MARK PILLING LONDON
Moves towards the outsourcing of a multitude of airline services have been gathering pace over the past decade, but the global downturn, and then the US terror attacks, have spurred carriers to even greater efforts.
To some in the airline fraternity, outsourcing is a dirty word. They feel it carries with it the implication of job cuts and a loss of managerial and product control. In response to these sensitivities several service providers stress that what they offer is not outsourcing but "out-tasking" or "re-engineering".
But call it what you like, the bottom line is that outsourcing is already well-established in a variety of airline fields, rapidly expanding in others, and moving into as yet untouched areas of what airlines have previously regarded as their exclusive domain. The conventional wisdom is that, compared with airlines, specialist providers are more efficient in fields where they are the experts. The end result should be an equally good or better service at a lower cost.
According to one service provider, the airline business, compared with, say, the automotive industry, has been relatively backward in its take-up of outsourcing. But others accept that it is hard for airlines that have traditionally performed most of their operations in-house to change their ways. "You can of course outsource nearly everything, but in many key business areas it is not possible," says Michael Gaebler, chief executive of airline sales agency Aviareps.
Prior to the 11 September terror attacks, many carriers were already responding to the global economic downturn by examining outsourcing opportunities. What was a steady stream of enquiries to service providers has since turned into a torrent. "We are now in advanced negotiations with people who previously wouldn't give us the time of day," says one.
On information technology (IT) outsourcing, Mike Hulley, general manager travel and transportation industry at IBM, says: "Only 10% of airlines would consider embracing some thought process to do this prior to 11 September. "Since then there has been a huge increase in the number of airlines considering it."
Airlines are thinking the once- unthinkable across the service spectrum. "We are in various levels of discussion [on outsourcing] - some pretty advanced, some preliminary - with most driven by the severe downturn in business after 11 September," explains Peter Bluth, chief executive of GlobeGround-Servisair, the world's largest third-party ground handling company.
It is understandable that outsourcing has soared up airline priority lists as they explore every avenue that promises cost cuts. In-flight catering - a field through which outsourcing has swept in recent years - is using the Internet as the basis for taking it to the next level of savings. "This is an industry that has cut costs over the last two years by 15-20%, so there are not too many stones that haven't been turned over," says Derek Byrne, director general of the International Flight Catering Association (IFCA). The focus is not so much on the food cost itself - although there are caterers that are now mainly assemblers of meals rather than producers of the food itself - but on getting it efficiently and cheaply to the aircraft. "In catering, the trend is to push outsourcing back down the provision chain," he says.
"The whole thing about in-flight catering is that it is a logistical nightmare," says Professor Peter Jones of the UK's University of Surrey, which runs the world's first course on airline catering. "An integrated information management system is the only way to handle it, to manage the catering supply chain much more effectively," he says.
GateGourmet - the catering subsidiary of bankrupt Swissair - was one of the first major caterers to move into this area with its e-gatematrix operation. This business-to-business (b2b) catering solution was launched last year with Delta Air Lines as its first and exclusive customer for 15 months. In a daring move, Delta has outsourced virtually the whole of the food delivery chain to e-gatematrix, from menu design to buying and supplying meals.
Mike Pooley, e-gatematrix vice-president for Europe, admits that airlines can get extremely nervous over the prospect of someone else taking over the design process. "But we are not trying to come in and run their business, just re-engineer it to enable them to concentrate more on their core competancies."
The contract with Delta, which was originally designed to save $40 million of its on board services annual operating budget of over $600 million, has enabled e-gatematrix to put its b2b platform in place. It has been working in tandem with Delta for the past 18 months and fulfilled 70% of the goals set out with the US major, says Pooley.
e-catering
With its "toolbox" now ready, the company is seeking more customers and in particular a European launch. Prior to their bankruptcies, this was to be jointly with Swissair and Sabena, and although e-gatematrix hopes to re-open talks with Crossair as it seeks to resume operating some of the Swiss carrier's network, it now has the capacity for other major European clients.
"The total in-flight supply chain approach embraced by Delta is one of the key e-gatematrix proposals and we are happy to show what the complete model does, but it is certainly not just what we can offer to airlines. We proposed to Delta the whole supermarket, but others can buy a single shelf or an item on the shelf," explains Pooley. Carriers can take elements of e-gatematrix technology and functionality and build up their capability over time.
During 2002, Pooley expects another two or three carriers to sign up with e-gatematrix. He stresses that, although the product uses the Internet and IT as its main tools, it "is very much a service management proposition" and "not just another e-commerce operation". For instance, a key component of its service is to establish dedicated teams at the home base of the airline customer, as it has done for Delta in Atlanta.
GateGourmet's biggest rival, LSG Sky Chefs, is planning to announce the first customers for its catering e-business solution at the IFCA bi-annual exhibition in February in Cologne, Germany. According to Joao Monteiro, global senior vice-president for corporate strategy, there has been a recent significant change in attitude at carriers towards e-business solutions, such as the eLSG. Sky Chefs web-based portal. "To our surprise, airlines are showing increasing interest in implementing these systems. The fears over loss of product control and neutrality [of the provider] are not as pre-eminent as they use to be."
