When casting around for ways to reduce costs and strip out non-core businesses, airline chief executives did not take long to focus on the opportunities to be had from outsourcing their in-flight catering services.
While menus may be a crucial part of the marketing mix, it is difficult to argue that production and delivery of on-board meals is a core airline function. The agonising that has typically accompanied outsourcing in areas such as maintenance has largely been missing in catering, as has the prospect of tough union battles.
Through outsourcing, the industry has pushed down the costs of in-flight catering over the past few years. It now stands at about 4% of overall airline operating costs in the USA and around 6% in Europe. At the same time, airlines can claim that by handing over the job to the professionals, the quality of the product has improved.
Estimates vary widely about how much in-flight catering is being carried out by third parties. But there is no doubt that the amount has soared, particularly in Europe and the Americas, where, according to some estimates, it has jumped from 20-30% a decade ago to around 80% today. Economy class and main meals were the first to be contracted out, but many airlines are now out of the food business altogether.
"There has been a sea change in in-flight catering," says Derek Byrne, director general of the International In-Flight Catering Association (IFCA). "There are a lot of alliances, mergers and greenfield mergers going on and the big guys are getting bigger." Economies of scale and quality control are two of the main reasons for this trend, says Byrne.
Some airlines have nevertheless been reluctant to part with their catering arms. Continental's Chelsea, Air France's Servair and Cathay Pacific Catering Services, are all expanding their third-party business. But they face a stiff uphill task to achieve world scale, still standing as comparative pygmies to the global catering giants.
Independent companies such as Dobbs International of Memphis, Tennessee, and UK-based Alpha Catering Services, which has a strong presence in Europe, have emerged as contenders. But the two most successful suppliers are strides ahead. LSG Lufthansa Service Holding is the industry giant, with annual sales of around $1.5 billion in its own right and near double that after including its partnerships - principally the US Sky Chefs joint venture with Canada's Onex Food Services. SAirGroup's Gate Gourmet is keeping pace with ambitions of its own to become a world giant. Together, the two groupings hold over 40% of the open market for outsourced in-flight catering. Both have plans to grow.
More than five years ago, Lufthansa and SAirGroup decided to apply the same strategy to catering as they did to their other units, spinning them off into independent subsidiaries in an effort to turn them into profitable global players in their own right. To underline the fact, LSG plans a stock market listing this year.
LSG should consolidate its position by taking full control of the Sky Chefs venture. The plan is for LSG to buy out the Onex 75% share by 2003. This follows an aggressive acquisition strategy which sees LSG active not only in western Europe and the USA but also in Turkey, Sweden, the Baltic region, Bangkok and Johannesburg. LSG, including its joint LSG-Sky Chefs brand, operates more than 200 production kitchens worldwide.
Although firmly in second place, Gate Gourmet has been no less expansive, growing fivefold since it was formed in 1993 and picking up, among other acquisitions, the kitchens and business of British Airways and Varig.
"We have the ambition to double our size within the next three to four years," says Gate Gourmet chief executive Henning Boysen. "We have been growing strongly in Latin America and intend to continue growing there, including Central America, while still growing in Europe." At the end of the year, says Boysen, the company will open a flight kitchen at Paris Charles de Gaulle.
BA's sale of its in-flight catering kitchens at London Heathrow to Gate Gourmet at the end of 1997, set the outsourcing ball rolling in Europe - joining a trend already begun in the Americas where major airlines have long since sold off their kitchens and outsourced the work. All attention is now trained on Asia, to see whether it will follow suit. Gate Gourmet and LSG-Sky Chefs have taken a toe-hold in the region, including in-flight kitchen facilities in Hong Kong's new Chek Lap Kok Airport, but they see this as only a small start.
"Due to the crisis and downturn, a number of airlines are evaluating the possibility of divesting themselves of their catering activities," says Boysen. "Asia is still where the US market was 20 years ago and Europe 10 years ago. Part of the structure of the Asian market is reciprocal deals [between airlines]. So far they are very happy with their in-flight catering arrangement because they are very profitable."
However, airlines with in-house catering facilities are paying "artificially high prices", he says. In his view, airlines must remember that although "-catering costs are a very low percentage of the total cost picture-they still affect the bottom line". SAirGroup now accounts for just 15% of Gate Gourmet's sales, says Boysen. And although his company still supplies 80% of meals for the Swiss group's airlines, it has to bid for contracts just like any other outside supplier.
Boysen believes that airlines have generally welcomed the trend towards consolidation in the industry represented by LSG-Sky Chefs and Gate Gourmet. "While there will always be room for niche players and a few regional caterers, some of the medium-sized suppliers will disappear. Airlines are looking for fewer and more global suppliers."
KLM, Europe's fourth largest airline, agrees. "We try to limit ourselves to a small number of suppliers," says Ed Wijnen, manager of purchasing, catering contracts, at KLM's Catering In Flight Services.
KLM, which still has its own in-house kitchen, began contracting out in-flight catering in March, and will have farmed out business and economy class across its network by the start of July. KLM has already managed to reduce the number of suppliers it relies on in the USA to just two. But because the European Union in-flight catering industry is more "fragmented" than that in the USA - where LSG-Sky Chefs and Dobbs International dominate - his job is "more difficult", he says.
Wijnen, whose carrier has a 10-year alliance with Northwest Airlines, says the growth in global alliances is fuelling the need for simpler and more comprehensive outsourcing arrangements.
Like the members of the Star Alliance, the carriers within the Northwest-KLM grouping already take joint decisions on catering suppliers and their new partner Alitalia looks set to join them. Alitalia is considering outsourcing for the first time after a trial with a third-party supplier, and is talking to its Dutch and US partners about the possibility of starting to make outsourcing decisions collectively.
"We [KLM and Northwest] supply the same meals on all flights where we operate together," he says.
"The more uniform the product, the greater the price advantage."
According to Wijnen, truly global sourcing has not yet happened, but this is largely because airlines are cautious about relying on one supplier. "They [in-flight caterers] try to offer us global deals but we do not believe that this is to the advantage of KLM or its partners," he says, but adds that regional contracts are on the cards. "KLM and its alliance partners are close to signing a deal with Gate Gourmet in South America."
In the coming years, more airlines will outsource their catering, says Wijnen. But, because in-flight food is an important factor the overall service package, carriers will continue to set menus. Wijnen adds: "They will keep their fingers on the pulse."
Source: Airline Business
