Revolution delayed

The major ground handling groups have built global networks ready for wholesale outsourcing. But carriers have been slow to take up the opportunity

Like a wave that is always about to break, the promised outsourcing revolution in ground handling seems to be a long time coming. Over the last few years a handful of major groupings such as Servisair/ GlobeGround, Swissport and Worldwide Flight Services (WFS) have set about building global handling empires, backed by major investment. But the global customers have largely failed to materialise.

The theory was that handling would go the same way as the flight catering market, to become dominated by only a few global specialists. But the aftermath of 11 September slowed the tempo of handling acquisitions, and airlines have been slow to consider global or even regional outsourcing. Most keep ground handling in-house at major hubs and buy on an airport-by-airport basis elsewhere.

Global vision

Meanwhile, a few cracks have appeared in the global visions of the handlers. One revealing comment came from Mervyn Walker, director Europe for Menzies Aviation Group, another would-be global player, speaking at the Airfreight Asia conference in Bangkok in February 2004. "To be honest, other companies and my own did pay quite high multiples for our acquisitions pre-9/11," he said, adding that there had also been disappointingly little network purchasing - that is strategic multi-airport deals - and "stiff competition" from local handlers.

In November 2004, Swissport also decided to close its London Heathrow passenger-handling operation, an acquisition it had only made in 2000. It put the closure down to intransigent unions resisting cost-cutting proposals.

It was clearly a painful decision. While neither Swissport nor any of its rivals ever admits these days to having an ambition to handle in all of the key airports worldwide - the official line is always that they pursue acquisitions only when they can profitably add to the business - not having a presence at Heathrow will be inconvenient when trying to win multi-airport deals from airlines. Stephan Beerli, Swissport executive vice-president sales, seems to admit as much: "Believe me, we thought not twice, but five or 10 times before taking this decision."

On the other hand, Swissport has signed two deals in the last 18 months that must be the envy of its competitors. In August 2003, it reached an agreement to take over all the ground handling worldwide for Swiss, and in April 2004 it signed a 60-station deal with KLM. Neither is an unlikely customer - Swissport was owned by Swissair until 1997, and in 2002 it bought Cargo Service Centre, the global cargo handling operation of KLM. But the two deals are at least examples of the kind of contracts global handlers were set up to win.

Other global handlers point to more piecemeal arrangements, with a few airports here and a few there. Glenn Rutkowski, senior vice-president passenger terminal services North America for Worldwide Flight Services, says deals involving 15 to 20 stations are not unusual, but pressed for examples, most handlers talk of deals involving three to six airports. "No one is getting global deals or anything remotely like that," says John Willis, who is the vice-chairman of Servisair/GlobeGround, but was speaking in his capacity as chairman of the International Aviation Handlers Association, which represents ground-handling companies.

Airline resistance

Why the resistance at a time when airlines are desperate to cut costs? Beerli says Swissport can offer 15-20% savings, and Rutkowski says costs at WFS are probably 25% below those of legacy carriers. Yet still airlines are apparently not tempted to outsource wholesale.

One problem, handlers agree, is union and staff issues. "Every week customers say to me that if they could get rid of the 50 staff employed at their hub, they would outsource," says Alex Verougstraete, president and chief executive of European handler Aviapartner. "But it is not easy. They have been employing some of these staff for 25 years and it would cost a lot to get rid of them." Beerli thinks there is a control issue too. "They fear losing control, but in fact we can define the standards they need. We can clearly define targets, service levels, incentive programmes, bonuses - these are the tools in which we specialise," he says.

Another reason may be that airlines are still focused heavily on price over network synergies - something that has probably been reinforced by the tough financial times of the past three years. One fact often stated by the handlers, for example, is that airlines are looking to use fewer partners, to cut down on administration and simplify negotiations. Willis agrees, but says airlines still have an overriding wish to get the best price at each airport. "They are not yet prepared to pay a higher price at one location just because you are a global handler," he says. "So there is a trend to have fewer suppliers, but airlines still want the best deal."

Rutkowski says that in the USA price is even more important than that. "We hear of foreign carriers wanting to use fewer suppliers, but in the USA it is just the opposite," he says. "They want the best price and are not afraid to deal with multiple ground-handling contracts to get it. In the current financial environment they are after every penny they can save."

Building density

Talk of global synergies is probably premature. Aviapartner has focused on building density in European countries such as Belgium, France, Germany and Italy, rather than "planting the flag", as Verougstraete puts it, at airports around the world. The reason, he says, is that airport operations need to be close to each other to benefit from such synergies as joint marketing and training. "The more airports you have, the more economies of scale, provided they are within a reasonable distance of each other. It would help us to have another station in Europe, but not in South America," he says.

As evidence of the success of this strategy, Verougstraete points to a number of deals - as many as 30, he says - where Aviapartner handles a carrier in more than one airport in a particular country. For example, it recently signed a deal with Air France to handle it in Bologna, Turin and Venice. "Customer demands are different on different continents," Verougstraete says. "Handling in Europe is not the same as in the USA - airlines want different services and the handler has different responsibilities. So it makes more sense to look for deals on a regional basis."

At Swissport, Beerli agrees, although he sees this kind of deal as the first step to larger-scale outsourcing. "If a carrier gives us a regional contract and it works out, then they will be more confident to outsource a larger piece of the business," he says. "We clearly sense an increased openness to such ideas. Airlines are still quite opportunistic about ground-handling purchasing, but there is more strategic thinking. They will start by outsourcing a bit, and then a bit more. It will take time, but sooner or later we will get there."

Verougstraete notes that even in their hubs, carriers such as British Airways and Lufthansa have begun outsourcing some handling services - the operation of lounges and wheelchairs, for example. "They are likely to stick for longer to the parts of the service that involve direct contact with customers, but other elements are being subcontracted," he says.

