two airlines expanded their
areas of cooperation to include services between the United States, Canada and
Mexico, on the one hand, and Europe, Africa, the Middle East and India, on the
other hand. In addition, the two companies increased the level of co-operation
between their respective cargo divisions. Code sharing arrangements, through which airlines sell under their own code or
prefix seats on another carriers services, have been introduced on all
routes between Amsterdam and Northwests hubs as well as to destinations in the
United States, Europe, Africa and Asia served by the alliance. In 2002, KLM and Northwest synchronized their respective frequent flyer
programs to create increased opportunities to earn frequent flyer miles and to
offer additional worldwide destinations as travel awards. Through the co-ordination of route schedules and aircraft deployment, KLM and
Northwest work to improve their utilization of assets such as aircraft and
gates. KLM and Northwest have also combined certain sales and distribution
channels to improve the products offered at reduced costs to their corporate
customers and travel agents and to market a common World Business Class
product. 17




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The joint venture between KLM and Northwest Airlines relates to operations on
the North Atlantic route, routes between The Netherlands and India and related
feeder routes. The North Atlantic routes comprise all air traffic between the
United States, Canada and Mexico on the one hand and Europe on the other. This
joint venture relates to both passenger and cargo traffic. Each partner contributes to the joint venture the difference between its
traffic revenue and operating expenses and shares in the
total on a 50/50 basis. The assets (including aircraft) used in the joint venture are managed
separately by the two airlines, while the related operating expenses are
part of the joint venture contribution. The financial results of our alliance with Northwest Airlines are described in
more detail in Item 5  Operating and Financial Review and Prospects. Agreements with Alitalia On September 30, 2003, Air France, KLM and Alitalia entered into an agreement
listing the conditions and principles under which Air France, KLM and Alitalia
will conduct a three-way commercial alliance. Pursuant to this agreement, a
three-way commercial alliance among the parties would be implemented only if
Air Frances offer for KLM was successful. The tripartite alliance coordination
agreement will be terminated if the framework agreement is terminated in
accordance with its terms. Furthermore, Air France and KLM have agreed that it is in the joint interest of
Air France and KLM to accelerate the integration of Air Frances, Alitalias
and KLMs cargo activities and that it is the joint objective of Air France and
KLM to establish a trilateral integrated approach by 2005. Discussions among
the parties are currently ongoing. Cooperation with Continental Airlines In October 2001, KLM and Continental Airlines announced a limited and, for the
time being, temporary commercial co-operation. In the first instance, code
sharing was introduced on connecting flights between Newark International
Airport in the United States and other domestic destinations in the United
States and on connecting flights between Schiphol airport in
Amsterdam and other
European destinations. KLM and Continental also concluded a fully reciprocal
Frequent Flyer Agreement. The agreement was reached in close consultation with
Northwest Airlines. Subsequently, as of May 2002, a code share agreement
between KLM and Continental was renewed for a further period of one year
covering selected connecting flights between Newark and Houston and other
domestic destinations in the United States and on selected connecting flights
between Amsterdam Airport Schiphol and other destinations in Europe, Africa,
and the Middle East. As of June 10, 2003, this contract was further expanded in
scope and extended so as to make it co-terminous with the KLM-Northwest
Airlines Enhanced Alliance Implementation Agreement discussed above. Cooperation with other airlines Interline Agreements are agreements between two airlines enabling the
partners to accept each others travel tickets, thereby allowing passengers to
travel with one airlines tickets on the flights of other carriers and shippers
to arrange transportation for cargo under a single contract, even if multiple
carriers are used. More intensive cooperation exists between KLM and a select
number of carriers in either the commercial field (such as code sharing
arrangements and the carriage of feeder traffic for each others services) or
the operational field (such as pooling of spare parts or equipment, joint
handling of passengers or cargo, etc.). These agreements, which are intended to reduce the participating airlines cost
of operation and to offer better service to the public, are of course subject
to applicable rules and regulations including the competition and
anti trust
rules of the United States, the EU and other countries. The financial results of our alliances with other airlines are described in
more detail in Item 5  Operating and Financial Review and Prospects. KLM admission into SkyTeam On October 16, 2003, KLM and the members of the SkyTeam alliance entered into
an adherence agreement under which they agreed that, subject to completion of
Air Frances offer for KLM, to KLMs fulfilling the SkyTeam alliance admission
criteria and to the signing by Northwest and Continental of the adherence
agreements, KLM will be admitted as a member of the SkyTeam alliance. The SkyTeam alliance is a worldwide strategic alliance between Aeroméxico, Air
France, Alitalia, CSA Czech Airlines, Delta Airlines and Korean Air. The
SkyTeam alliance benefits from one of the worlds most extensive hub networks
and provides passengers with benefits such as:  
    
    access to a global network of routes and destinations;
    
    guaranteed seating;
    
    access to approximately 340 passenger lounges worldwide;
    
    increased connections through SkyTeams worldwide hub network;
    
    single check-in for connecting flights and streamlined check-in procedures;
    
    coordinated ground and in-flight services among alliance members; and
    
    the ability of passengers to make travel arrangements and get information at any of SkyTeams ticket offices
worldwide. 18




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The adherence agreement provides that, upon admission to the SkyTeam alliance, KLM will be:  
    
    considered a member of the SkyTeam alliance;
    
    entitled to participate in the SkyTeam governing board and working groups;
    
    required to contribute to SkyTeam costs; and
    
    entitled to use the SkyTeam brand or logo for marketing, branding or advertising. Under the adherence agreement, KLM will be admitted to the SkyTeam alliance once the following events have occurred:  
    
    Air Frances exchange offer for KLM common shares has been completed (this condition has been fulfilled);
    
    KLM has executed bilateral code-sharing, frequent flyer and lounge agreements with the current SkyTeam members;
    
    Northwest Airlines and Continental Airlines will have executed adherence agreements with the SkyTeam alliance
members. These agreements are currently under negotiation. However, it is expected that these adherence
agreements will be executedshortly; and
    
    the SkyTeam alliance members have jointly informed KLM in writing that KLM has fulfilled certain of the
admission criteria. If, however, KLM has not satisfactorily completed certain of the admission
criteria before the end of December 2004, the adherence agreement will
terminate. The entry date has now been set at September 15, 2004. KLM will be
audited by SkyTeam in early September. Under the framework agreement, Air France and KLM undertook to execute a global
airline cargo alliance implementation adherence agreement with SkyTeam alliance
members that would permit KLM to become a member of the SkyTeam alliances
cargo activities. The entry date has been set at September 16, 2004. This
agreement was signed on January 16, 2004. Regulation In the Netherlands the two main legislative acts applicable to aviation are
called Wet Luchtvaart and the Luchtvaartwet. The Ministry of Transport,
Public Works and Water Management administers these, and they define the nature
and extent of the regulation of airports and of civil aircraft operating within
and/or registered in the Netherlands. These acts provide the framework for
safety regulation, air traffic control rules, aircraft airworthiness, pilot
competency certificates, airport and air navigation standards and environmental
protection measures. Our operations are also subject to treaties and international agreements,
including the International Civil Aviation Convention of December 7, 1944, as
amended, to which the Netherlands is a party, and to economic, safety,
environmental and other regulations by the governmental authorities of many
countries and organizations, including the Netherlands itself and the E.U. The
legislatures and other governmental bodies of many foreign jurisdictions have
adopted or are considering various noise-reducing measures, including
limitations on hours of operation applicable to jet aircraft generally or to
specific types of aircraft. The extent to which these regulations will affect
us is unclear, but compliance with these regulations could have an effect upon
the cost of our future operations. E.U. regulation In 1987, the European Commission undertook to create common European air
transport regulations. These consist of three sets of measures known as the
First, Second and Third Packages. The Third Package (1992) included measures
aimed at putting an end to certain aspects of the monopolies of various
national airline companies. As a result, airlines licensed by any member state
of the European Economic Area (EEA) now have free access to all international
routes (subject to certain limited technical exceptions) within the EEA, and
capacity restrictions on such routes are no longer permissible. On April 1,
1997, a single European airspace was established within which any European
airline may freely operate on any routes within the E.U. member states. In
particular, European airlines may freely practice cabotage (i.e., transporting
passengers or cargo from one city to another, either within a member state or
between member states other than the airlines home country). In addition, any
resident of an E.U. member state may hold an interest in the share capital of
any E.U. registered airline company, provided such interest holder is not
acting as a front for a beneficial owner who is not a citizen of an E.U. member
state. The E.U. regulations establish the following principles:  
    
    satisfaction of the criteria established by the European authorities prior to obtaining an air
operator certificate and a license,
    
    freedom of access to routes within the E.U. member states to Community carriers, and
    
    the ability of airlines to fix their own fares. In its work program for the calendar year 2003, the European Commission
announced the revision of the Third Package and a wide-scale consultation of
individuals and entities. The consultation took place in May 2003, but there
has been no revision as of the date of this annual report. 19




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In addition to these measures, on October 10, 2001, the European Commission
adopted a package of proposals on air traffic management designed to create a
Single European Sky by December 31, 2004. This package is based on
establishing a decision-making and regulatory framework and to mobilize all
concerned in a comprehensive reform of air traffic management by reorganizing
the provision and supervision of air traffic control services. The package sets
out the objectives of the Single European Sky and its operating principles,
including: increasing air traffic control capacity, improving safety, reducing
fragmentation of air traffic control, gradual integration of civilian and
military airspace management, introduction of appropriate modern technology and
better coordination of human resources policy in the air traffic control
sector. On December 5, 2002, the Council of E.U. Transport Ministers agreed on the
single European sky package, and an agreement was reached on December 9, 2003
with the European Parliament covering the legislation establishing the
objectives and operating principles. The European Commission will draft the
rules needed to enact the legislation. We expect that the creation of a Single European Sky will optimize use of
European airspace, with improvements in such areas as air traffic delays,
flight safety, security and growth. Franchises and landing rights Our authorizations to operate our routes and to serve destinations inside and
outside the Netherlands are subject, among other things, to obtaining and
retaining the requisite permits and authorizations from the appropriate Dutch
and foreign governmental authorities as well as to the possession of required
local operating concessions, franchises and permits relating to operating
rights, the use of airports and facilities and the utilization of radio and

meteorological services. On some of our routes or route segments, governmental
limitations are imposed on the number of services, the number of passengers,
the amount of cargo and other matters relating to traffic. Our activities and
the possibilities for our growth are limited by these restrictions. We
continually strive to maintain and improve our traffic and operating rights. The various necessary concessions, franchises and permits that we hold differ
widely as to the rights granted, the obligations or restrictions imposed, their
terms and conditions, the duration of their effect and other miscellaneous
details. In the majority of cases, our rights stem from bilateral air services
agreements entered into between the State of the Netherlands and another
country, in which the Dutch government has designated KLM as the air carrier
officially authorized to operate the routes and enjoy the rights accorded to
the State of the Netherlands under these bilateral agreements. The Dutch
government has traditionally followed a civil aviation policy favorable to
competition. In conformity with international practice, the great majority of
the bilateral air services agreements concluded by the Netherlands can be
terminated after one years notice given by either contracting government. Some
rights are of a unilateral nature, terminable at will by the government that
granted them. In practice, termination is normally preceded by consultations. Open sky agreements In 1992 the United States and the Netherlands agreed to expand their bilateral
Air Transport Agreement to create an open sky agreement, under which American
and Dutch scheduled and charter carriers may operate services between the
United States and the Netherlands without restrictions as to frequency and
capacity. A number of other E.U. states, including France, have also concluded
open sky agreements with the U.S. Following challenges raised by the European
Commission, the European Court of Justice (ECJ) in November 2002 ruled that
certain provisions of these open sky agreements were in violation of the
Commissions exclusive external competence. The ECJ also held that the
nationality clause (entitling the U.S. to withdraw, suspend or limit traffic
rights in cases where air carriers designated by the E.U. member state are not
substantially owned or effectively controlled by the E.U. Member State or by
its nationals) infringed Article 43 of the E.C. Treaty with respect to freedom
of establishment. This open sky agreement will be terminated once a new
E.U.-U.S. agreement enters into force. In June 2003, the 15 E.U. member states gave the European Commission a mandate
to negotiate with the United States the creation of an open aviation area
providing freedom of access on both sides of the Atlantic. The member states
also gave the European Commission a so-called horizontal mandate to negotiate a
European nationality clause in bilateral agreements and with third countries on
behalf of the E.U. member states. Competition In most areas we service, we are subject to intense direct and indirect
competition by other air carriers operating scheduled or chartered services.
Our future operations may be affected by expanded services offered by competing
air carriers, some of which receive direct or indirect government subsidies, by
the entry of new air carriers into the market, by restricted low fares offered
by carriers that are protected by their governments policies, by the
imposition of traffic restrictions, by the limitation of our operating rights
in foreign countries, by other applicable governmental or regulatory action or
by changes in the international political or economic situation. 20




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E.U. regulations establish the uniform application of the European competition
rules for all airlines operating air transport services within the E.U. as well
as the rules concerning the granting of state aid to airlines. The European
regulatory framework enables the European Commission to grant block exemptions
from E.U. competition rules for certain kinds of agreements, decisions and
concerted practices concerning the following:  
    
    the joint planning and coordination of flight schedules between E.U. airports,
    
    consultations on tariffs for the carriage of passengers, baggage and freight on scheduled air services,
    
    joint operations on new, less heavily traveled air services,
    
    slot allocation and airport scheduling, and
    
    joint purchase, development and operation of computerized reservation systems relating to timetabling, reservations and
ticketing by air transport undertakings. One such regulation currently in force provides, subject to certain conditions,
an automatic exemption from E.U. competition rules with respect to agreements
concerning slot allocation and airport scheduling. In connection with the combination, Air France and KLM committed to the
European Commission to make take-off and landing slots available under certain
circumstances to competitors wishing to introduce competing passenger air
service on routes between Amsterdam on the one hand, and Bologna, Bordeaux,
Lyon, Marseilles, Milan, Paris, Rome, Toulouse and Venice on the other hand. C. Organizational structure For a description of the Air France-KLM group and our position within that
group, see the discussion in Item 4.A  History and development of the company
 Combination with Air France. KLMs important subsidiaries As of the date of this annual report, our subsidiaries were as follows: PercentageOwnership InterestHolding
    
    Place of Incorporation
    
    and Voting PowerTransavia Airlines B.V.
    
    The Netherlands
    
    
    100KLM cityhopper B.V.
    
    The Netherlands
    
    
    100KLM cityhopper uk Ltd
    
    United Kingdom
    
    
    100KLM uk Engineering Ltd
    
    United Kingdom
    
    
    100KLM Catering Services Schiphol B.V.
    
    The Netherlands
    
    
    100KLM Flight Academy B.V.
    
    The Netherlands
    
    
    100KLM Arbo Services B.V.
    
    The Netherlands
    
    
    100KLM Equipment Services B.V.
    
    The Netherlands
    
    
    100KLM Financial Services B.V.
    
    The Netherlands
    
    
    100KLM Ground Services Ltd
    
    United Kingdom
    
    
    100Cygnific B.V.
    
    The Netherlands
    
    
    100Martinair Holland N.V.
    
    The Netherlands
    
    
    50Polygon Insurance Company Ltd
    
    Guernsey
    
    
    31Kenya Airways Ltd
    
    Kenya
    
    
    26HSA Beheer N.V.
    
    The Netherlands
    
    
    10Opodo Ltd
    
    United Kingdom
    
    
    4
 None of the subsidiaries listed above qualify as a significant subsidiary in
the context of SEC Regulation S-X rule 4-08(g). 21




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##### Table of Contents



D. Property, plants and equipment On March 31, 2004, we owned or financially leased the following aircraft: Number
    
    
    
    Term ofof
    
    
    
    depreciation
    
    Average ageaircraft
    
    Type
    
    in years
    
    in years1
    
    Boeing 747-300
    
    
    25
    
    
    
    23.35
    
    Boeing 747-400
    
    
    18
    
    
    
    13.317
    
    Boeing 747-400 Combi
    
    
    18
    
    
    
    10.13
    
    Boeing 747-400ER Freighter
    
    
    18
    
    
    
    0.73
    
    Boeing 777-200ER
    
    
    18
    
    
    
    0.48
    
    Boeing MD-11
    
    
    18
    
    
    
    9.11
    
    Boeing 737-900
    
    
    18
    
    
    
    2.525
    
    Boeing 737-800
    
    
    18
    
    
    
    4.24
    
    Boeing 737-700
    
    
    18
    
    
    
    1.07
    
    Boeing 737-400
    
    
    18
    
    
    
    12.37
    
    Boeing 737-300
    
    
    18
    
    
    
    11.515
    
    Fokker 100
    
    
    12
    
    
    
    14.917
    
    Fokker 70
    
    
    15
    
    
    
    8.010
    
    Fokker 50
    
    
    15
    
    
    
    13.22
    
    BAe 146-300
    
    
    15
    
    
    
    14.38
    
    Training aircraft
 In
fiscal year 2003/2004, we added six Boeing 777-200ER aircraft to our
fleet,
which replaced our Boeing 747-300 Classic fleet ahead of schedule in 2003. Since
the last Boeing 747-300 flight on December 3, 2003, from Delhi to Amsterdam, our
Boeing 747 fleet has consisted only of the more modern Boeing 747-400. Of the 12 Boeing 747-300 aircraft that composed KLMs Boeing 747-300 Classic
fleet, three have been returned to the lessor, seven have been sold and one has
been donated to the Aviodrome Museum. At Transavia we took five Boeing 737-700 aircraft into operation between April
and June 2003 to replace the Boeing 757-200 fleet. KLM cityhopper returned two
Fokker 50 aircraft to the lessor in fiscal year 2003/2004. The size of both the
Fokker 70 and the Fokker 100 fleet was unchanged. At March 31, 2004, we had the
following aircraft  excluding operational lease aircraft  on order for
utilization in our future Passenger, Cargo and Charter/Low-cost businesses:  
    
    One Boeing 777-200ER aircraft
    
    Six Airbus A330-200 aircraft
    
    Three Boeing 737 Next Generation aircraft Advance payments on these assets amounted to 276 million as of March 31, 2004. Encumbrances The book value of our tangible fixed assets for which encumbrances were in
effect as of March 31, 2004 amounted to 3,254 million (69% of book value as of
March 31, 2004). Of this amount, 3,077 million related to encumbrances on
fleet aircraft resulting from financial lease agreements. 177 million related
to other tangible fixed assets whose availability is based on limited right of
use, such as buildings on land held under long-term rental agreements. Ground facilities We own our head office buildings in Amstelveen where our corporate management
and various staff bureaus and divisions are located. We maintain and operate
complete and modern facilities at Amsterdam Airport Schiphol for the servicing,
overhauling and repair of aircraft and engines and of a wide range of aircraft
parts and accessories. These facilities include hangars, engine, communications
and other workshops, engine test cells and warehousing facilities. In addition,
we house our operations, engineering and purchasing personnel at Schiphol
airport. All of these engineering and maintenance facilities are either leased
or constructed on leased land. The land leases typically have a term varying
from 75 to 99 years. The airport is operated by a corporation owned jointly by
the State of the Netherlands, the City of Amsterdam and the City of Rotterdam. Schiphol airport Following its thorough renovation in recent years, Schiphol airport is now one
of the most modern, pleasant and customer-friendly airports in Europe. This is
in keeping with our efforts to accelerate a number of passenger-related
processes on the ground (check-in, baggage handling, security and boarding).
Two of the measures we have taken, self-service check-in kiosks and baggage
drop-off points, have become popular among passengers. The peak load at the
gates has been reduced by a number of organizational changes and alterations to
schedules, which have eliminated the need to deploy additional personnel and
streamlined the operation. 22




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##### Table of Contents



The performance of Schiphols baggage handling system, a source of irritation
among passengers, and financial loss and damage to KLMs reputation for many
years, improved markedly during the fiscal year ended March 31, 2004. KLMs
service recovery costs were therefore 14 million, considerably lower than 22
million for the fiscal year ended March 31, 2003. However, this result could
also be attributable to the fact that fewer passengers traveled through
Schiphol airport in the fiscal year ended March 31, 2004 than in previous
years. Following our combination with Air France, the Air France-KLM group will have
Schiphol and Roissy-CDG airports as its two European hubs connecting to a
series of American hubs through the SkyTeam alliance and alliances between Air
France or KLM and other airlines to form the backbone of its shared network. Assurances and assurances foundation In connection with the combination, Air France and KLM have granted assurances
to the State of the Netherlands to preserve the network quality of KLM at
Schiphol airport, a matter of public interest for the State of the Netherlands,
while taking into account the best interests of Air France-KLM and its
shareholders. The assurances granted to the State of the Netherlands have a
term of five or eight years from May 6, 2004, depending on the assurance in
question. In particular, the State of the Netherlands has agreed that each of
Air France and KLM will remain an airline company operating from its home base
in France and the Netherlands respectively and that each will retain its Air
Operations Certificate and operating licenses and will continue to fulfill the
conditions necessary to maintain such licenses. In addition the State of the
Netherlands has agreed to maintain KLMs current portfolio of air traffic
rights, other than those that have not been used by KLM for a period of 12
months. Air France and KLM have also agreed to various assurances to preserve their
respective long-term interests, while taking into account the best interests of
Air France-KLM and its shareholders. These assurances have a term until May 6,
2009, but will be evaluated after May 6, 2007. In particular, the combined
group has committed to maintain and ensure a fair long-term development of
international and intercontinental services on overlapping routes to and from
both Roissy CDG and Schiphol airports. Air France and KLMs commitment to fair
capacity development of both hubs includes a commitment that neither Air France
nor KLM will change a unique passenger destination into a destination served by
both hubs, unless certain conditions are met. In addition, Air France and KLM
have agreed to make investments, when economically justified, in both the cargo
and passenger businesses at both Roissy CDG and Schiphol airports. Air France and KLM have established a foundation in the Netherlands to
facilitate compliance with both sets of assurances. The foundation will, if
requested to do so, render binding advice regarding possible contraventions of
the assurances by Air France or KLM. Growth and privatization Discussion of Schiphols growth, which will be important to the success of the
Air France-KLM group in the future and to the success of alliances of which KLM
is a member, was strongly influenced by an increase in the number of noise
complaints, despite a decline in the number of flight movements, following the
opening of the new runway in February, 2003. Furthermore, the incorrect
calculation of the number of flights permitted within the environmental noise
framework has contributed to the discussion. This entry error will be corrected
by September 2, 2004. See the discussion under  KLM and the environment
below. The proposed partial or complete privatization of Schiphol is acceptable to the
main user if the agreements made between the airport and KLM in the previous
fiscal year are embedded in legislation and regulations. In June 2004, the Dutch Council of Ministers decided to partly privatize no
more than 49% of Schiphol airport, although the terms have not yet been decided.
Prior to any sale of shares, the Advisory Committee to the Ministry of
Transport will determine whether public interests are served in an adequate
manner and an independent financial committee will establish a financially
viable moment for floatation. The consequences for airlines will become clear only after the relevant law is
in place. The Dutch Council of Ministers has decided upon a dual till model,
whereby aviation and non-aviation will be split and only the aviation-related
till will be regulated. To minimize financial and operational risks for
carriers, agreements have been put in place on tariff structure, return on
investments and long-term aviation-related investments. 23




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##### Table of Contents



KLM and the environment Like all other types of transport, air transport can harm the environment and
be an inconvenience to local residents. We limit  and try to prevent 
inconvenience and harm wherever possible by taking measures at the source. To establish the impact our activities have and to monitor and improve our
environmental performance, we have operated an ISO 14001 certified
environmental management system since 1999. KLMs company-wide environmental
management system is a comprehensive set of policy objectives, organizational
structure and handbooks/procedures for monitoring, reporting and control. The
system manages the environmental impacts of our operations and aims for further
reduction of this impact, whenever feasible. The international ISO 14001
standard is based on the dynamic process of plan-do-check-act. The conformity
of KLMs daily operation with this standard is checked through internal and
external audits. We are one of only a very few airlines to have such a system, which is utilized
in all our activities in the Netherlands. In addition, the implementation of
Good Environmental Practices was begun last year at our outstations. Under this
program, areas for improvement are identified each year to enhance the
environmental performance, such as the further optimization of the quantity of
additional fuel carried onboard, which was identified as a primary area for
improvement last year. Through this new fuel policy, in fiscal year 2003/2004
we realized a saving of 11.5 million tons of fuel, equal to 36 million kg of
CO2 emissions. Line management is responsible for realizing environmental
targets under this program, and a member of our Board of Management is
responsible at the highest management level. In addition to these measures, we have successfully reduced the environmental
impact of certain of our activities. Our continuous investments in fleet
renewal reduce the noise nuisance and raise fuel efficiency. Between 2000 and
2003 the noise nuisance caused by KLM at Schiphol declined by 12%. The noise
produced by a Boeing 777-200 on the flyover after takeoff is about 11 dB lower
than that of its predecessor, the Boeing 747-300, which people perceive as
being half as quiet. KLM is represented on the Schiphol Regional Review
Board, a consultative body established by the Minister of Transport, Public
Works and Water Management pursuant to the Civil Aviation Act. Its primary
task, in consultation with representatives of local residents and the aviation
industry, is to prevent noise nuisance in accordance with applicable
environmental limits. The noise nuisance perceived by residents following the opening of the new
runway in February 2003 received, as expected, a great deal of attention during
the fiscal year 2003/2004, as the number of complaints received increased
despite an overall reduction in the number of flight movements as a result of
general economic weakness experienced in the airline industry, the impact of
SARS and the war in Iraq. Per passenger-kilometer, our fuel efficiency was approximately 25% higher than
the European average. We expect these improvements to continue in the years
ahead. The modern engines of the Boeing 777-200ERs use up to 25% less fuel than
their predecessors and are considerably quieter. The Next Generation Boeing 737
will considerably increase KLMs and Transavias fuel efficiency per
passenger-kilometer. The construction of efficient buildings is also a contributor to environmental
gains, as demonstrated by our Engineering & Maintenance businesss new engine
overhaul center, which is equipped with underground heat/cold storage units.
Depending on the time of the year, the internal climate of the building can be
controlled by extracting heat or cold. KLM uses underground heat/cold storage
at three of its facilities. The Engineering & Maintenance businesss workshops
are also establishing new methods to paint aircraft, which will serve to
improve the impact of such activities on the environment and workers health. 
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS A. Operating results You should read the following discussion in conjunction with the consolidated
financial statements included in this document. The following discussion covers
the three years ended March 31, 2004 and is based on our consolidated financial
statements prepared in conformity with generally accepted accounting principles
in the Netherlands, which differ in certain significant respects from U.S.
GAAP. A discussion of the principal differences between Dutch accounting
policies and U.S. GAAP and a reconciliation from Dutch accounting policies to
U.S. GAAP of net income and shareholders equity as of March 31, 2003 and 2004
and in respect of the three years ended March 31, 2004, is provided in note 28
to our consolidated financial statements. 24




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##### Table of Contents



Overview The fiscal year ended March 31, 2004 remained challenging for the airline
industry. The geopolitical unrest created by the war in Iraq and its aftermath,
as well as the outbreak and spread of SARS in Asia contributed to a decline in
passenger traffic in the first half of the fiscal year. Passenger traffic to
Asian destinations improved in the second half of the fiscal year as the SARS
outbreak abated, but concerns regarding future terrorist attacks continued to
have a negative effect on the airline industry. Our operating revenues
decreased from 6,485 million in the year ended March 31, 2003 to 5,877
million in the year ended March 31, 2004, as the economic environment in which
we operate remained challenging. Nonetheless, we achieved an operating income
of 120 million for the fiscal year ended March 31, 2004, as compared to an
operating loss of 484 million for the previous year. This result was in part
due to the successful implementation of the first stage of our structural cost
savings program, which reduced operating expenses for the year by over 1,200
million to 5,757 million, from 6,969 million in the previous year. KLM undertook two major strategic changes in the financial year ended March 31,
2004. On May 8, 2003, we announced our plans to implement a structural cost
savings program, aimed at an improvement in operating income of 650 million
and a reduction of 4,500 full-time employee equivalents over a two-year period.
On September 30, 2003, we and Air France announced that we expected to conclude
an agreement that would lead to the creation of Europes leading airline group
through a share exchange offer by Air France for all of our outstanding common
shares. On October 16, 2003, we entered into a framework agreement with Air
France, which contained the terms of the offer, the combination and related
transactions. Air Frances offer was completed in May, 2004. In addition to these changes, KLM started the first phase of its fleet renewal
program by replacing nine of its aircraft during fiscal year 2003/2004, which
will reduce the operational cost per available seat-kilometer. Structural Cost Savings Program We are implementing the cost savings program we announced on May 8, 2003
through a combination of process change, productivity gains and product
improvement, accompanied by a reduction of 4,500 full-time employee
equivalents. Our goal is to reduce our annual cost base by 650 million by
April, 2005. As of March 31, 2004, the structural cost savings program had
resulted in approximately 200 million of cumulative cost savings, including a
reduction of 3,100 full-time employee equivalents. Combination with Air France At the beginning of the 2003/2004 fiscal year, KLM was engaged in discussions
with Air France as to a possible combination of the two airlines. On September
30, 2003, we announced that we expected to conclude an agreement with Air
France that would lead to the creation of Europes leading airline group
through a share exchange offer by Air France for all of our outstanding common
shares. On October 16, 2003, we entered into a framework agreement with Air
France, which contained the terms of the offer, the combination and related
transactions. Air Frances offer commenced on April 5, 2004 and the subsequent
offer period ended on May 26, 2004. As of the date of this annual report, we
are part of the Air France-KLM group. See Item 4.A  Information on the
Company  History and development of the company  Combination with Air France
and Item 6.C  Directors, Senior Management and Employees  Board practices
and corporate governance. Air France and KLM estimated that the combined cost-savings and
revenue-increasing synergies arising from the combination will amount to an
improvement in operating income of 385 million to 495 million per year after
five years following completion of the offer. Of this figure, 60% of the
potential synergies will derive from cost savings while the remaining 40% will
derive from increased revenues. The estimated revenues and cost savings
expected to result from the synergies above do not include any costs of
implementation, which Air France and KLM expect to be a minimum of 115 million
over five years. It is expected that KLMs share in the combined synergies and
implementation costs will range from 20% to 50%. On October 16, 2003, KLM and the members of the SkyTeam alliance entered into
an adherence agreement under which they agreed that, subject to completion of
Air Frances offer for KLM and to KLMs fulfilling the SkyTeam alliance
admission criteria, KLM would be admitted as a member of the SkyTeam alliance.
As of the date of this annual report, KLM is confident that it will meet all
relevant conditions of the adherence agreement and SkyTeam admission criteria,
and expects to be admitted as a member of the SkyTeam alliance during the
course of fiscal year 2004/2005. For further information regarding the SkyTeam
alliance, see Item 4.B  Information on the Company  Business overview  KLM
admission into SkyTeam. 25




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##### Table of Contents



Fleet Renewal Program In 2002, KLM announced that it would commence a program to renew its
intercontinental fleet by replacing 11 Boeing 747-300, 10 MD-11 and two Boeing
747-300 aircraft with Boeing 777-200ER, Boeing 747-400ERF and Airbus A330-200
aircraft. The first phase of this international fleet renewal program, which
will continue until February 2005, consists of replacing 11 Boeing 747-300
aircraft with 10 Boeing 777-200ER aircraft and replacing two Boeing 747-300
with three Boeing 747-400ERF aircraft. In fiscal year 2003/2004 KLM took the
first step in implementing phase one of this renewal program by taking delivery
of six Boeing 777-200ER aircraft and three Boeing 747-400ERF aircraft. The last
Boeing 747-300 was retired from KLMs fleet on December 3, 2003. On October 25,
2003, KLM obtained its first Boeing 777-200ER, which started operating on the
Amsterdam-Toronto route. In December 2003, KLM sold two of its Boeing 747-300 aircraft. Three Boeing
747-300s were returned to the lessor during the third quarter under standard
terms. During the third quarter Transavia completed the sale of three Boeing
757-200 aircraft. Furthermore two Boeing 737-700 aircraft entered into
Transavias fleet during the third quarter. Due to changing market circumstances, KLM delayed phase two of its fleet
renewal program, which is now due to start in April 2005 and is now expected to
run until calendar year 2012. As a consequence, KLM will delay the phasing out
of its MD-11 aircraft (which is the youngest aircraft type of the three that
are part of the renewal program) from 2008 to 2012 and therefore defer capital
expenditures in excess of 1 billion. Factors Affecting Operating Results Cyclicality Our business, and the airline industry as a whole, is highly sensitive to
general economic conditions. Because a substantial portion of airline travel
(both business and leisure) is discretionary, the industry tends to experience
severe adverse financial results during economic downturns. Downturns in the
airline industry are characterized by excess capacity and lower prices. Seasonality Our passenger business is subject to seasonal fluctuations, as the demand for
scheduled passenger services is strongest in the summer months and weaker in
the winter months. For our international cargo operations demand is
more stable. Inflation and fuel price fluctuations Approximately 87% of our cost basis is affected by inflation. The effects of
inflation on our cost basis are only to a limited extent compensated by the
revenue side, since fierce competition in the airline industry puts continuous
pressure on the prices we can charge our customers. The airline industry in
general and KLM in particular is therefore adversely impacted by inflation.
Nevertheless, in recent years inflation has been at historically low levels and
inflation has not materially affected our results. The remaining 13% of our cost basis relates to fuel expenses. During fiscal
year 2003/2004 the average price of jet fuel increased by approximately 8%
compared to the previous fiscal year, increasing the fuel expense ratio from
12.7% to 13.1%. The price of aircraft fuel is predominantly correlated with the
price of Brent crude oil and is not generally affected by inflation. Foreign currency fluctuations Our results for the fiscal year ended March 31, 2004 were to a limited extent
affected by foreign currency movements, since our exposures in major currencies
(dollar, pound Sterling, and Japanese yen) are hedged. Operational cash flow
exposures are hedged within a range of 40-80% on a 12 month-rolling basis.
Long-term exposures in foreign currencies (especially U.S. dollar purchase
options of aircraft) are hedged through dollar-denominated deposits. Net
investments in subsidiaries are not hedged. Other than the transaction gains
and losses, the differences arising from the translation of assets and
liabilities of these subsidiaries into euro, however, do not affect our results
since these differences are accounted for through equity. See also note 28 to
our consolidated financial statements and Item 11  Quantitative and
Qualitative Disclosures about Market Risk. 26




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##### Table of Contents



Year by Year Analysis of Operating Results Fiscal year ended March 31,Consolidated statement of earnings (in millions of euro)
    
    2004
    
    2003
    
    2002Operating revenuesTraffic revenue
    
    
    5,197
    
    
    
    5,780
    
    
    
    5,826Other revenue
    
    
    680
    
    
    
    705
    
    
    
    7065,877
    
    
    
    6,485
    
    
    
    6,532Operating expenses
    
    
    5,757
    
    
    
    6,969
    
    
    
    6,626Operating
income (loss)
    
    
    120
    
    
    
    (484
    )
    
    
    (94
    )Financial income and expense
    
    
    (101
    )
    
    
    (98
    )
    
    
    (134
    )Results on sale of assets
    
    
    (1
    )
    
    
    (42
    )
    
    
    10Results of holdings
    
    
    
    
    
    
    (4
    )
    
    
    (15
    )Results on sale of holdings
    
    
    13
    
    
    
    6
    
    
    
    9Pretax income (loss)
    
    
    31
    
    
    
    (622
    )
    
    
    (224
    )Taxes
    
    
    (7
    )
    
    
    206
    
    
    
    68After tax income (loss)
    
    
    24
    
    
    
    (416
    )
    
    
    (156
    )Share of third parties
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    
    24
    
    
    
    (416
    )
    
    
    (156
    )
 Year ended March 31, 2004 compared with year ended March 31, 2003 Operating revenues for the fiscal year ended March 31, 2004 decreased by 9% to
5,877 million. The increased competition and a relatively strong euro reduced
the yield per revenue ton-kilometer by 8%. Total traffic in ton-kilometers was
unchanged as compared to the previous year, which, along with a 1% decrease in
capacity, improved the load factor by 1.0 percentage point to 79.2%. Passenger load factor for the fiscal year ended March 31, 2004 was 80.1%, as
compared to 79.4% for the previous year. Measured in passenger kilometers,
traffic decreased by 3% from 59,417 million in the 2002/2003 fiscal year to
57,784 million in the 2003/2004 fiscal year. This decrease was mainly caused by
the Iraq war and the SARS epidemic. Freight capacity for the year ended March 31, 2004 increased by 3% as compared
to the previous year. In freight ton-kilometers, traffic increased by 5% to
4,392 million as compared to 4,197 million in the previous year. The load
factor rose from 71.7% to 72.9% in fiscal year 2003/2004. Operating expenses decreased by 1,212 million to 5,757 million, reflecting
amongst others the implementation of KLMs cost savings program discussed above
(impact 200 million). Also contributing to this result were a weak dollar as
compared to the euro (impact
346 million), a 1% decrease in capacity (impact
approximately 25 million), the inclusion of the exceptional expenses set forth
below (impact 438 million) and the sale of our low-cost operation Buzz in
April 2003 (impact 148 million). Salary and benefit costs were unchanged from
the previous fiscal year as the reduction in the number of KLM employees under
the cost savings program was offset by general salary increases and higher
retirement and pre-pension costs. Exceptional expenses for the fiscal year
ended March 31, 2003 related to a 276 million arbitration award regarding the
termination of the alliance between KLM and Alitalia on April 28, 2000, a 75
million provision for restructuring and 87 million in respect of the phasing
out of KLMs Boeing 747-300 fleet ahead of schedule. KLM achieved an operating income of 120 million for the fiscal year ended
March 31, 2004, an increase of 604 million from an operating loss of 484
million for the previous fiscal year. Results on sale of assets for the fiscal year ended March 31, 2004 improved
with a final loss for the year of just 1 million, as compared to a loss of 42
million in the previous year, 9 million of which was due to the sale of KLM
uks low cost business, Buzz, to Ryanair in 2003. Under Netherlands GAAP, we
recorded a loss of 9 million in fiscal year 2002/2003 to reflect the net
effect of proceeds to be received from the sale of Ryanair, costs arising from
arrangements under the Buzz sales agreement (which can be characterized as
impairment losses on certain fleet assets) and staff redundancies costs to be
borne by KLM uk in connection with the transaction. Results on holdings for the fiscal year ended March 31, 2004 were nil, an
increase of 4 million from the previous year. The increase was attributable in
part to an improvement in Martinairs results by 7 million compared to
the previous fiscal year. Results on sale of holdings benefited from the sale of
KLMs 9% interest in TUI Nederland N.V. in September 2003 (gain of  6 million)
and from the release of several provisions that had been formed in previous
years in respect of guarantees given to buyers upon the sale of certain
holdings (gain of 6 million). 27




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##### Table of Contents



KLM had corporate income tax expenses of 7 million for the fiscal year
ended March 31, 2004, a substantial decrease from the income of 206 million it
received from taxes in the previous fiscal year. For more detail see note 24 to
the consolidated financial statements, which explains the effective tax burden. Net income for the year amounted to 24 million, as compared to a net loss of
416 million for the 2002/2003 fiscal year. This result was due to the
substantial improvement in operating income for the 2003/2004 fiscal year, as
well as to a 41 million increase in results on sale of assets, for which KLM
realized a loss of 42 million in fiscal year 2002/2003 relating to the sale of
aircraft and the sale of KLM uks low cost business, Buzz, to Ryanair. Results from joint venture with Northwest Operating income from the joint venture between KLM and Northwest Airlines for
the year ended March 31, 2004 was $170 million, 20% higher than $142 million in
the previous fiscal year. Capacity contributed to the joint venture during the
year was reduced. The number of seat-kilometers was 11% lower. Revenue
increased by 2%, the outcome of a decline in passenger traffic from 33.5
billion passenger kilometers for the previous fiscal year to 31.3 billion
passenger kilometers, and an improvement in yield per revenue
passenger-kilometer from $0.48 for the previous fiscal year to $0.52. Unit
costs were 13% higher in fiscal year 2003/2004, chiefly as a result of currency
effects and higher fuel costs. Operating results by business segment for the year ended March 31, 2004 The following table sets forth the operating income (in millions of euro) per
business for fiscal year 2003/2004. Engineering
    