Another significant shift is that LSG Sky Chefs is not talking exclusively to the in-flight catering group, as used to be the case. "Today we even see the airline's chief financial officer in some meetings," he notes. This demonstrates the importance airlines are attaching to any project that can make them more efficient and save money. "Management is really very interested in anything creative that has a bottom line impact, even if it changes the way things are done," says Monteiro.
LSG Sky Chefs also sees a will emerging for airlines to go beyond the e-business offering and bring in an outside supplier to manage and use these tools to improve their in-flight operation. This goes towards the provision of a total in-flight service, from product design and engineering to meal delivery.
The barriers to this thinking are breaking down, with carriers willing to use the caterer's strong knowledge for their own benefit. One of the keys is to develop a deeper relationship between supplier and customer. It provides this style of service for parent Lufthansa and to a degree for several others, says Monteiro, and the interest is growing "exponentially". The idea is "intelligently integrating food and other services to enhance the brand of the airline," he explains.
Supplair, which launched its web-based catering supply management system in early 2000, does not claim to go this far, but it believes its neutrality and focus on providing carriers with cost-savings is important. Interest in its ability to extract costs through the distribution of catering products via its European and US networks has brought many knocking at the door, says chief executive Jan-Willem Dankelman. He conservatively estimates that using Supplair can save an airline 5-10% of the overall cost of buying food.
Ground control
While in-flight catering is contemplating second- and third-generation outsourcing, the ground handling industry has only just begun to digest its first generation. The world's two largest third-party handlers - Lufthansa's GlobeGround and Swissair's Swissport - both entered first generation deals in 2001. French services giant Penauille Polyservices will complete the 100% takeover of GlobeGround by June, while UK venture capitalist Candover Partners is in negotiations to take over Swissport.
Airlines have always outsourced much of their handling at out-stations and in overseas locations, but for control, labour relations and dogmatic reasons have been reluctant to do so at hubs or large secondary bases. So far the main deals have been in Europe, but that may change soon. "In the USA there has been nearly nothing on outsourcing, but now carriers are starting to think about the issue for the first time," says GlobeGround's Bluth.
"Many airlines did not see a great urgency in changing," says Alex Verougstraete, president of Aviapartner, the number two supplier in Europe with 32 stations. "It is not easy, has great social implications and psychologically it was not possible in the past." Such hurdles have been swept away as airlines scan their empires for cost-savings. "Carriers are looking for better prices, even though in Western Europe they are very low already, and even if outsourcing involves losing some direct contact with the customer, it will not make a deal impossible in the future," he believes.
According to Bluth: "Carriers have to look at their cost structures and define what their core business is." He contends that an airline's core business on the ground is where the airline comes into contact with the customer - passenger handling. The part that involves moving and servicing the aircraft - ramp handling - does not, and is an obvious outsourcing opportunity.
Both GlobeGround and Aviapartner are discussing several major outsourcing deals at present, with the first ones likely to come to fruition this year. This will usher in a sea change in thinking for this labour-intensive industry, but a lack of suppliers able to cope with large outsource projects may frustrate those airlines not in at the start.
However, Bluth says GlobeGround is well positioned to take advantage of the opportunities that arise, and is prepared to take a shareholding in an airline operation if necessary. But if GlobeGround does go into a new hub it is important that it be able to go for other carrier business too, which may mean setting up two separate profit centres. This is partly to enable the handler to expand outside the boundaries of the hub carrier, and also to reduce its exposure to a single airline if it cuts back.
GlobeGround knows about being exposed to specific operations thanks to its experience with Canada 3000, for whom it was the main handler in its home market. The carrier's bankruptcy cost it considerable business.
It is not only important for both sides to be confident about the ability of the partnership to produce the right service delivery, but to be confident in each other's financial reliability. The difficulty for airlines is that the poor health of many handlers may restrict their ability to take on big outsourcing projects. There are only a few with the financial and managerial muscle to perform such projects, and even fewer who could do more than one simultaneously. Even GlobeGround would baulk at more than three in a year, says Bluth.
But not all are so confident, particularly in Europe, that changes are afoot. Over the past few years there has been a host of handlers changing owners in Europe, often at significant mark-ups. Peter O'Boyle, managing director of UK-based GHI and spokesman for the Aviance alliance of handlers, sees the number of buyers for handling operations drying up. In addition, their ability to invest in major outsource deals may be limited. "The process of outsourcing will probably slow down somewhat as ground handling slips down their priority list," he says.
IT dominance
In the IT world, US giants IBM and EDS have grown to dominate the airline outsourcing market. EDS expanded with the purchase in mid-2001 of Sabre's airline infrastructure outsourcing business, and added the operations of Swissair's IT subsidiary Atraxis in November. Last year was also a good one for IBM as it sealed huge outsourcing deals with Japan Airlines, Air Canada and Cendant Corporation, the parent of global distribution system Galileo.
