In-flight catering companies are being squeezed by their airline customers and are looking for ways to cut waste from their processes and work more efficiently
Over the past few years the emphasis for the in-flight catering industry has been all about slimming, but it has nothing to do with waistlines. The sharp capacity drawbacks after September 2001, radical cuts in food provision and increasing moves towards buy-on-board food conspired to hammer the high-flying catering giants and instigate a fundamental transformation in their businesses.
“In-flight catering was a buoyant industry before September 2001,” says Professor Peter Jones of the UK’s University of Surrey, the world’s only academic specialising in travel catering. Before the crisis Lufthansa-owned LSG Skychefs and Swissair-owned Gate Gourmet accounted for around 55% of the global market with combined revenues of $5.3 billion.
They are still easily the industry’s largest players but such has been the scale of the shake-out they have seen a dramatic slump in revenues since their peak, with LSG Skychefs sliding by a third since 2001 and Gate Gourmet, now owned by US investment group Texas Pacific, tumbling by over 40%.
The stress placed on the industry was illustrated only too dramatically in August when British Airways services at London Heathrow were thrown into turmoil after a wildcat strike by baggage handlers grounded the carrier for 48 hours. They were protesting to show sympathy with workers at Gate Gourmet UK, BA’s catering supplier, which had dismissed over 650 staff who walked out over a contentious restructuring plan.
That plan included new working practices and job cuts to bring costs down, and negotiations with BA, which sold the catering operation to Swissair in 1997, for a better deal. Gate Gourmet’s UK operation urgently needs these measures as it is bleeding red ink. It lost £22 million ($40 million) in 2004 and says it will lose a further £25 million this year if the BA deal is not revised.
Most of the pain in the catering industry over the past few years has been felt in Europe and the US. The cost-cutting chain reaction began with the US mainline carriers, which have almost universally ceased serving free meals on flights lasting less than four hours. Since 2001 LSG Skychefs has reduced its US workforce by around a third when faced with the joint challenges of expensive leases, high labour costs and shrinking customer contracts.
Of the US carriers, American Airlines is by far LSG’s biggest customer, followed by Northwest And United. Tim McMahan, manager of menu planning for American Airlines says: “American still offers complimentary food in first class and business class on domestic, Hawaii and Caribbean flights. In the main cabin, a buy-on-board food programme is offered on more than 800 flights, those greater than three hours in length.”
Low-cost carriers in the USA have taken it even further, and many see no value in providing food for passengers. “Food is an irrelevance compared with price and schedule,” says Pete McGlade, vice-president schedule planning at Southwest Airlines.
LSG Skychefs says the result is a 40% drop in the US catering market. Europe has seen a more modest 20% drop, mainly due to the fact that Europeans still like to be offered refreshments on board aircraft, whether they must be paid for or not. In Asia the effect has been less severe as the arrival of low-cost competition has been balanced by huge traffic growth, says LSG.
As a result of this shrinkage many catering companies have been forced to seek to reduce their costs by operating more efficiently. In some cases this has led them to restructure their businesses. To this end they have turned to the lessons learned in the manufacturing and assembly business, says Jones. In many cases catering company managers are being recruited with these backgrounds, he adds. “Food is now seen as a commodity just like any other,” he says.
Restructuring costs
In the case of LSG the restructuring project, which began in 2003, is tasked with cutting administrative costs by about 30% by 2006. The company has reached agreement with its union to reduce the complexity of the current pay structure and streamline production processes. The company says it hopes to reach close to breakeven, before restructuring costs, by the end of the year. Today around 50% of its revenue comes from Europe and Africa; 30% from the Americas and around 20% from the Asia-Pacific.
The lean production model has been widely taken up among the in-flight catering players in a bid to increase productivity. Finnair Catering introduced this model in October 2004 and expects to see savings by the end of 2006. Anssi Komulainen, senior vice-president at Finnair Catering, says the company is looking for 15-20% efficiency gains.
Alpha Flight Services introduced a similar programme with the same aims. It has now been rolled out across the company since trials began seven years ago. “We have achieved a 58% improvement in productivity over the past five years,” says chief executive Keith Abbott.
In the past airline catering was a simple affair, with all passengers, regardless of where they sat, getting a free meal. Nowadays the mainline carriers are seeking to differentiate their business and first-class cabin products by increasing the quality and standard of their catering. It is in the economy cabin that economies are being found.
This is described as a “schizophrenic situation” by Komulainen, with some carriers prepared to invest in enhancing the premium service to gain competitive edge, and others such as the low-cost carriers, paring the service down to the bone. In future, Komulainen sees passengers being able to order and pay for their onboard catering online, at the point of booking the flight or when checking in over the internet.
But he adds that it will always be necessary to carry a certain amount of buy-on-board food for passengers who have not made prior arrangements. When it comes to innovating, “we only do things customers are willing to pay for”, he says, adding that the idea is to “sell better products at better prices”.
“In-flight service has become an even stronger differentiation factor in the first and business class segments, which allows the caterer to develop concepts to enhance the airline’s brand,” explains Alfred Rigler, managing director of LSG Sky Chefs inflight management solutions. “Opposite to this, economy class service concepts as well as the low-cost carrier offerings are under severe price pressure.”
The rise of buy-on-board
Buy-on-board is becoming more popular, and is seen as a major revenue source by some low-cost carriers. The concept is based on the premise that the food items become a retail product and so the retail supply chain can be adopted for this purpose. Low-cost carriers, as part of their business model, adopted the retail approach to the flight catering supply chain from the start, according to Jones.
“If easyJet continues to expand at the current rate, it will overtake British Airways by the end of the year as Alpha’s major in-flight catering customer,” says Abbott. The company also lists Virgin Express and Ryanair as big customers and is about to establish a base in Berlin that will join others in Dortmund, Geneva, Nice and Paris Orly specifically to supply easyJet’s operations there.
However, LSG estimates that the buy-on-board model so far contributes less than 10% of its revenues. It says that several mainline carriers, for example Swiss, flirted with buy-on-board catering for short-haul flights, but due to poor customer feedback have reverted to providing free meals. The obvious drawback with buy-on-board is that demand is difficult to predict, which could lead to unacceptable levels of wastage.
Although the catering firms are battling to return to profitability, the market is still a major prize. Jones says the total market size of the in-flight catering industry is estimated to be around $12 billion annually and feeding more than 1 billion passengers each year. It employs around 250,000 staff worldwide in 630 production kitchens.
Where the market goes next is another question as the regional variations are so deep. “Its complexity nowadays makes it very difficult to forecast,” says Jones. “It is very dangerous to talk about a global industry as it can be divided into three clear markets. In certain sectors such as Asia and the Middle East the picture looks quite rosy, in dramatic contrast to the agonies of restructuring being faced in North America.”
JACKIE THOMPSON/LONDON/AMSTERDAM
Source: Airline Business