    
    
    
    
    
    
    
    
    Elimination
    
    TotalOperating income per business
    
    
    
    
    
    
    
    
    
    &
    
    Charter /
    
    
    
    
    
    of inter-
    
    consoli-2003/2004
    
    Passenger
    
    Cargo
    
    Maintenance
    
    Low-cost
    
    All other
    
    segments
    
    datedOperating revenues from
external customers
    
    
    4,107
    
    
    
    1,014
    
    
    
    258
    
    
    
    427
    
    
    
    71
    
    
    
    
    
    
    
    5,877Intersegment revenues
    
    
    16
    
    
    
    18
    
    
    
    547
    
    
    
    0
    
    
    
    218
    
    
    
    (799
    )
    
    
    0Operating revenues
    
    
    4,123
    
    
    
    1,032
    
    
    
    805
    
    
    
    427
    
    
    
    289
    
    
    
    (799
    )
    
    
    5,877Operating expenses
    
    
    3,936
    
    
    
    961
    
    
    
    789
    
    
    
    411
    
    
    
    459
    
    
    
    (799
    )
    
    
    5,757Operating income
    
    
    187
    
    
    
    71
    
    
    
    16
    
    
    
    16
    
    
    
    (170
    )
    
    
    
    
    
    
    120
 Passenger business The Passenger business segment is the largest and most visible part of KLMs
operations. Our Passenger business achieved operating revenues of 4,123
million in fiscal year 2003/2004, as compared to 4,454 million in the previous
fiscal year. This 8% decrease reflects the effects of the aftermath of the Iraq
war and the SARS outbreak, as well as a weak global economy. The Passenger
business achieved an operating income of 187 million in the fiscal year
2003/2004, as compared to an operating loss of 25 million in the previous
fiscal year, largely due to this reduction in operating expenses. The Passenger business carried almost 19 million passengers and accounted for
70% of our operating revenues in the year ended March 31, 2004. Due to a
reduction in capacity, load factor increased from 79.4% to 80.1% in fiscal year
2003/2004. Our European passenger business achieved operating revenues of 2,122 million
in fiscal year 2003/2004, as compared to 2,496 million in the previous fiscal
year. This 15% decrease was in part due to competition from low-cost airlines
on short-haul routes. Our long-haul passenger business, comprising long-haul
routes to destinations in the North Atlantic, Asia Pacific, Central and South
Atlantic, and Middle East and South Asia regions, achieved operating revenues
of 2,915 million in fiscal year 2003/2004, as compared to 3,180 million in
the previous fiscal year. This 8% decrease was mainly caused by the SARS
epidemic. Passenger traffic to destinations in Africa, as in previous years,
were not affected by the developments in other regions, and achieved operating
revenues of 536 million, a slight decrease from operating revenues of 542
million achieved in the previous fiscal year. Operating expenses for the Passenger business in fiscal year 2003/2004 were
3,936 million, a decrease of 12% from the previous fiscal year. This result
was due to the implementation of KLMs cost savings program (impact
approximately 140 million), under which the number of full time employee
equivalents in the Passenger business segment was reduced by 6%. Furthermore,
the weaker U.S. dollar compared to the euro, resulted in a reduction of
operating expenses of approximately 250 million. In addition, distribution
costs were reduced by 80 million mainly as a result of our shift to direct
sales. Cargo business Operating revenues from our Cargo business amounted to 1,032 million for the
fiscal year ended March 31, 2004, a 6% decrease from the previous fiscal year.
This revenue decrease was principally due to a yield decrease of 9%, which was
partly offset by an increase of traffic volume by 5%. The yield decrease was
influenced by the weak dollar, which explains 8% of the yield decline. 28




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Traffic growth attracted more capacity on the Asian routes. Traffic between
Asia and Europe picked up strongly and showed an increase of 14% compared to
fiscal year 2002/2003. The load factor on Asian routes was also excellent later
in the year and amounted to 84.6% while the average load factor for the total
Cargo business reached 72.9%. The yield, however, remained under pressure and
decreased by 11% compared to fiscal year 2002/2003; excluding currency effects,
this decrease amounted to 2%. Traffic growth to Asian destinations remained
behind capacity growth, resulting in lower load factor and putting pressure on
yield. On transatlantic routes, volume decreased by 3% compared to fiscal year
2002/2003. The North Atlantic route sector, comprising routes between the
Netherlands and each of Canada, the United States and Mexico, accounted for
approximately 24% of our total traffic ton-kilometers in fiscal year 2003/2004. Operating expenses for our Cargo business for the fiscal year ended March 31,
2004 were 961 million, a 6% decrease from the previous fiscal year. This
decrease was largely due to the implementation of our cost savings program,
which reduced personnel numbers by 300 during the year and redesigned the
internal organization of the cargo business according to a market-based matrix,
with a distinction being made between General Cargo, Specialties and Verticals,
the latter being designed for complete industries. This approach enables the
Cargo business to tailor its capacity and competencies to specific markets and
sell them in cooperation with agents. Our Cargo business achieved an operating income of 71 million for the
2003/2004 fiscal year. This result was virtually unchanged from the previous
fiscal year due to the fact that the decrease in operating revenues (67
million) in fiscal year 2003/2004 was almost entirely offset by the decrease in
operating expenses ( 66 million) achieved. Engineering & Maintenance business Our Engineering & Maintenance business segment achieved operating revenues of
805 million in fiscal year 2003/2004, a 17% decrease from the previous fiscal
year. Operating income for the Engineering & Maintenance segment was 16
million for the fiscal year ended March 31, 2004, a 61% decrease from 41
million in the previous year. The decrease was due in part to the decline in
traffic, which resulted in a 22% decrease in revenue from external customers,
from 329 million in fiscal year 2002/2003 to 258 million in fiscal year
2003/2004. However, this decrease was partially offset by the implementation of
KLMs cost savings program, which accounted for a 15% decrease in the segments
operating expenses, from 927 million for fiscal year 2002/2003 to 789 million
for fiscal year 2003/2004. Under the cost savings program, personnel in the
Engineering & Maintenance segment were reduced by 400 in fiscal year 2003/2004,
approximately half of the number set to be reduced under the program by 2005. The decrease in operating revenues and operating income experienced by our
Engineering & Maintenance segment reflected the effects of the Iraq war and the
aftermath of the SARS outbreak on the airline industry generally. The reduction
in the number of our flights and flights by third party airlines to compensate
for the market downturn, and the postponement of optional modifications by
airlines across the industry owing to their own low revenues resulted in less
demand for engineering and maintenance services. In addition, global access
capacity in the aircraft maintenance market resulted in airlines turning to
wide-body maintenance providers operating at very competitive rates in low-wage
countries for their engineering and maintenance services. Charter/Low-cost business Operating revenues for our Charter/Low-cost business segment, operated through
our subsidiary Transavia, were 427 million for the fiscal year ended March 31,
2004, a 10% decrease from the previous fiscal year. This decrease reflects the
effects of the economic recession in Europe on holiday travel and the effects
of the Iraq war on passenger traffic. Demand for charter flights decreased
sharply from the previous fiscal year, resulting in increased competition
between charter carriers and a general reduction in fares for passenger charter
services. According to a McKinsey survey in 2002 on intra European passenger
traffic, the share of charter traffic has decreased from 23% of total
intra-European passenger traffic in 1998 to 21% in 2001 and is expected to
decrease further to 19% in 2007. Operating expenses for our Charter/Low-cost business segment were 411 million,
a 7% decrease from 444 million in the previous fiscal year. This decrease was
the result of the implementation of cost savings measures, including a
reduction of 90 full time employee equivalent positions as well as a reduction
in distribution costs by conducting ticket sales for BASIQ AIR exclusively over
the internet and through call centers. Our Charter/Low-cost business segment achieved an operating income of 16
million for the 2003/2004 fiscal year, as compared to 28 million in the
previous fiscal year. 29




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All other business In fiscal year 2002/2003 operating loss for the All other business decreased
by 430 million from 600 million to 170, a reduction of more than 70%. This
reduction was the result of a decrease in operating revenues of 55 million and
a decrease in operating expenses of 485 million. In fiscal year 2002/2003
exceptional losses of 350 million had a strong negative effect on operating
income in the all other segment. Furthermore, the operating result in fiscal
year 2002/2003 was negatively influenced by the Buzz operating loss of 30
million. A reduction of IT-related expenses in fiscal year 2003/2004 also
contributed to the overall reduction in the segments operating loss. Year ended March 31, 2003 compared with year ended March 31, 2002 We realized an operating loss for this financial year of 484 million (2001/02:
94 million operating loss). The net loss before tax amounted to 622 million
(2001/02: 224 million loss). After tax, the net loss for the year amounted to
416 million (2001/02: 156 million loss). Operating income was negatively affected by higher depreciation and phasing-out
charges of 87 million for the Boeing 747-300 fleet. The operating result in
the previous year had included a 27 million contribution from the State of the
Netherlands following the closure of U.S. airspace for three days in the wake
of the September 11, 2001 attacks. Operating revenues decreased by 1% to 6,485 million. Total traffic, in
ton-kilometers, was 2% higher than in the previous year. Since capacity was 2%
higher, the load factor increased by 1.3 percentage points to 78.2%. Due to the
changing market conditions, yield per revenue ton-kilometer decreased by 4%.
Operating expenses increased by 343 million to 6,969 million. Salary costs
were 9% higher, principally due to general salary increases (in part from new
contractual pay agreements) and due to additional costs for pre pension and
retirement plans. The 42 million loss on the sale of assets (2001/02: 10 million income) was
caused by the sale of KLM uks low-cost Buzz activities (9 million) and the
sale of assets from our fleet (33 million). The result on the sale of KLM uks
low-cost activities is the net effect of sales proceeds received from Ryanair
on the transfer of assets (20 million, received at April 11, 2003), costs
arising from arrangements under the sales agreement (20 million) and staff
redundancies costs (9 million) which will be borne by KLM uk. The result on
the sale of fleet assets arose principally from sale and leaseback transactions
entered into to limit future residual value risks on these aircraft. Financial income and expense improved by 36 million (27% compared to the
previous year) principally due to lower interest expense in connection with
investments in the fleet. Results on holdings were 11 million better at 4 million negative. The
increase was attributable in part to an improvement in Martinairs earnings. Operating expenses included exceptional costs to an amount of 351 million. Of
these exceptional costs 276 million related to the arbitration tribunals
decision on the dispute between KLM and Alitalia regarding the termination of
their alliance as of April 28, 2000. The tribunal ruled that our termination of
the agreement was void and allowed Alitalias claim for 250 million plus
interest. The claim brought by us against Alitalia to recover 100 million plus
interest paid for the development of Malpensa Airport was also awarded. The
remaining exceptional loss (75 million) related to a provision for
restructuring and relates to redundancy costs for approximately 1,000 full-time
equivalents. In the fiscal year 2001/02 there were no exceptional items. The results of the joint venture between KLM and Northwest Airlines improved
significantly in comparison with the previous year, which had been negatively
influenced by the September 11, 2001 attacks. On balance, the joint ventures
capacity was gradually reduced over the fiscal year. The number of
seat-kilometers was 3% lower than in the previous year. Revenue rose by 6%,
chiefly because of the improved yield per revenue ton-kilometer. The settlement
of the joint venture contribution is recognized as revenue or expense under the
heading Commercial cooperation (included in operating expenses). Passenger load factor for the financial year as a whole was 79.4% (2001/02:
78.7%). Measured in passenger kilometers, traffic increased by 2% from 58,447
million in 2001/02 to 59,417 million. The passenger business realized an
operating loss of 25 million. Over the year as a whole, freight capacity increased by 1%. In freight
ton-kilometers, traffic increased by 4% to 4,197 million (2001/02: 4,050
million). The load factor rose from 69.6% to 71.7%. The decline in traffic had an indirect effect on engineering and maintenance
activities. Thanks to an active sales policy, the Engineering & Maintenance
division maintained its volumes. Third party revenue amounted to 329 million.
The Engineering & Maintenance businesss operating income came to 41 million. 30




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Critical accounting policies and new accounting standards The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with Netherlands GAAP. The preparation of these
financial statements requires us to make estimates and judgments that affect
the reported amount of assets and liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities at the date of our
financial statements. Actual results may differ from these estimates under
different assumptions or conditions. Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions. We believe that our critical
accounting policies are limited to those described below. See the Accounting
policies section beginning on page F-3 of our consolidated financial
statements for additional discussion of our accounting policies. Frequent flyer accounting KLM operates a frequent flyer marketing program under which our customers earn
mileage credits by flying KLM or its alliance partners and by using the
services of participating non-airline partners. We use a number of accounting
estimates in accounting for our frequent flyer program, which we believe are
consistent with industry practices. Under our frequent flyer program, miles earned are accumulated in an account
for each member. These earned miles do not expire. Mileage credits can be
redeemed for free or upgraded travel on KLM and other participating airlines or
for other non-flight awards. Both under Netherlands GAAP and under U.S. GAAP we account for our frequent
flyer obligations on an accrual basis using the incremental cost method. For
expected use of earned miles in flight awards we include on-board supplies
(food, beverages, newspapers) and fuel and passenger insurance in our
incremental cost calculation. The costs of on-board supplies are based on
average cost per passenger, calculated on an annual basis. The incremental fuel
cost per mile is calculated on the basis of a complicated formula we use to
determine the average fuel cost per kilogram carried on board. Estimated
average fuel prices and average passenger and luggage weights are used in the
calculation of the incremental cost per award and per earned mile equivalent.
Incremental costs of non-flight awards are calculated as the average expected
out-of-pocket expense charged to KLM by the third party suppliers of such
awards to members of the program. The number of earned miles included in the accrual takes into account expected
non-use of miles for awards. Factors that determine the percentage of earned
miles for which we do not accrue an expense are:  
    
    Members that have not (yet) earned sufficient miles to make use of
awards, taking percentages used for flight awards and non-flight
awards into account. Their earned miles are not accrued for on the
basis that there is no real obligation until miles earned reach the
threshold required before a reward is secured.  
    
    Remaining expected non-use of earned miles for awards, estimated at a
percentage of the total miles earned and not used, after deduction of
earned miles not accrued as they fall into the category mentioned
above. This percentage is based on an annual review of miles
outstanding per account and thresholds determined by the average
number of miles actually redeemed per award in the past. Expected use of earned miles for upgrades are not accrued for, as incremental
costs of upgrades are minor. The total number of miles outstanding under KLMs frequent flyer program at
March 31, 2004 was 67,500 million. KLM has recorded a liability for awards
relating to these mileage credits of 33 million. KLM sells mileage credits to the other companies participating in the program.
The proceeds from the miles sold represent the compensation paid to KLM by the
non-airline partners for miles actually earned by members of the frequent flyer
program on their use of the services of these non-airline partners. Following
the recommendations included in IATA Airline Accounting Guideline 2, frequent
flyer program accounting, as the non-airline partners do not represent a
significant part of the total miles earned in our frequent flyer program (3%),
the proceeds from the miles sold are recognized as income when the miles are
earned by the members although an amount equivalent to the incremental cost of
honoring those mileage credits is deferred. Passenger revenue Passenger revenue is initially recorded as a liability for sales in advance of
carriage. Revenue from ticket sales is recognized at the time when we provide
the transportation. We make estimates based on historical trends regarding
liability for tickets sold but not yet reported, the timing and amount of
tickets used for travel on other airlines and the amount of tickets sold that
will not be used. Changes to these estimation methods could have a material
effect on the presentation of our financial results. Moreover, in light of the
uncertainties surrounding the effects of the events of September 11, 2001,
these historical trends may not be representative of future results. 31




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Impairment of long-lived assets Under Netherlands GAAP, whenever there is an indication of impairment, we test
long-lived assets for impairment by comparing the carrying amount of each asset
group (cash generating unit) to its recoverable amount, defined as the higher
of the net selling price and its value in use. We make judgments about the
level of assets to be grouped for purposes of impairment. We estimate the value
in use based on discounted future cash flows for our fleet based on models that
we also use in making fleet scheduling decisions. These models use projections
of passenger yields, fuel costs, labor costs and other relevant factors. Fair
values of aircraft are estimated based on information from third party
resources. Under U.S. GAAP we evaluate impairment of long-lived assets in compliance with
Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.We record impairment losses on
long-lived assets used in operations when events and circumstances indicate the
assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets groups are less than the carrying amounts of those
assets. The impairment loss is measured by comparing the fair value of the
asset to its carrying amount. We estimate the undiscounted future cash flows for our fleet based on models
that we also use in making fleet scheduling decisions. These models use
projections of passenger yields, fuel costs, labor costs and other relevant
factors. Fair values of aircraft are estimated based on information from third
party resources. In the 2003/2004 fiscal year no impairment loss was recognized either under
Netherlands GAAP or U.S. GAAP. Pensions and other post-retirement benefits Pension cost included in the Consolidated Statements of Earnings is computed in
accordance with Netherlands GAAP. For the Companys defined benefit plans,
those amounts are based on the actuarially determined premiums which the
company is required to pay, adjusted for restitution of structural surpluses
and discounts received by KLM from its pension funds. Under U.S. GAAP KLM accounts
for its pension costs in accordance with SFAS No.
87, Employers Accounting for Pensions. Retirement benefits represent
obligations that will be settled in the future and require assumptions to
project benefit obligations and fair values of plan assets. Retirement benefit
accounting is intended to reflect the recognition of future benefit costs over
the employees approximate service period, based on the terms of the plans and
the investments and funding decisions made by KLM. This requires management to
make assumptions regarding variables such as discount rate, rate of wage
increase and return on assets. Management consults with external actuaries
regarding these assumptions annually. Changes in these key assumptions can have
a significant impact on our projected benefit obligations, funding requirements
and periodic cost incurred. The table below illustrates the approximate impact on net pension costs for the
2004/2005 fiscal year for KLMs three main Dutch pension funds if KLM were to
change key assumptions by the indicated percentages: Increase
    
    DecreaseImpact on net pension cost
    
    assumption
    
    assumptionin millions of euro
    
    10%
    
    10%Discount rate
    
    -18
    
    +18Rate of return of plan assets
    
    -45
    
    +45
 If more than one of the assumptions were changed, the impact would not
necessarily be the same as if only one assumption were changed in isolation.
For a discussion of the current funded status and pension plan assumptions, see
note 28 to our consolidated financial statements. New U.S. accounting standards In January 2003, the Financial Accounting Standards Board (FASB) published
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities,
which was amended by FIN 46R, issued in December 2003. FIN 46R became effective
for KLM on April 1, 2004. KLM has entered into various financing structures
related to the sale and operational lease back of aircraft. In accordance with
FIN 46R, KLM determined whether these structures were variable interest
entities and assessed whether KLM was the primary beneficiary of these
entities. Following this determination, we concluded that the adoption of FIN
46R did not have a material impact on our financial results or our cash
position. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. SFAS 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. KLM has not entered into such contracts or modified existing contracts
after June 30, 2003 or designated any hedging relationships after June 30,
2003. 32




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In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This Statement
establishes standards for classifying and measuring certain financial
instruments with
characteristics of both liabilities and equity. It requires that we classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). Many of those instruments were previously classified as
equity. KLM currently has no financial instruments that would need to be
reclassified under SFAS 150. In December 2003, the FASB revised SFAS No. 132, Employers Disclosures about
Pensions and Other Postretirement Benefits. This revision requires disclosures
in addition to those in the original statement about the assets, obligations,
cash flows, and net periodic benefit costs of defined benefit pension plans and
other defined benefit postretirement plans. The company has adopted the
provisions of this revised statement and has included the required disclosures
in note 28 to our consolidated financial statements. The Medicare Prescription Drug,
Improvement and Modernization Act of 2003 was passed by Congress and signed
into law on December 8, 2003. The Act establishes a voluntary prescription drug
benefit beginning January 1, 2006. The Act also provides for the government to
pay a special subsidy equal to 28% of a retirees covered prescription drug
expenses between $250 and $5,000 (adjusted annually by the percentage increase
in Medicare per capita prescription drug costs), to employers who sponsor
retiree prescription drug plans. The Company elected to include the effects of
the Act in the Accumulated Pension Benefit Obligation (APBO) and, as of March
31, 2004 on the Net Periodic Pension Cost (NPPC) of fiscal year 2003/2004.
Specific authoritative guidance on the accounting for the federal subsidy is
pending and that guidance, when issued, could require the Company to change
previously reported information. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This Statement requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of the fair value can be made. The associated asset
retirement costs are to be capitalized as part of the carrying value of the
relevant long-lived asset. This statement became effective for us on April 1,
2003. The adoption of SFAS No. 143 did not have a significant impact on our
financial position, results of operations or cash flows. In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN 45 elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees. The disclosure requirements of FIN 45 became
effective for us in our financial statements for the 2002/2003 fiscal year.
Additionally, FIN 45 clarifies the requirements for recognizing a liability at
the inception of the guarantee equal to the fair value of the obligation
undertaken in issuing the guarantee and incorporates the guidance in FASB
Interpretation No. 34, Disclosure of Indirect Guarantees of Indebtedness of
Others. No guarantees were issued or modified by KLM after December 31, 2002.
As of March 31, 2004, additional disclosures were required by FIN 45, which are
elucidated in note 28 to the consolidated financial statements. B. Liquidity and capital resources Internal and external sources of liquidity Currently our liquidity position exceeds the minimum levels required to sustain
our business adequately. Currently there are no unusual provisions in any of
our financial guarantees, debt or lease agreements or other arrangements that
could trigger a requirement for an early payment, additional collateral
support, changes in terms, acceleration of maturity, or the creation of
additional financial obligations to any material extent. If required, we
believe that our liquidity position could be extended further by the use of
internal and external resources. Our internal source of liquidity consists of operating cash flows. The
availability of these funds could be reduced by risks relating to the airline
industry such as the threat or effects of terrorists attacks, deteriorating
economic conditions, intense competition in the airline industry and seasonal
changes in demand. Our external sources of liquidity consist of our 500 million commercial paper
program, mortgages secured by aircraft and non-fleet assets, and sale-and-lease
back transactions of aircraft and non-fleet assets. As of March 31, 2004, no
amounts were outstanding under our commercial paper program. The book value of
our unencumbered fleet and non-fleet assets as of March 31, 2004, was 1,488
million. These assets offer us a possible source of liquidity through the
financing and the sale (and lease back) of these assets. Despite the effects of the implementation of our fleet renewal program in the
fiscal year ended March 31, 2004, we improved our overall liquidity position.
We believe that our working capital is sufficient to meet our present
requirements. 33




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Evaluation of the sources and amounts of our cash flows We invest our liquid reserves in short-term instruments at current interest
rates. Nonetheless in some of our foreign establishments exchange controls,
transfer formalities and currency shortages restrict a portion of our funds.
The part of our liquid reserves subject to these restrictions amounts to 7
million, which generally does not earn interest and is subject to the risk of
currency devaluation. These restrictions currently do not affect our ability to
meet any cash obligations. We have covered our Japanese yen and parts of our
U.S. dollar long-term commitments with forward exchange contracts. As of March
31, 2004, 75% of our long-term debt, excluding perpetual loans, was denominated
in euro, 22% was denominated in U.S. dollars and 3% was denominated in British
sterling. Cash flows for the fiscal year ended March 31, 2004 Our net cash inflow from operating activities amounted to 303 million for the
fiscal year ended March 31, 2004. Our net cash outflow from investing
activities totaled 532 million, reflecting capital expenditures of 707
million, of which 584 million related to the purchase of aircraft in
connection with our fleet renewal program. KLM made advance payments for the
purchase of six Airbus A330-200 aircraft, one Boeing 777-200 aircraft and three
Boeing 737-700 aircraft in connection with the fleet renewal program during
fiscal year 2003/2004. These capital expenditures were partially offset by proceeds received from the
sale of tangible fixed assets of 149 million, relating to the sale of eight
Boeing 747-300 aircraft, as this aircraft type was taken out of service during
the 2003/2004 fiscal year, and the sale of three Boeing 757-200 aircraft used
by Transavia Airlines B.V. Investments in inventory in fiscal year 2003/2004
amounted to 38 million. Our net cash inflow from financing activities amounted to 259 million for the
fiscal year ended March 31, 2004. Funding of 690 million was arranged for
eight aircraft, which was higher than redemption of 322 million that we made
on existing debt during the fiscal year. KLM constantly seeks opportunities to
optimize its current debt position in order to further reduce the average cost
of capital. Our cash position as of March 31, 2004 amounted to 949 million, a 3% increase
from the previous fiscal year. 663 million, or 70%, of our cash as of March
31, 2004 consisted of cash and marketable securities, and 286 million, or 30%,
consisted of AAA bonds and long-term deposits available to the Company on
demand and immediately convertible into cash. Of our cash position of 919
million as of March 31, 2003, 608 million, or 66%, consisted of cash and
marketable securities, and 311 million, or 33%, consisted of AAA bonds and
long-term deposits available to the Company on demand and immediately
convertible into cash. Current liabilities decreased from 2,190 million as of March 31, 2003 to
1,856 million as of March 31, 2004, especially as a result of the reduction of
current maturitys of long-term debt. Group equity rose from 1,477 million as
of March 31, 2003 to 1,488 million as of March 31, 2004. Cash flows for the fiscal year ended March 31, 2003 Our cash inflow from operating activities amounted to 297 million for the
fiscal year ended March 31, 2003. Our cash outflow from investing activities
totaled 436 million, reflecting capital expenditures of 725 million, of which
269 million related to delivered aircraft, under which one Boeing 747-400
aircraft, two Boeing 737-700 aircraft, and one Fokker 70 aircraft. Additionally
KLM made advance payments for the purchase of three Boeing 747-400 aircraft
(219 million), four Boeing 777-200 aircraft (203 million), six Airbus 330-200
aircraft (18 million) and two Boeing 737-700 aircraft (15 million) . These expenditures were partially offset by proceeds received from the sale of
thirteen aircraft (305 million), most of which were leased back under
operating leases. Information on borrowings We have placed deposits in legal structures that accomplish either legal
defeasance or defeasance in substance. Defeasance is accomplished by linking
deposits placed with investment grade financial institutions to lease
commitments, in some cases through pledge and escrow agreements. Deposits
amounting to 214 million were pledged, held in escrow or on deposit to satisfy
all scheduled payments on the related lease commitments. In order to hedge
interest rate and currency risk, the deposits are in the same currencies as the
related lease commitments and have the same scheduled dates and amounts for
payments. We believe that the possibility that we will be required to make
future payments with respect to these obligations is relatively remote. Information on debt For information on the types of our financial instruments, the maturity profile
of our debt, the currency and interest rate structure of our debt, please see
notes 8 and 14 to our consolidated financial statements. 34




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Capital Expenditures Capital expenditures for the fiscal year ended March 31, 2004 See  Cash flows for the fiscal year ended March 31, 2004 above for a
discussion of capital expenditures during the 2003/2004 fiscal year. For a
description of material commitments, an indication of the purpose of these
commitments and the expected source of funds for them, see Item 5.F 
Operating and Financial Review and Prospects  Tabular disclosure of
contractual obligations below. Capital expenditures for the fiscal year ended March 31, 2003 See  Cash flows for the fiscal year ended March 31, 2003 above for a
discussion of capital expenditures during the 2002/2003 fiscal year. C. Research and development, patents and licenses etc. None. D. Trend information For the first four months of the 2004/2005 fiscal year we have achieved a
traffic growth (measured in revenue passenger kilometers) of 17%, compared to
the same period in fiscal year 2003/2004. This result reflects an increase in
passenger traffic as the markets continue to recover from the impact of SARS
and the Iraq war. Passenger traffic on routes to destinations in Asia showed a
strong recovery of 39% compared to previous year. In the first four months of the 2004/2005 fiscal year, cargo traffic (measured
in revenue ton kilometers freight) showed an increase of 13% from the same
period in fiscal year 2003/2004. Cargo traffic on Asian routes showed a
significant improvement of 23%. The increase in traffic was especially driven
by a capacity increase of 24%, which was due to the introduction of a third
full freighter aircraft in our operation. On August 13, 2004 Air France-KLM published its turnover figures for the first
quarter of fiscal year 2004/2005. These figures include the turnover of KLM for
the months May and June 2004. KLMs contribution for these months amounted to
1.1 billion and was up 14.3% compared to the same period in fiscal 2003/2004. E. Off-balance sheet arrangements An off-balance sheet arrangement is any transaction, agreement or other
contractual arrangement involving an unconsolidated entity under which a
company has (1) made guarantees, (2) a retained or a contingent interest in
transferred assets, (3) an obligation under derivative instruments classified
as equity or (4) any obligation arising out of a material variable interest in
an unconsolidated entity that provides financing, liquidity, market risk or
credit risk support to the company, or that engages in leasing, hedging or
research and development arrangements with the company. We have no arrangements of the types described in the first three categories
that we believe may have a material current or future effect on our financial
condition, liquidity or results of operations. Certain guarantees that we do
not expect to have a material current or future effect on our financial
condition, liquidity or resulted operations are disclosed in note 28 to our
consolidated financial statements included in Item 18 of this report. In January 2003, the Financial Accounting Standards Board (FASB) published
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities,
which was amended by FIN 46R, issued in December 2003. Effective April 1, 2004,
we have adopted this interpretation, which addresses the accounting for these
variable interests. We do have obligations arising out of variable interests in
unconsolidated entities. See note 28 to our consolidated financial statements
included in Item 18 of this report for a discussion of our on-balance and
off-balance sheet aircraft leases. 35




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##### Table of Contents



F. Tabular disclosure of contractual obligations The following table presents a summary of our contractual obligations and
commitments as of March 31, 2004, and the effects these obligations are
expected to have on our cash flows in the periods set forth below: Payments due by periodContractual Obligations
    
    
    
    
    
    Less than
    
    1-3
    
    
    
    
    
    After 5(in millions of euro)
    
    Total
    
    1 year
    
    years
    
    4-5 years
    
    yearsLong-term debt obligations
    
    
    3,913
    
    
    
    192
    
    
    
    910
    
    
    
    1,059
    
    
    
    1,752Financial lease obligations
    
    
    214
    
    
    
    3
    
    
    
    88
    
    
    
    123
    
    
    
    Operating lease obligations
    
    
    1,085
    
    
    
    180
    
    
    
    301
    
    
    
    181
    
    
    
    423Purchase obligations
    
    
    494
    
    
    
    140
    
    
    
    354
    
    
    
    
    
    
    
    Other Long-term obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    5,706
    
    
    
    515
    
    
    
    1,653
    
    
    
    1,363
    
    
    
    2,175
 As of the end of August 2004, our contractual obligations had not changed
materially compared to the information included in the table above. The cash received from our operating activities is expected to be sufficient to
cover our commitments with respect to the long-term debt obligations, financial
lease obligations and operating lease obligations referred to above. The purchase obligations relate to the purchase of one Boeing 777-200ER and six
Airbus A330-200 aircraft as part of our fleet renewal program, representing a
total commitment of 430 million. The remainder of the purchase obligations
relate to the purchase of three Boeing 737 aircraft, representing commitments
of 64 million. The purchase of one Boeing 777-200ER will be financed through a U.S. ExIm Bank
guaranteed commercial loan covering 85% of the purchase price for the aircraft.
KLM will seek financing through various sources of external funding guaranteed
by European ECB-supported commercial loans with respect to the commitments for
Airbus A330-200 aircraft, falling due in the next three fiscal years. With
respect to the Boeing 737 aircraft, we expect to attract funding through
financial lease structures. For more information regarding our contractual obligations, see note 8 to our
consolidated financial statements. G. Safe Harbor Please see Warning about Forward-Looking Statements at the beginning of this
annual report. 
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. Directors and senior management We are managed by a Board of Managing Directors (Board of Management), which is
responsible for our overall results and the Companys mission and strategy. The
responsibility for the management of the company is vested in the Board of
Management as a whole. Our Board of Management consists of four members: a
president and chief executive officer, a chief operations officer, a chief
human resources officer and a chief financial officer. The Board of Management
performs its activities under the supervision of the Supervisory Board. The Supervisory Board is charged with overseeing the policies of the Board of
Management and the general course of affairs of the Company and the business
connected with it, as well as assisting the Board of Management by providing
advice. The Supervisory Board evaluates the main organizational structure and
the control mechanisms established by the Board of Management. The
responsibility for proper performance of duties is vested in the Supervisory
Board as a whole. Articles of association and the protocol In connection with the combination, on October 16, 2003 Air France, KLM,
members of our Board of Management and all members of our Supervisory Board at
the time entered into a protocol in which they undertook to adhere to the
corporate governance arrangements contained in the framework agreement. All new
members of the Supervisory Board have also entered into the protocol. 36




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Following the completion of Air Frances offer we amended our articles of
association to reflect these arrangements. The protocol and our articles of
association provide that:



| |  | our Supervisory Board will be required to approve:
|- |  | --------------------------------------------------



| |  |  | any KLM business plan and KLM budget;
| | - |  | -------------------------------------


    
    any decision of the Board of Management regarding the amended state
option (see Item 7.B  Major Shareholders and Related Party Transactions
 Related party transactions  Relation with the State of the
Netherlands) or to
amend the framework agreement or the KLM assurances (see Item 4.D 
Information on the Company  Property, plants and equipment Schiphol
airport Assurances and assurances foundation); and
    
    certain material decisions of the Board of Management set out in our
articles of association, as well as any other resolutions that our
Supervisory Board may resolve and notify to the Board of Management;  
    
    until May 6, 2007, any decision of the Board of Management that requires approval of our Supervisory Board will require a
two-thirds majority vote of the Supervisory Board if it concerns:  
    
    a matter on which the Strategic Management Committee has rendered a binding recommendation;
    
    the adoption of a KLM business plan or budget; or
    
    the approval of our annual financial statements;  
    
    as from May 6, 2007 and until May 6, 2009:  
    
    any decision to amend the KLM assurances will require a favorable
vote of at least three-fourths of the KLM-designated members of our
Supervisory Board; and
    
    any decision to amend the corporate governance principles in the
framework agreement will require a favorable vote of at least two-thirds
of the members of our Supervisory Board;  
    
    the meeting of the priority shareholders (composed solely of Air
France) will, after consulting our Board of Management and our
Supervisory Board, determine the amount to be set aside to establish
or increase KLMs reserves, provided the amount is reasonable
considering our financial situation and complies with Air France-KLMs
dividend policy;  
    
    our Supervisory Board, with the prior approval of the priority
shareholders, will determine the remuneration of the members of our
Board of Management; and  
    
    two new committees are established within our Supervisory Board. The
first committee consists of three members of our Supervisory Board
(including two designees of Air France and one designee of KLM), and
its members will have the right to cast two votes in respect of any
decision of our Supervisory Board to appoint a member of our Board of
Management. The second committee will consist of four members of our
Supervisory Board (including three designees of Air France and one
designee of KLM), and its members will have the right to cast two
votes in respect of any decision of our Supervisory Board to suspend
or dismiss a member of our Board of Management:  
    
    for urgent reasons (dringende redenen) within the meaning of
article 7:678 of the Dutch Civil Code (acts, qualities or behavior of an
employee such that an employer cannot reasonably be expected to continue
the employment agreement and justify instant dismissal); or
    
    on the grounds that the member of the Board of Management has acted
contrary to any binding recommendation of the Strategic Management
Committee, with regard to applicable law, the fiduciary duties of the
members of the Board of Management and the obligations of the members of
the Board of Management to comply with any binding advice of the
assurances foundation (as discussed in Item 4.D  Information on the
Company  Property, plants and equipment Schiphol airport  Assurances
and assurances foundation).  The two committees will be appointed by the Supervisory Board at the next
Supervisory Board meeting. These two committees will terminate on May 6,
2007. For additional discussion on corporate governance arrangements in connection
with the combination with Air France, see Item 6.D  Board practices and
corporate governance  Air France-KLM corporate governance arrangements below. 37




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Board of Management In the framework agreement, Air France and KLM agreed that following the
combination of Air France and KLM, Air France would appoint one member of the
Board of Management and KLM would appoint four members. KLM designated the four
members of its Board of Management prior to the offer as members of the Board
of Management following completion of the offer. Air France has not yet
designated a person to be appointed to KLMs Board of Management. Members of our Board of Management serve at the discretion of the Supervisory
Board and may be removed in accordance with the protocol and our articles of
association and subject to consultation with our shareholders at a general
meeting of shareholders. The Supervisory Board informs the Works Council, a
body of our employees elected by our employees in the Netherlands pursuant to
our articles of association and Dutch law, regarding the intended removal. Each
member of the Board of Management has, by entering into the protocol with Air
France, KLM, all other members of the Board of Management and all members of
the KLM Supervisory Board, agreed, subject to legal requirements and fiduciary
duties, to adopt and implement any binding recommendation of the Strategic
Management Committee relating to KLM. See the discussion below under Item 6.C
 Board practices and corporate governance  Air France-KLM corporate
governance arrangements  Strategic Management Committee. The following is a list of the members of our Board of Management as of the
date of this annual report: Year
    
    
    
    First
    
    Function/Supervisory Board
    
    Past areas ofof
    
    
    
    Appoint-
    
    membership and other
    
    experience withinBoard of Management
    
    birth
    
    Nationality
    
    ment
    
    functions (1)
    
    KLMLeo M. van Wijk
    
    
    1946
    
    
    Dutch
    
    
    1991
    
    
    President & Chief Executive
Officer/member of Board of
Directors of Northwest
Airlines, Inc., member of
Advisory Council of ABN
AMRO Holding N.V., member
of Supervisory Boards of
AEGON Nederland N.V.,
Randstad Holding N.V.,
Martinair Holland N.V. and
TUI Nederland N.V.
    
    Automation Services,
Cargo, Commercial
Services, Corporate
DevelopmentPeter F. Hartman
    
    
    1949
    
    
    Dutch
    
    
    1997
    
    
    Managing Director & Chief
Operations Officer/member of
Supervisory Board of RAI
Amsterdam B.V., member of
Supervisory Board Martinair
Holland B.V.
    
    Finance & Control,
Ground Services,
Customer Services,
Personnel &
Organization,
Engineering &
MaintenanceCees van Woudenberg
    
    
    1948
    
    
    Dutch
    
    
    1997
    
    
    Managing Director & Chief
Human Resources
Officer/member of Supervisory
Boards of DSM N.V.,
Aalsmeer Flower Auction,
Transavia Airlines B.V. and
Mercurius Groep Wormerveer
B.V., member of Advisory
Board of Deloitte & Touche
Human Capital Group
    
    Personnel &
Organization, Flight
Operations, Cabin
CrewRobert A. Ruijter
    
    
    1951
    
    
    Dutch
    
    
    2001
    
    
    Managing Director & Chief
Financial Officer/member of
Supervisory Boards of
Transavia Airlines B.V. and
Kenya Airways Ltd.
    
