Breaking new ground

Network and low-cost carriers are busy transforming their ground and passenger services using outsourcing, new technology and shared facilities

Nobody said it would happen overnight, but a reinvention of ground and passenger services is under way. Many network carriers are busy introducing technologies like self-service kiosks to automate the passenger check-in process, spinning off their ground handling units from the mother company and using their alliances to share ground services and facilities.

The way in which carriers have built their airport services over the past few decades means that progress has been measured rather than meteoric. Changes in handling arrangements often require tough negotiations with staff and the untangling of a web of local bilateral arrangements between carriers.

Mainline carriers cast envious glances at the way low-cost upstarts have been able to start from scratch and design an airport terminal and ramp service with low complexity. But even at this end of the market, efforts to drive out more costs continue unabated.

The desire to reinvent the traditional way of providing ground services is hardly a new phenomenon, and not simply a response to the acute cost pressure that followed the recent crises. "In the past four to five years internally at Finnair and in the alliance world there have been a lot of changes," says Juka Rahko, vice-president ground operations at Finnair, who has been in the midst of such change. "This has partly been due to enormous outside pressures, and Finnair has been no exception to the rule."

One of the most profound transformations under way is the removal of handling from core airline activity. Many carriers would like immediately to outsource a service they acknowledge independent handlers can perform more cheaply. But it is not that simple. "The problem in getting new business is what to do with the long-standing agreements with the incumbent workforce," says Conrad Clifford, commercial director at global handler Menzies Aviation Group. "To get out of such arrangements is either very tough or expensive."

Upfront costs

Menzies has made proposals to carriers contemplating outsourcing where the handler will take on the costs of redundancies or buying staff out of their contracts, says Clifford. However, these high upfront costs have to be balanced by the carrier committing to a longer-term deal with the handler of say five to 10 years, he adds. So far, carriers have been reluctant to do this. "They want more flexibility," he acknowledges.

Another solution Menzies has explored is to create a partnership with an airline. "Instead of wholesale divorce, the airline takes a minority shareholding in the handling venture," says Clifford. This enables the carrier to retain an element of control over its service function and potentially have less labour disruption. Menzies proposed such a solution to United Airlines early in 2003 as the carrier sought to offload its large US cargo handling operation. In the end, United chose instead to outsource this work to the world's second-largest handler, Swissport.

The number of opportunities for the independent handling groups to tackle bulky outsourcing projects or even to bid for stakes in carrier handling companies is rising. For instance, the Portuguese government is offering a 50.1% stake in Servicos Portugeses de Handling, the services arm of TAP Air Portugal. Local investors and several handlers are in the running as the government aims to find a strategic partner for the business.

Elsewhere in Europe, Alitalia is another in the process of finding a partner for its ground handling activities, while Hungary's Malév is following a similar path. According to Stephan Beerli, Swissport executive vice-president marketing and sales, over the next year his company will be taking over ground handling across the globe for Swiss, which also has a common heritage within the former Swissair group.

The collaboration, signed in August, saw handling at Los Angeles and Johannesburg transfer to Swissport from November. Swiss says the move will generate sizeable cost savings and enable it to "focus more clearly on core flight operations". The move will also "help Swissport recoup some of the business volumes it has lost through our recent resizing", adds Swiss.

Separating handling into a standalone unit is the first step in a process towards outsourcing this function completely. Finnair's Rahko describes the division of the carrier's various departments into independent business units in early 2001 as the biggest change in its 80-year history.

Finnair Ground Handling (FGH) took over all handling for Finnair at Helsinki and around the country's domestic airports. Rahko himself moved back into the airline to provide global oversight for handling.

FGH has strict cost targets and service quality levels to meet, and while it was guaranteed Finnair's business initially, this is not always necessarily so. "At the beginning, when it was established, even if it is not stated formally, the understanding is that there is a kind of grace period," says Rahko. "During this time the unit has to prove it can work in such a way that it deserves the business from us, although there is no time limit."

Tough targets

The targets Finnair set for its handling subsidiary were deliberately tough, says Rahko. "Productivity has improved quite substantially, but there is still a long way to go," he says. To date, the transformation to FGH has enabled Finnair to save at least 20% on its handling costs compared to the old system. "The biggest headache is the same as every handler faces - how to organise work during peak hours so your operation is economic and efficient," says Rahko.

While in theory Finnair could out-source handling at Helsinki from FGH to another provider, in reality the size of its operation there means that would be a tough call. However, it has outsourced handling at 15 of the country's 20 domestic airports to independent subcontractors, many of which are run by former Finnair employees. "It is only a matter of time before the rest of the domestic airports are outsourced," adds Rahko.

Further dramatic cost cuts, as well as improvements in service quality, can be achieved by outsourcing at outstations, argues Rahko. Over the past three years Finnair has begun service to Hong Kong and Osaka and has not employed one person at these airports, leaving the task to a dedicated manager provided by the contracted handler.

A serious evaluation of staffing levels at all outstations over this period has led Finnair to reduce headcount by 40% with still some way to go, says Rahko. "The challenge is not to compromise on quality," he says. This involves a raft of service level agreements with handlers and constant monitoring of their performance. "It has worked surprisingly well and from the quality point of view we are probably better off," he says.

Low-cost in-sourcing

When UK low-cost carrier easyJet began operating in 1995 it naturally outsourced its handling. But rapid growth at its London Luton and Geneva bases, plus a desire to have its own staff in front of passengers to better control this aspect of its brand, led easyJet to in-source this function, even though it admits it is a more expensive option.

Now easyJet is considering a return to a form of outsourcing at Luton and Geneva. Its preferred route is to establish a handling joint venture where it retains a significant influence over the operation. In the maintenance field it has already created a similar arrangement.