A further sign that outsourcing is slowly extending its grip is that almost no airline is expanding its in-house handling operations. Verougstraete says he has "no knowledge in the last five years" of such a thing. Willis points to the example of Air France: "In Paris, they have subcontracted out their regional routes and moved their handling staff to long haul. So they keep the staff they have, but they are not hiring more people."

Low-cost airlines, which have no legacies of staff, are also overwhelmingly outsourcing, making them prime customers for the big handling companies. "We are happy - they are adding to the general market growth," says Verougstraete.

Price pressure

Low-cost business comes at a price: namely further pressure on rates. Handlers put a brave face on this. Aviapartner suggests that the low-cost airlines teach them useful lessons about being more efficient and Swissport talks of their openness to unconventional solutions, but all admit that negotiations with low-cost carriers are tougher than with legacy carriers. Verougstraete says the low-cost carriers often want a simpler service - no cargo, no cleaning - while Willis points out that they usually have traffic well spread through both the year and the day, making staff utilisation easier.

One further source of opportunity for the global handlers ought to come from purchasing by airline alliances. Here again, progress is fragmentary, but not entirely invisible. From this month, Aviapartner will be handling all SkyTeam carriers at Munich, and since 2001 has handled three oneworld carriers - British Airways, Cathay Pacific and Iberia - in Amsterdam. Willis adds a couple of Servisair deals to this list as well as Spanish/German handler Acciona's contract for oneworld carriers at Frankfurt.

"I think it is coming on a wider basis, but not yet," he says. "One of the problems is that airlines in an alliance don't have the same requirements - one may be regional at an airport and another long haul." Beerli agrees: "You can put the check-in desks all together in one place, but if they do not harmonise products and service level agreements, we can't really develop synergies. We have had alliance tenders, but when we have raised questions and asked for product details, then often they have not been feasible."

All of this adds up to a sense that strategic outsourcing of handling is still on the agenda, but not yet at the top of it. "We see a lot of solutions, but the big outsourcing concept that was being floated 10 years ago has not happened," admits Willis. So far, he adds, airlines have only done the "easy outsourcing". The question is when - and even whether - they will make the next step.

Is self-service a threat?

Are self-service check-in kiosks a threat to ground handlers' business? After all, their introduction is aimed at replacing the kind of staffed check-ins that ground handlers exist to provide.

On the surface the answer from handlers is no, but underneath one can detect some concern. "I don't see them hurting us at the moment - in fact they are helping us by providing an extra pair of hands. But yes, they might hurt us down the road," says Glenn Rutkowski, senior vice-president passenger terminal services for Worldwide Flight Services in North America.

Alex Verougstraete, president and chief executive of Aviapartner, agrees. Like e-ticketing, he expects kiosks to spread rapidly and become the norm in two or three years. "The traditional system will remain only for a minority of customers," he says. "But it is in line with the efficiency of the whole transport process, and we have to look for opportunities. The world is changing, and we have to change too." He is confident that Aviapartner will still be able to grow. "After all kiosks have spread in the past year, and we still saw revenue grow by 10%," he says.

The good news is that while check-in is the most visible part of the ground-handling service, it is not the biggest part - less than 20% of revenue according to Verougstraete. There is still boarding, baggage handling and service, lost and found, and other such services. Someone has to maintain the kiosks, too.

Stephan Beerli, executive vice-president sales and marketing for Swissport, also reckons that increased security measures will require people, not machines, to remain for some check-in roles. "If you are travelling to the USA and there are specific security requirements, you need an agent not a machine checking details," he says. "We get paid for meeting the requirements of airlines. If they need fewer counters, there will be other services we can perform. It will not mean our profits disappear."

There is also the question of whether handlers might end up operating kiosks of their own. Away from major hubs, airlines are faced with maintaining a kiosk that might get relatively light use, or using a common user (CUSS) terminal.

To date these have been installed by a number of airports - for example Vienna, which has pioneered them in Europe over the past 15 months. But John Willis, chairman of the International Aviation Handlers Association, detects unease among airlines about this. "I get the impression that they are nervous about airports operating them and would prefer us to do it, at least away from their home hubs," he says.

Not all handlers are keen on this idea - Verougstraete says for maximum efficiency CUSS kiosks need to be used by all airlines, but he does not rule out co-operation with other parties on the subject. Swissport, however, says it is working with airlines and IT companies on self-service devices, which might also have applications in areas such as railways stations and check-in for cruises.

Major players in ground handling 2003-4

Rank supplier	Revenues 2003 $million	% change	Stations	Countries served	Parent group	Base
1  Servisair/GlobeGround	1,048.7	6.9%	150	31	Penauille Polyservices	France
2  Swissport	873.6	25.9%	165	36	Candover	Switzerland
3  Frankfurt AGS	573.0	4.8%	25	9	Fraport	Germany
4  Worldwide Flight Servs	535.9	4.5%	100	20	Vinci	France
5  Aviance UK	413.3	11.5%	17	2	Go Ahead Group	UK
6  Menzies	394.4	9.4%	90	21	John Menzies	UK
7  AviaPartner	283.3	12.3%	32	6	Verougstraete family 75%	Belgium
8  SATS	242.0	-7.4%	7	5	Singapore Airlines	Singapore

Total/Average                          4,364.2                   13.9%

 Notes: Revenues for 2003 at average exchange rate. Servisair and GlobeGround are combined in the Airport Services Division of Penauille PolyServices      although they operate as separate market brands. SATS financial year ending March 2004. Aviance UK year ending July 2004. Frankfurt AGS= Frankfurt Aviation Ground Services.

 

 

 

 

Source: Airline Business