    
 (1) Only membership of supervisory boards and functions with large non-group
companies as of March 31, 2004 are shown here. Our Board of Management has established a Disclosure Committee to maintain
compliance with the U.S. Sarbanes-Oxley Act and related regulations and to
facilitate improvement of our disclosure control framework. The committee
assists our Board of Management by working to ensure that our disclosures in
all filed reports are accurate, complete, timely, understandable and that they
fairly present the condition of the group in all material respects. The composition of the Disclosure Committee as of the date of this annual
report included Jan Ernst de Groot (Chairman), Senior Vice President, General
Counsel and Company Secretary; Ruud van der Vlugt, Vice President, Reporting
and Control; Ronald Alsen, Senior Vice President, Internal Audit; Barbara van
Koppen, Deputy General Secretary; Jan Christiaan Hellendoorn, Senior Vice
President, Corporate Communications; and Roger van Hal (Secretary), Senior
Legal Counsel. 38




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Supervisory Board The members of the Supervisory Board are appointed by the Supervisory Board,
subject to the rights of our shareholders at a general meeting and of the Works
Council to render advice and to object. The Board of Management also has the
right to render advice regarding the appointment of a Supervisory Board member.
The term of office of each Supervisory Board member ends upon the convening of
the first general meeting of shareholders after the expiration of four years
from the time of his or her appointment. On July 6, 2004, the Dutch Upper House of Parliament approved an amendment to
certain provisions of Dutch corporate law, in particular relating to the
so-called large company regime to which we are subject. The amendment is
scheduled to enter into force on October 1, 2004. Under the
amendment, inter
alia, the following changes to the large company regime would be effected:  
    
    supervisory directors will no longer be directly appointed by a
companys supervisory board, but by the general meeting of
the companys
shareholders on the basis of a nomination by the supervisory board;  
    
    supervisory directors will no longer be directly appointed by a
companys supervisory board, but by the general meeting of
the companys
shareholders on the basis of a nomination by the supervisory board;  
    
    the general meeting of a companys shareholders will be able to make
a motion of no confidence in the supervisory board as a whole, which
would result in the immediate dismissal of all supervisory board
members;  
    
    a companys annual accounts will no longer be adopted by the
supervisory board, but by the general meeting of shareholders; and  
    
    the works council will have the right to make nominations for
one-third of the seats on a companys supervisory board. This
number will be rounded downwards if the number of supervisory board members
cannot be evenly divided by three. In the framework agreement, KLM and Air France anticipated that the amendment
would become law. KLM and Air France agreed to exercise their reasonable best
efforts to reach an agreement with the Works Council in respect of a corporate
governance structure of KLM that will implement the corporate governance
structure provided for in the framework agreement. The framework agreement
stipulates that, until May 6, 2007, the KLM Supervisory Board will be composed
of nine members, including five independent members and four members designated
by Air France. However, if no agreement is reached with the Works Council, the
KLM Supervisory Board will instead be composed of 11 members to accommodate
Works Council nominations in compliance with the amendment. On June 23, 2004, KLM appointed the following five new members to the KLM Supervisory Board:  
    
    Hans Smits,
as a new independent and Dutch member;  
    
    Henri Martre, a member designated by Air France;  
    
    Jean-Didier Blanchet, a member designated by Air France;  
    
    Henri Guillaume, a member designated by Air France; and  
    
    Remmert Laan, a member designated by Air France. On the same date or shortly thereafter, five Supervisory Board members, Lutgart
van den Berghe, Dudley Eustace, Cees van Lede, Floris Maljers and Gary Wilson,
stepped down from the KLM Supervisory Board. Floris Maljers and Cees van Lede
then joined the board of directors of Air France on June 24, 2004. See the
discussion in Board practices and corporate governance  Air France-KLM
corporate governance arrangements  Air France board of directors below. 39




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The following is a list of all Supervisory Board members as of the date of this
annual report: Year
    
    
    
    Firstof
    
    
    
    appointment/
    
    Function (1) /Supervisory Board
    
    birth
    
    Nationality
    
    Current term
    
    Supervisory board memberships and other functions (2)Kees J. Storm
    
    1942
    
    Dutch
    
    2002 /
    
    Former Chairman Board of Managing Directors AEGON N.V./Chairman
    
    
    
    
    
    2002  2006
    
    Koninklijke Wessanen N.V., Interbrew SA, Laurus N.V.,AEGON N.V., Pon Holdings N.V., Baxter International Inc.Jean F.H. Marte
    
    
    
    
    
    2004 /
    
    Former Vice-Chairman Airbus, former Chairman & CEOVice-Chairman
    
    1928
    
    French
    
    2004  2008
    
    Aérospatiale / AFNOR (Chairman), Eurocopter, Sogepa, GiatIndustries, CSAMIrene P.
Asscher-Vonk  (3)
    
    1944
    
    Dutch
    
    2004 /
    
    Professor of social law at the Nijmegen Catholic University /2004  2008
    
    Crown-appointed member of the Social Economic Council,Numico Nederland B.V., Arriva Nederland B.V.Jean-Didier F.C. Blanchet
    
    1939
    
    French
    
    2004 /
    
    Former CEO Air France, former CEO Méridien hotel chain /2004  2008
    
    Chairman of the Cercle des
Transports (TransportationCommission), Guadeloupe Port AuthorityBauke Geersing
    
    1944
    
    Dutch
    
    1985 /
    
    Managing Director Consultancy /2002  2006
    
    Holland Weather Services B.V., TIE Holding N.V., DudokArena B.V., RTV Utrecht, NIGZHenri Guillaume
    
    1943
    
    French
    
    2004 /
    
    Treasury Inspector on special assignment to the Treasury /2004  2008
    
    Former Vice President of ERAP (predecessor Elf concern)Wim Kok (4)
    
    1938
    
    Dutch
    
    2003 /
    
    Former Prime Minister of the Netherlands /2003  2007
    
    ING Groep N.V., TPG N.V., Koninklijke NederlandsePetroleum Maatschappij N.V.Remmert Laan
    
    1942
    
    French
    
    2004 /
    
    Senior Advisor of Lazard Frères in Paris, Chairman of Lazard2004  2008
    
    BV in Amsterdam /Interbrew S.A., AON France S.A., Vedior N.V.Hans N.J. Smits
    
    1950
    
    Dutch
    
    2004 /
    
    Director of Arthur D. Little, former President & CEO of2004  2008
    
    Rabobank, former President and CEO
of Amsterdam Airport Schiphol / Havenbedrijf Rotterdam N.V.
  (1)
    
    Latest function; if currently no function is held, the former function is
mentioned here.(2)
    
    Only memberships of supervisory boards and functions with large non-group
companies as of March 31, 2004 are shown here.(3)
    
    Johan Stekelenburg died on September 22, 2003. Irene P. Asscher-Vonk was
appointed on April 19, 2004 to fill the vacancy on the Supervisory Board
that arose upon Mr. Stekelenburgs death.(4)
    
    Wim Kok and Cees J.A. van Lede were appointed to fill the vacancies on
the Supervisory Board occasioned by the retirement of Arie Maas and Max
Albrecht. As mentioned above, Mr. van Lede later stepped down from the
Supervisory Board and joined the board of directors at Air France. There is no family relationship between any of the members of the Supervisory
Board or members of the Board of Management. Other than as described in this
annual report, there are no arrangements with major shareholders, customers,
suppliers or any other parties pursuant to which members of the Supervisory
Board or members of the Board of Management were selected or appointed. As of
the date of this annual report, the members of the Board of Management and the
Supervisory Board had no commitments in respect of loans, advances or
guarantees granted to them by KLM. For a discussion of Supervisory Board committees, see below under Item 6.C 
Board practices and corporate governance  Supervisory Board committees. 40




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##### Table of Contents



B. Compensation For the compensation paid to members of the Supervisory Board and the Board of
Management and the amounts we accrued to provide pension, retirement or similar
benefits for those persons, please refer to note 35 to our consolidated
financial statements. Prior to the execution of the framework agreement, Air France and Leo van Wijk
discussed modifications of the employment arrangements of members of KLMs
Board of Management to provide payments for limiting the duration of
their employment contracts and a special incentive bonus related to
the realization of synergies. On April 28, 2004,
KLMs Board of Management decided not to accept the special incentive bonus and
KLMs Supervisory Board expressed support for this decision. We expect in the near future
to reach agreement on a modified arrangement with respect to the
appropriate compensation for members of the Board of Management in
connection with the limitation of the duration of their employment
contracts. Salary and bonus systems The salaries and bonus
systems in place prior to the combination were
maintained for Messrs. van Wijk, Hartman, van Woudenberg and Ruijter. Employment arrangements The existing employment contracts with Messrs. van Wijk, Hartman, van Woudenberg and
Ruijter were maintained, but are subject to modification as described
above. In these contracts there are no provisions to receive benefits
upon termination of employment. There are no provisions for Supervisory Board members to receive benefits upon
termination of their Supervisory Board membership. C. Board practices and corporate governance For a discussion of the duration of each Board of Management and Supervisory
Board members term of office, including the date of expiration, see Item 6.A
 Directors, Senior Management and Employees  Directors and senior management
above. For details of directors employment contracts providing for benefits
upon termination of employment, see Item 6.B  Directors, Senior Management
and Employees  Compensation above. Supervisory Board committees The Supervisory Board held six scheduled meetings during the year, and met on
four additional occasions to consider the proposed combination with Air France.
The scheduled meetings considered a wide range of matters, including the cost
saving program, the fleet migration schedule, the management development policy,
the performance of the Supervisory Board, the relationship with the Board of
Management and developments in corporate governance. In keeping with
previous years, members of the Supervisory Board attended meetings of the Works
Council. As of the date of this annual report our Supervisory Board has three main
committees, the Audit Committee, Nomination Committee and Remuneration
Committee. They were composed as follows: Audit Committee
    
    Nomination Committee
    
    Remuneration CommitteeHenri Guillaume
    
    Wim Kok Chairman
    
    Wim Kok ChairmanHans N.J. Smits
    
    Bauke Geersing
    
    Bauke GeersingKees J. Storm
    
    Remmert Laan
    
    Remmert Laan
 The Audit Committee operates pursuant to a charter approved by the Supervisory
Board and annually reviews and reassesses the adequacy of the charter. The
Audit Committee is charged with assisting the Supervisory Board and monitoring,
inter alia, the integrity of the financial statements, the financial reporting
process, the system of internal business controls, the external auditors
qualifications and independence, the performance of the Companys internal
audit function and external auditor, the Companys compliance with legal and
regulatory requirements and the Companys financing and finance related
strategies. The Audit Committees charter requires it to consist of at least three members.
At least one member of the Audit Committee shall be a financial expert as
defined by the Securities and Exchange Commission. Audit Committee members may
not simultaneously serve on the audit committees of more than two other
companies unless the Supervisory Board determines that such simultaneous
service does not impair the ability of such member to serve effectively on the
Audit Committee. No member of the Audit Committee may receive, directly or
indirectly, any compensation from the Company other than fees paid to
Supervisory Board members for service on the Supervisory Board or a committee
thereof. The Audit Committee met on four occasions during the year. On the date of this
annual report, all its members were independent non-executive directors. The
Audit Committee will determine its chairmanship at the next Audit Committee
meeting in November 2004. 41




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##### Table of Contents



The Remuneration Committee drafts proposals for the Supervisory Board regarding
the Companys policy on executive directors remuneration and the remuneration
packages for individual members of the Board of Management, including
pension benefits and severance payments. In addition, the Remuneration
Committee reviews the annual performance targets set for individual members of
the Board of Management and evaluates their performances in relation to those
targets in connection with the Supervisory Boards allocation of grants to
those members under the Companys long term incentive and share option plans.
Furthermore, the Remuneration Committee makes proposals to the Meeting of
Holders of Priority Shares regarding the remuneration of members of the
Supervisory Board and its committees. No director is involved in deciding his
own remuneration. The Remuneration Committee met on two occasions during the
year. On the date of this annual report, all its members were
independent non-executive directors. The Nomination Committee prepares the appointments by the Supervisory Board of
members of the Supervisory Board and the Board of Management. It met on three
occasions during the year. Two additional Supervisory Board committees were established in connection with
the combination with Air France. See Item 6.A  Directors and senior
management  Articles of association and the protocol above. Air France-KLM corporate governance arrangements Pursuant to the framework agreement, following completion of Air Frances
offer, Air France and KLM have effected certain corporate governance
arrangements to enable them to operate as a combined group. Air Frances board of
directors
In the framework agreement, Air France and KLM agreed that Air Frances board
of directors will include the chief executive officer of KLM as vice-chairman,
a director designated by the State of the Netherlands and two directors
proposed by the KLM Supervisory Board. On June 24, 2004, the general meeting of Air France appointed the following to Air Frances board of directors:  
    
    Leo van Wijk, our president and chief executive officer, as
vice-chairman of the Air France board of directors;
    
    Wim Duisenberg, designated by the State of the Netherlands;
    
    Floris Maljers, proposed by the KLM Supervisory Board; and
    
    Cees van Lede, proposed by the KLM Supervisory Board. The State of the Netherlands will be entitled to designate a director to the
Air France board of directors for so long as the French State is represented on
the Air France board. As of the date of this annual report, the Air France board of directors has 26
members. Strategic Management
Committee
On May 6, 2004 Air France and KLM established a Strategic Management Committee
to make decisions on behalf of the combined group as to strategy relating to
commercial, financial, technical and operational matters regarding AFOP and
KLM, including but not limited to:  
    
    strategy regarding Air France-KLMs competitive environment, partners
and public authorities;
    
    strategic orientation with respect to network management, including
hub growth, significant changes in network structure, introduction of
overlapping routes, agreements with other operators, sharing between KLM
and Air France of traffic rights in the event of a decision to lift the
national origin restrictions at the European level;
    
    funding, debt issuances and significant investments in fleet, information systems and major projects;
    
    significant financial investments and strategic airline partnerships or cooperation agreements and alliances;
    
    purchasing policies;
    
    mid-term planning and budgets to ensure compatibility with the
strategy agreed by the Strategic Management Committee;
    
    appointments of key personnel in Air France and KLM to be selected
from lists prepared by Air France and KLM, respectively,
    
    inclusion of other airlines in Air France-KLM;
    
    human resources policies covering multi-company issues;
    
    any decision regarding the Dutch airline Martinair, of which KLM is a 50% shareholder; and
    
    any reserved or consultation matters (which are discussed below). The framework agreement provides that operational subcommittees may be
established under the supervision of the Strategic Management Committee. Thus
far the Strategic Management Committee has established 13 committees, in the
following areas: commercial, marketing, revenue management & network, cargo,
engineering & maintenance, fleet, information technology, corporate purchasing,
human resources/culture, communication, finance, hubs and grounds services,
flight operations and brand & product. 42




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The Strategic Management Committee will also mediate differences that may arise
regarding the application of bilateral agreements or the management of entities
that are owned or operated together by Air France and KLM. The Strategic Management Committee makes binding recommendations with respect
to the matters above to the Air France board of directors (or the board of
directors of AFOP, the French operating company after the hive down), the KLM
Board of Management and the KLM Supervisory Board. The chief executive officer
of KLM, the chairman of the board of directors of Air France (or the chairman
of the board of directors of AFOP) and any chairman, board member or key
officer of the combined operating companies or their subsidiaries may not make
or implement any major strategic decisions before the Strategic Management
Committee has been consulted and are required to implement any such decision in
accordance with the binding recommendation of the Committee. The Strategic
Management Committee makes its decisions by majority vote, except in respect of
the following reserved matters, which require the unanimous consent of all
Committee members:  
    
    any decision proposing an amendment to the KLM assurances (as
discussed below under Assurances and assurances foundation);  
    
    any decision whose purpose or effect is:  
    
    to combine or create common activities among the Air France and KLM
operating activities existing as of the date of the framework agreement
(such as the integration into a joint structure of catering or cargo
activities) or any global reorganization of any such operating
activities by way of discontinuation or disinvestment for both Air
France and KLM;
    
    to alter the allocation of key management personnel or of an entire
operating activity between Air France and KLM; or
    
    related to the timing, phasing in and structure of any decision
relating to the two matters noted immediately above; and  
    
    any decision to enter into an intercompany agreement other than at arms
length. Any rejection by the Strategic Management Committee of a proposed action on one
of these reserved matters will be binding. On all matters requiring a majority vote, the chairman of the Strategic
Management Committee has the deciding vote in the event of a tie, except that
until May 6, 2007, the chairman of the board of directors of Air France is
required to consult with KLMs chief executive officer prior to exercising his
deciding vote with respect to the following consultation matters:  
    
    the coordination of Air France and KLM capacities, schedules and days of operation relating to joint destinations;  
    
    the coordination in order to avoid unfair behavior of any partner in alliance with Air France against KLM or any partner in
alliance with KLM against Air France; and  
    
    the scheduling of passenger services between France and the Netherlands. The Strategic Management Committee will remain in place until May 6, 2007,
unless the chairman of the board of directors of Air France-KLM decides to
maintain the Committee or decides to create an equivalent body after that date.
The Strategic Management Committee currently consists of the following eight
members:  
    
    Jean-Cyril Spinetta, chairman of the board of directors and chief executive officer of Air France, as chairman;  
    
    Leo van Wijk, the president and chief executive officer of KLM;  
    
    Philippe Calavia, a director of Air France;  
    
    Pierre-Henri Gourgeon, a director of Air France;  
    
    Peter Hartman, KLMs chief operations officer;  
    
    Bruno Matheu, a director of Air France;  
    
    Robert Ruijter, KLMs chief financial officer; and  
    
    Cees van Woudenberg, KLMs chief human resources officer. If a third airline is acquired by or merged into Air France-KLM prior to May 6,
2007, the Strategic Management Committee will be enlarged by adding four
members representing the new airline. In that case, those members of the
Committee appointed by Air France will receive double voting rights so that
their votes equal the combined votes of KLM and the third airline. The chairman
will continue to have the deciding vote in the event of a tie, except with
respect to the reserved matters relating to KLM, over which the KLM members of
the Strategic Management Committee will have a veto right. For additional discussion on corporate governance arrangements in connection
with the combination with Air France, see Item 6.A  Directors and senior
management  Articles of association and the protocol above. 43




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D. Employees During the 2003/2004 fiscal year our workforce consisted of 31,182 full-time
equivalents, including 1,333 temporary staff. The following table sets forth the average number of employees divided by main
category of activity and geographic location for the past three fiscal years. Fiscal year ended March 31,2004
    
    2003
    
    2002Ground staff in the Netherlands
    
    
    17,818
    
    
    
    18,255
    
    
    
    17,951Ground staff outside the
Netherlands
    
    
    4,077
    
    
    
    4,848
    
    
    
    5,421Flight staff
    
    
    9,287
    
    
    
    9,935
    
    
    
    9,893Total
    
    
    31,182
    
    
    
    33,038
    
    
    
    33,265
 We concluded collective labor agreements with our ground staff and cabin crews
in November 2002 for the period to the end of March 2004. In the context of our
structural cost savings program an agreement was concluded with the
unions (Sociaal Plan), which includes involuntary redundancy arrangements for KLM
staff. From June 2003 until July 2005 this document will replace certain
paragraphs of our collective labor agreement. As part of the cost saving
program and the Sociaal Plan, we agreed with the relevant unions that the 2.5%
salary increase provided for in the collective labor agreements would be
postponed from October 2003 to June 2004. On June 14, 2004, we signed a new collective labor agreement with our unions
for the period April - December 2004. As part of this new agreement a
supplementary, non-recurring gross payment of 1% of 12 times the monthly
salary will be made in August 2004 to our ground staff. If we meet our
budget-target for the first half year of 2004/2005, a supplementary
non-recurring gross payment will be made in November 2004 of
0.75% of 12
times the monthly salary. In connection with the combination, a conditional employment guarantee was
agreed with the unions. It was agreed that in principle, the proposed
cooperative venture between KLM and Air France will, in itself, not lead to
forced layoffs in the Netherlands in the five-year period following the closing
date, on condition that:  
    
    employees who become redundant will do everything in their power to
facilitate redeployment in a suitable position. A suitable position will
initially be sought within KLM in the Netherlands, but may also be
sought at Air France. In this regard, employees will be requested to
adopt a flexible stance, as all due consideration will be given to the
nature and status of the post and the personal circumstances of the
employee in question;  
    
    employees will undertake any retraining or supplementary training
that may be required; and  
    
    where necessary, optimum use will be made of options such as
short-term contracts and the hire of temporary employees to cope with
potential capacity deficits. These conditions will only be reconsidered if KLM is faced with external
factors such as war, the threat of war, epidemics, and terrorist attacks, or if
KLMs yield deviates substantially from the average yield achieved by Europes
major airlines. E. Share ownership As of May 4, 2004, none of the members of our Supervisory Board held our
securities and none of the members of our Board of Management held our
securities, except for options rights under our option scheme. For information
about options held by members of the Board of Management, please refer to note
35 to our consolidated financial statements. 44




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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. Major shareholders As of the date of this annual report, the number of our voting securities held
by the only persons known by us to own beneficially more than 5% of any class
of our voting securities was as follows: Number ofTitle of Class
    
    Identity of Person or Group
    
    Shares Owned
    
    Percentage of ClassCumulative
preference shares A
    
    The State of the Netherlands
    
    
    8,812,500
    
    
    
    100.0
    %Cumulative
preference shares C
    
    Stichting Administratie
Kantoor Cumulatief
Preferente Aandelen C KLM
    
    
    7,050,000
    
    
    
    100.0
    %Priority shares
    
    Air France SA
    
    
    1,312.5
    
    
    
    100.0
    %Common shares
    
    Air France SA
    
    
    30,708,708
    
    
    
    65.6
    %Common shares
    
    Stichting Administratie
Kantoor KLM
    
    
    14,384,591
    
    
    
    30.7
    %
 For a discussion of significant changes in the percentage ownership held by
major shareholders during fiscal years 2001/2002 and 2002/2003, please see our
annual report on Form 20-F for the fiscal year ended March 31, 2003. For a description of our shareholding prior to and following the combination
with Air France and comparative voting rights for each of the major
shareholders listed above, see Item 4.A  Information on the Company  History
and development of the company  Combination with Air France. For details of
our corporate governance within the Air France-KLM group, see Item 6 
Directors, Senior Management and Employees. As per August 19, 2004, none of our priority or preference shares and 865,953
of our common shares were held of record by a total of 1,897 record holders
resident in the United States. As part of the Air France-KLM group, we are owned and controlled in accordance
with the organizational structure described in Item 4.A  Information on the
Company  History and development of the company  Combination with Air France
 KLMs current position in the combined group. Other than certain changes in
our shareholdings before May 6, 2007 between the major shareholders listed
above, as discussed in Item 4.A, there are no arrangements known to us which
may result in a change of control of KLM. B. Related party transactions See note 28 to our consolidated financial statements included in Item 18. 
Financial Statements of this report for a discussion of related party
transactions. Offer By Air France We are party to significant agreements with Air France related to our
governance and the governance of the Air France-KLM group. See Item 4.A 
Information on the Company  History and development of the company 
Combination with Air France and Item 6.C  Directors, Senior Management and
Employees  Board practices and corporate governance  Air France-KLM corporate
governance arrangements. Furthermore, we are also party to significant agreements with Air France in
relation to various commercial issues. Our Cargo division has several cargo
capacity agreements with Air France. The Engineering & Maintenance division has
entered into several agreements with Air France concerning engine, component and
aircraft maintenance. Our Passenger division has entered into agreements with
Air France relating to code share, frequent flyer program, lounge access and
special pro-rate agreements. In addition, we are a party to a number of ordinary course commercial
agreements with Air France, relating to, among other things, ground engineering
assistance and the exterior painting and weighing of aircraft. Such agreements
are entered into by both KLM and Air France with airlines throughout the world
in the ordinary course of their businesses. Each of these agreements was
entered into on an arms-length basis in circumstances unrelated to the
framework agreement or Air Frances offer. None of such agreements is
individually, nor are such agreements in the aggregate, material to KLM. 45




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Relation with the State of the Netherlands From 1929 to March 1986, the State of the Netherlands owned a majority of our
outstanding capital stock. In August 1998, the role of the State of the
Netherlands as holder of our common shares came to an end with the conversion
of its remaining 8,470,723 common shares into cumulative preference shares C,
which were subsequently transferred to Stichting Luchtvaartbelangen Nederland,
an independent foundation whose purpose is to promote Dutch aviation in general
as well as to promote KLM as designated carrier in international aviation. Prior to Air Frances offer, the State of the Netherlands continued to own a
majority of our outstanding priority shares, which gave it rights of governance
including the right to approve, among other things, the issuance of shares, the
limitation or exclusion of pre-emptive rights, the payment of dividends in
shares, the sale or transfer of priority shares, any changes to our articles of
association and our dissolution. In connection with the interest held by the State of the Netherlands in our
share capital, KLM and the State of the Netherlands entered into an option
agreement. Since 1994 the State of the Netherlands has had a right (the Option)
to take sufficient 2.00 preference shares B to ensure that the State would
be able to obtain an interest of up to 50.1% in our issued capital. The
combination with Air France retained the Option with some amendments. The
Option may now be exercised only in the event that any key country served by
KLM restricts or terminates, or gives written notice that it will restrict or
terminate, KLMs operation of scheduled air services because of that countrys
view that a substantial part of our share capital is not demonstrably
Dutch-owned, or KLM is not effectively controlled by Dutch nationals. As
amended, the Option has an initial duration of three years, but may be renewed
by the State of the Netherlands up to three times for periods of 12 months
each. The State of the Netherlands is entitled to renew the amended Option if it deems renewal necessary to avoid traffic rights operated and
enjoyed by KLM in certain key countries from being restricted or terminated. On October 16, 2003, Air France, the State of the Netherlands and KLM entered
into the Air France  Dutch State  KL agreement in which the parties agreed on
the terms and conditions relating to renewal of the amended Option,
procedures on notification and discussion regarding the exercise by the State
of the Netherlands of the amended Option, the exercise of voting rights
by the State of the Netherlands after the exercise of the amended Option
and procedures on the redemption of the shares issued to the State of the
Netherlands in the context of the State of the Netherlands exercising the
amended Option. As of March 31, 2004 the State of the Netherlands held 8,812,500 cumulative
preference shares A and 975 priority shares, to which a voting right
of 14.1% attaches. As of May 4, 2004 the State of the Netherlands holds only the
cumulative preference shares A. C. Interests of experts and counsel Not applicable. 
 ITEM 8. FINANCIAL INFORMATION A. Consolidated statements and other financial information For our consolidated financial statements, see Item 18  Financial
Statements. We are involved in various legal actions. Although we cannot predict the
outcome of these actions, on the basis of information currently available and
views expressed by counsel, we do not expect their outcome to adversely affect
our financial position to any material degree. For additional discussion of
this litigation, see note 13 to our consolidated financial statements. Dividend
Policy
For the past two years, our dividend policy has been based on cash earnings.
Owing to the high level of our investment in aircraft in the past fiscal year,
our cash earnings were negative. The Board of Management and the Supervisory
Board therefore proposed to the meeting of priority shareholders that no
dividend be distributed to common KLM shareholders for the year. B. Significant changes Except as otherwise disclosed in this annual report, there has been no material
adverse change in our financial position since March 31, 2004. 46




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ITEM 9. THE OFFER AND LISTING A. Offer and listing details The table below sets forth the high and low closing sales prices for our common
shares on the New York Stock Exchange and the Euronext Stock Exchange in
Amsterdam during the periods indicated (source: Bloomberg). New York
    
    Amsterdam(U.S. dollars)
    
    (euro)High
    
    Low
    
    High
    
    LowLast five financial years2003/2004
    
    
    24.23
    
    
    
    5.99
    
    
    
    19.29
    
    
    
    5.402002/2003
    
    
    15.71
    
    
    
    5.87
    
    
    
    17.85
    
    
    
    5.352001/2002
    
    
    20.46
    
    
    
    7.55
    
    
    
    23.00
    
    
    
    8.502000/2001
    
    
    30.06
    
    
    
    15.13
    
    
    
    32.65
    
    
    
    18.151999/2000
    
    
    44.83
    
    
    
    17.50
    
    
    
    30.92
    
    
    
    18.25Last two financial years on a
quarterly basis, plus interim
periodApril  June 2002
    
    
    15.71
    
    
    
    11.75
    
    
    
    17.85
    
    
    
    11.90July  September 2002
    
    
    12.23
    
    
    
    8.30
    
    
    
    12.62
    
    
    
    8.15October  December 2002
    
    
    12.40
    
    
    
    7.76
    
    
    
    12.90
    
    
    
    8.10January  March 2003
    
    
    10.10
    
    
    
    5.87
    
    
    
    9.79
    
    
    
    5.35April  June 2003
    
    
    9.99
    
    
    
    5.99
    
    
    
    8.60
    
    
    
    5.40July  September 2003
    
    
    15.58
    
    
    
    8.42
    
    
    
    13.46
    
    
    
    7.20October  December 2003
    
    
    16.50
    
    
    
    14.78
    
    
    
    14.37
    
    
    
    12.50January  March 2004
    
    
    24.23
    
    
    
    16.37
    
    
    
    19.29
    
    
    
    12.87April  June 11, 2004
    
    
    21.07
    
    
    
    12.56
    
    
    
    16.41
    
    
    
    12.56Last six monthsFebruary 2004
    
    
    24.23
    
    
    
    18.38
    
    
    
    19.29
    
    
    
    14.67March 2004
    
    
    23.70
    
    
    
    18.81
    
    
    
    18.99
    
    
    
    15.33April 2004
    
    
    21.07
    
    
    
    19.52
    
    
    
    17.45
    
    
    
    16.41May 2004
    
    
    20.86
    
    
    
    16.21
    
    
    
    17.45
    
    
    
    13.38June 1  June 11, 2004
    
    
    16.41
    
    
    
    12.56
    
    
    
    13.23
    
    
    
    10.65
 Pursuant to the terms of the framework agreement, following completion of the
offer, Air France requested that KLM seek the delisting of its common shares
(including the New York registry shares) from Euronext Amsterdam and the New
York Stock Exchange. On June 11, 2004, KLMs common shares were delisted from
Euronext Amsterdam. On June 14, 2004, the New York Stock Exchange suspended
trading in KLMs New York registry shares. The New York registry shares were
delisted from the New York Stock Exchange effective July 30, 2004. As a result,
KLMs shares are not regularly traded in an organized market and are relatively
illiquid. KLMs common shares in the form of New York registry shares currently are
registered under the Exchange Act. The Exchange Act registration of these
shares may be terminated upon application by KLM to the SEC if the New York
registry shares are no longer held by 300 or more holders resident in the
United States. KLM has undertaken in the framework agreement to deregister its
New York registry shares under the Exchange Act as soon as reasonably
practicable upon the request of Air France. The termination of the New York
registry shares under the Exchange Act may further reduce their liquidity. B. Plan of distribution Not applicable. C. Markets KLMs shares are not listed on any stock exchange. See Item 9.A  The Offer
and Listing  Offer and listing details above. D. Selling shareholders Not applicable. E. Dilution Not applicable. 47




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F. Expenses of the issue Not applicable. 
 ITEM 10. ADDITIONAL INFORMATION A. Share capital Not applicable. B. Memorandum and articles of association Our corporate seat is in Amstelveen, the Netherlands. We are registered in the
Commercial Register at Amsterdam under number 33014286. Following is a
description of certain provisions of our articles of association and Dutch law.
This description is only a summary and does not purport to be complete. Our
articles of association are available on our website and are incorporated by
reference as an exhibit to this annual report. General Pursuant to the framework agreement with Air France, KLM voluntarily complies
with the Dutch statutory rules for corporate governance of large companies.
Under this regime, we are required to adopt a two-tier system of corporate
governance, comprising a board of managing directors and a supervisory board.
Under these rules, subject to statutory exceptions, the Supervisory Board,
rather than general meeting of shareholders,  
    
    appoints members of the Supervisory Board,  
    
    appoints and dismisses members of the Board of Management, and  
    
    must approve certain resolutions by the Board of Management. For a discussion of the amendments to the large company regime that will take
effect on October 1, 2004, see Item 6.A  Directors, Senior Management and
Employees  Directors and senior management. Corporate purpose Pursuant to article 3 of our articles of association, our purpose is to carry
on the business of air transport and to engage in any other activities of a
commercial, industrial or financial nature, including participation in other
enterprises, both for our own account and for the account of, or in
participation or co-operation with, third parties and to observe the interests
of the group of companies of which we form a part. Directors A member of the Board of Management or the Supervisory Board may not vote in
respect of a proposal, arrangement or contract in which he or she is materially
interested, including his or her own compensation. A member of the Board of Management or the Supervisory Board is not required to
hold our shares in order to be qualified. Supervisory Board The Supervisory Board shall consist of nine natural persons. Supervisory Board
members are appointed by the Supervisory Board, subject to a right of a general
meeting of shareholders or the Works Council to object. An appointment may be
made over this objection if the Enterprise Division of the Court of Appeals in
Amsterdam declares the objection unfounded. The general meeting of
shareholders, the Works Council and the Board of Management may recommend
persons to the Supervisory Board for appointment as Supervisory Directors. The Supervisory Board advises the Board of Management and generally monitors
its affairs. The Supervisory Board approves the Board of Managements annual
business plan and budget, adopts our annual financial statements and submits
them for approval to the general meeting of shareholders. In performing these
duties, the members of the Supervisory Board are required to be guided by our
interests and the enterprise we carry on. The Board of Management has the power to approve borrowings by KLM. The meeting
of the holders of our priority shares determines the compensation of the
Supervisory Board. 48




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Board of Management The Board of Management manages our affairs under the supervision of the
Supervisory Board. The Board of Management consists of five natural persons.
The Supervisory Board appoints members of the Board of Management and,
following consultation with the general meeting of shareholders, may remove
members of the Board of Management. Our Supervisory Board also appoints our
President from within the Board of Management. Remuneration and other conditions of employment for the members of the Board of
Management are determined by the Supervisory Board, after having obtained the
prior approval of the meeting of priority shareholders. We are represented by the members of the Supervisory Board in any case in which
we have a conflicting interest with one or more members of the Board of
Management. Share capital Our authorized share capital consists of:  
    
    1,875 priority shares,  
    
    37,500,000 cumulative preference shares A,  
    
    75,000,000 preference shares B,  
    
    18,750,000 cumulative preference shares C, and  
    
    149,998,125 common shares. Each share in the classes listed has a par value of two euro. As of the date of
this annual report there were no preference shares B outstanding. Common shares are, at the election of the holder, issued either as bearer
shares or registered in the holders name. In the United States, registered
common shares are evidenced either by certificates or by entries in the
book-entry system maintained by The Depository Trust Company (New York registry
shares). Priority shares, and each series of preference shares are registered
in the name of the holder. New York registry shares and bearer shares may be held by residents as well as
non-residents of the Netherlands. Upon presentation to our transfer agent in
the Netherlands, ABN AMRO Bank N.V., Amsterdam of a certificate representing
bearer shares, accompanied by a request that the common shares represented by
such certificate be exchanged for a certificate representing New York registry
shares, the Netherlands transfer agent will instruct our New York transfer
agent, Citibank N.A., to issue New York registry shares in respect of those
common shares. Similarly, upon presentation to the New York transfer agent of a
certificate representing New York registry shares accompanied by an appropriate
request, the New York transfer agent will instruct the Netherlands transfer
agent to issue a certificate representing bearer shares in respect of those
common shares. Transfers of bearer shares, which are negotiable instruments,
are accomplished by surrender of the share certificates. New York registry
shares may be transferred on the books maintained for us by the New York
transfer agent. Dividend rights We pay profits as dividends after setting aside amounts to establish or
increase reserves. A general meeting of priority shareholders determines the
amounts set aside as reserves, if any, after consultation with the Board of
Management and the Supervisory Board. We may not pay dividends if the payment
would reduce stockholders equity below the sum of nominal share capital and
any reserves required by Dutch law or our articles of association. We are required to distribute our profits, after setting aside any reserves, as
follows: Priority shares First, the holders of priority shares receive the statutory interest percentage
prevailing on the last day of the fiscal year concerned to a maximum of 5% of
the paid-in capital per priority share. To the extent that our profits are not
sufficient to make this distribution, we must make subsequent distributions to
the holders of priority shares until the shortfall is fully paid before we can
distribute profits to holders of other classes of shares. Cumulative preference shares A Next, the holders of cumulative preference shares A receive 6% of the par value
of their cumulative preference shares A. To the extent that our profits are not sufficient to make full payment of this
dividend on the cumulative preference shares A, the shortfall is paid and
charged to our reserves, to the extent that such action is not contrary to the
provisions of Article 105, paragraph 2 of Book 2 of the Dutch Civil Code. To
the extent that the payment cannot be charged to the reserves, then we must
make subsequent distributions to the holders of cumulative preference shares A
until the shortfall is fully paid before we can make distributions to the
holders of classes of shares listed below. 49




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Preference shares B Next, the holders of preference shares B receive 5% of the par value of their
preference shares B. The holders of preference shares B then receive 0.5% of
the par value of their preference shares B for each percent of the ratio
(expressed as a percentage) of our profits to our operating revenues. This
dividend percentage cannot exceed the dividend percentage received on the
common shares described in the first paragraph under Common shares below. Cumulative preference shares C Next, the holders of cumulative preference shares C receive the average of the
effective yield on a basket of loans by the State of the Netherlands. This
dividend is currently equal to 4.98% of the paid-in capital per share. This
rate is recalculated every eight years and will be next recalculated on August
14, 2006. Depending on the prevailing market circumstances at the time and
subject to the approval of the Supervisory Board and the meeting of priority
shareholders, the Board of Management may augment the recalculated rate of the
cumulative preference shares C dividend by a supplement of no more than 135
basis points.
To the extent that our profits are not sufficient to make full payment of this
dividend on the cumulative preference shares C, the shortfall is paid and
charged to our reserves, to the extent that such action is not contrary to the
provisions of Article 105, paragraph 2 of Book 2 of the Dutch Civil Code. To
the extent that the payment cannot be charged to the reserves, then we must
make subsequent distributions to the holders of cumulative preference shares C
before we can distribute profits to holders of our common shares. Common shares Next, the holders of common shares receive 5% of the par value of their shares. Finally, the holders of common shares receive payments in proportion to the par
value of their shares to the extent the shareholders in a general meeting have
not made further appropriations for reserves in addition to any reserves
established as described above. Other matters relating to dividends and distributions On the recommendation of the Board of Management and after approval of that
recommendation by the Supervisory Board and the holders of priority shares, the
general meeting of shareholders may decide that payments to shareholders will
be wholly or partly effected by issuing shares of the same type of our capital
stock as the type of shares to which those payments relate.
Subject to the approval of the Supervisory Board, the meeting of priority
shareholders may to the extent permitted by law:  
    
    pay one or more interim dividends against the expected dividend, or  
    
    make a distribution to the holders of common shares out of our freely
distributable reserves other than our share premium reserves. Except in the case of our dissolution, we may not make distributions on our
shares and preference shares other than the distributions described above. The person entitled to a dividend, interim dividend or other distribution on a
registered share is the person in whose name the share appears in our register
of shareholders on the date fixed for that purpose by the Board of Management. The person entitled to a dividend, interim dividend or other distribution on a
bearer share is the person holding the share on a date fixed for that purpose
by the Board of Management. In order to be entitled to exercise his or her
rights the holder of a bearer share must cause his or her dividend sheet to be
in the custody of a designated depositary on that date. The right to claim payment of a dividend, interim dividend or other
distribution is barred beginning five years after the date on which it was made
payable. Voting rights Each share entitles the holder to cast one vote, unless that right has been
vested in a usufructuary or pledgee at the granting of the usufruct or the
pledge, in which case the usufructuary or the pledgee may exercise the voting
right as long as his right of usufruct or his pledge has not expired. At a
general meeting of shareholders, all classes of shares vote together as a
single class. Dissolution In the event of our dissolution, our debts and the costs of dissolution will be
paid from our assets first. The remaining balance will be distributed in the
order stated below so far as the available balance permits:  
    
    first, to the holders of priority shares, in an amount equal to the paid-in capital for every priority share held,  
    
    next, to the holders of the other shares in an amount equal
to the par value of those shares, or  in case of shares not fully
paid  the amount obligatory paid thereon,  
    
    next, to the holders of priority shares in an amount equal to any dividends accrued and unpaid on their priority shares,  
    
    next, to the holders of cumulative preference shares A in an amount equal to any dividends accrued and unpaid on their
cumulative preference shares A, and  
    
    finally, to the holders of common shares in proportion to the par value of their common shares. 50