One of the reasons for evaluating the move is the dramatic improvement in service it is receiving from handlers around its network, says the airline. "Handlers realise they need to be flexible in the product they offer," says easyJet. This often means a team dedicated by the handler to the carrier. "This gives us what we want and enables staff to get to know your product inside and out."

As handlers design simpler and cheaper products to suit low-cost carriers, Menzies has produced a brand called KISS - for Keep It Safe and Simple - especially for these airlines. It launched the concept for bmibaby at the UK's East Midlands airport in late 2002, and has just concluded a deal with unions in the Netherlands to start up the second KISS operation at Amsterdam Schiphol on a trial basis, says Clifford. The first customers will be easyJet and Virgin Express, which will transfer from the standard Menzies handling operation.

With carriers reorganising their handling operations, another big effort is under way to speed up passenger check-in. The introduction of new technology can provide some answers, says Tom Cauthen, associate partner at global consulting firm Accenture. "In general, we are now just starting to see airlines who were in hibernation recognise the need to invest to get their costs aligned," he says.

For its part, easyJet sees that automated solutions can minimise check-in times, but the carrier has not found what it feels is an appropriate solution yet. Other European low-cost carriers have also found the upfront investment in kiosks a deterrent.

Kiosk investment

On the other hand, US low-fare carriers are investing in the technology. Southwest Airlines is installing its Rapid check-in kiosks at 20 of its busiest airports, while America West Airlines introduced kiosks at Dallas/Fort Worth - its first bank of kiosks at a non-hub airport - in November. The airline plans to install kiosks in every one of the airline's markets by early 2005, says Anthony Mule, senior vice-president customer service.

Although self-service kiosks do not fit the business philosophy of all carriers, they do provide a payback in the form of an on-going reduction in labour costs, says Cauthen. The logical next step of this development is an expansion of common-use self-service (CUSS), which enables passengers to check in for a variety of airlines at the same kiosk.

This is certainly something carriers within the Star Alliance are working towards, says Hock Lye Lee, vice-president products & services for Star. The aim is to deliver CUSS within two years among all carriers in the alliance, or as many as possible, he says.

There are many opportunities for the global alliances to reduce airport service costs by standardising procedures, sharing facilities and developing common check-in policies. Alliance members have also begun to buy ground handling as a group.

Star is attempting to expand its "move under one roof concept" from concentrating on "mere physical collocation" at airports to integrating systems and procedures. It has a range of initiatives from ticketing and transfers to check-in and baggage services. For instance, the alliance now has its first joint lounge at Zurich and is planning on others at Nagoya and Los Angeles, says Hock.

At Frankfurt and Los Angeles it has created Star Connection Centers, which are special teams aimed at ensuring passengers with tight connections, and their bags, make their flight. The operations people inform the connection team where a connection is tight, send people to meet the aircraft, find the bags, and escort them to their next flight. "It is a no-brainer, but takes an effort to set up," says Hock. There are savings. Star calculates that the move has saved €1.8 million ($2.2 million) in the nine months since it began in April for an investment a third of that size, he says. This does not include the goodwill created by ensuring passengers make their connection.

Joint facilities

Oneworld is similarly introducing joint facilities where they make sense, and they are now operational at 25 airports around the world. The latest, a combined transfer facility for connecting passengers at London Heathrow Terminal 3, opened in October. It replaces units operated by American Airlines, British Airways and Cathay Pacific. It will not actually cost any less than the three units it is replacing, but oneworld says it will offer a better service.

The accumulative effect of such facilities is important, but the biggest impact is where carriers are able to move under one roof. Hock rates the agreement of 11 Star carriers that operate at Heathrow to move into one terminal once the new fifth terminal opens in 2008 as one of its major achievements to date.

Star had selected a move into Terminal 3, but now that BA has said it will move its T1 and T4 operations simultaneously into T5, there is the option for Star to consolidate in T1. The fifth terminal is not large enough to accommodate all oneworld carriers, and the alliance says it is looking at T3 to house airlines that will not fit into T5.

Another dedicated Star terminal is on the cards at Paris Charles de Gaulle's Terminal 1 after its refurbishment in 2005, says Hock. Other opportunities for co-location are being studied at Vienna, Madrid, Warsaw, Bangkok and Miami. The headline example that is already in service is the Star Terminal at Munich, he says.

Major international players in ground handling 2002/3
Rank	Supplier	Revenues $ million	2002 change	Stations	Countries served	Parent group	Base
1	Servisair/GlobeGround	976	n/a	170	37	Penauille Polyservices	France
2	Swissport	648	-3.1%	150	29	Candover	Switzerland
3	Frankfurt A/pt Ground Services	546	4.1%	25	9	Fraport	Germany
4	Worldwide Flight Services	512	n/a	100	20	Vinci	France
5	Menzies	357	1.5%	91	22	John Menzies plc	UK
6	Aviance UK	319	41.1%	17	2	Go Ahead Group	UK
7	SATS	260	9.7%	6	5	Singapore Airlines	Singapore
8	AviaPartner	249	32.9%	32	6	Verougstraete family	Belgium
NOTES: Revenues for 2002 year at average exchange rate. Other figures for December 2003. Servisair/GlobeGround combined in the Airport Services Division of Penauille but operate as separate brands. GlobeGround 2002 revenues included in Penauille accounts for first time. SATS financial year ending March 2003. Worldwide Flight Services 2002 revenues included in Vinci accounts for first time. Aviance UK is part of the Aviance alliance with $550 million revenues across six member companies.

REPORT BY MARK PILLING IN LONDON

Source: Airline Business