More will follow. "In the next three to five years I think IBM will have at least two to three times the level of outsource accounts that we have had in the past," says IBM's Hulley. Although he believes recent events have caused a fundamental shift in how airlines view outsourcing it must not just be about cutting costs. "It goes much deeper than that and must be a two-way partnership. When talking to airlines we say it is not just about saving money, the issue is what else we can bring to the table," he adds.
The deals it struck in 2001 saw IBM become a strategic business partner with its clients. For instance, the $900 million deal with Air Canada - which also promises to save the airline $120 million over the term of the seven-year deal - will see the two pursuing new business, particularly in the field of customer service, such as self-service kiosks.
IBM is also researching products that can broaden its reach. One concept used commonly in other industries is for operations to outsource IT to a remote host and to pay for using it, depending on how much load they have, says Hulley. Information security is an issue, but IBM has the capability to partition databases. Another potential for sharing is among the airline alliances. According to Hulley, there are huge economies of scale for the alliances to share resources and systems, particularly on the customer service side.
Sales agents
The goal of cutting costs and - more importantly - improving performance is a message to which Gaebler of Aviareps subscribes. His firm offers airlines a sales and marketing presence in off-line markets in Europe and the USA, with African and Asian operations being developed over the next two years.
Gaebler saw the demands for more outsourcing in the field starting in late 2000 as the world economy slowed. To counter this, he aims to put in place a dedicated sales force that can win high- performance bonuses and explore all possible market segments. For instance, in off-line markets, carriers often concentrate on a regulated sales pattern focusing on the larger corporate or retail clients. The Aviareps job is to start from scratch and expand the distribution channels and sell more tickets. Close attention is also given to yield management, which can show improvements of 4-8% over just 10 months, he claims.
The level of interest in the product - ideal for carriers serving secondary or tertiary markets - is represented by Aviareps having 41 customers today and talking to another 72, plus the alliances. Aviareps offers alliances a neutral sales force that will represent all the interests of the members equally, says Gaebler.
The potential for outsourcing in this area is huge. Gaebler estimates that 95% of airlines still run their own sales teams wherever they operate. The logic of this can be questionable, he believes, and knows of operations which generated revenues of only 15% of what it cost to keep them running.
The provision of call centre services to third parties has caught the eye of several providers, but so far the efforts of airline-related operations to win business has been limited. The attraction of outsourcing call centre work to low-labour cost areas is obvious. The philosophy works on the so-called "follow the sun" methodology.
"No single call centre is open 24 hours a day," says Mindpearl, the re-named former Qualiflyer Customer Care Centres. "As the sun moves around the globe, so does our service. Calls received during the evening are routed to other parts of the world at no extra cost to the customer. In Europe, for example, all calls received during the night are routed to the company's call centre in Australia, where the staff are working their regular business hours." With the call routing only being 10% of the cost, the advantage looks clear.
However, according to John Pope, operations director of independent airline call centre specialist Flight Directors, carriers are nervous about outsourcing such a critical area to other airlines. Yet it has occurred within alliances, where Mindpearl, for instance, has worked for members of the now disbanding Qualiflyer alliance.
Flight Directors provides call centre services for airlines from its London Gatwick base. So far these are not total outsourcing deals but tend to focus on specific areas. For example, it handles all of the calls to Ryanair's Internet help line, or takes all incoming calls to CSA Czech Airlines in the UK after office hours and offers an overflow service during daytime hours when CSA gets busy.
Although it has lost business because of 11 September - due to reduced call volumes United Airlines took back in-house the booking amendment calls Flight Directors formerly handled - the company has seen positive signs that its Complementary Airline Reservations product does provide the kind of tailored approach that carriers want. "Airlines want to keep the capability of dealing with their most important customers, but they also want to get better at segmenting their customer base and find segments that can realistically be outsourced to save them money," says Pope. For Flight Directors the next target is to open a second call centre somewhere in Europe. It is talking to airlines that may completely outsource their call centre operations.
The neutrality that Flight Directors and Supplair cite is one that World Fuel Services - which has annual aviation fuel sales of $600 million - also believes is a crucial selling point in its favour. It began promoting its service for fuel buying and management in mid-2001, says president Michael Clementi, to expand its aviation business out from its niche in providing credit for small and mid-sized carriers so that they do not have to pay for fuel prior to delivery.
WFS believes fuel is a classic outsourcing opportunity, and one that only a tiny proportion of airlines embrace so far. Apart from a few large carriers, such as American, United, Northwest and KLM, few can justify a specialist fuel trading operation. "It is remarkable that fuel gets as little attention as it does," says Clementi. "Our argument is we can save a lot of money by being proactive and taking control of it."
The company will work hand-in-hand with airline buyers on fuel pricing, tax advice, hedging, storage and credit. WFS has already picked up some outsource business for carriers at their smaller locations.
From areas as diverse as fuel and call centres it is clear that the pressure on cost management is today so acute that outsourcing opportunities abound. The major challenge for airline management is to assess and take these opportunities quickly while ensuring they find the right partners and sustain service levels.
Source: Airline Business