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Redemption and sinking fund provisions Subject to applicable Dutch law, we may acquire our fully paid shares or
depository receipts issued therefore for consideration for our own account. Our
acquisition of shares requires the approval of the meeting of priority
shareholders and authorization of the general meeting of shareholders based
upon a proposal by our Supervisory Board. There are no provisions of our
articles of association that provide for or prohibit a sinking fund. Liability to further capital calls All of our outstanding common shares are fully paid and non-assessable. Discriminating provisions There are no provisions of our articles of association that discriminate
against a shareholder because of his or her ownership of a substantial number
of shares. Pre-emptive rights When we issue common shares or against payment in cash, the holders of common
shares obtain pre-emptive rights in proportion to their holdings of common
shares. The person entitled to pre-emptive rights on a registered share is the person
in whose name the share appears in our register of shareholders on the date
fixed for that purpose by the Board of Management. The person entitled to preemptive rights on a bearer share is the person
holding the share on a date fixed for that purpose by the Board of Management.
In order to be entitled to exercise his or her rights the holder of a bearer
share must cause his or her dividend sheet to be in the custody of a designated
depositary on that date. Shareholders have no pre-emptive rights with respect to shares issued to our
employees or to those of any of our groups companies. Holders of cumulative preference shares A, preference shares B and cumulative
preference shares C have no pre-emptive rights with respect to shares to be
issued. The general meeting of shareholders or the Board of Management may limit or
exclude pre-emptive rights with the approval of the Supervisory Board and the
approval of the meeting of the holders of priority shares. The Board of
Management may only limit or exclude pre-emptive rights to the extent that the
general meeting of shareholders has designated the Board of Management to do
so, up to a maximum period of five years. At the June 2003 annual general
meeting of shareholders, our shareholders approved a resolution granting the
Board of Management the right to limit or exclude pre-emptive rights through
December 25, 2004. At our June 2004 annual general meeting of shareholders such
a proposal to designate the Board of Management has been withdrawn from the
agenda of the meeting. Changing the rights of holders of shares The rights of holders of stock can only be changed by a resolution of the
general meeting of shareholders amending our articles of association.
Resolutions amending our articles of association require the prior approval of
(i) the meeting of priority shareholders and (ii) the Supervisory Board,
adopted by a majority of two-thirds of the votes cast. A copy of any resolution including the exact text of the proposed amendment to
our articles of association is made available to shareholders free of charge
for inspection at our principal office from the date of the notice of the
general meeting of shareholders to the conclusion of that meeting. Resolutions amending our articles of association that would change the rights
of the holders of priority shares must also be approved by a meeting of the
holders of priority shares at which at least three-quarters of the issued
priority share capital is represented and at which the approval is given by at
least two-thirds of the votes cast. If the required number of priority shares
is not represented at the meeting of priority shareholders, the general
procedure for amendment of our articles of association shall apply. General meetings of shareholders The Board of Management, the President, the Supervisory Board, three
Supervisory Directors or the meeting of priority shareholders may call the
annual general meeting of shareholders, which is held no later than during the
month of September. We normally hold our annual general meeting of shareholders
in June. 51




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Other general meetings of shareholders are held as often as the Board of
Management, the President, the Supervisory Board, three Supervisory Directors
or the meeting of priority shareholders may considers them necessary. These
meetings may also be held if one or more shareholders representing in the
aggregate at least one-tenth of the issued shares makes a demand in writing to
the Board of Management specifying the subjects to be dealt with, and has
deposited the share certificates, if any, representing their shares. If the
Board of Management does not comply with the request in time to permit the
meeting to be held within six weeks after the request, the person or persons
making the request may be authorized by the presiding judge of the District
Court (Arrondisementsrechtbank) in Amsterdam, in accordance with the applicable
provisions of law, to call the meeting. At least 14 days in advance of a meeting, not including the day of the notice
and the day of the meeting, we must give notice of the meeting to shareholders
by publication in the Netherlands and by mail to holders of registered shares. All shareholders may attend any general meeting of shareholders, either in
person or by proxy duly authorized in writing. Holders of bearer shares must
have deposited their share certificates before the meeting at such time and
place as is designated in the notice calling the meeting, and holders of
registered shares must have notified the Board of Management before the
meeting, by means of a registered letter, of their intention to attend the
meeting. The ultimate date for deposit of shares and for notification is not
earlier than seven days before the meeting. General meetings must be held in Amstelveen, Amsterdam, The Hague,
Haarlemmermeer, Rotterdam or Utrecht. Limitations on rights to own shares Although there are no limitations on the rights to own securities under our
articles of association or the laws of the Netherlands, including the rights of
non-resident or foreign shareholders to hold or exercise voting rights on the
securities, certain restrictions were put in place pursuant to the combination
with Air France to protect KLMs international traffic rights. These are
discussed in Item 4.A  Information on the Company  History and development
of the company  Combination with Air France. Change in control provisions The option agreement with the State of the Netherlands with respect to
preference shares B may have the effect of delaying, deferring or preventing a
change of control. For further information regarding the preference shares B,
see Item 10 C.  Material Contracts  Amended state option. For further information regarding change of control provisions, see Item 6.C 
Board practices and corporate governance  Air France-KLM corporate governance
arrangements  Articles of association and the protocol. Obligations of shareholders to disclose holdings No provision of our articles of association requires disclosure of ownership of
shares. The Dutch Act on Disclosure of Holdings in Listed Companies 1996 (Disclosure
Act) applies to any person who, directly or indirectly, acquires or disposes of
an interest of a specified size in the voting rights and/or the capital of a
public limited company incorporated under Dutch law with an official listing on
a stock exchange within the European Economic Area. This person is required to
notify us and the Financial Markets Authority of the Netherlands (Autoriteit
Financiële Markten) in writing immediately after the acquisition or disposal of
shares if, as a result of the acquisition or disposal, the change in the
percentage of voting rights or capital interest held by the shareholder is
sufficient to bring the shareholder within a different specified category of
share ownership. The categories referred to in the Disclosure Act are based on
the percentage of voting rights or capital interests held by a person: 0-5%,
5-10%, 10-25%, 25-50%, 50-66.6% and greater than 66.6%. The Disclosure Act also
requires members of the Board of Management and the Supervisory Board to
disclose their holdings of our shares. Failure to comply with the Disclosure Act constitutes an economic offense. In
addition, a civil court can issue sanctions against any person who fails to
notify, or incorrectly notifies us and the Financial Markets Authority in
accordance with the Disclosure Act. Possible court sanctions include the
suspension of voting rights with respect to the shares held by the offending
person. Discharge of liabilities (decharge) After the annual accounts have been approved at an annual general meeting of
shareholders, our shareholders are requested to adopt a separate resolution
releasing the members of the Board of Management and the members of the
Supervisory Board from actual or potential liabilities in connection with the
execution of their duties during the financial year. The release obtained by
the Board of Management is limited to the facts in the financial statements and
facts otherwise disclosed to the annual general meeting of shareholders prior
to the approval of the financial statements. In any event, the scope of a
discharge from liabilities is subject to limitations imposed by law. 52




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Changes in capital The conditions imposed by our articles of association for changes in capital
are not more stringent than required under Dutch law. In addition to the
statutory requirements for the issue of shares, our articles of association
require the approval of the meeting of priority shareholders. In addition to
the statutory requirements for changes in the authorized share capital via a
change of the articles of association, our articles of association require the
prior approval of the meeting of priority shareholders (see also under changing
the rights of holders of shares above) and a supermajority of two-thirds of the
votes cast within the Supervisory Board when approving the amendment to the
articles of association (as opposed to the statutory requirement of approval by
the Supervisory Board, resolving by simple majority). Transfer of shares In the Netherlands, bearer common shares are transferable through the
book-entry transfer system maintained by Nederlandse Centraal Instituut voor
Giraal Effectenverkeer. The transfer of record of a registered share requires a
deed notarial of transfer to be executed before a Dutch civil law notary. In the United States, registered common shares are evidenced either by
certificates or by entries in the book-entry system maintained by The
Depository Trust Company (DTC). Transfer of registered certificates is effected
by presenting and surrendering the certificates to Citibank N.A., our transfer
agent in New York. A valid transfer requires the registered certificates to be
properly endorsed for transfer as provided in the certificates and accompanied
by proper instruments of transfer and stock transfer tax stamps for, or funds
to pay, any applicable stock transfer taxes. The transfer of uncertificated
shares is effected by the transfer agent causing the appropriate electronic
transfer to be made in DTCs book-entry system. C. Material contracts Framework agreement On October 16, 2003, KLM entered into a framework agreement with Air France
pursuant to which Air France and KLM agreed to combine. In the framework
agreement, the parties agreed on the terms and conditions of a public exchange
offer by Air France for all of KLMs issued and outstanding common shares in
KLMs share capital, as well as on the terms and conditions of agreements
through which Air France would acquire, conditional upon the exchange offer
being declared unconditional:  
    
    all of KLMs outstanding priority shares held by the State of the
Netherlands, ABN AMRO Bank N.V., NS Groep N.V., SNS Reaal Group N.V.,
Fortis Bank (Nederland) N.V., Imtech N.V. and KLM;  
    
    from time to time, the cumulative preference shares A held by the
State of the Netherlands, or, for an initial period of three years
after completion of the exchange offer, depositary receipts
corresponding to such cumulative preference shares A;  
    
    the depositary receipts corresponding to the cumulative preference shares C held by the Stichting Luchtvaartbelangen from Rabobank
Nederland Participatiemaatschappij B.V. In addition, Air France and KLM agreed in the framework agreement on the
corporate structure of the combined group after completion of the exchange
offer, on certain corporate governance arrangements of the combined group, on
the KLM assurances and State assurances and a mechanism to ensure compliance
with the assurances and on the procedure regarding the entry of KLM into the
SkyTeam alliance. Neither KLM nor any member of the KLM group is entitled to any consideration
under the framework agreement. For a discussion of the material terms and conditions of the framework
agreement see Item 4.A  Information on the Company  History and development
of the company  Combination with Air France and Item 6  Directors, Senior
Management and Employees. Aircraft In fiscal year 2002/2003, we negotiated and secured purchase commitments with
the Boeing Company and with Airbus S.A.S. to acquire aircraft for our fleet.
Copies of these contracts were filed as exhibits to our annual report on Form
20-F for the fiscal year ended March 31, 2003. D. Exchange controls There are no laws, decrees, regulations or other legislation currently in force
in the Netherlands restricting the import or export of capital, including the
availability of cash and cash equivalents for our use or that affect
remittances of dividends, interest or other payments to non-resident holders of
our securities. Cash dividends payable in euro may be officially transferred
from the Netherlands and converted into any other convertible currency. There are no limitations, under the laws of the Netherlands or our articles of
association on the rights of non-resident or foreign shareholders to hold or
exercise voting rights with respect to our common shares. 53




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E. Taxation Each prospective investor should consult its own tax advisor with respect to
the U.S. Federal, state, local and foreign tax consequences of acquiring,
owning and disposing of our common shares. Dutch tax Withholding tax We are generally required to withhold tax at a rate of 25% on dividends. This
tax does not apply to stock dividends that are payable out of our paid-in
surplus capital account. Pursuant to the provisions of the Tax Convention of
December 18, 1992, between the United States and the Netherlands (the Treaty),
the rate of withholding tax on dividends paid by us to a shareholder that is a
resident of the United States for purposes of the Treaty and that qualifies for
benefits under the Treaty (a U.S. treaty shareholder) is reduced to 15%. For
purposes of this discussion, a U.S. shareholder is a holder of common shares
that is:  
    
    a resident of the United States,  
    
    a corporation organized under the laws of the United States or of any state or territory of the United States, or  
    
    any other person subject to United States Federal income tax on a net income basis, provided that the holder is
not also a resident of the Netherlands or any other country. The reduced rate of withholding discussed above will not apply if:  
    
    the U.S. treaty shareholder carries on business in the Netherlands through a permanent establishment or performs
independent personal services from a fixed base situated in the Netherlands, and  
    
    the common shares with respect to which the dividends are paid form part of the business property of that
permanent establishment or pertain to that fixed base. Moreover, the rate of withholding tax is generally reduced to 0% under the
Treaty in the case of dividends paid to a United States resident trust,
corporation or other organization that is generally exempt from United States
Federal income tax and that is either:  
    
    constituted and operated exclusively to administer or provide benefits
under a fund or plan established to provide pension, retirement or
other employee benefits, or  
    
    operated exclusively for religious, charitable, scientific,
educational or public purposes, if the trust, corporation or other
organization would be exempt in the Netherlands if it were organized,
and carried on all its activities, in the Netherlands. In order to qualify for the reduction of or exemption from the withholding tax
described above, a U.S. shareholder may be required to satisfy certain
certification requirements or otherwise provide documentation of its status as
a U.S. treaty shareholder. Where shares are beneficially or legally owned by a resident or corporation of
any country other than the United States or the Netherlands, the determination
of whether the resident or corporation will be eligible for a full or partial
exemption or refund of Dutch withholding tax will be governed by Dutch internal
law or the terms of any income tax convention which may be in effect between
the Netherlands and the holders country of residence or incorporation. Gift or estate tax No gift, estate or inheritance tax is payable in the Netherlands on a gift of
common shares by, or on the death of, a holder that is neither resident nor
deemed resident in the Netherlands, unless the gift is construed as made by or
on behalf of a person who is resident or deemed resident of the Netherlands or
unless the common shares are attributable to a permanent establishment or
permanent representative in the Netherlands of the holders trade or business. Capital gains tax Capital gains upon sale or exchange of common shares by an individual or
corporation that is neither resident nor deemed resident in the Netherlands are
generally exempt from Dutch income tax or withholding tax, unless the common
shares are attributable to a permanent establishment or permanent
representative in the Netherlands of the holders trade or business. United States Federal income tax The following discussion is a summary of material U.S. Federal income tax
consequences of the ownership of common shares by holders that will hold the
common shares as capital assets. It does not purport to be a comprehensive
description of all the tax consequences to holders of common shares. In
particular, this summary does not address tax considerations applicable to
holders that may be subject to special tax rules including, without limitation,
the following: 54




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
    
    financial institutions,  
    
    insurance companies,  
    
    dealers or traders in securities or currencies,  
    
    tax-exempt entities,  
    
    regulated investment companies,  
    
    persons that will hold the common shares as part of a hedging or conversion transaction or as a position in a straddle or
as part of a synthetic security or other integrated financial transaction for U.S. Federal income tax purposes,
    
    holders that are subject to mark-to-market rules,
    
    persons that have a functional currency other than the U.S. dollar,
    
    persons that own or are deemed to own 10% or more, by voting power, of our voting stock, and
    
    persons who hold common shares through partnerships or other pass-through entities. Further, this summary does not address alternative minimum tax consequences or
the indirect effects on holders of equity interests in a holder of common
shares. This summary does not describe any tax consequences arising under any
laws other than the U.S. Federal income tax laws. This summary is based on the Internal Revenue Code of 1986 (the Code), U.S.
Treasury Regulations and judicial and administrative interpretations, in each
case as in effect and available on the date of this annual report. These laws,
regulations and interpretations are subject to change, and any change could
apply retroactively and affect the tax consequences described below. For purposes of this summary a U.S. holder is a beneficial owner of common
shares that is, for U.S. Federal income tax purposes:  
    
    a citizen or resident of the United States,
    
    a corporation (or other entity treated as a corporation) created or organized in or under the laws of the United States or
any state of the United States (including the District of Columbia),
    
    an estate, the income of which is subject to U.S. Federal income taxation regardless of its source,
    
    or a trust, if:  (1)
    
    a court within the United States is able to exercise primary
supervision over its administration, and(2)
    
    one or more U.S. persons have the authority to control all of the
substantial decisions of the trust. If a partnership holds common shares, the tax treatment of a partner will
generally depend upon the status of the partner and upon the activities of the
partnership. A partner of a partnership holding common shares should consult
its own tax advisor. A non-U.S. holder is a beneficial owner of common shares
that is not a U.S. holder. Dividends and other distributions Subject to the passive foreign investment company (PFIC) rules discussed below,
the gross amount of any distribution (including any amounts withheld in respect
of Dutch withholding tax) actually or constructively received by a U.S. holder
in respect of common shares will be taxable to the U.S. holder as a dividend to
the extent of our current and accumulated earnings and profits as determined
under U.S. Federal income tax principles. The U.S. holder will not be eligible
for any dividends received deduction in respect of the dividend otherwise
allowable to corporations. Distributions in excess of earnings and profits will
be non-taxable to the U.S. holder to the extent of, and will be applied against
and reduce, the U.S. holders adjusted tax basis in the common shares.
Distributions in excess of earnings and profits and the adjusted tax basis will
generally be taxable to the U.S. holder as capital gain from the sale
or
exchange of property. We do not maintain calculations of our earnings and
profits under U.S. Federal income tax principles. If we do not report to a U.S.
holder the portion of a distribution that exceeds earnings and profits for U.S.
Federal income tax purposes, the distribution will generally be taxable as a
dividend even if that distribution would otherwise have been treated as a
non-taxable return of capital or as capital gain. Dividends received by a U.S. holder with respect to common shares will be
treated as foreign source income for the purposes of calculating that U.S.
holders foreign tax credit limitation. Subject to some conditions and
limitations, and subject to the discussion in the next paragraph, Dutch income
tax withheld on dividends may be deducted from taxable income or credited
against a U.S. holders U.S. Federal income tax liability. The limitation on
foreign taxes eligible for the U.S. foreign tax credit is calculated separately
with respect to specific classes of income. For this purpose, dividends
distributed by us generally will constitute passive income, or, in the case
of some U.S. holders, financial services income. In some circumstances, a
U.S. holder may be unable to claim foreign tax credits for foreign taxes
imposed on a dividend if the U.S. holder:  
    
    has not held the common shares for at least 16 days in the 30-day
period beginning 15 days before the record date for the dividend,
during which it is not protected from risk of loss, or
    
    is obligated to make payments related to the dividends. 55




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In general, upon making a distribution to shareholders, we are required to
remit all amounts withheld as Dutch dividend withholding tax to the Dutch tax
authorities and, in such circumstances, the full amount of the taxes so
withheld will generally (subject to limitations and conditions) be eligible for
the U.S. holders foreign tax deduction or credit as described above. However,
under some circumstances we may be allowed to reduce the amount of Dutch
dividend withholding tax that is required to be remitted to the Dutch tax
authorities by the lesser of:  
    
    3% of the portion of the gross amount of the dividend paid by us that is
subject to Dutch dividend withholding tax, and
    
    3% of the gross amount of the dividends and profit distributions received
by us from qualifying non-Netherlands subsidiaries in the current calendar
year (up to the date of the distribution) and the two preceding calendar
years, to the extent that the dividends and profits distributions have not
yet been taken into account for purposes of establishing this reduction. Although this credit reduces the amount of dividend withholding tax that we are
required to pay to the Dutch tax authorities, it does not reduce the amount of
tax we are required to withhold from dividends. In these circumstances, to the
extent that we are not required to remit the funds to the Dutch tax
authorities, the withholding tax likely will not qualify as a creditable tax
for U.S. foreign tax credit purposes. Investors are urged to consult their tax advisers regarding the general
creditability or deductibility of Dutch withholding taxes and, in particular,
the effect of our potential ability to receive a credit with respect to
dividends received from any of our qualifying non-Netherlands subsidiaries. Under recent U.S. tax legislation (the 2003 Tax Act), qualified dividend
income received by individuals (as well as certain trusts and estates) in
taxable years beginning before January 1, 2009, generally will be taxed at a
preferential tax rate (rather than the higher rates of tax generally
applicable to items of ordinary income) provided certain conditions are met,
including a minimum holding period with respect to the relevant shares of at
least 61 days during a specified 121-day period. For this purpose qualified
dividend income generally includes dividends paid on stock in certain non-U.S.
corporations if, among other things, the non-U.S. corporation is eligible for
the benefits of a comprehensive income tax treaty with the United States which
contains an exchange of information program (a Qualifying Treaty). According
to a Notice issued by the U.S. Internal Revenue Service (IRS), the Convention
Between the United States of America and the State of the Netherlands for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect
to Taxes on Income is a Qualifying Treaty for purposes of the 2003 Tax Act.
Therefore, subject to the discussion below under Passive Foreign Investment
Company Considerations, dividends paid by us with respect to our common shares
are expected to constitute qualified dividend income for U.S. federal income
tax purposes. Under the 2003 Tax Act, the amount of the qualified dividend income, if any,
paid to a U.S. holder that may be subject to the reduced dividend income tax
rate and that is taken into account for purposes of calculating the U.S.
holders U.S. foreign tax credit limitation must be reduced by the rate
differential portion of the dividend. Investors should consult their own tax
advisors regarding the implications of the 2003 Tax Act for them, in light of
their particular situation. The amount of any distribution paid in euro, including the amount of any
withholding tax on that distribution, will be included in the gross income of a
U.S. holder in an amount equal to the U.S. dollar value of the euro calculated
by reference to the exchange rate in effect on the date the dividend is
actually or constructively received, regardless of whether the euro received
are converted into U.S. dollars. If the euro are converted into U.S. dollars on
the date of receipt, a U.S. holder generally should not be required to
recognize foreign currency gain or loss in respect of the dividend. If the euro
received in the distribution are not converted into U.S. dollars on the date of
receipt, a U.S. holder will have a basis in the euro equal to its U.S. dollar
value on the date of receipt. Any gain or loss on a subsequent conversion or
other disposition of the euro received will be treated as ordinary income or
loss and generally will be treated as U.S. source income or loss for foreign
tax credit limitation purposes. Subject to the backup withholding rules discussed below, a non-U.S. holder
generally will not be subject to U.S. Federal income or withholding tax on
dividends received on common shares unless that income is effectively connected
with the conduct by that Non-U.S. holder of a trade or business in the United
States. Sale or other disposition of common shares A U.S. holder will generally recognize gain or loss for U.S. Federal income tax
purposes upon the sale or exchange of common shares in an amount equal to the
difference between the amount realized (or its U.S. dollar equivalent,
determined at the spot rate on the date of sale (or in the case of cash basis
and electing accrual basis taxpayers, the settlement date), if the amount is
determined in a foreign currency) from the sale or exchange and the U.S.
holders tax basis for the common shares. This gain or loss will be a capital
gain or loss and will generally be treated as from sources within the United
States. Investors should consult their own tax advisors with respect to the treatment
of capital gains (which may be taxed at lower rates than ordinary income for
taxpayers who are individuals, trusts or estates that hold the common shares
for more than one year) and capital losses (the deductibility of which is
subject to limitations). 56




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If a U.S. holder receives foreign currency upon a sale or exchange of common
shares, gain or loss, if any, recognized on the subsequent sale, conversion or
disposition of that foreign currency will be ordinary income or loss, and will
generally be income or loss from sources within the United States for foreign
tax credit limitation purposes. However, if the foreign currency is converted
into U.S. dollars on the date received by the U.S. holder, the U.S. holder
generally will not be required to recognize any gain or loss on that
conversion.
Subject to the backup withholding rules discussed below, a non-U.S. holder
generally will not be subject to U.S. Federal income or withholding tax on any
gain realized on the sale or exchange of common shares unless:  
    
    that gain is effectively connected with the conduct by that non-U.S. holder of a trade or business in the United States,
    
    in the case of any gain realized by an individual non-U.S. holder, that holder is present in the United States for 183 days
or more in the taxable year of the sale or exchange and certain other conditions are met, or
    
    the non-U.S. holder is subject to tax pursuant to provisions of the Code applicable to some expatriates. PFIC considerations A corporation organized outside the United States generally will be classified
as a PFIC for U.S. Federal income tax purposes in any taxable year in which,
after applying certain look-through rules, either:  
    
    at least 75% of its gross income is passive income, or
    
    on average at least 50% of the gross value of its assets is
attributable to assets that produce passive income or are held for the
production of passive income. Passive income for this purpose generally includes dividends, interest,
royalties, rents, annuities and gains from commodities and securities
transactions. Based on our estimated gross income, the average value of our
gross assets and the nature of our business, we do not believe that we will be
classified as a PFIC in the current taxable year. However, because this is a
factual determination made annually at the end of each taxable year, it is
possible that we will be considered a PFIC in the current or any future years.
Our status in any taxable year will depend on our assets and activities in each
year and is subject to change. If we were a PFIC in any year during which a U.S. holder owns common shares,
the U.S. holder would be subject to additional taxes on any excess
distributions received from us and any gain realized from the sale or other
disposition of the common shares (whether or not we continued to be a PFIC). A
U.S. holder has an excess distribution to the extent that distributions on the
common shares during a taxable year exceed 125% of the average amount received
during the three preceding taxable years (or if shorter, the U.S. holders
holding period). To compute the tax on excess distributions or any gain:  
    
    the excess distribution or gain is allocated ratably over the U.S. holders holding period,
    
    the amount allocated to the current taxable year and any year before we became a PFIC is taxed as ordinary income in the
current year, and
    
    the amount allocated to other taxable years is taxed at the highest applicable marginal rate in effect for each year and an
interest charge is imposed to recover the deemed benefit from the deferred payment of the tax attributable to each year. If we were to provide necessary information to U.S. holders, some of the above
rules could also be avoided if a U.S. holder is eligible for and timely makes a
valid qualified electing fund election, in which case the U.S. holder generally
would be required to include in income on a current basis its pro rata share of
our ordinary income and net capital gains. We do not, however, intend to
provide to U.S. holders the information regarding this income that would be
necessary in order for a U.S. holder to make a qualified electing fund election
with respect to the common shares. If we were a PFIC, each U.S. holder would be required to make an annual return
on IRS Form 8621, reporting distributions received and gains realized with
respect to each PFIC in which it holds a direct or indirect interest. The
reduced rate for dividend income, as discussed above under Dividends and other
distributions, is not applicable ot dividends paid by a
PFIC.Backup withholding tax and information reporting requirements
Backup withholding and information reporting requirements may apply to payments
to U.S. holders of dividends on the common shares and to the proceeds of a sale
or redemption of a common share. We, our agent, a broker or any paying agent,
as the case may be, may be required to withhold tax from any payment that is
subject to backup withholding (currently at a rate of 28%), if the U.S. holder
fails to:  
    
    furnish the U.S. holders taxpayer identification number,
    
    certify that the U.S. holder is not subject to backup withholding, or
    
    otherwise comply with the applicable requirements of the backup withholding rules. 57




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Some U.S. holders (including, among others, corporations) are not subject to
the backup withholding and information reporting requirements. Non-U.S. holders
who hold their common shares through a U.S. broker or agent or through the U.S.
office of a non-U.S. broker or agent may be required to comply with applicable
certification procedures to establish that they are not U.S. holders in order
to avoid the application of such information reporting requirements and backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
under the backup withholding rules from a payment to a holder of common shares
generally may be claimed as a credit against that holders U.S. Federal income
tax liability provided that the required information is furnished to the IRS. Holders of common shares should consult their own tax advisers as to their
qualification for exemption from backup withholding and the procedures for
obtaining an exemption. F. Dividends and paying agents Not applicable. G. Statements by experts Not applicable. H. Documents on display We are currently subject to the informational reporting requirements of the
U.S. Securities Exchange Act of 1934 and file annual reports and other
information with the Securities and Exchange Commission. For information about
the possible termination of our Exchange Act reporting requirements, see Item
9.A  The Offer and Listing  Offer and listing details. You may read and copy
any document filed with or furnished to the SEC by us without charge at the
SECs public reference room at 450 Fifth Street, N.W., Washington D.C. 20549.
You may also receive copies of these materials by mail from the SECs Public
Reference Branch at 450 Fifth Street, N.W., Washington D.C. 20549. Our SEC
filings are also available to the public through commercial document retrieval
services and the website maintained by the SEC at www.sec.gov. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference room in
Washington D.C. or those in other locations. As permitted by the SEC, this annual report does not contain all the
information comprising this annual report on Form 20-F. The SEC permits us to
incorporate by reference information into this annual report, which means that:  
    
    incorporated documents are considered part of this annual report, and
    
    we can disclose important information by referring to those documents. I. Subsidiary information Not applicable. 
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Qualitative disclosures about market risk As of the date of this annual report, we are exposed to market risks caused by
movements in foreign exchange rates, interest rates and fuel prices. KLM
constantly works towards reducing these risks. To this end, it concludes
various hedging transactions, in part making use of derivatives, subject to
internal guidelines. KLM does not hold derivatives for trading purposes. To
minimize the credit risk of financial instruments, KLM enforces specific
procedures and codes of conduct relating in part to the creditworthiness of
contract partners. In long-term derivatives only counter parties with a minimum
AA- rating (based on assessments of credit agencies with a good standing) are
selected. For derivatives with a maturity of less than 12 months,
counter parties with an A- rating may be selected. For each category of risk, the effect of exchange rate, interest rate and fuel
price movements on the fair value of financial instruments is explained below.
No account is taken of the consequences the movements would have on the general
economic situation nor of management decisions to reduce the consequences of
such movements. Our market risk exposure in the 2003/2004 fiscal year did not
change materially as compared to the previous fiscal year. 58




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Quantitative disclosures about market risk Foreign currency In our operating cash flows, we have a surplus in all major foreign currencies
with the exception of the U.S. dollar, in which we have a deflcit. We use
forward contracts, options and other financial instruments to hedge expected net
cash flows in the main foreign currencies. With regard to translation risk, our
policy is to match assets and liabilities in foreign currency. In principle, we
do not hedge our share in the results and equity of holdings. We performed a
sensitivity analysis based on a sudden 10% movement in exchange rates compared
to the March 31, 2004 level, with all other variables (including interest
rates) remaining constant. A 10% movement in the euro against all foreign
currencies would affect the fair value of all financial instruments by
approximately 42 million net. Interest rate Our interest rate policy is to minimize long-term net funding costs within an
agreed framework of interest rate sensitivity. This is achieved mainly through
the use of interest rate swaps. As of March 31, 2004, 58% of our outstanding
debt carried a fixed rate of interest and 42% a variable rate. The average rate
of interest on borrowings (excluding subordinated perpetuals) was 4.0%. We
performed a sensitivity analysis based on a sudden 100-basis-point movement in
interest rates compared to the level observed on March 31, 2004, with all other
variables (including foreign exchange rates) remaining constant. Based on our
net interest-bearing debt position as of March 31, 2004, a 100-basis-point
movement in interest rates would have affected the fair value of our net
interest-bearing debt by approximately 138 million. The related effect on
financial income and expense would have been approximately 12 million. Commodity risks (fuel prices) Utilizing forwards and combinations of written put options and purchased call
options, we generally hedge the purchase price in U.S. dollars of a portion of
our fuel requirements in order to reduce the risk of fuel price movements.
During the past financial year, we hedged 67% of our dollar-priced fuel
requirements. The positive effect of these hedging transactions amounted to
49 million. In comparison with the 2002/2003 financial year, our average
fuel prices, including these derivative commodity instruments, increased by 8%.
We performed a sensitivity analysis based on a sudden 10% movement in fuel
prices compared to the level observed on March 31, 2004, with the U.S. dollar
exchange rate remaining constant. Such a movement would have affected fuel
costs by approximately 35 million (at the March 31, 2004 U.S. dollar
exchange rate of $1.22 per 1.00), taking into account hedging contracts
concluded as of the 2003/2004 fiscal year-end. 
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 
 PART II: 
 ITEM 13. DEFAULTS, DIVIDENDS ARREARRAGES AND DELINQUENCIES Not applicable. 
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS Not applicable. 
 ITEM 15. CONTROLS AND PROCEDURES Under the supervision and with the participation of our chief executive officer
and chief financial officer, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of March
31, 2004. Based on that evaluation, our chief executive officer and chief
financial officer concluded that these disclosure controls and procedures are
effective. There have been no changes in our internal controls over financial
reporting during the fiscal year ended March 31, 2004 that have materially
affected, or are reasonably likely to affect materially, our internal controls
over financial reporting. 59




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ITEM 16. Not applicable. 
 Item 16A. Audit Committee Financial Expert KLMs Supervisory Board has established an Audit Committee, which is comprised
of three non-executive directors of KLM. Due to the combination and alignment
with Air France, the Supervisory Board has not formally designated an audit
committee financial expert, as such is defined in Item 16A of Form 20-F,
although the Supervisory Board believes that the members of the audit committee
of KLM have sufficient experience and expertise to be able to provide
appropriate independent review and oversight of KLMs financial reporting
processes, internal controls, and independent auditors. The Supervisory Board
has put this matter on its agenda and intends formally to designate such an
expert. 
 Item 16B. Code of Ethics KLM recognizes that its businesses have responsibilities within the communities
in which they operate. Due to the combination and alignment with Air France,
KLM has not yet independently established a code of ethics as that term is
used for purposes of Item 16B of Form 20-F. Nevertheless, KLM expects to adopt
and make public such a code of ethics. Any code of ethics established by KLM
will apply to the principle directors of KLM as required by Form 20-F. 
 Item 16C. Principal Accountant Fees and Services In the annual meeting held on June 23, 2004, our shareholders appointed KPMG
Accountants N.V. to serve also as our independent auditors for the 2004/2005
fiscal year. KPMG billed the following fees to us for professional services in
each of the last two fiscal years (in millions of euro): Fiscal Year Ended March 312004
    
    2003Audit fees
    
    
    1,235
    
    
    
    1,545Audit-related fees
    
    
    1,355
    
    
    
    360Tax fees
    
    
    855
    
    
    
    250All other fees
    
    
    1,085
    
    
    
    0Total
    
    
    4,530
    
    
    
    2,155
 Audit fees means fees for audit services, which are professional
services provided by independent auditors for the audit of our annual financial
statements or for services that are normally provided by independent auditors
with respect to any submissions required under applicable laws and regulations. Audit-related fees means fees for audit-related services, which are assurance
services provided by independent auditors that are reasonably related to the
carrying out of auditing or reviewing of our financial reports and other
related services. For example, this category includes fees for financial
statement audits of employee benefit plans, accounting consulting, internal
control reviews, attest services that are not required by statute or
regulation, and consultation concerning financial accounting and reporting
standards. Tax fees means fees for tax services, which are services provided by
independent auditors related to tax compliance, tax advice and tax planning. All other fees means fees for all other services, which are any services
provided by independent auditors other than the audit services,
auditrelated
services and tax services set forth above. This category includes fees for
training and other miscellaneous support services. Audit Committees pre-approval policies and procedures Under applicable SEC rules, our Audit Committee must pre-approve all audit
services, audit-related services, tax services and other services to be
provided by our principal accountant to ensure that the independence of our
principal accountant under such rules is not impaired as a result of the
provision of any of these services. The Audit Committee has pre-approved
certain additional audit or review engagements as part of KLMs 2003/2004
engagement letter with its auditors provided that the fee is less than
20,000. 60




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Item 16D. Exemptions from the Listing Standards for Audit Committees Not applicable 
 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated
Purchasers Not applicable 
 PART III: 
 ITEM 17. FINANCIAL STATEMENTS We are furnishing our financial statements pursuant to item 18 of Form 20-F. 
 ITEM 18. FINANCIAL STATEMENTS See pages F-1 through F-54 and page S-1, which are incorporated by reference
in this annual report. 
 ITEM 19. EXHIBITS  1.1
    
    Articles of Association of KLM dated May 6, 2004.4.1
    
    Framework Agreement dated October 16, 2003, between Air France and
KLM (incorporated by reference to Exhibit 2.1 to the registration
statement on Form F-4 (File No. 333-114188) filed by Air France with the
Securities and Exchange Commission on April 5, 2004).4.2
    
    Form of Employment Agreement with members of Board of Management
(incorporated by reference to Exhibit 4.1 to KLMs annual report on Form
20-F for the financial year ended March 31, 2003, filed with the
Securities and Exchange Commission June 19, 2003).4.3
    
    A330 Purchase Agreement dated November 13, 2002, between Airbus and
KLM (incorporated by reference to Exhibit 4.2 to KLMs annual report on
Form 20-F for the financial year ended March 31, 2003, filed with the
Securities and Exchange Commission June 19, 2003).4.4
    
    Purchase Agreement No. 2399, including exhibits and side letters
thereto, dated August 19, 2002, between the Company and Boeing relating
to the purchase of Boeing 777 aircraft (incorporated by reference to
Exhibit 4.3 to KLMs annual report on Form 20-F for the financial year
ended March 31, 2003, filed with the Securities and Exchange Commission
June 19, 2003).12.1
    
    Certification by Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.12.2
    
    Certification by Managing Director & Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.13.1
    
    Certification by Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.13.2
    
    Certification by Managing Director & Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. 61




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SIGNATURES The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf. KONINKLIJKE LUCHTVAART MAATSCHAPPIJ N.V.(KLM Royal Dutch Airlines)By:
    
    LEO M. VAN WIJKPresident and Chief Executive OfficerBy:
    
    ROBERT A. RUIJTERManaging Director and Chief Financial Officer
 Date: August 31, 2004 62




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INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm
    
    F- 2Consolidated Financial StatementsAccounting Policies
    
    F- 3Consolidated Balance Sheet as of March 31, 2004 and 2003
    
    F- 7Consolidated Statements of Earnings for the years ended March 31, 2004, 2003 and 2002
    
    F- 8Consolidated Statements of Cash Flows for the years ended March 31, 2004, 2003 and 2002
    
    F- 9Notes to the Consolidated Financial Statements
    
    F- 10Company Financial StatementsCompany Balance Sheet as of March 31, 2004 and 2003
    
    F- 46Company Statements of Earnings for the years ended March 31, 2004, 2003 and 2002
    
    F- 46Notes to the Company Financial Statements
    
    F- 47Financial Statement Schedules
    
    S- 1
 F - 1




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Report of Independent Registered Public Accounting Firm To the Board of Management and Supervisory Board of KLM Royal Dutch Airlines
and subsidiaries: We have audited the financial statements of KLM Royal Dutch Airlines and its
subsidiaries (the Company) listed in the index on page F-1 and included on
the pages F-3 through F-54. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement schedules
listed in the index on page S-1. These consolidated financial statements and
financial statement schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial statement schedules are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of KLM Royal Dutch Airlines and
its subsidiaries at March 31, 2004 and 2003 and the results of their operations
and their cash flows for each of the years in the three-year period ended March
31, 2004, in conformity with generally accepted accounting principles in the
Netherlands. Also in our opinion, the related financial statement schedules,
when considered in relation to the consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein. Accounting principles generally accepted in the Netherlands vary in certain
significant respects from accounting principles generally accepted in the
United States of America. Information relating to the nature and effect of such
differences is presented in note 28 to the consolidated financial statements. Amstelveen, the Netherlands
    
    KPMG Accountants N.V.May 4, 2004
 F - 2




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CONSOLIDATED FINANCIAL STATEMENTS ACCOUNTING POLICIES General The Company financial data of KLM are incorporated in the consolidated balance
sheet and the consolidated statement of earnings. The Company statement of
earnings is presented in simplified form in accordance with article 402, Title
9, Book 2, of the Netherlands Civil Code. For the sake of comparison within the aviation industry, pursuant to article
362, Title 9, Book 2, of the Netherlands Civil Code, the model used for the
consolidated statement of earnings differs from the models laid down in the
Financial Statements Formats Decree in the Netherlands. All amounts are in millions of euro unless stated otherwise. Changes in accounting policies There were no changes in accounting policies during fiscal year 2003/2004. Changes in presentation A stricter regime is applicable to the recognition of revenue and expense items
as extraordinary for fiscal years commencing on or after January 1, 2003.
Comparative figures for 2002/2003 have been restated accordingly. This change
in presentation has had no consequences for the net result for 2002/2003. Basis of consolidation The consolidation includes the financial data of KLM and its Group companies.
Group companies are those holdings with which KLM forms a financial and
organizational entity and over which KLM exercises direct or indirect control.
Group companies are consolidated in full. The share of third parties in the
Group result and Group equity is stated separately. A list of capital interests within the meaning of articles 379 and 414, Title
9, Book 2, of the Netherlands Civil Code has been filed with the Trade Register
of the Chamber of Commerce in Amsterdam. Accounting Policies General The balance sheet and the statement of earnings are prepared under the
historical cost convention unless stated otherwise. For information regarding
U.S. GAAP please refer to note 28 to the consolidated financial statements. Foreign currency Assets and liabilities denominated in foreign currencies are translated at the
rates of exchange ruling at balance sheet date. Amounts in the statement of earnings denominated in foreign currencies are
translated at weighted average monthly exchange rates. The resulting
translation adjustments are recorded as a separate component of other
comprehensive income (loss) within shareholders equity. Cumulative
translation adjustments are recognized as income or expense upon
disposal or liquidation of a foreign entity. Unearned revenues relating to future transportation commitments included under
current liabilities are carried at the euro value at the date on which the
transportation commitment was made. Exchange rate differences arising on the translation of assets and liabilities
are taken to the statement of earnings as other operating expenses. Exchange
rate differences arising on the translation of purchased goodwill, the share in
the permanent financing of foreign holdings and the share in the equity and
results of those holdings are taken directly to stockholders equity. Gains and losses arising from
the translation or settlement of foreign-currency-denominated
monetary assets and liabilities into the local currency are
recognized in income in the period in which they arise. The most important exchange rates at balance sheet date were: March 31, 2004
    
    March 31, 20031 U.S. dollar (USD)
    
    
    0.82
    
    
    
    0.941 pound sterling (GBP)
    
    
    1.50
    
    
    
    1.471 Swiss franc (CHF)
    
    
    0.64
    
    
    
    0.68100 Japanese yen (JPY)
    
    
    0.76
    
    
    
    0.79
 F - 3




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Derivatives KLM uses derivatives to hedge its exposure to fuel prices, foreign currencies
and interest rates. In accordance with SFAS 133/138, derivatives are carried in
the balance sheet at fair value as financial fixed assets and long-term debt. Revenues or expenses arising from movements in the fair value of derivatives
are in principle recognized in the statement of earnings. Movements in the fair value of derivatives that are held as effective hedges to
exposures that influence the fair value of assets, liabilities and unrecognized
firm commitments (fair value hedges) are recognized together with the
movements in the fair value of the underlying positions in the statement of
earnings. Where hedges are no longer effective, the derivatives are carried at
fair value without the underlying positions being adjusted for movements in
fair value. In such circumstances, only movements in the value of derivatives
are recognized in the statement of earnings. Movements in the fair value of derivatives that are held as effective hedges of
future cash flows (cash flow hedges) are included under Other reserves up to
the date on which the effects of the results on the underlying positions
materialize. As of that date, value movements included in Other reserves are
taken to the statement of earnings together with those effects on the
underlying positions. Where hedges are no longer effective, the derivatives are carried at fair value
and value movements are released to the statement of earnings as from that
date. The accumulated results included in Other reserves are released to the
statement of earnings together with the effects of the results on the remaining
underlying exposure. If there is no longer an exposure, the results included in
Other reserves are released directly to the statement of earnings. Intangible fixed assets Purchased goodwill is capitalized and amortized on a straight-line basis. The
amortization period is determined for each individual holding up to a maximum
of twenty years based on the period in which the interest acquired is expected
to contribute to results. Due account is taken of lower realizable value. Software costs, capitalized under intangible fixed assets, qualify as
internal-use software. This software has been acquired (or produced) by KLM
solely to meet the companys needs. Costs in the Preliminary Project Stages are
expensed when incurred. Expenses capitalized are those incurred from the
Application Development Stage. Costs capitalized include fees of external IT
consultants and actual hours spent by KLMs personnel (based on project
administration). Capitalization is also applied to enhancements of the
software, only when they introduce more functionality. Costs incurred in the
Post Implementation / Operating Stage, including training and running costs,
are expensed when incurred. The amortization period for software is determined
on the basis of the useful life of each investment up to a maximum period of
ten years. As from the date on which it is taken into service, software is
fully amortized on a straight-line basis over the amortization period. Until it
is taken into service, software is capitalized as a prepayment under Intangible
fixed assets. Tangible fixed assets Aircraft, spare engines and spare parts are carried at cost (including purchase
expenses, such as financing expenses up to the date aircraft are taken into
service) less depreciation, or lower realizable value, defined as the higher of
net selling price and value in use. Value in use is defined as discounted
estimated future operating cash flow. Aircraft held under financial lease agreements are also included under this
heading following the same valuation policy. KLM has a foreign Group company that uses the U.S. dollar to value and
depreciate aircraft that are purchased in U.S. dollars and related financing.
For their inclusion in the consolidated financial statements of KLM, these
aircraft are translated into euro at the U.S. dollar exchange rate ruling at
balance sheet date. The net book value of these aircraft is included under
Tangible fixed assets. Aircraft are depreciated on a straight-line basis over their useful lives to
estimated residual values of 0% to 25%. Depending on the type of aircraft, the
useful life varies from 10 to 25 years. Spare engines are depreciated to their estimated residual value on a
straight-line basis over the remaining estimated useful life of the engine
type. Spare parts are depreciated to their estimated residual value on a
straight-line basis over the remaining estimated useful life of the associated
aircraft or engine type. Heavy maintenance costs are capitalized and depreciated on a straight-line
basis over the period to the next heavy maintenance. These costs include both
internal costs and external expenditures. Significant modernization and
improvement costs are capitalized and depreciated over, at maximum, the
remaining life of the aircraft concerned. F - 4




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Other tangible fixed assets are carried at cost less straight-line
depreciation, or lower realizable value. Financing costs for major projects are
included in cost until the date of first usage. Straight-line depreciation to
residual value is based on the following estimated useful lives: Buildings (land is not depreciated)
    
    10 - 40 yearsInventories, machines and installations
    
    3 - 15 yearsVehicles and other tangible fixed assets
    
    5 - 20 years
 Tangible fixed assets are translated at the exchange rates ruling at the date
of payment or at the date deposits in foreign currencies are applied or at the
exchange rates of forward exchange contracts. Tangible fixed assets on order are carried in the balance sheet at the amount
of advance payments made. Remaining balances due are included in the Notes to
the consolidated balance sheet under commitments and contingent liabilities. Financial fixed assets Holdings in which KLM exercises a significant influence on the business and
financial policies are carried at net-equity value, where possible in
accordance with KLMs accounting policies, less any exceptional diminutions in
value. Holdings in which KLM does not exercise a significant influence on the
business and financial policies are carried at cost less any exceptional
diminution in value. KLMs share in the holdings carried at net asset value is included under
Results of holdings in accordance with KLMs accounting policies. Dividends
declared by holdings carried at cost are included in Results of holdings. Accounts receivable from holdings and other financial fixed assets are carried
at face value less necessary provisions. Amounts falling due within one year
are included under Current assets. KLM holds a portfolio of zero-coupon triple A bonds to hedge the foreign
exchange exposure on part of the financial lease commitments. These securities
are at the free disposal of KLM and are included under Financial fixed assets
at cost plus realized interest. For the valuation of derivatives, reference is made to the notes above. Other financial fixed assets are valued at the lower of face value or
realizable value. Operating supplies Supplies are carried at average cost net of a provision for economic
obsolescence where applicable. Supplies are translated at the exchange rates
ruling at the date of receipt of the materials. Accounts receivable Accounts receivable are carried at face value less necessary provisions for bad
debts. Marketable securities and cash Marketable securities other than the Triple A bonds recognized under Financial
fixed assets are carried at market value. Realized and unrealized results are
recognized in the statement of earnings under Financial income and expense. Cash on hand, demand deposits and time deposits are carried at face value less
necessary provisions for transfer risk. Deferred credits Deferred credits relate to investment incentive grants, deferred gains on
aircraft sale and lease back transactions and benefits regarding financial lease
arrangements for aircraft. Deferred credits with respect to investment
incentive grants are carried at face value and are credited to depreciation
charges in accordance with the economic life of the related tangible fixed
assets. Deferred credits with respect to sale and lease back transactions are
initially established at face value and are credited to operational aircraft
lease expenses over the remaining life of the associated operating lease
contracts. Deferred credits with respect to benefits regarding financial lease
arrangements for aircraft are initially established at present value and
credited to Financial income and expense over the remaining term of the
associated financial lease contracts. Provisions Provisions are formed in respect of legally enforceable or actual commitments
arising from prior-year events that lead to an outflow of funds that can be
reliably estimated. Provisions are carried at face value with the exception of
the provision for postretirement health insurance costs and the provision for
the frequent flyer program. These provisions are carried at the present value
of future commitments discounted at 5%. F - 5




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##### Table of Contents



Nearly all pension plan commitments have been placed with independent pension
funds. Expenses relating to pension benefits accrued by employees are allocated
to the years in which the employees performed the work on which the
benefits are
based. Recurrent and single premiums remitted in respect of past-service
commitments are expensed. Expenses relating to the majority of the pension
plans are calculated by means of the dynamic method, with account being taken
of future exogenous and endogenous salary movements. A discount rate is applied
of 4%. Provisions are also formed for any deficits arising from the adequacy
tests applied by the supervisors. Postretirement health insurance costs are determined in accordance with SFAS
No. 106, Post-retirement Benefits other than Pensions. Frequent flyer obligations are accounted for on an accrual basis using the
incremental cost method. Mileage credits are sold to other companies
participating in the program. Following the recommendations included in IATA
Airline Accounting Guideline 2, frequent flyer program accounting, the
proceeds from the miles sold are recognized as income when the miles are earned
by the members although an amount equivalent to the incremental cost of
honoring those mileage credits is deferred. For a number of aircraft held under operational leases, there is a contractual
obligation to the lessor to redeliver the aircraft in an agreed maintenance
state. Formation of a provision for these costs is started when the related
commitment can be reliably estimated. The provision is formed on a
straight-line basis over the remaining terms of the operational leases. Long-term debt Long-term debt is carried at face value. Debt hedged by means of fair value
hedges, however, is adjusted for movements in the fair value of the positions
hedged. Financial lease obligations are initially stated at net present value,
discounted at the contracted interest rate. Loans to finance companies in this
respect are set off against lease obligations, provided offsetting of
receivables and debts is legally permitted or agreed upon. Long-term debt
falling due within one year is included under Current liabilities. Current liabilities Current liabilities are carried at face value. Operating revenues Traffic revenue includes revenues from transportation performed, translated at
exchange rates ruling at the date on which the transportation commitment was
made. Other revenue comprises proceeds on deliveries and services to third
parties at the date that goods are delivered or services performed. Financial income and expense Interest payments on long-term debt are included at their effective rates after
deduction of finance benefits amortized. Costs relating to financing
transactions are also included under Financial income and expense. Financing
costs are capitalized under Tangible fixed assets on the basis of the average
interest rate on borrowed capital. The ineffective part of the unrealized
result on derivatives that do not qualify as effective hedges within the
meaning of SFAS 133/138 or that are considered partially ineffective is
included under Financial income and expense. Taxes Taxes on result are calculated at current income tax rates on the current
result. Deferred investment grants, tax-exempt profit components, loss
carryforwards and permanent differences between fiscal accounting policies and
KLMs accounting policies are taken into account.
Deferred tax assets and liabilities are formed in respect of timing differences
between the valuation of assets and liabilities for accounting purposes and for
fiscal purposes. Deferred tax assets are recognized insofar as future
realization is probable. Cash flow statement Cash flow from operating activities is calculated by means of the indirect
method. Reported net income is therefore adjusted for non-cash items from both
the statement of earnings and movements in the balance sheet. F - 6




---



KLM ROYAL DUTCH AIRLINES CONSOLIDATED BALANCE SHEET *
In millions of euro Before appropriation of results Note
    
    March 31, 2004
    
    March 31, 2003Fixed assetsIntangible fixed assets
    
    
    1
    
    
    
    52
    
    
    
    
    
    
    
    66Tangible fixed assets
    
    
    2
    
    
    
    5,080
    
    
    
    
    
    
    
    4,982Financial fixed assets
    
    
    3
    
    
    
    1,124
    
    
    
    
    
    
    
    1,2896,256
    
    
    
    
    
    
    
    6,337Current assetsOperating supplies
    
    
    4
    
    
    
    211
    
    
    
    
    
    
    
    222Accounts receivable
    
    
    5
    
    
    
    907
    
    
    
    
    
    
    
    998Cash and marketable securities
    
    
    6
    
    
    
    663
    
    
    
    
    
    
    
    6081,781
    
    
    
    
    
    
    
    1,828Current liabilities
    
    
    7
    
    
    
    1,856
    
    
    
    
    
    
    
    2,190Current assets less current liabilities
    
    
    
    
    
    
    
    
    
    
    (75
    )
    
    
    
    
    
    
    (362
    )Assets less current liabilities
    
    
    
    
    
    
    
    
    
    
    6,181
    
    
    
    
    
    
    
    5,975Long-term debt
    
    
    8Subordinated perpetual debt
    
    
    
    
    
    
    507
    
    
    
    
    
    
    
    544Other long-term debt
    
    
    
    
    
    
    3,721
    
    
    
    
    
    
    
    3,4274,228
    
    
    
    
    
    
    
    3,971Provisions
    
    
    9
    
    
    
    
    
    
    
    279
    
    
    
    
    
    
    
    271Deferred credits
    
    
    10
    
    
    
    
    
    
    
    186
    
    
    
    
    
    
    
    256Group equityStockholders equity
    
    
    11
    
    
    
    1,487
    
    
    
    
    
    
    
    1,476Share of third parties
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    11,488
    
    
    
    
    
    
    
    1,4776,181
    
    
    
    
    
    
    
    5,975
 * The accompanying notes are an integral part of these consolidated financial statements. F-7




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES CONSOLIDATED STATEMENTS OF EARNINGS*, **In millions of euro with the exception of the stock data For the Years Ended March 31,Note
    
    2004
    
    2003
    
    2002Operating revenuesTraffic revenue
    
    
    15
    
    
    
    5,197
    
    
    
    5,780
    
    
    
    5,826Other revenue
    
    
    16
    
    
    
    680
    
    
    
    705
    
    
    
    7065,877
    
    
    
    6,485
    
    
    
    6,532Operating expenses
    
    
    17 - 19
    
    
    
    5,757
    
    
    
    6,969
    
    
    
    6,626Operating income (loss)
    
    
    
    
    
    
    120
    
    
    
    (484
    )
    
    
    (94
    )Financial income and expense
    
    
    20
    
    
    
    (101
    )
    
    
    (98
    )
    
    
    (134
    )Results on sale of assets
    
    
    21
    
    
    
    (1
    )
    
    
    (42
    )
    
    
    10Results of holdings
    
    
    22
    
    
    
    
    
    
    
    (4
    )
    
    
    (15
    )Results on sale of holdings
    
    
    23
    
    
    
    13
    
    
    
    6
    
    
    
    9Pretax income (loss)
    
    
    
    
    
    
    31
    
    
    
    (622
    )
    
    
    (224
    )Taxes
    
    
    24
    
    
    
    (7
    )
    
    
    206
    
    
    
    68After tax income (loss)
    
    
    
    
    
    
    24
    
    
    
    (416
    )
    
    
    (156
    )Share of third parties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    
    
    
    
    
    24
    
    
    
    (416
    )
    
    
    (156
    )Net income (loss) attributable to common shares
    
    
    
    
    
    
    22
    
    
    
    (418
    )
    
    
    (158
    )Average number of common shares outstanding 1
    
    
    
    
    
    
    44,188,157
    
    
    
    45,070,544
    
    
    
    45,681,707Average number of common shares outstanding (fully diluted) 1/2
    
    
    
    
    
    
    44,301,426
    
    
    
    45,070,544
    
    
    
    45,681,707Net income (loss) per common share
    
    
    
    
    
    
    0.50
    
    
    
    (9.26
    )
    
    
    (3.46
    )Net income (loss) per common share (fully diluted)
    
    
    
    
    
    
    0.50
    
    
    
    (9.26
    )
    
    
    (3.46
    )
  *
    
    Operating income has been adjusted for the year ended
March 31, 2003, to reflect the changed accounting rules
effective for KLM.
as of April 1, 2003, with respect to the presentation of extraordinary items (see note 17).**
    
    The accompanying notes are an integral part of these consolidated financial statements. 1 Taking repurchased shares into account (see note 27). 2 Taking repurchased and potentially dilutive shares into account (see note 27). F-8




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES CONSOLIDATED STATEMENTS OF CASH FLOWS*In millions of euro For the Years Ended March 31,2004
    
    2003
    
    2002Cash flow from operating activities:Net income (loss)
    
    
    24
    
    
    
    (416
    )
    
    
    (156
    )Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    440
    
    
    
    535
    
    
    
    487Provision for losses and accounts receivable
    
    
    1
    
    
    
    (9
    )
    
    
    9Results on sale of assets
    
    
    1
    
    
    
    42
    
    
    
    (10
    )Undistributed earnings of affiliates
    
    
    
    
    
    
    4
    
    
    
    15Gain on sale of affiliates
    
    
    (13
    )
    
    
    (6
    )
    
    
    (9
    )Deferred taxes
    
    
    45
    
    
    
    (201
    )
    
    
    (65
    )Change in assets and liabilities:Accounts receivable
    
    
    20
    
    
    
    190
    
    
    
    122Supplies
    
    
    12
    
    
    
    35
    
    
    
    40Prepaid expenses
    
    
    46
    
    
    
    104
    
    
    
    (43
    )Change in provisions
    
    
    (9
    )
    
    
    87
    
    
    
    (21
    )Current liabilities
    
    
    (220
    )
    
    
    (40
    )
    
    
    152Taxes and social insurance premiums
    
    
    1
    
    
    
    (9
    )
    
    
    21Deferred credits
    
    
    (45
    )
    
    
    (22
    )
    
    
    (16
    )Marketable securities
    
    
    
    
    
    
    2
    
    
    
    4Share of third parties
    
    
    
    
    
    
    1
    
    
    
    Net cash provided by operating activities
    
    
    303
    
    
    
    297
    
    
    
    530Cash flow from investing activities:Proceeds from sale of tangible fixed assets
    
    
    149
    
    
    
    305
    
    
    
    64Capital expenditures
    
    
    (707
    )
    
    
    (725
    )
    
    
    (430
    )Net expansion of other holdings
    
    
    10
    
    
    
    (26
    )
    
    
    149Investment in inventory
    
    
    38
    
    
    
    10
    
    
    
    (17
    )Changes in the group of consolidated holdings
    
    
    3
    
    
    
    
    
    
    
    Marketable securities
    
    
    (25
    )
    
    
    
    
    
    
    Net cash (used in) provided by investing activities
    
    
    (532
    )
    
    
    (436
    )
    
    
    (234
    )Cash flow from financing activities:Dividend paid
    
    
    (6
    )
    
    
    (11
    )
    
    
    (30
    )Increase in long-term debt
    
    
    690
    
    
    
    121
    
    
    
    365Decrease in long-term debts
    
    
    (322
    )
    
    
    (259
    )
    
    
    (401
    )Increase in long-term receivables
    
    
    (70
    )
    
    
    (78
    )
    
    
    (161
    )Decrease in long-term receivables
    
    
    65
    
    
    
    62
    
    
    
    70Other
    
    
    (98
    )
    
    
    (115
    )
    
    
    49Net cash provided by financing activities
    
    
    259
    
    
    
    (280
    )
    
    
    (108
    )Changes in cash
    
    
    30
    
    
    
    (419
    )
    
    
    188Cash, opening balance
    
    
    608
    
    
    
    1,027
    
    
    
    839Cash, closing balance 1
    
    
    638
    
    
    
    608
    
    
    
    1,027
 In fiscal year 2003/2004 interest paid amounted to EUR 142 million, as compared
to fiscal year 2002/2003 EUR 151 million and fiscal year 2001/2002 EUR 178
million. In fiscal year 2003/2004, fiscal year 2002/2003 and fiscal year
2001/2002 no income taxes were paid on a preliminary basis.  *
    
    The accompanying notes are an integral part of these consolidated financial statements.1
    
    Including Triple A bonds and deposits and Marketable securities the overall cash position amounts to EUR 949 million as of March 31, 2004
(as of March 31, 2003: EUR 919 million, as of March 31, 2002: EUR 1,383 million). F-9




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In millions of euro Fixed assets 1. Intangible fixed assets Advance paymentson software onorder or underGoodwill
    
    Software
    
    construction
    
    TotalPurchase value as of March 31, 2003
    
    
    40
    
    
    
    78
    
    
    
    6
    
    
    
    124Accumulated amortization through
fiscal year 2002/2003
    
    
    26
    
    
    
    32
    
    
    
    
    
    
    
    58Book value as of March 31, 2003
    
    
    14
    
    
    
    46
    
    
    
    6
    
    
    
    66Changes in book valueAdditions
    
    
    
    
    
    
    10
    
    
    
    3
    
    
    
    13Amortization
    
    
    (4
    )
    
    
    (14
    )
    
    
    
    
    
    
    (18
    )Other
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    (9
    )Total changes
    
    
    (4
    )
    
    
    (4
    )
    
    
    (6
    )
    
    
    (14
    )Purchase value as of March 31, 2004
    
    
    40
    
    
    
    88
    
    
    
    
    
    
    
    128Accumulated amortization through
fiscal year 2003/2004
    
    
    30
    
    
    
    46
    
    
    
    
    
    
    
    76Book value as of March 31, 2004
    
    
    10
    
    
    
    42
    
    
    
    
    
    
    
    52
 2. Tangible fixed assets March 31, 2004
    
    March 31, 2003Aircraft, spare engines and spare parts
    
    
    4,230
    
    
    
    3,793Other tangible fixed assets
    
    
    512
    
    
    
    5444,742
    
    
    
    4,337Advance payments on tangible fixed assets on order or under construction
    
    
    338
    
    
    
    6455,080
    
    
    
    4,982
 F-10




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 2. Tangible fixed assets - (Continued) Aircraft,
    
    
    
    
    
    Inventories,
    
    Vehiclesspare
    
    
    
    
    
    machines
    
    and otherengines and
    
    Buildings
    
    and
    
    tangiblespare parts
    
    and land
    
    installations
    
    fixed assets
    
    TotalPurchase value as of March 31, 2003
    
    
    6,925
    
    
    
    728
    
    
    
    605
    
    
    
    132
    
    
    
    8,390Accumulated depreciation and
diminution in
value through fiscal year 2002/2003
    
    
    3,132
    
    
    
    397
    
    
    
    450
    
    
    
    74
    
    
    
    4,053Book value as of March 31, 2003
    
    
    3,793
    
    
    
    331
    
    
    
    155
    
    
    
    58
    
    
    
    4,337Changes in book valueAdditions
    
    
    984
    
    
    
    6
    
    
    
    38
    
    
    
    14
    
    
    
    1,042Disposals
    
    
    (134
    )
    
    
    (2
    )
    
    
    (6
    )
    
    
    (6
    )
    
    
    (148
    )Depreciation
    
    
    (351
    )
    
    
    (25
    )
    
    
    (40
    )
    
    
    (12
    )
    
    
    (428
    )Exchange rate differences
    
    
    (57
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (57
    )Other
    
    
    (5
    )
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    (4
    )Total changes
    
    
    437
    
    
    
    (20
    )
    
    
    (8
    )
    
    
    (4
    )
    
    
    405Purchase value as of March 31, 2004
    
    
    6,854
    
    
    
    728
    
    
    
    574
    
    
    
    130
    
    
    
    8,286Accumulated depreciation and
diminution in
value through fiscal year 2003/2004
    
    
    2,624
    
    
    
    417
    
    
    
    427
    
    
    
    76
    
    
    
    3,544Book value as of March 31, 2004
    
    
    4,230
    
    
    
    311
    
    
    
    147
    
    
    
    54
    
    
    
    4,742
 This overview includes aircraft for which financial lease agreements have been
concluded. Their purchase value amounts to EUR 4,539 million (last fiscal year
EUR 3,868 million), accumulated depreciation amounts to EUR 1,462 million (last
fiscal year EUR 1,330 million). Other tangible fixed assets include assets whose availability is based on
limited right of use, such as buildings on land held under long-term rental
agreements or on leasehold, and assets acquired through financial lease
agreements. The book value of these assets amounts to EUR 177 million (last
fiscal year EUR 184 million). The book value of tangible fixed assets taken out of operation (one Boeing
747-300) amounts to EUR 2 million. In fiscal year 2002/2003 a write down of EUR 78 million was recognized for the
Boeing 747-300 fleet in connection with an accelerated phasing
out.
In fiscal year 2001/2002 a EUR 17 million exceptional diminution in value for
four aircraft was recognized. Advance payments on tangible fixed assets on order or under construction Balance as of March 31, 2003
    
    
    645Advance payments
    
    
    179Tangible fixed assets taken into operation
    
    
    (486
    )Balance as of March 31, 2004
    
    
    338Aircraft on
order as of March 31, 2004 1:- 3 Boeing 737 Next Generation- 1 Boeing 777-200ER- 6 Airbus A330-220
 1 Excluding operational leases. F-11




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 3. Financial fixed assets March 31, 2004
    
    March 31, 2003Holdings
    
    
    193
    
    
    
    198Receivables from holdings
    
    
    4
    
    
    
    18Triple A bonds/deposits
    
    
    286
    
    
    
    311Derivatives
    
    
    368
    
    
    
    482Other financial fixed assets
    
    
    180
    
    
    
    152Deferred taxes
    
    
    93
    
    
    
    1281,124
    
    
    
    1,289
 Receivables
    
    Triple A
    
    
    
    
    
    Otherfrom
    
    bonds/
    
    
    
    
    
    financial
    
    DeferredHoldings
    
    holdings
    
    deposits
    
    Derivatives
    
    fixed assets
    
    taxes
    
    TotalBalance as of March 31, 2003
    
    
    198
    
    
    
    18
    
    
    
    311
    
    
    
    482
    
    
    
    152
    
    
    
    128
    
    
    
    1,289New/expansion
    
    
    5
    
    
    
    2
    
    
    
    53
    
    
    
    72
    
    
    
    
    
    
    
    22
    
    
    
    154Sale/redemption
    
    
    (2
    )
    
    
    (11
    )
    
    
    (58
    )
    
    
    (17
    )
    
    
    (47
    )
    
    
    (57
    )
    
    
    (192
    )Share in results
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Revaluation
    
    
    (4
    )
    
    
    (2
    )
    
    
    (16
    )
    
    
    (169
    )
    
    
    20
    
    
    
    
    
    
    
    (171
    )Dividends received
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Exchange rate differences
and other
    
    
    (2
    )
    
    
    (3
    )
    
    
    (4
    )
    
    
    
    
    
    
    55
    
    
    
    
    
    
    
    46Balance as of March 31, 2004
    
    
    193
    
    
    
    4
    
    
    
    286
    
    
    
    368
    
    
    
    180
    
    
    
    93
    
    
    
    1,124
 Triple A bonds and deposits are unemcumbered to the Company and (including the
effect of derivatives) carry an average fixed rate of interest of 5.6%. The
bonds and deposits have an average remaining term of 6 years. The fair value of financial fixed assets does not differ materially from the
disclosed book value. The deferred tax assets and liabilities can be explained as follows: March 31, 2004
    
    March 31, 2003Assets
    
    Liabilities
    
    Assets
    
    LiabilitiesFixed assets
    
    
    7
    
    
    
    73
    
    
    
    8
    
    
    
    69Current assets
    
    
    3
    
    
    
    10
    
    
    
    3
    
    
    
    20Deferred liabilities
    
    
    21
    
    
    
    
    
    
    
    30
    
    
    
    Provisions
    
    
    20
    
    
    
    55
    
    
    
    26
    
    
    
    66Carryforward loss compensation
    
    
    186
    
    
    
    
    
    
    
    188
    
    
    
    Other items
    
    
    64
    
    
    
    70
    
    
    
    86
    
    
    
    58Deferred taxes
    
    
    301
    
    
    
    208
    
    
    
    341
    
    
    
    213Net tax position
    
    
    93
    
    
    
    
    
    
    
    128
 Current assets 4. Operating supplies March 31, 2004
    
    March 31, 2003Maintenance materials
    
    
    124
    
    
    
    160Various supplies
    
    
    87
    
    
    
    62211
    
    
    
    222
 F-12




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 5. Accounts receivable March 31, 2004
    
    March 31, 2003Debtors
    
    
    734
    
    
    
    745Receivables from holdings
    
    
    10
    
    
    
    3Value added tax
    
    
    28
    
    
    
    37Prepaid expenses
    
    
    135
    
    
    
    213907
    
    
    
    998
 Accounts receivable are stated net of a provision for bad debts of EUR 26
million (last fiscal year EUR 25 million). The fair value of accounts receivable does not differ materially from the
disclosed book value. 6. Cash and marketable securities March 31, 2004
    
    March 31, 2003Marketable securities
    
    
    25
    
    
    
    Time deposits
    
    
    587
    
    
    
    506Cash on hand and demand deposits
    
    
    51
    
    
    
    102663
    
    
    
    608
 As a result of transfer formalities and scarcity of foreign currency, EUR 7
million in cash (last fiscal year EUR 15 million) is not freely transferable
from foreign establishments. The fair value of cash and marketable securities does not differ materially
from the disclosed book value. 7. Current liabilities March 31, 2004
    
    March 31, 2003Current maturities of long-term debt:- concerning financial lease commitments
    
    
    182
    
    
    
    251- concerning other long-term debt
    
    
    10
    
    
    
    65Unearned revenues
    
    
    577
    
    
    
    548Creditors
    
    
    383
    
    
    
    532Taxes and benefit premiums
    
    
    31
    
    
    
    29Accruals and other current liabilities
    
    
    673
    
    
    
    7651,856
    
    
    
    2,190
 The fair value of current liabilities does not differ materially from the disclosed book value. F-13




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 8. Long-term debt March 31, 2004
    
    March 31, 2003Perpetual debtSubordinated perpetual loans
    
    
    
    
    
    
    507
    
    
    
    
    
    
    
    544Other long-term debtBank loans
    
    
    14
    
    
    
    
    
    
    
    21Financial lease commitments
    
    
    3,493
    
    
    
    
    
    
    
    3,295Other loans
    
    
    406
    
    
    
    
    
    
    
    4273,913
    
    
    
    
    
    
    
    3,743of which maturing in
2004/2005 and 2003/2004
respectively
    
    
    192
    
    
    
    
    
    
    
    3163,721
    
    
    
    
    
    
    
    3,4274,228
    
    
    
    
    
    
    
    3,971
 Subordinated loans In certain circumstances, KLM has the right to redeem the subordinated
perpetual loans, with or without payment of a premium. These loans are
subordinated to all other existing and future KLM debts. The subordinations are
equal in rank. Financial lease commitments As of March 31, 2004, loans to financing institutions, which are deducted from
the financial lease commitments, amounted to EUR 214 million (last fiscal year
EUR 317 million). The redemptions of financial leases for each of the coming years are: 2004/2005
    
    
    1822005/2006
    
    
    3292006/2007
    
    
    4902007/2008
    
    
    5952008/2009
    
    
    359after 2008/2009
    
    
    1,538
 Covenants Several loans, including subordinated perpetual loans, can be called if KLM can
no longer be regarded as the most important Dutch international airline. The
offer by Air France for KLMs common shares has no impact on the call of the
loans. Pari-passu clauses have been agreed for a number of loans. With regard to a
number of other loans included under Long-term debt, KLM has undertaken not
to encumber the aircraft and real estate legally owned now or in the future
without prior consent of the lenders. Redemption
    
    Redemptionthrough
    
    afterTerm
    
    5 years
    
    5 years
    
    Perpetual
    
    TotalSubordinated perpetual loans
    
    
    
    
    
    
    
    
    
    
    507
    
    
    
    507Financial lease commitments
    
    
    1,773
    
    
    
    1,538
    
    
    
    
    
    
    
    3,311Other loans
    
    
    197
    
    
    
    213
    
    
    
    
    
    
    
    410March 31, 2004
    
    
    1,970
    
    
    
    1,751
    
    
    
    507
    
    
    
    4,228March 31, 2003
    
    
    1,729
    
    
    
    1,698
    
    
    
    544
    
    
    
    3,971
 F-14




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 8. Long-term debt - (Continued) Interest rates The amortized financing benefits including the effects of derivatives are
included in the average interest rates. Variable
    
    Fixed
    
    Average
    
    Rangeinterest
    
    interest
    
    variable
    
    of fixed
    
    Averageloans
    
    loans
    
    rate
    
    rates
    
    rateSubordinated perpetual loans
    
    
    64
    
    
    
    443
    
    
    
    2.3
    %
    
    
    4.5 - 5.7
    %
    
    
    4.7
    %Financial lease commitments
    
    
    1,651
    
    
    
    1,660
    
    
    
    3.5
    %
    
    
    2.0 - 15.6
    %
    
    
    4.2
    %Other loans
    
    
    81
    
    
    
    329
    
    
    
    1.4
    %
    
    
    1.1 - 7.1
    %
    
    
    1.6
    %March 31, 2004
    
    
    1,796
    
    
    
    2,432March 31, 2003
    
    
    1,452
    
    
    
    2,519
 Variable interest rates are based on London and Euro Interbank Offered Rates. Currencies The amounts stated in the table below including the effects of derivatives are
presented in millions of euro for each currency. EUR
    
    USD
    
    JPY
    
    CHF
    
    GBP
    
    TotalSubordinated perpetual loans
    
    
    238
    
    
    
    
    
    
    
    
    
    
    
    269
    
    
    
    
    
    
    
    507Financial lease commitments
    
    
    2,440
    
    
    
    742
    
    
    
    1
    
    
    
    
    
    
    
    128
    
    
    
    3,311Other loans
    
    
    334
    
    
    
    76
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    410March 31, 2004
    
    
    3,012
    
    
    
    818
    
    
    
    1
    
    
    
    269
    
    
    
    128
    
    
    
    4,228March 31, 2003
    
    
    2,705
    
    
    
    858
    
    
    
    
    
    
    
    285
    
    
    
    123
    
    
    
    3,971
 Fair value of long-term debt March 31, 2004
    
    March 31, 2003Subordinated perpetual loans
    
    
    446
    
    
    
    499Financial lease commitments
    
    
    3,591
    
    
    
    3,222of which maturing within one year
    
    
    182
    
    
    
    251Other long-term debt
    
    
    98
    
    
    
    177of which maturing within one year
    
    
    10
    
    
    
    65
 The fair value estimates referred to above are based on the present value of
the debt based on a current interest rate. F-15




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 9. Provisions March 31,
    
    
    
    
    
    
    
    
    
    March 31,2003
    
    Charges
    
    Additions
    
    2004Postretirement health costs
    
    
    69
    
    
    
    6
    
    
    
    9
    
    
    
    72Early retirement provision
    
    
    31
    
    
    
    4
    
    
    
    2
    
    
    
    29Other staff commitments
    
    
    72
    
    
    
    27
    
    
    
    8
    
    
    
    53Reorganization and restructuring
    
    
    75
    
    
    
    17
    
    
    
    
    
    
    
    58Frequent flyer program
    
    
    24
    
    
    
    
    
    
    
    9
    
    
    
    33Phase out operational lease aircraft
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    34271
    
    
    
    54
    
    
    
    62
    
    
    
    279
 The Post-retirement health costs provision relates to health insurance
contributions payable in respect of retired employees. In accordance with the collective labor agreement, an Early retirement
provision has been formed in respect of existing early retirement entitlements. Other staff commitments include commitments in respect of redundancy
and supplementary schemes.The Reorganization and restructuring
provision relates to the estimated staff redundancy costs. KLM accounts for its frequent flyer obligation on an accrual basis using the
incremental cost method. For expected use of earned miles in flight awards KLM
includes board supplies, fuel and passenger insurance in its incremental cost
calculation. KLM sells mileage credits to the other companies participating in
the program. Proceeds from the miles sold are recognized in income.
Simultaneously, mileage credits awarded to the members of the frequent flyer
program are expensed. For a number of aircraft held under operational leases, there is a contractual
obligation to the lessor to redeliver the aircraft in an agreed maintenance
state. The provision for the phasing-out costs for aircraft held under operational
leases discloses the estimated costs arising from this obligation. With the exception of the Reorganization and restructuring provision,
provisions are mainly long-term in nature. 10. Deferred credits March 31, 2004
    
    March 31, 2003Investment incentive grants received under the Investment Account Act
    
    
    15
    
    
    
    20Deferred gains on aircraft sale and leaseback transactions
    
    
    62
    
    
    
    78Deferred benefits regarding finance lease arrangements for aircraft
    
    
    109
    
    
    
    158186
    
    
    
    256
 The investment incentive grants received under the Investment Account Act
included under this heading relate to the grants claimed before the amendment
of the Act as of May 1, 1986. Items related to aircraft financing relate to the upfront financing benefits to
be amortized. F-16




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 11. Stockholders equity For a break-down of Stockholders equity, please refer to comment 34 on page
F-49 and further. 12. Commitments and contingent liabilities Commitments for tangible fixed assets on order or under construction As of March 31, 2004, KLM had commitments for previously placed orders of EUR
530 million (last fiscal year EUR 1,087 million). Of this amount EUR 494
million related to aircraft (last fiscal year EUR 1,042 million), of which EUR
140 million is due in fiscal year 2004/2005. The remainder of the commitments
as of March 31, 2004 amounted to EUR 36 million (last fiscal year EUR 45
million) and related to other tangible fixed assets. Commitments relating to aircraft for the next five fiscal years and thereafter: 2004/2005
    
    
    1402005/2006
    
    
    2002006/2007
    
    
    1542007/2008
    
    
    2008/2009
    
    
    after 2008/2009
    
    
    
 Rental agreements KLM has long-term rental commitments amounting to EUR 1,399 million (last
fiscal year EUR 1,517 million). Commitments for the next five fiscal years and
thereafter: Operational leases
    
    Rental ofof aircraft
    
    buildings2004/2005
    
    
    180
    
    
    
    402005/2006
    
    
    163
    
    
    
    222006/2007
    
    
    138
    
    
    
    202007/2008
    
    
    95
    
    
    
    192008/2009
    
    
    86
    
    
    
    18after 2008/2009
    
    
    423
    
    
    
    195
 F-17




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 13. Lawsuits KLM and its consolidated holdings are involved in various legal actions.
Although the outcome of these actions cannot be predicted, on the basis of
information currently available and views expressed by counsel KLM does not
expect their outcome to adversely affect the financial position of the company
to any material degree. Hall case In June 2000, an antitrust class action was filed in federal district court in
North Carolina by a North Carolina travel agent, on behalf of herself and all
similarly situated travel agents in the United States, challenging actions by
most major U.S. airlines to reduce travel agent base commissions from 8% to 5%.
On November 13, 2001, the Court granted the plaintiffs motion to amend the
complaint to include allegations that other commission reductions were the
result of unlawful agreements among the airline defendants, and to add several
international airlines as defendants, including KLM. On September 18, 2002, the
Court entered an Order granting the plaintiffs motion for class certification.
On October 30, 2003, the Court granted summary judgment against the plaintiff
class, dismissing all claims asserted against KLM and most other defendants.
The plaintiffs have appealed to the United States Court of Appeals for the
Fourth Circuit. We believe that the case is without merit, and intend to
continue defending against the claim. Tam Travel case On April 9, 2003, a similar antitrust complaint was filed against KLM, together
with 11 U.S. airlines and eight other international airlines, in federal
district court in Oakland, California. This case, referred to as the Tam Travel
case, was filed on behalf of approximately 50 travel agents who elected to
withdraw from the class of plaintiffs in the above mentioned Hall case. The
allegations in the Tam Travel case are fundamentally similar to the Hall case;
the plaintiffs allege that the defendant airlines conspired to reduce and
ultimately eliminate base commissions paid to travel agents. On November 10,
2003, the Judicial Panel on Multidistrict Litigation transferred the Tam Travel
case, together with two other similar cases in which KLM is not a defendant, to
the federal district court in Youngstown, Ohio. On May 2, 2004, the court
denied the request of certain defendants that the case be stayed until the
appeal in the Hall case is decided. The case will now proceed to discovery. No
trial date has been set. We believe this case is also without merit, and we
intend to defend ourselves against the claim. 14. Derivatives and risk management The table below indicates the notional amounts of forward exchange contracts,
interest rate and currency swap contracts and fuel collar and swap contracts.
Generally, the terms of the contracts are equal to the terms of the positions
hedged. These derivatives are used to ensure that financings are concluded in
the currency required and to reduce interest risks resulting from financings and
investments to levels acceptable to KLM. Derivatives are also used to hedge the
currency risks on all or part of the operating and investment cash flow and to
limit the price risk on fuel purchases. Notional amount March 31,
    
    Fair value March 31,2004
    
    2003
    
    2004
    
    2003Forward exchange contracts
    
    
    1,682
    
    
    
    2,519
    
    
    
    (56
    )
    
    
    (55
    )Interest-currency swap contracts
    
    
    1,075
    
    
    
    1,403
    
    
    
    80
    
    
    
    274Interest rate swap contracts
    
    
    2,093
    
    
    
    1,907
    
    
    
    (29
    )
    
    
    (11
    )Fuel collar and swap contracts
    
    
    375
    
    
    
    368
    
    
    
    35
    
    
    
    (11
    )30
    
    
    
    197
 The fair value of the above derivatives is recognized on KLMs balance sheet
under Financial fixed assets (EUR 368 million) and Long-term debt (EUR 338
million). In view of the purpose for which they are held, derivatives may be
qualified as follows: March 31, 2004
    
    March 31, 2003Cash flow hedges
    
    
    (11
    )
    
    
    4Fair value hedges
    
    
    16
    
    
    
    188No hedge accounting
    
    
    25
    
    
    
    5Fair value
    
    
    30
    
    
    
    197
 F-18




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Operating revenues 15. Traffic revenue For the Years Ended March 31,2004
    
    2003
    
    2002Passenger
    
    
    3,852
    
    
    
    4,210
    
    
    
    4,267Cargo
    
    
    963
    
    
    
    1,017
    
    
    
    1,016Charter / Low-cost
    
    
    382
    
    
    
    553
    
    
    
    5435,197
    
    
    
    5,780
    
    
    
    5,826
 16. Other revenue For the Years Ended March 31,2004
    
    2003
    
    2002Aircraft maintenance related services
    
    
    221
    
    
    
    280
    
    
    
    273Cargo and mail handling
    
    
    35
    
    
    
    40
    
    
    
    39Tax-free sales
    
    
    111
    
    
    
    115
    
    
    
    107Aircraft handling
    
    
    119
    
    
    
    105
    
    
    
    92Renting out aircraft
    
    
    42
    
    
    
    13
    
    
    
    14Miscellaneous
    
    
    152
    
    
    
    152
    
    
    
    181680
    
    
    
    705
    
    
    
    706
 These services were rendered mainly in The Netherlands. 17. Operating expenses For the Years Ended March 31,2004
    
    2003
    
    2002Salaries and benefits
    
    
    1,903
    
    
    
    1,907
    
    
    
    1,747Aircraft fuel
    
    
    756
    
    
    
    886
    
    
    
    983Materials and consumables
    
    
    358
    
    
    
    448
    
    
    
    470Commercial costs
    
    
    383
    
    
    
    499
    
    
    
    506Landing fees and navigation charges
    
    
    503
    
    
    
    541
    
    
    
    524Third-party handling costs
    
    
    218
    
    
    
    208
    
    
    
    231Work by third parties
    
    
    384
    
    
    
    489
    
    
    
    455Depreciation and amortization
    
    
    440
    
    
    
    535
    
    
    
    487Operational aircraft lease expenses
    
    
    164
    
    
    
    171
    
    
    
    226Cost of housing, vehicles and inventories
    
    
    168
    
    
    
    186
    
    
    
    180Commercial cooperation
    
    
    66
    
    
    
    117
    
    
    
    176Ad hoc and short-term aircraft/truck rentals
    
    
    87
    
    
    
    99
    
    
    
    153Hired personnel
    
    
    67
    
    
    
    108
    
    
    
    116Reorganization costs *
    
    
    
    
    
    
    75
    
    
    
    Costs arising from arbitration in legal dispute between KLM and Alitalia *
    
    
    
    
    
    
    276
    
    
    
    Other operating expenses
    
    
    260
    
    
    
    424
    
    
    
    3725,757
    
    
    
    6,969
    
    
    
    6,626
 * These costs were previously classified as extraordinary items F-19




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 18. Salaries For the Years Ended March 31,2004
    
    2003
    
    2002Salaries
    
    
    1,479
    
    
    
    1,510
    
    
    
    1,449Benefits
    
    
    155
    
    
    
    167
    
    
    
    154Pension fund contributions
    
    
    269
    
    
    
    230
    
    
    
    1441,903
    
    
    
    1,907
    
    
    
    1,747
 Pension fund contributions include the positive effects of the restitution of
ground staff pension fund surpluses to an amount of EUR 19 million (last fiscal
year EUR 46 million). The independent funds for the Dutch pension plans are regulated by the Pensions
and Insurance Supervisory Authority of the Netherlands. Their capital is
adequate based on the policies applied by the regulator for the calculation of
postretirement provisions. During fiscal year 2003/2004 KLM and its Group companies employed a combined
average workforce of 31,182 full-time equivalents (fiscal year 2002/2003 33,038
full-time equivalents), as follows: For the Years Ended March 31,2004
    
    2003
    
    2002Ground staff in The Netherlands
    
    
    17,818
    
    
    
    18,255
    
    
    
    17,951Ground staff outside The Netherlands
    
    
    4,077
    
    
    
    4,848
    
    
    
    5,421Flight staff
    
    
    9,287
    
    
    
    9,935
    
    
    
    9,89331,182
    
    
    
    33,038
    
    
    
    33,265
 19. Depreciation and amortization For the Years Ended March 31,2004
    
    2003
    
    2002Amortization of intangible fixed assets
    
    
    18
    
    
    
    17
    
    
    
    12Depreciation of aircraft and spare parts
    
    
    351
    
    
    
    382
    
    
    
    383Write down/impairment
    
    
    
    
    
    
    78
    
    
    
    17Depreciation of other tangible fixed assets
    
    
    77
    
    
    
    84
    
    
    
    90446
    
    
    
    561
    
    
    
    502Amortization of deferred credits
    
    
    (6
    )
    
    
    (26
    )
    
    
    (15
    )440
    
    
    
    535
    
    
    
    487
 20. Financial income and expense For the Years Ended March 31,2004
    
    2003
    
    2002Interest income from financial fixed assets
    
    
    5
    
    
    
    20
    
    
    
    39Other interest income
    
    
    6
    
    
    
    11
    
    
    
    21Changes in the value of marketable securities
    
    
    6
    
    
    
    15
    
    
    
    (2
    )Interest expense
    
    
    (138
    )
    
    
    (155
    )
    
    
    (193
    )Capitalized interest incurred through advance payments
on tangible fixed assets
    
    
    9
    
    
    
    11
    
    
    
    2Unrealized results on derivatives
    
    
    11
    
    
    
    
    
    
    
    (1
    )(101
    )
    
    
    (98
    )
    
    
    (134
    )
 F-20




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 21. Results on sale of assets The fiscal year 2003/2004 loss on sale of assets of EUR 1 million relates
principally to the sale of aircraft. The fiscal year 2002/2003 loss on sale of
assets of EUR 42 million related principally to the sale of aircraft (EUR 33
million) and the sale of KLM uks low cost Buzz activities (EUR 9 million). 22. Results of holdings 1 For the Years Ended March 31,2004
    
    2003
    
    2002Aviation
    
    
    9
    
    
    
    1
    
    
    
    (14
    )Aviation-related
    
    
    (10
    )
    
    
    (8
    )
    
    
    (1
    )Other holdings
    
    
    1
    
    
    
    3
    
    
    
    
    
    
    
    (4
    )
    
    
    (15
    )
 23. Results on sale of holdings Results on sale of holdings partly relates to the profit made on the sale of
KLMs stake of 9% in TUI Nederland N.V. Furthermore, KLM released EUR 6 million
from provisions, relating to holdings that have been sold in the past few
years. These provisions were initially set up to cover any warranties
subsequent to the sale. 24. Taxes The effective tax burden differs from the current tax rate (34.5%). For fiscal
year 2003/2004 the effective tax rate was 23.1%. The difference between the
effective and standard rate can be explained as follows: For the Years Ended March 31,2004
    
    20032
    
    2002Standard rate taxation
    
    
    (11
    )
    
    
    214
    
    
    
    79Participation exemption 3
    
    
    4
    
    
    
    1
    
    
    
    (1
    )Foreign tax issues
    
    
    (1
    )
    
    
    (13
    )
    
    
    (13
    )Other permanent differences
    
    
    1
    
    
    
    4
    
    
    
    3Effective rate taxation
    
    
    (7
    )
    
    
    206
    
    
    
    68
  1
    
    The term holdings refers to KLMs equity- and cost-accounted for
investments. Results of holdings comprise the results of equity-accounted
for investments and dividends of cost accounted for investments.2
    
    Standard rate taxation for fiscal year 2002/2003 has been adjusted to
reflect the changed accounting rules with respect to the presentation of
extraordinary items.3
    
    Under Dutch tax law, the (un)realized results of KLMs holdings with an
equity stake of 5% or more are tax exempt for KLM. F-21




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 25. Segmentation The segmental breakdown is based on the classification of KLMs four core
activities and accountability areas as agreed upon in fiscal year 2002/2003.
The segment All other includes the cost of shared-services, such as overheads
and certain expense and revenue items that are not attributable to the core
activities. Engineering
    
    
    
    
    
    
    
    
    
    Elimination
    
    TotalFiscal year 2003/2004
    
    
    
    
    
    
    
    
    
    &
    
    Charter /
    
    
    
    
    
    of inter-
    
    consoli-In millions of euro
    
    Passenger
    
    Cargo
    
    Maintenance
    
    Low-cost
    
    All other
    
    segments
    
    datedOperating revenuesOperating revenues from
external customers
    
    
    4,107
    
    
    
    1,014
    
    
    
    258
    
    
    
    427
    
    
    
    71
    
    
    
    
    
    
    
    5,877Intersegment revenues
    
    
    16
    
    
    
    18
    
    
    
    547
    
    
    
    
    
    
    
    218
    
    
    
    (799
    )
    
    
    4,123
    
    
    
    1,032
    
    
    
    805
    
    
    
    427
    
    
    
    289
    
    
    
    (799
    )
    
    
    5,877Operating expenses
    
    
    3,936
    
    
    
    961
    
    
    
    789
    
    
    
    411
    
    
    
    459
    
    
    
    (799
    )
    
    
    5,757Operating income (loss)
    
    
    187
    
    
    
    71
    
    
    
    16
    
    
    
    16
    
    
    
    (170
    )
    
    
    
    
    
    
    120Interest revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17Results of holdings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (119
    )Pretax income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31Taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24Total assets
    
    
    3,849
    
    
    
    643
    
    
    
    650
    
    
    
    763
    
    
    
    2,132
    
    
    
    
    
    
    
    8,037Total liabilities
    
    
    4,015
    
    
    
    141
    
    
    
    649
    
    
    
    594
    
    
    
    964
    
    
    
    
    
    
    
    6,363Commitments for tangible fixed assets
on order or under construction
    
    
    540
    
    
    
    
    
    
    
    
    
    
    
    52
    
    
    
    2
    
    
    
    
    
    
    
    594Capital expenditure
    
    
    310
    
    
    
    238
    
    
    
    77
    
    
    
    56
    
    
    
    (13
    )
    
    
    
    
    
    
    668Depreciation and amortization
    
    
    297
    
    
    
    10
    
    
    
    32
    
    
    
    29
    
    
    
    72
    
    
    
    
    
    
    
    440
 F-22




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 25. Segmentation - (Continued) Engineering
    
    
    
    
    
    
    
    
    
    Elimination
    
    TotalFiscal year 2002/2003 1
    
    
    
    
    
    
    
    
    
    &
    
    Charter /
    
    
    
    
    
    of inter-
    
    consoli-In millions of euro
    
    Passenger
    
    Cargo
    
    Maintenance
    
    Low-cost
    
    All other
    
    segments
    
    datedOperating revenuesOperating revenues from
external customers
    
    
    4,425
    
    
    
    1,068
    
    
    
    329
    
    
    
    472
    
    
    
    191
    
    
    
    
    
    
    
    6,485Intersegment revenues
    
    
    29
    
    
    
    31
    
    
    
    639
    
    
    
    
    
    
    
    153
    
    
    
    (852
    )
    
    
    4,454
    
    
    
    1,099
    
    
    
    968
    
    
    
    472
    
    
    
    344
    
    
    
    (852
    )
    
    
    6,485Operating expenses
    
    
    4,479
    
    
    
    1,027
    
    
    
    927
    
    
    
    444
    
    
    
    944
    
    
    
    (852
    )
    
    
    6,969Operating income (loss)
    
    
    (25
    )
    
    
    72
    
    
    
    41
    
    
    
    28
    
    
    
    (600
    )
    
    
    
    
    
    
    (484
    )Interest revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46Results of holdings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (186
    )Pretax income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (622
    )Taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    206Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (416
    )Total assets
    
    
    4,474
    
    
    
    254
    
    
    
    666
    
    
    
    659
    
    
    
    2,112
    
    
    
    
    
    
    
    8,165Total liabilities
    
    
    4,308
    
    
    
    168
    
    
    
    632
    
    
    
    487
    
    
    
    837
    
    
    
    
    
    
    
    6,432Commitments for tangible fixed assets
on order or under construction
    
    
    705
    
    
    
    225
    
    
    
    11
    
    
    
    120
    
    
    
    26
    
    
    
    
    
    
    
    1,087Capital expenditure
    
    
    554
    
    
    
    222
    
    
    
    19
    
    
    
    110
    
    
    
    34
    
    
    
    
    
    
    
    939Depreciation and amortization
    
    
    426
    
    
    
    14
    
    
    
    33
    
    
    
    25
    
    
    
    37
    
    
    
    
    
    
    
    535
 Engineering
    
    
    
    
    
    
    
    
    
    Elimination
    
    TotalFiscal year 2001/2002 1
    
    
    
    
    
    
    
    
    
    &
    
    Charter /
    
    
    
    
    
    of inter-
    
    consoli-In millions of euro
    
    Passenger
    
    Cargo
    
    Maintenance
    
    Low-cost
    
    All other
    
    segments
    
    datedOperating revenuesOperating revenues from
external customers
    
    
    4,485
    
    
    
    1,067
    
    
    
    288
    
    
    
    445
    
    
    
    247
    
    
    
    
    
    
    
    6,532Intersegment revenues
    
    
    51
    
    
    
    
    
    
    
    675
    
    
    
    
    
    
    
    146
    
    
    
    (872
    )
    
    
    4,536
    
    
    
    1,067
    
    
    
    963
    
    
    
    445
    
    
    
    393
    
    
    
    (872
    )
    
    
    6,532Operating expenses
    
    
    4,677
    
    
    
    1,020
    
    
    
    912
    
    
    
    427
    
    
    
    462
    
    
    
    (872
    )
    
    
    6,626Operating income (loss)
    
    
    (141
    )
    
    
    47
    
    
    
    51
    
    
    
    18
    
    
    
    (69
    )
    
    
    
    
    
    
    (94
    )Interest revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58Results of holdings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (182
    )Pretax income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (224
    )Taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (156
    )Total assets
    
    
    4,908
    
    
    
    298
    
    
    
    641
    
    
    
    576
    
    
    
    2,520
    
    
    
    
    
    
    
    8,943Total liabilities
    
    
    4,866
    
    
    
    206
    
    
    
    590
    
    
    
    413
    
    
    
    611
    
    
    
    
    
    
    
    6,686Commitments for tangible fixed assets
on order or under construction
    
    
    11
    
    
    
    423
    
    
    
    1
    
    
    
    217
    
    
    
    25
    
    
    
    
    
    
    
    677Capital expenditure
    
    
    192
    
    
    
    3
    
    
    
    3
    
    
    
    2
    
    
    
    35
    
    
    
    
    
    
    
    235Depreciation and amortization
    
    
    369
    
    
    
    27
    
    
    
    31
    
    
    
    29
    
    
    
    31
    
    
    
    
    
    
    
    487
 1 The figures for fiscal years 2002/2003 and 2001/2002 have been restated on
three points for comparative purposes. Firstly, as from April 1, 2003, all
extraordinary losses have been reclassified as Operating expenses (2002/2003
only). Secondly, the column Charter/Low-cost relates exclusively to the
results of Transavia. In the previous years this column had also included the
results of KLM uks low cost activities, which were disposed of in April 2003.
Thirdly, the cover the Passenger business
receives on the inter-Group provision of fleet capacity to the Cargo business
is no longer classified as Intersegment revenues under the Passenger
business, but instead as a cost reduction. F-23




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS - (Continued) 25. Segmentation -
(Continued)Consolidated information by geographic area (route areas) March 31, 2004
    
    March 31, 2003
    
    March 31, 2002Tangible/
    
    
    
    
    
    
    
    
    
    Tangible/
    
    
    
    
    
    
    
    
    
    Tangible/Operating
    
    Intangible
    
    Capital
    
    Operating
    
    Intangible
    
    Capital
    
    Operating
    
    Intangible
    
    CapitalIn millions of euro
    
    revenue
    
    fixed assets1
    
    expenditure1
    
    revenue
    
    fixed assets1
    
    expenditure1
    
    revenue
    
    fixed assets1
    
    expenditure1Europe
    
    
    2,122
    
    
    
    1,330
    
    
    
    96
    
    
    
    2,496
    
    
    
    1,450
    
    
    
    138
    
    
    
    2,427
    
    
    
    1,980
    
    
    
    124North Atlantic
    
    
    914
    
    
    
    
    
    
    
    
    
    
    
    1,032
    
    
    
    
    
    
    
    
    
    
    
    1,118Asia Pacific
    
    
    1,121
    
    
    
    
    
    
    
    
    
    
    
    1,200
    
    
    
    
    
    
    
    
    
    
    
    1,318Central and South
Atlantic
    
    
    490
    
    
    
    
    
    
    
    
    
    
    
    535
    
    
    
    
    
    
    
    
    
    
    
    572Middle East/ South
Asia
    
    
    390
    
    
    
    
    
    
    
    
    
    
    
    413
    
    
    
    
    
    
    
    
    
    
    
    335Africa
    
    
    536
    
    
    
    
    
    
    
    
    
    
    
    542
    
    
    
    
    
    
    
    
    
    
    
    494All Other
    
    
    304
    
    
    
    3,802
    
    
    
    572
    
    
    
    267
    
    
    
    3,598
    
    
    
    801
    
    
    
    268
    
    
    
    3,180
    
    
    
    111Total
    
    
    5,877
    
    
    
    5,132
    
    
    
    668
    
    
    
    6,485
    
    
    
    5,048
    
    
    
    939
    
    
    
    6,532
    
    
    
    5,160
    
    
    
    235
 26. Related-party transactions We have entered into at arms-length transactions in the ordinary course of
business with our subsidiaries Martinair Holland N.V. (50% equity interest),
Kenya Airways Ltd. (26% equity interest), Polygon Insurance Company Ltd. (31%
equity interest) and Opodo Ltd (4% equity interest). None of these subsidiaries
qualify as a significant subsidiary in the context of SEC S-X rule 4-08(g). The following is a summary of significant related party transactions that
occurred during 2004, 2003 and 2002. From Martinair we received EUR 34 million, EUR 28 million and EUR 23 million
for line maintenance services and aircraft maintenance services and the
temporary chartering of aircraft in 2004, 2003 and 2002 respectively. We paid
Martinair EUR 25 million in relation to the temporary chartering of aircraft in
2002. Furthermore we paid Martinair EUR 9 million, EUR 8 million and EUR 9
million in respect of inflight catering services rendered in 2004, 2003 and
2002 respectively. In November 1996, we began implementing an alliance with Kenya Airways on
African destinations involving extensive codesharing activities. The services
provided are considered normal to the daily operations of both airlines. As a
result of these activities, we paid Kenya Airways EUR 1 million, EUR 2 million
and EUR 2 million in 2004, 2003 and 2002. Furthermore, we received
approximately EUR 1 million for in-flight catering from Kenya Airways for each
of the years 2004, 2003 and 2002. Polygon Insurance Company Ltd. is an insurance company to which KLM paid
insurance premiums of EUR 10 million, EUR 12 million and EUR 10 million in
2004, 2003 and 2002 respectively. Opodo Ltd. exploits a travel planning website. We paid Opodo commissions of
approximately EUR 1 million for each of the years 2004 and 2003. The
distribution services provided by Opodo are considered normal to the daily
operations of both Opodo and us. Current account balances with these four subsidiaries amount to EUR 5 million,
EUR 4 million and EUR 2 million for the three years ended March 31, 2004, 2003
and 2002 respectively. Except for the employment arrangements with the members of our Board of
Management (Mr. Van Wijk, Mr. Hartman, Mr. Van Woudenberg and Mr. Ruijter), KLM
is not a party to any material transaction, or proposed transaction, in which a
member of our Board of Management, a member of our Supervisory Board or any
senior officer, or any spouse or relative of any of the foregoing, or any
relative of such spouse has or was to have a direct or indirect material
interest.  1
    
    KLMs tangible fixed assets consist principally of aircraft. The
narrow body fleet is flown in the European route area only and can
therefore be disclosed separately. The wide body fleet is mobile
across geographical markets and is therefore included at book value
under All other. F-24




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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 27. Results per common share The computational components of net income per share are as follows: Numerator
    
    Denominator
    
    Per share(net income)
    
    (shares)
    
    amountShares outstanding as of March 31, 2004
    
    
    
    
    
    
    46,809,699Effect of purchased own shares 1
    
    
    
    
    
    
    (2,621,542)Net income
    
    
    24Attributable to holders of preference
shares 2
    
    
    (2)22
    
    
    
    44,188,157
    
    
    
    0.50Shares outstanding as of March 31, 2003
    
    
    
    
    
    
    46,809,699Effect of purchased own shares 1
    
    
    
    
    
    
    (1,739,155)Net income
    
    
    (416)Attributable to holders of preference shares
    
    
    (2)(418)
    
    
    
    45,070,544
    
    
    
    (9.26)Shares outstanding as of March 31, 2002
    
    
    
    
    
    
    46,809,699Effect of purchased own shares 1
    
    
    
    
    
    
    (1,127,992)Net income
    
    
    (156)Attributable to holders of preference shares
    
    
    (2)(158)
    
    
    
    45,681,707
    
    
    
    (3.46)
 The computational components of diluted net income per share are as follows: Numerator
    
    Denominator
    
    Per share(net income)
    
    (shares)
    
    amountShares outstanding as of March 31, 2004
    
    
    
    
    
    
    46,809,699Effect of purchased own shares 1
    
    
    
    
    
    
    (2,621,542)Potential shares associated with the share option
plan 1
    
    
    
    
    
    
    113,269Net income
    
    
    24Attributable to holders of preference shares
    
    
    (2)22
    
    
    
    44,301,426
    
    
    
    0.50Shares outstanding as of March 31, 2003
    
    
    
    
    
    
    46,809,699Effect of purchased own shares 1
    
    
    
    
    
    
    (1,739,155)Potential shares associated with the share option
plan 1
    
    
    
    
    
    
    Net income
    
    
    (416)Attributable to holders of preference shares
    
    
    (2)(418)
    
    
    
    45,070,544
    
    
    
    (9.26)Shares outstanding as of March 31, 2002
    
    
    
    
    
    
    46,809,699Effect of purchased own shares 1
    
    
    
    
    
    
    (1,127,992)Potential shares associated with the share option
plan 1Net income
    
    
    (156)Attributable to holders of preference shares
    
    
    (2)(158)
    
    
    
    45,681,707
    
    
    
    (3.46)
  1
    
    Weighted average during the year.2
    
    Preference shares include priority shares, Cumulative preference shares A
and Cumulative preference shares C. F-25




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS - (Continued) 28. Differences between Netherlands GAAP and U.S. GAAP The Netherlands accounting principles (Netherlands GAAP) applied in the
preparation of the consolidated financial statements of the Company differ in
some respects from those generally accepted in the United States (U.S. GAAP).
It is noted that KLMs accounting policy for post-retirement benefits other
than pensions and the policy for derivatives and hedge accounting as applied in
the consolidated financial statements follow SFAS 106 and SFAS 133/138,
respectively. Differences which have a material effect on the financial statements (1) Under Netherlands GAAP, goodwill acquired prior to March 31, 1994 was
charged directly to equity. KLM now amortizes goodwill over 5 to 10 years under
Netherlands GAAP in response to the rapidly evolving environment in the airline
industry. Under U.S. GAAP goodwill and intangible assets with indefinite useful
lives are no longer amortized but tested for impairment at least annually. (2) Pension costs included in the consolidated statements of earnings under
U.S. GAAP is computed in accordance with Netherlands GAAP. For the Companys
defined benefit plans, those amounts are based on the actuarially determined
premiums which the Company is required to pay, adjusted for restitutions of
structural surpluses and discounts received by KLM from its pension funds.
Pension expense for U.S. GAAP purposes is determined in accordance with SFAS No.
87, Employers Accounting for Pensions. The U.S. GAAP adjustment is the
difference between amounts recorded under Netherlands GAAP and pension expense
as determined under SFAS No. 87. SFAS 106, Postretirement benefitsis already
implemented in the Netherlands GAAP consolidated financial statements. (3) Under Netherlands GAAP, KLM recognises an in-substance defeasance of
certain financial lease commitments when the Company places deposits with
financial institutions and matches the cash flows from the deposits with
scheduled payments on the lease commitments through pledge and escrow
agreements. Under U.S. GAAP, debt can not be considered extinguished by
providing arrangements designed to set aside assets dedicated to eventually
settling a liability. The U.S. GAAP adjustment increases financial fixed assets
and lease commitments classified as other long-term debt. These financial fixed
assets are restricted solely for the payment of the related lease commitments. (4) Under Netherlands GAAP, KLM formed a provision for reorganization and
restructuring related to the estimated staff redundancy costs for the plans
announced on March 31, 2003. Under U.S. GAAP costs of this nature are generally
recorded when the liability is incurred, except when a restructuring plan also
covers ongoing benefits (based on a formal or substantive plan), in which case
the costs are recognized over the service period, or, if the rights do not
accumulate or vest, when the liability is probable and estimable. The
reorganization costs recognized under Netherlands GAAP do not meet the criteria
of recognition under U.S. GAAP. (5) Under Netherlands GAAP the cumulative effects of changes in accounting
policies were include as direct movements in Other reserves in fiscal year
2001/2002. Under U.S. GAAP the cumulative effect of a change in accounting
policies is included in income when the accounting change concerns a choice
between two or more generally accepted accounting principles. The initial
adoption of a (new) accounting principle is not considered an accounting
change. For the fiscal year 2001/2002, the adjustments under U.S. GAAP relate to the
adoption as of April 1, 2001 of SFAS No. 133, Accounting for Derivative
Financial Instrumentsand the adoption as of April 1, 2001 of a capitalization
policy of aircraft heavy maintenance costs. Application of SFAS 133 was allowed under Dutch accounting rules and met our
aim to limit the accounting differences between Netherlands GAAP and U.S. GAAP.
We changed our accounting policies with respect to heavy maintenance costs in
line with developments in international accounting standards, which no longer
allow heavy maintenance costs to be accounted for under the accrual method. F-26




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS - (Continued) 28. Differences between
Netherlands GAAP and U.S. GAAP - (Continued) (6) Netherlands GAAP allows non-capital related transactions to be recorded
directly in equity in a limited number of circumstances. U.S. GAAP however has
severe restrictions with respect to the application of such direct equity
movements. Consequently, some direct equity movements under Netherlands GAAP
need to be included in earnings under U.S. GAAP. For the year 2003/2004 the adjustments denoted by (6) are direct equity
movements processed by certain of KLMs investments, which are accounted for
under the equity method. These direct equity movements (which principally
relate to the accounting of our equity interest of 26% in Kenya Airways, as
described below) especially relate to the effects of changes in accounting
policies to bring them more in line with group accounting policies. Netherlands
GAAP allows these changes to be reflected as direct equity movements. Under
U.S. GAAP these adjustments form part of results of holdings. The aircraft of Kenya Airways which are financed in whole or in part in foreign
currency borrowings are regarded together with the related liabilities as a
separate group of assets and liabilities and accounted for in foreign currency.
The resulting net exchange differences are taken directly to the reserves
within the accounting records of Kenya Airways. Under certain circumstances
(given the influence we have on Kenya Airways) it is allowed under Netherlands
GAAP to follow these direct equity movements. Consequently a part of the direct
equity movements of Kenya Airways are not reflected in the profit and loss
account but are treated as direct equity movements instead. Under U.S. GAAP
however, these direct equity movements are included in the profit and loss
account. (7) Under Netherlands GAAP, the equity investment accounts for Pensions as
discussed under (2), which is similar to KLM. Under U.S. GAAP, an adjustment is
made to bring the equity value to reflect SFAS 87. (8) Under Netherlands GAAP, KLM presents deferred credits with respect to
benefits regarding financial lease arrangements for aircraft under Deferred
credits in the balance sheet. Under U.S. GAAP (ABP 21) the discount should
have been added to the related liability. (9) The income tax effects of the adjustments have been calculated based on a
nominal tax rate of 34.5%. Adjustments with respect to goodwill do not include
tax effects since KLMs goodwill amortization is not tax deductible under Dutch
tax rules. Adjustments in respect of direct equity movements and Equity
investments - Pension related are presented net of tax since the adjustments
are processed by certain of KLMs investments which are independent taxable and
are accounted for through the equity method. Furthermore, under Dutch tax law there is a tax exemption for the (un)realized
results on investments with an equity stake of 5% or more (the participation
exemption). Discontinued operations KLM sold Buzz in April 2003 to Ryanair. Under Netherlands accounting principles
the sale of the Buzz operation is not considered as a discontinued operation
since KLM has not disposed of a significant separate activity as defined under
Netherlands GAAP. KLM is still operating a low cost business segment consisting
of Transavias Basiqair. Under SFAS 144 the disposal of KLM uks low-cost
activity buzz is considered a discontinued operation as it qualifies as a
component of an entity. Certain costs related to Buzz, including impairment charges, totalling EUR 9
million were recognized in fiscal year 2002/2003. The sales proceeds (EUR 20
million), less book value of related assets (EUR 1 million), less operating
costs, including termination benefits, were recognized in April 2003 and netted
out to be approximately zero. As of March 31, 2004 there are still liabilities regarding Buzz employees and
aircraft leases for which a provision of EUR 5 million exists. F-27




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS - (Continued) 28.
Differences between Netherlands GAAP and U.S. GAAP - (Continued) The following tables summarize the effects of U.S. GAAP differences on the net
income, stockholders equity, intangible fixed assets, financial fixed assets,
deferred taxes, prepaid expenses, current liabilities, debt, provisions and
deferred credits (in millions of euro, except per share data): For the years ended March 31,Net income
    
    2004
    
    2003
    
    2002Net income (loss) in conformity with Netherlands GAAP
    
    
    24
    
    
    
    (416
    )
    
    
    (156
    )(1) Goodwill
    
    
    4
    
    
    
    (1
    )
    
    
    (3
    )(2) Pensions
    
    
    130
    
    
    
    172
    
    
    
    168(4) Reorganization provision
    
    
    (75
    )
    
    
    75
    
    
    
    (25
    )(5) Changes in accounting policies
    
    
    
    
    
    
    
    
    
    
    109(6) Adjustment in respect of direct equity movements
    
    
    (1
    )
    
    
    (12
    )
    
    
    (9
    )(7) Equity investments - Pension related
    
    
    (7
    )
    
    
    
    
    
    
    (9) Income tax effect
    
    
    (13
    )
    
    
    (85
    )
    
    
    (86
    )Total adjustments
    
    
    38
    
    
    
    149
    
    
    
    154Net income (loss) in conformity with U.S. GAAP
    
    
    62
    
    
    
    (267
    )
    
    
    (2
    )Result from continuing operations
    
    
    62
    
    
    
    (234
    )
    
    
    28Result from discontinued operations
    
    
    
    
    
    
    (33
    )
    
    
    (30
    )Net income (loss) in conformity with U.S. GAAP
    
    
    62
    
    
    
    (267
    )
    
    
    (2
    )Net income per common share 1Basic
    
    
    1.37
    
    
    
    (5.97
    )
    
    
    (0.08
    )Diluted
    
    
    1.36
    
    
    
    (5.97
    )
    
    
    (0.08
    )Net income (loss) from continuing operations per common share 1Basic
    
    
    1.37
    
    
    
    (5.23
    )
    
    
    0.57Diluted
    
    
    1.36
    
    
    
    (5.23
    )
    
    
    0.57Net income (loss) from discontinued operations per common share 1Basic
    
    
    
    
    
    
    (0.74
    )
    
    
    (0.65
    )Diluted
    
    
    
    
    
    
    (0.74
    )
    
    
    (0.65
    )Average
number of common shares outstanding 2/3 (in thousands of shares)Basic
    
    
    44,188
    
    
    
    45,071
    
    
    
    45,682Diluted
    
    
    44,301
    
    
    
    45,071
    
    
    
    45,682
 Stockholders equity
    
    March 31, 2004
    
    March 31, 2003Stockholders equity in conformity with Netherlands GAAP
    
    
    1,487
    
    
    
    1,476(1) Goodwill
    
    
    8
    
    
    
    4(2) Pensions
    
    
    2,132
    
    
    
    2,010(4) Reorganization provision
    
    
    
    
    
    
    75(7) Adjustment in respect of equity investments (pension related)
    
    
    (7
    )
    
    
    (9) Income tax effect
    
    
    (751
    )
    
    
    (738
    )Total adjustments
    
    
    1,382
    
    
    
    1,351Stockholders equity in conformity with U.S. GAAP
    
    
    2,869
    
    
    
    2,827
  1 Taking into account distribution which will be made to holders of cumulative
preferent shares A, holders of cumulative preferent
   shares C and holders of
priority shares.2 Earnings per share calculations are exclusive of any shares held by KLM.
Outstanding shares used for the earnings per
share  calculations are based on
the weighted average outstanding shares during the year.3 Taking potentially dilutive shares into account. F-28




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS - (Continued) 28. Differences between
Netherlands GAAP and U.S. GAAP - (Continued) The results on sale of assets and results on sale of holdings are presented as
separate line items below operating income under Netherlands GAAP. Under U.S.
GAAP, these results are included in operating income. In accordance with paragraph 40(c) of SFAS 128 the number of potential shares
of common stock that were excluded from the computation of diluted earnings per
share because their effect was anti-dilutive were: Fiscal year
    
    Number of shares excluded2003/04
    
    
    2,111,5102002/03
    
    
    2,134,9902001/02
    
    
    1,314,184
 Intangible fixed assets
    
    March 31, 2004
    
    March 31, 2003Intangible fixed assets in conformity with Netherlands GAAP
    
    
    52
    
    
    
    66(1) Goodwill
    
    
    8
    
    
    
    4Intangible fixed assets in conformity with U.S. GAAP
    
    
    60
    
    
    
    70
 Financial fixed assets
    
    March 31, 2004
    
    March 31, 2003Financial fixed assets in conformity with Netherlands GAAP
    
    
    1,124
    
    
    
    1,289Reclassification of deferred tax position
    
    
    (93
    )
    
    
    (128
    )(3) In-substance defeasance of lease obligations
    
    
    214
    
    
    
    317(7) Equity investment-Pension related
    
    
    (7
    )
    
    
    Financial fixed assets in conformity with U.S. GAAP
    
    
    1,238
    
    
    
    1,478
 Deferred taxes
    
    March 31, 2004
    
    March 31, 2003Net deferred tax position in conformity with Netherlands GAAP
    
    
    93
    
    
    
    128(2) Income tax effect on OCI movement with regard to
minimum pension liability
    
    
    25
    
    
    
    13(9) Income tax effect
    
    
    (751
    )
    
    
    (738
    )Net deferred tax liability in conformity with U.S. GAAP
    
    
    (633
    )
    
    
    (597
    )
 Prepaid expenses
    
    March 31, 2004
    
    March 31, 2003Prepaid expenses in conformity with Netherlands GAAP
    
    
    135
    
    
    
    213(2) Pension costs
    
    
    2,158
    
    
    
    2,024Prepaid expenses in conformity with U.S. GAAP
    
    
    2,293
    
    
    
    2,237
 Current liabilities
    
    March 31, 2004
    
    March 31, 2003Current liabilities in conformity with Netherlands GAAP
    
    
    1,856
    
    
    
    2,190(2) Pension costs
    
    
    69
    
    
    
    44Current liabilities in conformity with U.S. GAAP
    
    
    1,925
    
    
    
    2,234
 F-29




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS - (Continued) 28. Differences between
Netherlands GAAP and U.S. GAAP - (Continued) Long-term debt
    
    March 31, 2004
    
    March 31, 2003Other long-term debt in conformity with Netherlands GAAP
    
    
    3,721
    
    
    
    3,427(3) In-substance defeasance of lease obligations
    
    
    214
    
    
    
    317(8) Deferred benefits regarding financial lease arrangements for aircraft
    
    
    109
    
    
    
    158Other long-term debt in conformity with U.S. GAAP
    
    
    4,044
    
    
    
    3,902
 Provisions
    
    March 31, 2004
    
    March 31, 2003Provisions in conformity with Netherlands GAAP
    
    
    279
    
    
    
    271(2) Early retirement provision
    
    
    (18
    )
    
    
    (17
    )(5) Reorganization provision
    
    
    
    
    
    
    (75
    )Provisions in conformity with U.S. GAAP
    
    
    261
    
    
    
    179
 Deferred credits
    
    March 31, 2004
    
    March 31, 2003Deferred credits in conformity with Netherlands GAAP
    
    
    186
    
    
    
    256(8) Deferred benefits regarding financial lease arrangements for aircraft
    
    
    (109
    )
    
    
    (158
    )Deferred credits in conformity with U.S. GAAP
    
    
    77
    
    
    
    98
 The following are additional disclosures to comply with generally accepted
accounting principles in the United States of America: Accounting for leases (SFAS 13 / SFAS 125) KLM has entered into several cross-border capital lease transactions. In
general these transactions involve the purchase of an aircraft by a taxpaying
investor (the lessor) and the simultaneous contracting by KLM (lessee) for the
use of the aircraft in return for specified rental payments over a specific
term of 12 to 15 years. Notwithstanding the ownership of the aircraft by the
lessor, KLM wants to be able to control and operate the aircraft in the same
manner as it would if it was the owner. The leveraged cross-border lease is a variation that introduces a third party
lender into the transaction. The lessor, in conjunction with the lessee, will
seek to finance 50-90% of the assets cost by borrowing the funds on a
non-recourse basis from banks. While the lessor actually invests only 10-50% of
the cost of the aircraft, it will be entitled to 100% of the tax benefits of
ownership and thus can be said to have leveraged its equity investment by
utilizing the non-recourse borrowing. The advantage of the lessor in such
circumstances is in part transferred to KLM resulting in lower rental payments. KLM concluded (leveraged) cross-border capital leases for a total of 80
aircraft, where the risk and return of ownership remains with KLM as lessee. As per March 31, 2004 and 2003 the Company had financial lease commitments for
EUR 3,493 million and EUR 3,612 million, respectively. The redemption of financial leases for each of the following fiscal years are
(in millions of euro): 2004/2005
    
    
    1822005/2006
    
    
    3282006/2007
    
    
    4902007/2008
    
    
    5952008/2009
    
    
    359after 2008/2009
    
    
    1,539
 F-30




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS - (Continued) 28. Differences between Netherlands GAAP and U.S. GAAP - (Continued) As of March 31, 2004 the purchase value of aircraft for which financial lease
commitments have been concluded amounted to EUR 4,539 million (last fiscal year
EUR 3,868 million), accumulated depreciation amounted to EUR 1,462 million
(last fiscal year EUR 1,330 million). The majority of the financial lease commitments had fixed interest rates which
ranged from 2.0% to 15.6%.Variable rate commitments averaged, after taking
interest rate contracts into account, 3.5% for fiscal 2003/2004. The overall
average interest percentage on financial lease commitments was 4.2%. Disclosure on the fair value of financial instruments (SFAS 107) Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation, and is best evidenced by a quoted market price, if
one exists. Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instruments.
Although management uses its best judgement in estimating the fair value of
these financial instruments, there are inherent weaknesses in any estimation
technique. Therefore the estimates presented are not necessarily indicative of
the amounts that the Group could realize in a current market exchange or the
value that ultimately will be realized by the Group upon maturity or
disposition. The following table summarises the carrying amounts and estimated fair values of the Groups financial
instuments: March 31, 2004
    
    March 31, 2003Carrying
    
    Estimated
    
    Carrying
    
    Estimatedamount
    
    fair value
    
    amount
    
    fair valueAssetsFinancial fixed assets- Receivables from holdings
    
    
    4
    
    
    
    4
    
    
    
    18
    
    
    
    18- Triple A bonds/deposits
    
    
    286
    
    
    
    349
    
    
    
    311
    
    
    
    371- Derivatives
    
    
    368
    
    
    
    368
    
    
    
    482
    
    
    
    482- Other financial fixed assets
    
    
    180
    
    
    
    180
    
    
    
    152
    
    
    
    152Cash and marketable securities
    
    
    663
    
    
    
    663
    
    
    
    608
    
    
    
    608LiabilitiesPerpetual debt
    
    
    507
    
    
    
    446
    
    
    
    544
    
    
    
    499Financial lease commitments
    
    
    3,493
    
    
    
    3,591
    
    
    
    3,295
    
    
    
    3,222- maturing within one year
    
    
    (182
    )
    
    
    (182
    )
    
    
    (251
    )
    
    
    (251
    )Other long-term debt
    
    
    420
    
    
    
    98
    
    
    
    448
    
    
    
    177- maturing within one year
    
    
    (10
    )
    
    
    (10
    )
    
    
    (65
    )
    
    
    (65
    )Current liabilities
    
    
    1,856
    
    
    
    1,856
    
    
    
    2,190
    
    
    
    2,190
 Concentration of credit risk (SFAS 105) Most of the holdings are air transport related holdings. As of March 31, 2004
and 2003 total holdings and receivables from holdings in air transport or
related industries amounted to EUR 174 million and EUR 164 million
respectively. Of the commitments for tangible fixed assets on order or under construction,
EUR 494 million and EUR 1,042 million as of March 31, 2004 and 2003
respectively, relates to aircraft. The advance payments on aircraft amounted to
EUR 276 million and EUR 604 million as of March 31, 2004 and 2003,
respectively. As of the date of this annual report, we are exposed to market risks caused by
movements in foreign exchange rates, interest rates and fuel prices. KLM
constantly works towards reducing these risks. To this end, it concludes
various hedging transactions, in part making use of derivatives, subject to
internal guidelines. KLM does not hold derivatives for trading purposes. To
minimize the credit risk of financial instruments, KLM enforces
specific
procedures and codes of conduct relating in part to the creditworthiness of
contract partners. In long-term derivatives only counter-parties with a minimum
AA- rating (based on assessments of credit agencies with a good standing) are
selected. For derivatives with a maturity of less than 12 months,
counter-parties with an A- rating may be selected. F-31




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS - (Continued) 28. Differences between
Netherlands GAAP and U.S. GAAP - (Continued) Interest rates Interest rates excluding the effects of derivatives are as follows: Average
    
    Rangevariable
    
    of fixed
    
    Averagerate
    
    rates
    
    rate2003/2004Subordinated perpetual loans
    
    
    
    
    
    
    5.3 - 5.8
    %
    
    
    5.5
    %Financial lease commitments
    
    
    3.4
    %
    
    
    2.1 - 15.6
    %
    
    
    5.4
    %Other loans
    
    
    1.4
    %
    
    
    1.2 - 7.1
    %
    
    
    1.6
    %2002/2003Subordinated perpetual loans
    
    
    
    
    
    
    5.3 - 5.8
    %
    
    
    5.4
    %Financial lease commitments
    
    
    3.7
    %
    
    
    4.4 - 11.3
    %
    
    
    7.0
    %Other loans
    
    
    1.4
    %
    
    
    1.2 - 6.6
    %
    
    
    4.4
    %
 Income Taxes Income before taxes based on Netherlands GAAP, but discussed in accordance with
SFAS 109, is analyzed over its component parts as follows: For the years ended March 31,2004
    
    2003
    
    2002The Netherlands
    
    
    22
    
    
    
    (555
    )
    
    
    (195
    )Foreign
    
    
    9
    
    
    
    (67
    )
    
    
    (29
    )31
    
    
    
    (622
    )
    
    
    (224
    )
 The components of income tax are as follows: For the years ended March 31,2004
    
    2003
    
    2002The NetherlandsCurrent taxes
    
    
    5
    
    
    
    (133
    )
    
    
    (17
    )Deferred taxes
    
    
    (2
    )
    
    
    (63
    )
    
    
    (54
    )ForeignCurrent taxes
    
    
    4
    
    
    
    (10
    )
    
    
    Deferred taxes
    
    
    
    
    
    
    
    
    
    
    37
    
    
    
    (206
    )
    
    
    (68
    )
 The components of income tax entirely relate to taxation on continuing operations. In fiscal year 2003/2004 a deferred tax charge of EUR 7 million (for fiscal
year 2002/2003 EUR 20 million deferred tax benefit) was recorded through other
comprehensive income. The weighted average statutory tax rates reflected in the following table are
computed by applying the applicable current rates to the Companys earnings in
each country. For the years ended March 31,2004
    
    2003
    
    2002%
    
    %
    
    %Weighted average percentage, based on current tax rates (benefit)
    
    
    34.5
    
    
    
    34.5
    
    
    
    35Tax effect of exempt income
    
    
    (24.3
    )
    
    
    (3.1
    )
    
    
    (8.1
    )Tax effect of non-deductible expenses
    
    
    12.9
    
    
    
    0.6
    
    
    
    3.1Effective tax (benefit) rates
    
    
    23.1
    
    
    
    32
    
    
    
    30
 F-32




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS - (Continued) 28. Differences between
Netherlands GAAP and U.S. GAAP - (Continued) Deferred tax assets are recognized for net operating losses as it is more
likely than not that the results of future operations will generate sufficient
taxable income to realize the deferred tax assets. Deferred tax balances relate
substantially to continuing operations. A cumulative valuation allowance was
EUR 20 million as of April 1, 2002. In fiscal year 2002/2003, the valuation
allowance increased by EUR 11 million to EUR 31 million cumulative. In fiscal
year 2003/2004 the valuation allowance increased with EUR 3 million and
accumulated to EUR 34 million as per March 31, 2004. The valuation allowance
fully relates to the carry forward loss compensation recognized as a deferred
tax asset. Total deferred tax assets as of March 31, 2004 are
EUR 335 million (EUR 372 million as of March 31,
2003),
and total deferred tax liabilities as of March 31, 2004 are EUR
208 million (EUR 213 million as of March 31, 2003). The
net tax benefits on the discontinued operation for the years ended March 31,
2003 and 2002 amounted to EUR 15 million and EUR 10 million respectively and
have been fully provided for through the valuation allowance. KLM
has carry forward losses in an amount of EUR 644 million
relating to losses in the Netherlands and abroad. These losses may be
carried forward and offset against future income indefinitely. The net deferred tax assets or liabilities are determined per fiscal entity.
Offsetting of deferred tax assets and deferred tax liabilities within the same
fiscal entity is restricted to deferred tax assets and liabilities that reverse
in the same period. Current and non-current deferred taxes, are included in the balance sheet under
receivables in the event, and to the extent, that per fiscal entity total
deferred tax assets exceed total deferred tax liabilities. Conversely, current
and non-current deferred tax liabilities are included under provisions in the
event, and to the extent, that per fiscal entity total deferred tax liabilities
exceed total deferred tax assets. More detailed information concerning tax effects is disclosed in note 3 to the
consolidated financial statements. Pension Costs (SFAS 87/SFAS 132) Pension benefits of the majority of the Companys staff in The Netherlands and
of expatriate Dutch employees are covered by three separate contributory
pension plans: a ground staff plan, a cockpit staff plan and a cabin staff
plan. These separate plans are embedded in independent foundation, which are
managed by an independent administrator. Each plan is governed by a separate
independent Board. KLM has no influence on investments and no direct influence
on funding. Plan assets consist primarily of government and corporate debt
securities, marketable equity securities, real estate (funds) and money market
fund shares. The plans hold no investment in KLM shares or in KLM real estate. For UK based staff, two separate contributory pension plans exist with
different sections for different groups of employees. Each plan is
administrated by an independent trustee. Our subsidiary Transavia Airlines B.V.
has two defined contribution schemes for ground staff and cockpit staff
respectively. The plan assets of these schemes are administered by an
independent
asset manager. Furthermore, KLM and its subsidiaries have a few insignificant pension schemes,
which principally relate to defined contribution schemes for personnel based in
the Netherlands, Japan, Canada and Germany. As the three Dutch contributory pensions plans represent approximately 93% of
the total pension plan assets, the following details on investing policies and
strategies relate solely to these independent plans. The foundations have adopted and implemented an investment policy for the
defined benefit pension plans that incorporates a strategic, long-term asset
allocation mix designed to best meet the long-term pension requirements. The
asset allocation mix is based on ALM studies. This asset allocation policy mix
is reviewed every 5-7 years and, on a regular basis, actual allocations are
rebalanced to the prevailing targets. The following table summarizes the actual
asset mix of the three pension plans for fiscal year 2003/2004 and 2002/2003. March 31, 2004
    
    March 31, 2003Debt securities
    
    
    46
    %
    
    
    51
    %Equity securities
    
    
    39
    %
    
    
    35
    %Real estate
    
    
    11
    %
    
    
    12
    %Other
    
    
    4
    %
    
    
    2
    %Total
    
    
    100
    %
    
    
    100
    %
 Pension plan investments are determined for each asset category and diversified
over different regions and segments within the category. The diversification
within each asset category is based on several recent strategic studies by
independent asset managers. F-33




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS - (Continued) 28. Differences between Netherlands GAAP and U.S. GAAP - (Continued) In fiscal year 2003/2004, the strategic asset mix has remained unchanged. The
investment portfolios have been rebalanced in April 2003 and no additional
rebalancing has taken place during fiscal year 2003/2004. The tactical
underweighting of shares was continued in the first quarter but was gradually
phased out in the second and third quarter. In the fourth quarter shares have
been overweighted at the expense of bonds as macro-economic indicators had
indicated positive developments on the U.S. economy. In the last two quarters
real estate investments have been slightly underweighted. In fiscal year 2003/2004 the currency exposures with respect to plan assets
denominated in foreign currencies were hedged for a significant part
(75%-100%). The method used to determine expected return for each category. The foundations review its rate of return on plan assets assumptions annually.
These assumptions are largely based on the asset category rate-of-return
assumptions developed annually with the Companys pension actuaries. The
actuaries asset category return assumptions are based in part on a review of
historical asset returns, but in recent years have also emphasized current
market conditions to develop estimates of future risk and return. Current
market conditions include the yield-to-maturity and credit spreads on a broad
bond market benchmark in the case of fixed income asset classes, and current
prices as well as earnings and dividend growth rates in the case of equity
asset classes. The assumptions are also adjusted to account for the value of
active management the funds have provided historically. For the two major asset categories, debt securities and equity securities,
annual returns were assumed of 3.7% and 7.5% respectively. Given the asset mix
of the three foundations (debt securities ranging from 40%-50% and equity
securities ranging from 50%-60%), the total expected rate of return on plan
asset is 5.0%. PBO, NPPC, plan assets and funded status Under Netherlands GAAP for fiscal year 2003/2004 a net pension expense of EUR
269 million is included, for fiscal year 2002/2003 EUR 230 million and for
fiscal year 2001/2002 EUR 144 million was included. Participation in the
respective plans is mandatory. Pension costs, which are actuarially determined,
are funded and with minor exceptions fully vested. The accumulated benefit obligation for all defined benefit pension plans was
EUR 6,195 million at March 31, 2004. The expected net periodic pension costs
for fiscal year 2004/2005 are EUR 122 million. The estimated contributions expected to be paid to the plan during fiscal
year 2004/2005 are EUR 285 million. The measurement date is March 31, 2004,
which equals the balance sheet date. The benefit plans cost and funded status of the Companys staff in The
Netherlands as well as those of expatriate Dutch employees for the fiscal years
ended March 31, 2004, 2003 and 2002 were also computed in accordance
with SFAS No. 87, Employers Accounting for Pensionsand SFAS No. 132,
Employers disclosures about pensions and other postretirement benefitsas
follows: For the years ended March 31,Projected Benefit Obligation (PBO)
    
    March, 2004
    
    March, 2003PBO at beginning year
    
    
    6,753
    
    
    
    6,252Service cost
    
    
    229
    
    
    
    245Interest cost
    
    
    397
    
    
    
    353Plan participant contributions
    
    
    38
    
    
    
    Benefits paid
    
    
    (307
    )
    
    
    (207
    )Effect of change in assumptions
    
    
    
    
    
    
    81Actuarial (Gains) / Losses
    
    
    38
    
    
    
    29Foreign currency charges
    
    
    3
    
    
    
    Plan amendments
    
    
    75
    
    
    
    Net transfer in/(out)
    
    
    3
    
    
    
    Projected benefit obligation at end of year
    
    
    7,229
    
    
    
    6,753
 F-34




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS - (Continued) 28. Differences between
Netherlands GAAP and U.S. GAAP - (Continued) For the years ended March 31,Net Periodic Pension Cost
    
    2004
    
    2003
    
    2002Service cost
    
    
    229
    
    
    
    245
    
    
    
    236Interest cost
    
    
    397
    
    
    
    353
    
    
    
    330Expected return on assets
    
    
    (539
    )
    
    
    (545
    )
    
    
    (518
    )Amortization:Transition Amount
    
    
    (49
    )
    
    
    (49
    )
    
    
    (48
    )Prior service cost
    
    
    23
    
    
    
    22
    
    
    
    22Net actuarial (Gain)/Loss
    
    
    84
    
    
    
    25
    
    
    
    (18
    )Net periodic pension cost
    
    
    145
    
    
    
    51
    
    
    
    4
 Change in assets
    
    March 31, 2004
    
    March 31, 2003Assets at beginning of year
    
    
    7,437
    
    
    
    7,786Plan amendments
    
    
    
    
    
    
    Actual return on assets
    
    
    1,259
    
    
    
    (288
    )Employer contributions
    
    
    311
    
    
    
    146Plan participant contributions
    
    
    38
    
    
    
    Foreign currency charges
    
    
    1
    
    
    
    Net transfer in/(out)
    
    
    4
    
    
    
    Benefits and expenses paid
    
    
    (307
    )
    
    
    (207
    )Assets at end of year
    
    
    8,743
    
    
    
    7,437
 March 31, 2004
    
    March 31, 2003Funded status
    
    
    1,514
    
    
    
    684Unrecognized net (gain)/losses
    
    
    529
    
    
    
    1,328Unrecognized transition obligation / (asset)
    
    
    (75
    )
    
    
    (125
    )Unrecognized prior service cost
    
    
    190
    
    
    
    137Prepaid pension cost
    
    
    2,158
    
    
    
    2,024Amounts recognized in the balance sheet consists of:Prepaid pension costs
    
    
    2,168
    
    
    
    2,017Pension liability
    
    
    (82
    )
    
    
    (44
    )Accumulated other comprehensive income
    
    
    72
    
    
    
    512,158
    
    
    
    2,024
 The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for pension plans of KLM uks staff with accumulated benefit
obligations in excess of plan assets, included in the prepaid pension costs
disclosed above, were EUR 214 million, EUR 198 million and EUR 136 million,
respectively, as of March 31, 2004. A minimum pension liability of EUR 72
million (fiscal year 2002/2003: EUR 51 million) is recognized under
Accumulated other comprehensive income. March 31, 2004
    
    March 31, 2003AssumptionsDiscount rate
    
    
    5.3
    %
    
    
    5.5
    %Total salary increase
    
    
    5.8
    %
    
    
    4.0
    %Rate of return
    
    
    5.0
    %
    
    
    7.0
    %
 F-35




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS - (Continued) 28. Differences between Netherlands GAAP and U.S. GAAP - (Continued) Postretirement Benefits (SFAS 106/SFAS 132) SFAS 106, Postretirement Benefitsis already implemented under Netherlands GAAP
financial statements. Under Netherlands GAAP for fiscal year 2003/2004 a net
provision of EUR 72 million is included, for fiscal year 2002/2003 EUR 69
million and for fiscal year 2001/2002 EUR 67 million was included. The measurement date is March 31, 2004, which equals the balance sheet date.
The expected net periodic benefit costs for fiscal year 2004/2005 are EUR 10
million. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 was
passed by Congress and signed into law on December 8, 2003. The Act establishes
a voluntary prescription drug benefit beginning January 1, 2006. The Act also
provides for the government to pay a special subsidy equal to 28% of a
retirees covered prescription drug expenses between $250 and $5,000 (adjusted
annually by the percentage increase in Medicare per capita prescription drug
costs), to employers who sponsor retiree prescription drug plans. The Company
elected to include the effects of the Act in the Accumulated Pension Benefit
Obligation (APBO) and, as of March 31, 2004 on the Net Periodic Pension Cost
(NPPC) of fiscal year 2003/2004. Specific authoritative guidance on the
accounting for the federal subsidy is pending and that guidance, when issued,
could require the Company to change previously reported information. We
have determined that the Companys plan was actuarially equivalent to the
Medicare plan. By comparing the payments of the Companys plan with the
payments of the Medicare part D plan on a prescription drug claims tape from the
insurance carrier, the Companys plan proved to provide a higher level of
benefits. The required contribution from the retiree for the coverage is less
for the Companys plan than for the Medicare part D plan. We calculated the approximate subsidy per Medicare-eligible retiree beginning
in 2006 to be USD 360. The subsidy in effect, reduced the per capita costs by
USD 360. The assumptions on the participation rate remained unchanged. We then
valued this subsidy and calculated the reduced liability (APBO) and service
cost, and expense savings using a discount rate of 6.25% as of January 1, 2004.
The impact of the subsidy was to reduce the APBO by USD 2.1 million at March
31, 2004 and expense for the fiscal year 2003/04 by USD 0.031 million. None of the federal subsidy related to prescription drug costs included in the
APBO was recognized immediately as a component of income from continuing
operations. The entire reduction was amortized as an actuarial gain in
accordance with SFAS No. 106. The Companys benefit plans cost and funded status for fiscal years ended March
31, 2004, 2003 and 2002 were computed in accordance with SFAS No. 106,
Postretirement Benefitsand SFAS No. 132, Employers disclosures about pensions
and other postretirement benefitsas follows: For the years ended March 31,Net Periodic Benefit Cost
    
    2004
    
    2003
    
    2002Net service cost
    
    
    2
    
    
    
    3
    
    
    
    2Interest cost
    
    
    6
    
    
    
    6
    
    
    
    7Expected return
    
    
    
    
    
    
    
    
    
    
    Amortization ofTransition (asset/ obligation)
    
    
    1
    
    
    
    1
    
    
    
    2Prior service cost
    
    
    (1
    )
    
    
    
    
    
    
    Net actuarial gains
    
    
    2
    
    
    
    2
    
    
    
    1Net periodic benefit cost
    
    
    10
    
    
    
    12
    
    
    
    12
 Change in benefit obligation
    
    March 31, 2004
    
    March 31, 2003Benefit obligation at beginning year
    
    
    107
    
    
    
    102Service cost
    
    
    2
    
    
    
    3Interest cost
    
    
    6
    
    
    
    6Plan amendments
    
    
    (4
    )
    
    
    Benefits paid
    
    
    (4
    )
    
    
    (4
    )Actuarial result
    
    
    (2
    )
    
    
    5Foreign currency effect
    
    
    (6
    )
    
    
    (5
    )Benefit obligation at end of year
    
    
    99
    
    
    
    107
 F-36




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS - (Continued) 28. Differences between
Netherlands GAAP and U.S. GAAP - (Continued) Postretirement Benefits
(SFAS 106/SFAS 132) - (Continued) Change in plan assets
    
    March 31, 2004
    
    March 31, 2003Fair value at beginning of year
    
    
    
    
    
    
    Actual return
    
    
    
    
    
    
    Contributions
    
    
    4
    
    
    
    4Benefits paid
    
    
    (4
    )
    
    
    (4
    )Fair value at end of year
    
    
    
    
    
    
    
 March 31, 2004
    
    March 31, 2003Funded status
    
    
    (99
    )
    
    
    (107
    )Unrecognized net losses
    
    
    30
    
    
    
    36Unrecognized prior service cost
    
    
    (7
    )
    
    
    (4
    )Unrecognized obligation at transition
    
    
    4
    
    
    
    6Net amount recognized
    
    
    (72
    )
    
    
    (69
    )
 Assumptions
    
    March 31, 2004
    
    March 31, 2003Discount rate
    
    
    
    
    5.9
    %
    
    
    
    
    5.5
    %Increase rate benefit
    
    
    
    
    4.8
    %
    
    
    
    
    3.0
    %
 Sensitivity to change in health care cost trend rates Effect of a 1% increase in trend ratesService and interest cost
    
    
    9End of the year accumulated postretirement benefit obligation
    
    
    119Effect of a 1% decrease in trend ratesService and interest cost
    
    
    7End of the year accumulated postretirement benefit obligation
    
    
    92
 For measurement purposes, a 5.0% annual rate of increase in the per capita cost
of covered health care benefits was assumed for fiscal year 2004/2005 and the
years thereafter. Disclosure of Certain Risks and Uncertainties (SOP 94-6) Preparation of KLMs financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Guarantees Guarantees have been provided up to an amount of EUR 74 million of which EUR 50
million relates to various guarantees provided by KLM to third parties on
behalf of consolidated holdings. The guarantees mainly relates to financial
lease commitments (EUR 47 million), passenger handling (EUR 3 million), bank
guarantees (EUR 17 million), guarantees for personnel mortgages (EUR 5 million)
and some other small guarantees (EUR 2 million). Except for the financial lease
commitments no obligation has been recorded in relation to these guarantees. The guarantees expire as follows: 2004/2005
    
    
    132005/2006
    
    
    52006/2007
    
    
    172007/2008
    
    
    02008/2009
    
    
    29after 2008/2009
    
    
    10
 F-37




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS - (Continued) 28. Differences between
Netherlands GAAP and U.S. GAAP - (Continued) Goodwill and Other Intangible Assets In connection with the annual goodwill impairment evaluation required by SFAS
142, we determined that there was no impairment, and accordingly, no impairment
loss was recorded under U.S. GAAP in the statements of earnings for fiscal year
2003/2004. The following table shows U.S. GAAP net income in prior years on a pro forma
basis to show the effects of non-amortization of goodwill: For the years ended March 31,2004
    
    2003
    
    2002Net income in conformity with U.S. GAAP
    
    
    62
    
    
    
    (267
    )
    
    
    (2
    )Add back: Amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    7Pro forma net income
    
    
    62
    
    
    
    (267
    )
    
    
    5Basic earnings per share
    
    
    1.37
    
    
    
    (5.97
    )
    
    
    (0.08
    )Add back: Amortization of goodwill
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.15Pro forma earnings per share
    
    
    1.37
    
    
    
    (5.97
    )
    
    
    0.07
 The aggregate amortization expense for the fiscal year ended March 31, 2004 was
EUR 14 million. The following table summarizes the estimated amortization
expense for the coming five years: Advance paymentsSoftware
    
    on software
    
    Total2004/2005
    
    
    15
    
    
    
    
    
    
    
    152005/2006
    
    
    10
    
    
    
    
    
    
    
    102006/2007
    
    
    6
    
    
    
    
    
    
    
    62007/2008
    
    
    6
    
    
    
    
    
    
    
    62008/2009
    
    
    5
    
    
    
    
    
    
    
    542
    
    
    
    
    
    
    
    42
 Disclosure on SFAS No. 144,Accounting for the Impairment or Disposal of
Long-Lived Asset In
our fiscal year 2002/2003 we recognized an impairment loss of EUR 78 million
in respect of aircraft. The impairment loss related to the Boeing 747-300
sub-type. In that fiscal year management took the decision to retire this
subtype due to its relatively high operational costs (high fuel consumption,
unfavorable cockpit configuration) and low operational performance compared to
newer sub-types. The fair value of this aircraft sub-type was on pressure since
several airlines decided to retire this sub-type for the same reasons. We
determined the fair value of these aircraft base on external assessments
(Aircraft Value Reference Guide). The impairment charge was included in depreciation and amortization charges on
the line item Operating expenses in the statement of earnings for the fiscal
year ended March 31, 2003 under Netherlands GAAP and U.S. GAAP. F-38




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS - (Continued) 28. Differences between Netherlands GAAP and U.S. GAAP - (Continued) Variable Interest Entities In January 2003, the Financial Accounting Standards Board (FASB) published
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities,
which was amended by FIN 46R, issued in December 2003. FIN 46 requires the
consolidation of certain types of entities in which a company absorbs a
majority of another entitys expected losses, receives a majority of the other
entitys expected residual returns, or both, as a result of ownership,
contractual or other financial interests in the other entity. These entities
are called Variable Interest Entities (VIE). FIN 46R requires companies to determine whether a financing or other
arrangement constitutes a VIE. If a company concludes that such an arrangement
is a variable interest entity, the company must then evaluate whether it is the
primary beneficiary. The primary beneficiary of a variable interest entity is
required to consolidate the entity for financial statement purposes. Variable
interest entities are those that: 1) have insufficient equity investment at
risk to finance their activities without additional subordinated support or 2)
lack essential characteristics of a controlling financial interest including,
among others, the obligation to absorb expected losses, or the right to receive
expected residual returns, of the entity. The primary beneficiary is the
enterprise that is obligated to absorb the expected losses or has a right to
receive the expected residual returns. FIN 46 was effective immediately for
variable interest entities created, or in which the Company obtains an
interest, after January 31, 2003. For all variable interest entities created on
or before January 31, 2003, the FASB delayed the initial effective date of the
provisions until the quarter ending December 31, 2003, but encouraged early
adoption. FIN 46R became effective for KLM as a foreign
registrant on April 1, 2004. KLM has completed its evaluation of its interests in VIEs. We have variable interests in the following types of variable interest
entities: Aircraft
operating leases We are the lessee in a series of operating leases. In some circumstances the
lessors are trusts established specifically to purchase, finance and lease
aircraft to us. We are generally not the primary beneficiary of the leasing
entities if the lease terms are consistent with market terms at the inception
of the lease and do not include a residual value guarantee, fixed-price
purchase option or similar feature that obligates us to absorb decreases in
value or entitles us to participate in increases in the value of the aircraft.
This is the case for most of our operating leases. Our maximum exposure under
these leases is the remaining lease payments, which are reflected in future
lease commitments in note 12 to the consolidated financial statements We are the lessee of four operating leases where we are exposed to a residual
value risk, which is considered a variable interest under FIN 46. We
determined, however, based on an analysis of expected future cash flows that
the Company is not the primary beneficiary. The maximum exposure with respect
to this residual value risk amounts to EUR 12 million. Aircraft
capital leases We have entered into several transactions with special purpose entities (SPEs)
in connection with capital lease structures for aircraft. These structures do
not qualify as off balance sheet structures. We generally transfer aircraft to
SPEs and obtain the right to use these assets for our operations based on
financial lease agreements. Under FIN 46R these SPEs are considered Variable
Interest Entities of which KLM is the primary beneficiary, since KLM absorbs
the majority of risks with respect to expected losses and expected residual
returns associated with the aircraft. Consistent with previous years, these
SPEs are fully consolidated within our financial statements and form an
integral part of the disclosures on assets and liabilities that are included in
this annual report. F-39




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS - (Continued) 28. Differences between
Netherlands GAAP and U.S. GAAP - (Continued) Reporting Comprehensive Income (SFAS 130)
The figures stated in the table below are net of tax amounts.
(in millions of euro) TotalForeign
    
    
    
    
    
    accumulatedcurrency
    
    Unrealized
    
    Minimum
    
    othertranslation
    
    gain/loss
    
    pension
    
    comprehensiveadjustments
    
    derivatives
    
    liability
    
    income/(loss)Balance sheet as of March 31, 2001
    
    
    (16
    )
    
    
    
    
    
    
    
    
    
    
    (16
    )Impact of first time application SFAS 133/138
    
    
    
    
    
    
    (23
    )
    
    
    
    
    
    
    (23
    )Current-period change
    
    
    30
    
    
    
    23
    
    
    
    
    
    
    
    53Balance sheet as of March 31, 2002
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    14Current-period change
    
    
    (27
    )
    
    
    (39
    )
    
    
    (38
    )
    
    
    (104
    )Balance sheet as of March 31, 2003
    
    
    (13
    )
    
    
    (39
    )
    
    
    (38
    )
    
    
    (90
    )Current-period change
    
    
    (19
    )
    
    
    14
    
    
    
    (9
    )
    
    
    (14
    )Balance sheet as of March 31, 2004
    
    
    (32
    )
    
    
    (25
    )
    
    
    (47
    )
    
    
    (104
    )
 In
accordance with paragraph 132 (a) of SFAS 115, marketable securities are
classified as available-for-sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and reported in other
comprehensive income. For fiscal year 2003/2004 the fair value is equal to the
cost price of the marketable securities as these securities can be considered a
short-term instrument (maturing within one year). Summary of changes in
stockholders equity in conformity with U.S. GAAP: Years ended March 31, 2002, 2003 and 2004Capital paid-in and calledAccumulatedCumulative
    
    Cumulative
    
    
    
    
    
    
    
    
    
    other com-
    
    
    
    
    
    Total stock-Priority
    
    preference
    
    preference
    
    Common
    
    Paid-in
    
    prehensive
    
    Other
    
    holdersIn thousands of euro
    
    shares
    
    shares A
    
    shares C
    
    shares
    
    surplus
    
    income
    
    reserves
    
    equityBalance sheet as of March 31, 2001
    
    
    3
    
    
    
    17,625
    
    
    
    14,100
    
    
    
    93,619
    
    
    
    473,736
    
    
    
    (16,439
    )
    
    
    2,646,203
    
    
    
    3,228,847Distribution from net income 2000/2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,846
    )
    
    
    (29,846
    )Own shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,752
    )
    
    
    (6,752
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,539
    
    
    
    
    
    
    
    30,5393
    
    
    
    17,625
    
    
    
    14,100
    
    
    
    93,619
    
    
    
    473,736
    
    
    
    14,100
    
    
    
    2,609,605
    
    
    
    3,222,788Net loss 2001/2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,495
    )
    
    
    (2,495
    )Equity as of March 31, 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,607,110
    
    
    
    3,220,293Distribution from net income 2001/2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,122
    )
    
    
    (11,122
    )Own shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,678
    )
    
    
    (10,678
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (104,067
    )
    
    
    
    
    
    
    (104,067
    )3
    
    
    
    17,625
    
    
    
    14,100
    
    
    
    93,619
    
    
    
    473,736
    
    
    
    (89,967
    )
    
    
    2,585,310
    
    
    
    3,094,426Net loss 2002/2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (267,145
    )
    
    
    (267,145
    )Equity as of March 31, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,318,165
    
    
    
    2,827,281Distribution from net income 2002/2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,916
    )
    
    
    (5,916
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,101
    )
    
    
    
    
    
    
    (14,101
    )3
    
    
    
    17,625
    
    
    
    14,100
    
    
    
    93,619
    
    
    
    473,736
    
    
    
    (104,068
    )
    
    
    2,312,249
    
    
    
    2,807,264Net income 2003/2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62,178
    
    
    
    62,1782,869,442
 For fiscal year 2003/2004 no distribution will be made to holders of common
shares. The following distributions will be made to holders of cumulative
preference shares and charged to Other reserves:  -
    
    Cumulative preference shares A, 6% on the shares, involving an amount of EUR 1,057,500-
    
    Cumulative preference shares C, 4.98% on the shares, involving an amount of EUR 702,180 A distribution will be made to holders of priority shares of EUR 2,223. The rights and privileges associated with the various categories of KLMs
outstanding shares are described in Item 10.B Additional Information
-Memorandum and articles of association. F-40




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS - (Continued) 28. Differences between
Netherlands GAAP and U.S. GAAP - (Continued) Earnings per common share The computational components of basic net income (loss) per share are as
follows (based on U.S. GAAP figures): Numerator
    
    Denominator
    
    Per share(net income)
    
    (shares)
    
    amountShares outstanding as of March 31, 2004
    
    
    
    
    
    
    46,809,699Effect of purchased own shares
(weighted average during the year 2003/2004)
    
    
    
    
    
    
    (2,621,542
    )Net income
    
    
    62Attributable to holders of preference shares *
    
    
    (2
    )60
    
    
    
    44,188,157
    
    
    
    1.37Shares outstanding as of March 31, 2003
    
    
    
    
    
    
    46,809,699Effect of purchased own shares
(weighted average during the year 2002/2003)
    
    
    
    
    
    
    (1,739,155
    )Net loss
    
    
    (267
    )Attributable to holders of preference shares *
    
    
    (2
    )(269
    )
    
    
    45,070,544
    
    
    
    (5.97
    )Shares outstanding as of March 31, 2002
    
    
    
    
    
    
    46,809,699Effect of purchased own shares
(weighted average during the year 2001/2002)
    
    
    
    
    
    
    (1,127,992
    )Net loss
    
    
    (2
    )Attributable to holders of preference shares*
    
    
    (2
    )(4
    )
    
    
    45,681,707
    
    
    
    (0.08
    )
 The computational components of diluted net income (loss) per share are as
follows (based on U.S. GAAP figures): Numerator
    
    Denominator
    
    Per share(net income)
    
    (shares)
    
    amountShares outstanding as of March 31, 2004
    
    
    
    
    
    
    46,809,699Effect of purchased own shares
(weighted average during the year 2003/2004)
    
    
    
    
    
    
    (2,621,542
    )Potential shares associated with the share option plan
    
    
    
    
    
    
    113,269Net income
    
    
    62Attributable to holders of preference shares*
    
    
    (2
    )60
    
    
    
    44,301,426
    
    
    
    1.36Shares outstanding as of March 31, 2003
    
    
    
    
    
    
    46,809,699Effect of purchased own shares
-weighted average during the year 2002/2003)
    
    
    
    
    
    
    (1,739,155
    )Potential shares associated with the share option plan
    
    
    
    
    
    
    Net loss
    
    
    (267
    )Attributable to holders of preference shares *
    
    
    (2
    )(269
    )
    
    
    45,070,544
    
    
    
    (5.97
    )Shares outstanding as of March 31, 2002
    
    
    
    
    
    
    46,809,699Effect of purchased own shares
(weighted average during the year 2001/2002)
    
    
    
    
    
    
    (1,127,992
    )Potential shares associated with the share option plan
    
    
    
    
    
    
    Net loss
    
    
    (2
    )Attributable to holders of preference shares *
    
    
    (2
    )(4
    )
    
    
    45,681,707
    
    
    
    (0.08
    )
  *
    
    Preference shares include priority shares, Cumulative preference shares A and
Cumulative preference shares C. F-41




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS - (Continued) 28. Differences between
Netherlands GAAP and U.S. GAAP - (Continued) Disclosure about Accounting for Stock-Based Compensation (SFAS 123) The Companys remuneration and share option plans are disclosed in the note 35, Remuneration and share options
Awards in the context of the share option plan are accounted for under APB 25. The pro forma net income, calculated as if the fair value of the options granted to option holders would have been
considered as compensation costs, is as follows: For the years ended March 31,2004
    
    2003
    
    2002Net income (loss) in accordance with U.S. GAAP (as reported)
    
    
    62
    
    
    
    (267
    )
    
    
    (2
    )Add back: Stock-based employee compensation included
in reported net income
    
    
    
    
    
    
    
    
    
    
    Stock-based employee compensation that would have been
included in the determination of net income
    
    
    (1
    )
    
    
    (1
    )
    
    
    (2
    )Pro forma
net income (loss)
    
    
    61
    
    
    
    (268
    )
    
    
    (4
    )Basic earnings per share in accordance with U.S. GAAP:as reported
    
    
    1.37
    
    
    
    (5.97
    )
    
    
    (0.08
    )Add back: Stock-based employee compensation included
in reported net income
    
    
    
    
    
    
    
    
    
    
    Stock-based employee compensation that would have been
included in the determination of net income
    
    
    (0.01
    )
    
    
    (0.02
    )
    
    
    (0.05
    )Pro forma earnings per share
    
    
    1.36
    
    
    
    (5.99
    )
    
    
    (0.13
    )
 The fair value of the Companys option grants for the fiscal years 2004, 2003 and 2002 was estimated using a Black-Scholes
option pricing model and the following assumptions: For the years ended March 31,2004
    
    2003
    
    2002Risk-free interest rate
    
    
    2.8
    
    
    
    3.3
    
    
    
    4.8Expected dividend yield
    
    
    1.4
    
    
    
    1.5
    
    
    
    1.4Expected option life
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0Expected stock price volatility
    
    
    43.9
    
    
    
    53.4
    
    
    
    38.4Weighted average fair value (at grant date) of options granted
during the year in EUR1
    
    
    2.71
    
    
    
    2.17
    A
    
    
    2.66
    A
    
    
    
    2.57
    B
    
    
    3.59
    B
 Under its share option plan the Company has not awarded any options with an
exercise price below the market value on the date of grant of the option. Under Netherlands GAAP, compensation expense is only required to be recognised
over the vesting period when the exercise price at the date of grant is lower
than the KLM share price. When modifications are made to the exercise price
after the grant date, similar accounting is required under Netherlands GAAP as
compared to APB 25s variable plan accounting. 1 As of fiscal year 2001/2002 option A and option B differ in weighted average
fair value (see note 35, Remuneration and share option plan). F-42




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS - (Continued) 28. Differences between
Netherlands GAAP and U.S. GAAP - (Continued) The following tables summarizes information about the stock options1 outstanding at March 31, 2004: Fixed option plan KLM Management
    
    
    
    
    
    
    
    
    
    
    
    
    
    as of March 31, 2004exercisenumber of
    
    exercise
    
    remaining
    
    number of
    
    priceoutstanding
    
    price
    
    contractual
    
    exercisable
    
    (weightedYear granted
    
    options
    
    per option
    
    life (average)
    
    options
    
    average)1999
    
    
    449,310
    
    
    
    30.26
    
    
    
    0.5
    
    
    
    449,310
    
    
    
    30.262000
    
    
    425,700
    
    
    
    37.70
    
    
    
    1.6
    
    
    
    425,700
    
    
    
    37.702001
    
    
    399,000
    
    
    
    22.24
    
    
    
    2.6
    
    
    
    399,000
    
    
    
    22.242002
    
    
    419,000
    
    
    
    13.79
    
    
    
    3.6
    
    
    
    419,000
    
    
    
    13.792003
    
    
    418,500
    
    
    
    7.44
    
    
    
    4.3
    
    
    
    418,500
    
    
    
    7.442,111,510
    
    
    
    
    
    
    
    
    
    
    
    2,111,510
 Fixed option plan KLM Management
    
    as of March 31, 2004
    
    as of March 31, 2003
    
    as of March 31, 2002exercise
    
    
    
    
    
    exercise
    
    
    
    
    
    exerciseprice
    
    
    
    
    
    price
    
    
    
    
    
    pricenumber of
    
    weighted
    
    number of
    
    (weighted
    
    number of
    
    (weightedoptions
    
    average)
    
    options
    
    average)
    
    options
    
    average)Outstanding (begin of the year)
    
    
    2,134,990
    
    
    
    28.24
    
    
    
    2,116,720
    
    
    
    31.78
    
    
    
    1,887,222
    
    
    
    32.92Granted
    
    
    418,500
    
    
    
    7.44
    
    
    
    424,500
    
    
    
    13.78
    
    
    
    408,000
    
    
    
    22.21Exercised
    
    
    0
    
    
    
    
    
    
    
    0
    
    
    
    
    
    
    
    0Forfeited
    
    
    (17,150
    )
    
    
    
    
    
    
    (19,140
    )
    
    
    
    
    
    
    0Expired
    
    
    (424,830
    )
    
    
    36.52
    
    
    
    (387,090
    )
    
    
    31.79
    
    
    
    (178,502
    )
    
    
    22.04Outstanding (end of the year)
    
    
    2,111,510
    
    
    
    22.45
    
    
    
    2,134,990
    
    
    
    28.24
    
    
    
    2,116,720
    
    
    
    31.78Weighted average fair value
(grant date)
    
    
    2.71
    A
    
    
    
    
    
    
    2.17
    A
    
    
    
    
    
    
    2.66
    Aof options granted during the year
    
    
    
    
    
    
    
    
    
    
    2.57
    B
    
    
    
    
    
    
    3.59
    B
 1 As of fiscal year 2001/2002 option A and option B differ in weighted average fair value (see note 35, Remuneration and share option plan) F-43




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS - (Continued) 28. Differences between
Netherlands GAAP and U.S. GAAP - (Continued) Disclosure about derivative and hedge accounting (SFAS 133/SFAS 138) Currency risks In its operating cash flow, the Company has a substantial surplus in all major
foreign currencies, with the exception of the U.S. dollar, in which it has a
deficit. KLM hedges a part of its non-U.S. dollar cash flows by cash flow
hedges. Changes in the fair value of these contracts are included in Other
Comprehensive Income up to the date on which the effects of the results on the
underlying positions materialize, in general when traffic occurs. Some
currencies that have a strong correlation with the U.S. dollar are not being
hedged to euros but to U.S. dollars instead. In its cash flow from investing activities, the Company has a short position.
KLM uses fair value hedges to hedge these cash flows. It is KLMs intention to match assets and liabilities accurately. KLM uses
cross currency swaps either as cash flow hedge or fair value hedge in order to
achieve this matching. Interest rate risks It is KLMs policy to minimize long-term net funding costs within the agreed
framework of interest rate sensitivity. KLM uses cross currency interest rate
swaps, in combination with its hedging policies on foreign currencies, to
create a favorable mix of fixed and floating interest-bearing positions. In
this respect the Company uses both cash flow hedges and fair value hedges. Fuel price risks KLM is significantly exposed to price risk on its fuel requirements. The
Company uses cash flow hedges to reduce this price risk. Changes in the fair
value of these derivatives are include in Other Comprehensive Income and are
released in the profit and loss account (as a part of fuel expenses) when the
hedged fuel consumption materializes. Impact on equity and earnings The result on derivatives, which did not qualify for hedge accounting under
SFAS 133/138 during fiscal year 2003/2004, amounted to EUR 6.1 million
negative. The impact on earnings of the ineffective part of cash flow hedges
and fair value hedges is 0.1 EUR million positive. None of the derivatives,
which initially qualified as hedges, exceeded their effectiveness criteria
before expiration. The debit balance of Other Comprehensive Income as of March 31, 2004 with
respect to effective cash flow hedges amounted to EUR 25 million. A positive
effect of EUR 4 million is expected to be released to the statement of earnings
in fiscal year 2004/2005. The remainder (debit amount of EUR 29 million) will
be charged in earnings over a period of 11 years. Movements in Other comprehensive income during fiscal 2003/2004 In millions of euro, net of tax Balance as of March 31, 2003
    
    
    (39
    )Released to profit and loss account
    
    
    14Changes in fair value during the year
    
    
    Balance as of March 31, 2004
    
    
    (25
    )
 F-44




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS - (Continued) 28. Differences between
Netherlands GAAP and U.S. GAAP - (Continued) Consolidated statement of cash flows (SFAS 95) The table below represents the cash flows for each of the years in the three
years period ended March 31, 2004 in conformity with SFAS 95. The table below
is based on net income under U.S. GAAP as a starting point. Futhermore, in
accordance with paragraph 17 (c) of SFAS 95, in note 2 to
our consolidated financial statements, disclosures are included on
prepayments on aircraft, which are part of the cash flow from investing
activities. For the Years Ended March 31,2004
    
    2003
    
    2002Cash flow from operating activities:Net income (loss)
    
    
    62
    
    
    
    (267
    )
    
    
    (2
    )Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    436
    
    
    
    536
    
    
    
    490Provision for losses and accounts receivable
    
    
    1
    
    
    
    (9
    )
    
    
    9Results on sale of assets
    
    
    1
    
    
    
    42
    
    
    
    (10
    )Undistributed earnings of affiliates
    
    
    8
    
    
    
    7
    
    
    
    19Gain on sale of affiliates
    
    
    (13
    )
    
    
    (6
    )
    
    
    (9
    )Deferred taxes
    
    
    58
    
    
    
    (116
    )
    
    
    (15
    )Change in assets and liabilities:Accounts receivable
    
    
    20
    
    
    
    190
    
    
    
    122Supplies
    
    
    12
    
    
    
    35
    
    
    
    40Prepaid expenses
    
    
    (88
    )
    
    
    (43
    )
    
    
    (213
    )Change in provisions
    
    
    66
    
    
    
    (5
    )
    
    
    4Current liabilities
    
    
    (216
    )
    
    
    (48
    )
    
    
    182Taxes and social insurance premiums
    
    
    1
    
    
    
    (9
    )
    
    
    21Deferred credits
    
    
    (45
    )
    
    
    (22
    )
    
    
    (16
    )Marketable securities
    
    
    
    
    
    
    2
    
    
    
    4Share of third parties
    
    
    
    
    
    
    1
    
    
    
    Net cash provided by operating activities
    
    
    303
    
    
    
    288
    
    
    
    626Cash flow from investing activities:Proceeds from sale of tangible fixed assets
    
    
    149
    
    
    
    305
    
    
    
    64Capital expenditures
    
    
    (1,038
    )
    
    
    (355
    )
    
    
    (509
    )Prepaid on capital expenditures
    
    
    331
    
    
    
    (361
    )
    
    
    4Net expansion of other holdings
    
    
    10
    
    
    
    (26
    )
    
    
    149Investment in inventory
    
    
    38
    
    
    
    10
    
    
    
    (17
    )Changes in the group of consolidated holdings
    
    
    3
    
    
    
    
    
    
    
    Marketable securities
    
    
    (25
    )
    
    
    
    
    
    
    Net cash provided by investing activities
    
    
    (532
    )
    
    
    (427
    )
    
    
    (309
    )Cash flow from financing activities:Dividend paid
    
    
    (6
    )
    
    
    (11
    )
    
    
    (30
    )Increase in long-term debt
    
    
    690
    
    
    
    121
    
    
    
    365Decrease in long-term debts
    
    
    (322
    )
    
    
    (259
    )
    
    
    (401
    )Increase in long-term receivables
    
    
    (70
    )
    
    
    (78
    )
    
    
    (161
    )Decrease in long-term receivables
    
    
    65
    
    
    
    62
    
    
    
    70Other
    
    
    (98
    )
    
    
    (115
    )
    
    
    28Net cash provided by financing activities
    
    
    259
    
    
    
    (280
    )
    
    
    (129
    )Changes in cash
    
    
    30
    
    
    
    (419
    )
    
    
    188Cash, opening balance
    
    
    608
    
    
    
    1,027
    
    
    
    839Cash, closing balance
    
    
    638
    
    
    
    608
    
    
    
    1,027
 F-45




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES COMPANY BALANCE SHEET*In millions of euro Before appropriation of results Note
    
    March 31, 2004
    
    March 31, 2003Fixed assetsIntangible fixed assets
    
    
    
    
    
    
    47
    
    
    
    
    
    
    
    60Tangible fixed assets
    
    
    29
    
    
    
    3,893
    
    
    
    
    
    
    
    3,589Financial fixed assets
    
    
    30
    
    
    
    1,937
    
    
    
    
    
    
    
    2,1415,877
    
    
    
    
    
    
    
    5,790Current assetsOperating supplies
    
    
    
    
    
    
    195
    
    
    
    
    
    
    
    196Accounts receivable
    
    
    31
    
    
    
    1,005
    
    
    
    
    
    
    
    1,039Cash and marketable securities
    
    
    
    
    
    
    592
    
    
    
    
    
    
    
    5591,792
    
    
    
    
    
    
    
    1,794Current liabilities
    
    
    
    
    
    
    2,134
    
    
    
    
    
    
    
    2,191Current assets less current liabilities
    
    
    
    
    
    
    
    
    
    
    (342
    )
    
    
    
    
    
    
    (397
    )Assets less current liabilities
    
    
    
    
    
    
    
    
    
    
    5,535
    
    
    
    
    
    
    
    5,393Long-term debtSubordinated perpetual debt
    
    
    
    
    
    
    507
    
    
    
    
    
    
    
    544Other long-term debt
    
    
    32
    
    
    
    3,116
    
    
    
    
    
    
    
    2,9003,623
    
    
    
    
    
    
    
    3,444Provisions
    
    
    33
    
    
    
    
    
    
    
    266
    
    
    
    
    
    
    
    261Deferred credits
    
    
    
    
    
    
    
    
    
    
    159
    
    
    
    
    
    
    
    212Stockholders equity
    
    
    34Paid-in and called capital
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    125Paid-in surplus
    
    
    
    
    
    
    474
    
    
    
    
    
    
    
    474Other reserves
    
    
    
    
    
    
    864
    
    
    
    
    
    
    
    1,293Net profit (loss)
    
    
    
    
    
    
    24
    
    
    
    
    
    
    
    (416
    )1,487
    
    
    
    
    
    
    
    1,4765,535
    
    
    
    
    
    
    
    5,393
 COMPANY STATEMENT OF EARNINGS
In millions of euro For the Years Ended March 31,2004
    
    2003
    
    2002Results of holdings
    
    
    34
    
    
    
    (22
    )
    
    
    (7
    )KLM company income after tax
    
    
    (10
    )
    
    
    (394
    )
    
    
    (149
    )Net income (loss)
    
    
    24
    
    
    
    (416
    )
    
    
    (156
    )
 * The accompanying notes are an integral part of these consolidated financial statements F-46




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE COMPANY FINANCIAL STATEMENTS
In millions of euro General Reference is made to the notes to the consolidated financial statements unless
stated otherwise. Fixed assets 29. Tangible fixed assets March 31, 2004
    
    March 31, 2003Aircraft, spare engines and spare parts
    
    
    3,125
    
    
    
    2,518Other tangible fixed assets
    
    
    456
    
    
    
    4833,581
    
    
    
    3,001Advance payments on tangible fixed assets
on order or under construction
    
    
    312
    
    
    
    5883,893
    
    
    
    3,589
 Aircraft,
    
    
    
    
    
    Inventories,
    
    Vehiclesspare
    
    
    
    
    
    machines
    
    and otherengines and
    
    Buildings
    
    and
    
    tangiblespare parts
    
    and land
    
    installations
    
    fixed assets
    
    TotalPurchase value as of March 31, 2003
    
    
    4,885
    
    
    
    704
    
    
    
    508
    
    
    
    94
    
    
    
    6,191Accumulated depreciation and diminution in
value through fiscal year 2002/2003
    
    
    2,367
    
    
    
    388
    
    
    
    382
    
    
    
    53
    
    
    
    3,190Book value as of March 31, 2003
    
    
    2,518
    
    
    
    316
    
    
    
    126
    
    
    
    41
    
    
    
    3,001Changes in book valueAdditions
    
    
    876
    
    
    
    6
    
    
    
    35
    
    
    
    6
    
    
    
    923Disposals
    
    
    (22
    )
    
    
    (1
    )
    
    
    (4
    )
    
    
    (5
    )
    
    
    (32
    )Depreciation
    
    
    (243
    )
    
    
    (24
    )
    
    
    (32
    )
    
    
    (8
    )
    
    
    (307
    )Other
    
    
    (4
    )
    
    
    1
    
    
    
    (2
    )
    
    
    1
    
    
    
    (4
    )Total changes
    
    
    607
    
    
    
    (18
    )
    
    
    (3
    )
    
    
    (6
    )
    
    
    580Purchase value as of March 31, 2004
    
    
    5,116
    
    
    
    705
    
    
    
    479
    
    
    
    88
    
    
    
    6,388Accumulated depreciation and diminution in
value through fiscal year 2003/2004
    
    
    1,991
    
    
    
    407
    
    
    
    356
    
    
    
    53
    
    
    
    2,807Book value as of March 31, 2004
    
    
    3,125
    
    
    
    298
    
    
    
    123
    
    
    
    35
    
    
    
    3,581
 This overview includes aircraft for which financial lease agreements have been
concluded. Their purchase value amounts to EUR 3,473 million (last fiscal year
EUR 2,959 million) and accumulated depreciation amounts to EUR 1,145 million
(last fiscal year EUR 1,121 million). Other tangible fixed assets include assets whose availability is based on
limited right of use, such as buildings on land held under long-term rental
agreements or on leasehold, and assets acquired through financial lease
agreements. The book value of these assets amounts to EUR 174 million (last
fiscal year EUR 180 million). F-47




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE COMPANY
FINANCIAL STATEMENTS - (Continued) 30. Financial fixed assets March 31, 2004
    
    March 31, 2003Consolidated holdings
    
    
    590
    
    
    
    574Other holdings
    
    
    192
    
    
    
    197Receivables from consolidated holdings
    
    
    419
    
    
    
    487Receivables from other holdings
    
    
    4
    
    
    
    181,205
    
    
    
    1,276Other financial fixed assets
    
    
    732
    
    
    
    8651,937
    
    
    
    2,141
 Receivablesfrom con-
    
    Receivables
    
    OtherConsolidated
    
    Other
    
    solidated
    
    from other
    
    financialholdings
    
    holdings
    
    holdings
    
    holdings
    
    fixed assets
    
    TotalBalance as of March 31, 2003
    
    
    574
    
    
    
    197
    
    
    
    487
    
    
    
    18
    
    
    
    865
    
    
    
    2,141New/expansion
    
    
    
    
    
    
    4
    
    
    
    61
    
    
    
    2
    
    
    
    61
    
    
    
    128Sale/redemption
    
    
    1
    
    
    
    (1
    )
    
    
    (88
    )
    
    
    (11
    )
    
    
    (101
    )
    
    
    (200
    )Share in results
    
    
    34
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33Revaluation
    
    
    (15
    )
    
    
    (4
    )
    
    
    (41
    )
    
    
    (2
    )
    
    
    (29
    )
    
    
    (91
    )Dividends received
    
    
    (5
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Exchange rate differences
and other
    
    
    1
    
    
    
    (2
    )
    
    
    
    
    
    
    (3
    )
    
    
    (64
    )
    
    
    (68
    )Balance as of March 31, 2004
    
    
    590
    
    
    
    192
    
    
    
    419
    
    
    
    4
    
    
    
    732
    
    
    
    1,937
 Current assets 31. Accounts receivable March 31, 2004
    
    March 31, 2003Debtors
    
    
    691
    
    
    
    690Receivables from consolidated holdings
    
    
    179
    
    
    
    154Receivables from other holdings
    
    
    10
    
    
    
    3Value added tax
    
    
    22
    
    
    
    33Prepaid expenses
    
    
    103
    
    
    
    1591,005
    
    
    
    1,039
 F-48




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE COMPANY
FINANCIAL STATEMENTS - (Continued) Long-term debt 32. Other long-term debt March 31, 2004
    
    March 31, 2003Other long-term debt, as listed in note 8 on page F-14
    
    
    3,721
    
    
    
    3,427Loans obtained or repaid by consolidated holdings
    
    
    (605
    )
    
    
    (527
    )3,116
    
    
    
    2,900
 33. Provisions March 31, 2004
    
    March 31, 2003Postretirement health costs
    
    
    72
    
    
    
    69Early retirement provision
    
    
    17
    
    
    
    21Other staff commitments
    
    
    53
    
    
    
    72Reorganization and restructuring
    
    
    58
    
    
    
    75Frequent flyer program
    
    
    33
    
    
    
    24Phase out operational lease aircraft
    
    
    33
    
    
    
    266
    
    
    
    261
 34. Stockholders equity The authorized capital of the Company is EUR 600 million. Of this amount, EUR
125.3 million is issued and fully paid-in. For information on the amounts per
class of shares see under note 34 on page F-50. The effects of the Air France tender offer on the composition of Equity and the
related control as of May 4, 2004 (being the date of acceptance of the offer)
are described in Item 4  Information on the Company. In connection with the minority interest of the State of The Netherlands in
KLMs share capital, KLM and the State of the Netherlands are parties to an
option agreement. Since 1994 the State of the Netherlands has had a right (the Option) to take
such a number of EUR 2.00 B preference shares that the State would obtain an
interest of up to 50.1% in KLMs issued capital. Further to the combination
with Air France, the Option has been retained with some amendments. The Option
may be exercised only if KLMs access to relevant markets is or will be denied
or limited because a country is of the opinion that ownership or control of KLM
is not predominantly in Dutch hands. As of March 31, 2004, the State of the Netherlands held 8,812,500 cumulative
preference shares A and 975 priority shares, to which a voting right attaches
of 14.1%. As of May 4, 2004, the State of the Netherlands holds only the cumulative
preference shares A. As of March 31, 2004, the Company held 2,621,542 re-purchased common shares
with a total value of EUR 38 million. This amount has been deducted from Other
reserves. The repurchase of own shares is related to cover future commitments
arising from option rights granted to members of the Board of Managing
Directors and senior managers.
The nominal value of the re-puchased common shares amounts to EUR 3 million. Recorded within the line
items Exchange rate differences and other in Other
reserves is a increase of EUR 14 million in respect of the fair value of cash
flow hedges arising from the application of SFAS 133/138. The accumulated
movement in value as of March 31, 2004 amounted to EUR 25 million negative. A
positive effect of EUR 4 million is expected to be charged to the statement of
earnings in fiscal year 2004/2005. The remainder (EUR 29 million) will be
charged to the statement of earnings over a period of 11 years. In connection with the capitalization of software developed in-house, an amount
of EUR 42 million is included as a statutory reserve in
Other reserves in
accordance with article 365, Title 9, Book 2 of the Netherlands Civil Code. F-49




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##### Table of Contents



KLM ROYAL DUTCH AIRLINES NOTES TO THE COMPANY
FINANCIAL STATEMENTS - (Continued) 34. Stockholders
equity - (Continued) Fiscal years ended March 31, 2002, 2003, 2004Capital paid-in and calledCumulative
    
    Cumulative
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total stock-Priority
    
    preference
    
    preference
    
    Common
    
    Paid-in
    
    Other
    
    holdersIn thousands of euro
    
    shares
    
    shares A
    
    shares C
    
    shares
    
    surplus
    
    reserves
    
    equityBalance as of March 31, 2001
    
    
    3
    
    
    
    17,625
    
    
    
    14,100
    
    
    
    93,619
    
    
    
    473,736
    
    
    
    1,461,638
    
    
    
    2,060,721Own shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,752
    )
    
    
    (6,752
    )Change in accounting policies for
heavy maintenance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77,396
    
    
    
    77,396Change in accounting policies for
derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,258
    )
    
    
    (6,258
    )Exchange rate differences and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,211
    
    
    
    23,211Balance as of March 31, 2002
    
    
    3
    
    
    
    17,625
    
    
    
    14,100
    
    
    
    93,619
    
    
    
    473,736
    
    
    
    1,549,235
    
    
    
    2,148,318Net result fiscal year 2001/2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (156,293
    )
    
    
    (156,293
    )Dividend paid 2001/2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,122
    )
    
    
    (11,122
    )Own shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,678
    )
    
    
    (10,678
    )Exchange rate differences and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (78,214
    )
    
    
    (78,214
    )Balance as of March 31, 2003
    
    
    3
    
    
    
    17,625
    
    
    
    14,100
    
    
    
    93,619
    
    
    
    473,736
    
    
    
    1,292,928
    
    
    
    1,892,011Net result fiscal year 2002/2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (415,641
    )
    
    
    (415,641
    )Dividend paid 2002/2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,916
    )
    
    
    (5,916
    )Exchange rate differences and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,069
    )
    
    
    (7,069
    )Balance as of March 31, 2004
    
    
    3
    
    
    
    17,625
    
    
    
    14,100
    
    
    
    93,619
    
    
    
    473,736
    
    
    
    864,302
    
    
    
    1,463,385Net result fiscal year 2003/2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,867Equity as of March 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,487,252
 The paid-in surplus is fiscally exempt. The Other reserves includes a translation reserve of EUR 32 million negative (fiscal year 2002/2003 negative EUR 13 million). F-50




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##### Table of Contents



NOTES TO THE COMPANY FINANCIAL STATEMENTS - (Continued) 35. Remuneration and share option plan Supervisory Board The remuneration of the members of the Supervisory Board consists of a fixed fee
per annum (EUR 36,302 for the Chairman, EUR 29,495 for the vice-chairman and
EUR 22,689 for the other Board members) and a fee for each meeting of the
Boards Committees attended (EUR 1,361 for the chairman of the committee
concerned, unless also the vice-chairman or chairman of the Board, and EUR 453
for the other members of the Boards Committees). The total remuneration of
current and former Supervisory Board members for the fiscal year was EUR 207,017
(fiscal year 2002/2003 EUR 211,668).
Individually, the remuneration of the current and former Supervisory Board
members was as follows: 2003/2004
    
    2002/2003 1As member of
    
    
    
    
    
    
    
    
    
    As member ofthe Supervisory
    
    As member of
    
    
    
    
    
    the Supervisory
    
    As member ofBoard
    
    committees
    
    Total
    
    Board
    
    committees
    
    TotalF.A. Maljers
    
    
    36,302
    
    
    
    1,359
    
    
    
    37,661
    
    
    
    36,302
    
    
    
    1,359
    
    
    
    37,661C.J.A. van Lede
    
    
    20,420
    
    
    
    
    
    
    
    20,420
    
    
    
    
    
    
    
    
    
    
    
    L.A.A. van den Berghe
    
    
    22,689
    
    
    
    1,812
    
    
    
    24,501
    
    
    
    22,689
    
    
    
    2,718
    
    
    
    25,407D.G. Eustace
    
    
    22,689
    
    
    
    6,803
    
    
    
    29,492
    
    
    
    22,689
    
    
    
    6,803
    
    
    
    29,492B. Geersing
    
    
    22,689
    
    
    
    2,718
    
    
    
    25,407
    
    
    
    22,689
    
    
    
    1,812
    
    
    
    24,501W. Kok
    
    
    17,016
    
    
    
    
    
    
    
    17,016
    
    
    
    
    
    
    
    
    
    
    
    J. Stekelenburg
2
    
    
    11,344
    
    
    
    
    
    
    
    11,344
    
    
    
    22,689
    
    
    
    906
    
    
    
    23,595K.J. Storm
    
    
    22,689
    
    
    
    5,442
    
    
    
    28,131
    
    
    
    17,016
    
    
    
    906
    
    
    
    17,922former:A. Maas
    
    
    7,373
    
    
    
    
    
    
    
    7,373
    
    
    
    29,495
    
    
    
    906
    
    
    
    30,401M. Albrecht
    
    
    5,672
    
    
    
    
    
    
    
    5,672
    
    
    
    22,689
    
    
    
    
    
    
    
    22,689188,883
    
    
    
    18,134
    
    
    
    207,017
    
    
    
    196,258
    
    
    
    15,410
    
    
    
    211,668
 None of the Supervisory Board members held securities in KLM as of March 31,
2004. Supervisory Board members may not participate in the share option plan
described below. As of March 31, 2004, the Supervisory Board members had no
commitments in respect of loans, advances or guarantees granted to them by KLM. Board of Management The Supervisory Board determines the remuneration package, targets and
performance of the members of the Board of Management each year. In addition to
a fixed annual salary, the members of the Board of Management receive an annual
variable remuneration up to a maximum of 50% of the fixed salary (30% relating
to targets with respect to Company results, 20% relating to targets with
respect to personal performance). The variable remuneration paid and recognized
in a year relates to the targets realized in the previous year. Members of the
Board of Management are also granted options on KLM shares each year. The
receipt of options is based on personal performance. Options also serve to
increase longer-term commitment to the Company. The maximum number of options
that a member of the Board of Management may receive each year is 25,000. The total remuneration, including employer pension contributions, of members of
the Board of Management for the fiscal year amounted to EUR 3,176,066 (fiscal
year 2002/2003 EUR 4,614,561). Fiscal year 2003/2004
    
    Fixed salary
    
    Variable
    
    Targets realized
    
    Pension 3/4
    
    Upon standing down
    
    TotalL.M. van Wijk
    
    
    644,993
    
    
    
    
    
    
    partially
    
    
    88,298
    
    
    
    
    
    
    
    733,291P.F. Hartman
    
    
    549,996
    
    
    
    
    
    
    partially
    
    
    170,131
    
    
    
    
    
    
    
    720,127C. van Woudenberg
    
    
    469,994
    
    
    
    
    
    
    partially
    
    
    183,358
    
    
    
    
    
    
    
    653,352R.A. Ruijter
    
    
    469,994
    
    
    
    
    
    
    partially
    
    
    599,302
    
    
    
    
    
    
    
    1,069,2962,134,977
    
    
    
    
    
    
    
    
    
    
    
    1,041,089
    
    
    
    
    
    
    
    3,176,066
 Fiscal year 2002/2003
    
    Fixed salary
    
    Variable
    
    Targets realized
    
    Pension 3
    
    Upon standing down
    
    TotalL.M. van Wijk
    
    
    628,193
    
    
    
    317,802
    
    
    partially
    
    
    388,078
    
    
    
    
    
    
    
    1,334,073P.F. Hartman
    
    
    514,321
    
    
    
    271,289
    
    
    partially
    
    
    568,118
    
    
    
    
    
    
    
    1,353,728C. van Woudenberg
    
    
    447,733
    
    
    
    227,335
    
    
    partially
    
    
    365,367
    
    
    
    
    
    
    
    1,040,435R.A. Ruijter
    
    
    447,733
    
    
    
    151,398
    
    
    partially
    
    
    287,194
    
    
    
    
    
    
    
    886,3252,037,980
    
    
    
    967,824
    
    
    
    
    
    
    
    1,608,757
    
    
    
    
    
    
    
    4,614,561
  1
    
    Amounts for fiscal year 02/03 have been restated for comparative purposes and
relate to the Supervisory Directors remuneration alllocatable to the
fiscal year.2
    
    Mr. Stekelenburg died on September 22, 2003.3
    
    Including past-service commitments.4
    
    Mr. Ruijters pension costs include the cost of purchasing additional
membership time, which is paid in part by KLM. F-51




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##### Table of Contents



NOTES TO THE COMPANY FINANCIAL STATEMENTS - (Continued) 35. Remuneration and share option plan - (Continued) The variable remuneration in the table above relates to performance in
2002/2003; being payable in 2003/3004 it is disclosed in the Annual Report. The
performance-based targets related to an improvement in the Companys results
and operational conditions. In the light of the cost savings program introduced
in April 2003, however, the Board of Management decided in advance to waive in
full the variable remuneration for 2002/2003 payable in 2003/2004. The criteria on the variable remuneration for performance in fiscal year
2003/2004 relate to the realization of net income and the formation of an
alliance with a major European partner. The variable remuneration for fiscal
year 2003/2004 will be settled in fiscal year 2004/2005 and disclosed in the
fiscal year 2004/2005 annual report. The current and former members of the Board of Management had the following
positions with respect to options on KLM shares as of March 31, 2004: Options granted
    
    
    
    
    
    
    
    
    
    Number of
    
    Total number(number of shares
    
    Exercise price
    
    
    
    
    
    options
    
    as of March 31,Year granted
    
    that can be obtained)
    
    per share
    
    Expiration date
    
    exercised
    
    2004L.M. van Wijk:1999
    
    
    25,500
    
    
    
    30.26
    
    
    October 15, 2004
    
    
    
    
    
    
    25,5002000
    
    
    25,000
    
    
    
    37.70
    
    
    October 21, 2005
    
    
    
    
    
    
    25,0002001
    
    
    25,000
    A
    
    
    23.45
    A
    
    October 20, 2006
    
    
    
    
    
    
    25,000
    A2002
    
    
    25,000
    A
    
    
    14.69
    A
    
    October 19, 2007
    
    
    
    
    
    
    25,000
    A2003
    
    
    25,000
    
    
    
    7.44
    
    
    June 30, 2008
    
    
    
    
    
    
    25,000125,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,500P.F. Hartman:1999
    
    
    25,500
    
    
    
    30.26
    
    
    October 15, 2004
    
    
    
    
    
    
    25,5002000
    
    
    25,000
    
    
    
    37.70
    
    
    October 21, 2005
    
    
    
    
    
    
    25,0002001
    
    
    25,000
    A
    
    
    23.45
    A
    
    October 20, 2006
    
    
    
    
    
    
    25,000
    A2002
    
    
    25,000
    A
    
    
    14.69
    A
    
    October 19, 2007
    
    
    
    
    
    
    25,000
    A2003
    
    
    25,000
    
    
    
    7.44
    
    
    June 30, 2008
    
    
    
    
    
    
    25,000125,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,500C. van Woudenberg:1999
    
    
    25,500
    
    
    
    30.26
    
    
    October 15, 2004
    
    
    
    
    
    
    25,5002000
    
    
    25,000
    
    
    
    37.70
    
    
    October 21, 2005
    
    
    
    
    
    
    25,0002001
    
    
    25,000
    A
    
    
    23.45
    A
    
    October 20, 2006
    
    
    
    
    
    
    25,000
    A2002
    
    
    25,000
    A
    
    
    14.69
    A
    
    October 19, 2007
    
    
    
    
    
    
    25,000
    A2003
    
    
    25,000
    
    
    
    7.44
    
    
    June 30, 2008
    
    
    
    
    
    
    25,000125,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,500R.A. Ruijter :2001
    
    
    25,000
    A
    
    
    23.45
    A
    
    October 20, 2006
    
    
    
    
    
    
    25,000
    A2002
    
    
    25,000
    A
    
    
    14.69
    A
    
    October 19, 2007
    
    
    
    
    
    
    25,000
    A2003
    
    
    25,000
    
    
    
    7.44
    
    
    June 30, 2008
    
    
    
    
    
    
    25,00075,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,000formerR.J.N. Abrahamsen:1999
    
    
    25,500
    
    
    
    30.26
    
    
    October 15, 2004
    
    
    
    
    
    
    25,5002000
    
    
    25,000
    
    
    
    37.70
    
    
    October 21, 2005
    
    
    
    
    
    
    25,00050,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,500
 As of March 31, 2004, the members of the Board of Management together held no
securities in KLM other than the options below. As of March 31, 2004, the
members of the Board of Management had no commitments in respect of loans,
advances or guarantees granted to them by KLM. F-52




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##### Table of Contents



NOTES TO THE COMPANY FINANCIAL STATEMENTS - (Continued) 35. Remuneration and share option plan - (Continued) Senior officers Options on KLM shares had also been granted to approximately 120 senior officers as of March 31, 2004: Number of
    
    Number of
    
    Total numberOptions
    
    Exercise price
    
    
    
    
    
    options
    
    options
    
    as of March 31,Year granted
    
    granted 1
    
    per share
    
    Expiry date
    
    exercised
    
    withdrawn
    
    20041999
    
    
    358,530
    
    
    
    30.26
    
    
    October 15, 2004
    
    
    
    
    
    
    11,220
    
    
    
    347,3102000
    
    
    332,700
    
    
    
    37.70
    
    
    October 21, 2005
    
    
    
    
    
    
    7,000
    
    
    
    325,7002001 A
    
    
    203,500
    
    
    
    23.45
    
    
    October 20, 2006
    
    
    
    
    
    
    4,000
    
    
    
    199,5002001 B
    
    
    104,500
    
    
    
    18.61
    
    
    October 20, 2006
    
    
    
    
    
    
    5,000
    
    
    
    99,5002002 A
    
    
    200,500
    
    
    
    14.69
    
    
    October 19, 2007
    
    
    
    
    
    
    2,000
    
    
    
    198,5002002 B
    
    
    124,000
    
    
    
    11.56
    
    
    October 19, 2007
    
    
    
    
    
    
    3,500
    
    
    
    120,5002003
    
    
    318,500
    
    
    
    7.44
    
    
    June 30, 2008
    
    
    
    
    
    
    
    
    
    
    318,5001,642,230
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,720
    
    
    
    1,609,510
 The receipt of options is based on personal performance; options also serve to
increase longer-term commitment to the Company. The maximum number of options
that may be received is related to the recipients job grade. Notes to the share option plan As from 2003 the exercise price of the options has been based on a vesting
price equal to the weighted average quote for KLM shares as calculated by
Bloomberg on the first working day after KLMs Annual General Meeting. The
exercise price of the option series granted before 2003 was at least equal to
the quoted price on the data granted. As a result of amended tax rates, the exercise price of the option rights in
1999 and 2000 consisted of an amount equal to such a percentage of the vesting
price that the fiscal value of the option was 4% of the value of the KLM share. Following the introduction of fiscal legislation enabling option recipients to
elect for taxation upon the vesting of an option or upon the exercise of an
option, the share option plan allows option recipients to elect for 2001 and
2002 for (i) an exercise price that is equal to a percentage of the vesting
price such that the fiscal value of the option is 4% of the value of the KLM
share (Option A, as indicated in the above tables), or (ii) an exercise price
that is equal to the vesting price (Option B, as indicated in the above table).
Options may be exercised at any moment during the exercise period, subject to
applicable regulations on the prevention of insider trading and a waiting
period of two years in the case of options granted in 1998 and three years in
the case of options granted from 1999 onwards. In 2003 option recipients were
offered a single plan whereby tax is payable on exercise, with the exercise
price being equal to the vesting price. Options may be exercised at any moment
during the exercise period, subject to applicable regulations on the prevention
of insider trading and a waiting period of three years in the case of options
granted from 1999. The waiting period has been changed in light of Air Frances
offer for common KLM shares becoming unconditional, as explained below. To settle the tax liability on options granted between 1999 and end-2002,
option recipients have been offered a six-month interest-free loan with a
commitment to repay one sixth on the loan per month. As of March 31, 2004 obligations in connection with options granted had been
covered through the repurchase of own shares and the purchase of share options.
Such hedging transactions take place at the moment options are granted. The
purchase price of the KLM shares is charged to Other reserves (see note 34 to
Stockholders equity). The premium paid for the share options (EUR 0.4
million) is amortized through salaries and benefits on a straight-line basis
over five years. Following Air Frances offer for the common shares in KLM becoming
unconditional, options on KLM shares already granted were converted into
options on Air France shares. Conversion was based on the method applied for
the conversion of the options listed on Euronext Amsterdam. Recipients of
options in the 1999 and 2000 series may elect for an alterative conversion
formula. These options can be valued on the basis of the Black-Scholes model
and converted into the countervalue of Air France warrants. All other
conditions in the current plan shall remain applicable with the exception of
the three-year waiting period, which has been abolished. 1 number of shares
that can be obtained. F-53




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##### Table of Contents



NOTES TO THE COMPANY FINANCIAL STATEMENTS - (Continued) 36. Commitments and contingent liabilities Tangible fixed assets on order As of March 31, 2004 commitments relating to orders of tangible fixed assets
amount to EUR 478 million (last fiscal year EUR 965 million). Of this amount
EUR 442 million relates to aircraft (last fiscal year EUR
920 million) of which
EUR 104 million is due in fiscal year 2004/2005. The remainder of the
commitments as of March 31, 2004 amounted to EUR 36 million (last fiscal year
EUR 45 million) and is related to other tangible fixed assets. Commitments
relating to the fleet for the next five fiscal years and thereafter: 2004/2005
    
    
    1042005/2006
    
    
    1842006/2007
    
    
    1542007/2008
    
    
    2008/2009
    
    
    after 2008/2009
    
    
    
 Rental agreements As of March 31, 2004 KLM has long-term rental commitments amounting to EUR
1,476 million (last fiscal year EUR 1,521 million). Commitments for the next
five fiscal years and thereafter: Operational leases
    
    Rental ofof aircraft
    
    buildings2004/2005
    
    
    181
    
    
    
    352005/2006
    
    
    166
    
    
    
    172006/2007
    
    
    141
    
    
    
    162007/2008
    
    
    108
    
    
    
    142008/2009
    
    
    103
    
    
    
    14after 2008/2009
    
    
    442
    
    
    
    183
 Guarantees As of March 31, 2004 guarantees were provided up to an amount of EUR 74 million
(last fiscal year EUR 174 million) of which EUR 50 million relates to
consolidated holdings (last fiscal year EUR 114 million). Guarantees were further provided for a number of consolidated holdings in
accordance with Article 403, Book 2, of The Netherlands Civil Code. This
information is part of the information on capital interests which has been filed
with the Trade Register of the Chamber of Commerce in Amsterdam. The debts of
the companies which are included in the consolidated balance sheet as of March
31, 2004 amounted to EUR 53 million (last fiscal year EUR 74 million). The Company is a member of a fiscal unit and is accordingly jointly and
separately liable for taxes payable by the fiscal unit as a whole. F-54




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##### Table of Contents



SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS Fiscal years ended March 31, 2002, 2003 and 2004Balance at
    
    Additions
    
    Additionsbeginning
    
    Charged to cost
    
    Charged to
    
    
    
    
    
    Balance atIn millions of euro
    
    of year
    
    and expenses
    
    other accounts
    
    Deductions *
    
    End of yearYear ended March 31, 2002Allowance for doubtful accounts
(deducted from accounts
receivable)
    
    
    25
    
    
    
    12
    
    
    




    
    
    3
    
    
    
    34Year ended March 31, 2003Allowance for doubtful accounts
(deducted from accounts
receivable)
    
    
    34
    
    
    
    6
    
    
    
    
    
    
    
    15
    
    
    
    25Year ended March 31, 2004Allowance for doubtful accounts
(deducted from accounts
receivable)
    
    
    25
    
    
    
    4
    
    
    
    
    
    
    
    5
    
    
    
    26
 * Accounts deemed to be uncollectable. S-1