Seeking stability

Some stability is coming to the embattled ground services sector as the market consolidates, but major carriers remain frustratingly slow to outsource

A year ago, third-party ground handlers were predicting a full-scale rush by carriers to begin outsourcing their aircraft service operations. "The events of 11 September were expected to provide a lot of impetus to outsourcing, but it hasn't really happened," says Conrad Clifford, commercial director at global handler Menzies Aviation Group.

Handlers have proved they can perform airport services more cheaply than airlines because of their economies of scale and lower staff salaries, according to Stephan Beerli, executive vice-president marketing and sales for Swissport, the industry's second largest handler. But the lack of will to take on unions has led many carriers to duck repeatedly the issue of outsourcing.

"Airlines have in the main outsourced what they can overseas, and they are now stuck with what they have in their own country," says John Willis, chairman of Servisair and GlobeGround, which, combined under the ownership of French services company Penauille Polyservices, is the world's largest independent handler. "Socially it is very difficult to change," says Willis. Some impetus may come if two carriers take to fruition plans to outsource handling at their home bases.

The handling market has stabilised since the turmoil of late 2001, although margins are incredibly thin. There are also some fundamental market changes that are challenging handlers, says Willis. For instance, many carriers are downsizing aircraft types, from a Boeing 757 with around 200 seats, for example, to a 124-seat Airbus A319, in reaction to falling passenger numbers, while others are substituting 100- to 150-seat mainline aircraft with regional types. This development hurts the bottom line of the handlers since the costs they incur processing aircraft do not fall proportionate to their size, but their revenue does, says Willis. Positive signs are the emergence of new carriers and the revival in the cargo market, he says.

Swissport has bolstered its cargo-handling presence globally with the purchase of Dutch-based Cargo Service Center (CSC) from Germany's D Logistics. CSC has operations in 15 countries worldwide and posted a turnover of $132 million in 2001.

After the heavy turbulence of 11 September and the grounding of the Swissair fleet soon thereafter, the former SAirGroup subsidiary has recovered well and is "back on track", believes Beerli. Swissport is now owned by a group of investors headed by Candover Partners. This UK-based investment group, which paid $343 million for the handler in early 2002, is aiming to increase the value of its investment in Swissport with further acquisitions before going to the market with an initial public offering for the company.

However, the consolidation of the handling market, which had gained momentum by the late 1990s, slowed last year. Servisair-GlobeGround, once the most active of players, has been busy completing its merger and making the most of what it has, says Willis. Although there are a lot of handlers up for sale, the enthusiasm of venture capitalists for the sector has waned. It has been left to the handlers to continue the process.

Acquisition trail

Like Swissport, Menzies has dipped into the cargo field with the purchase of Fr8, the largest independent cargo handler at Amsterdam Schiphol airport. In Asia, it has bought Jardine Airport Services Australia to give it a passenger and ramp presence at Sydney and Melbourne, while a joint venture with state-owned China Great Wall Industry Corp could open the way to handling operations in China, says Clifford. Initially their venture will offer freight-forwarding services.

Although low-cost carriers squeeze handlers very tightly on prices, without them handlers would have been much worse off, believes Willis. While all of the handlers tailor their product and prices to the requirements of low-cost carriers, Menzies has gone a stage further by launching KISS - Keep It Safe and Simple - a handling business model aligned to the needs of these airlines.

The launch customer for KISS is bmibaby at the UK's East Midlands airport. Designed as a standalone operation, Menzies has recruited an entirely new workforce for KISS, with performance-related pay that is higher than the traditional handling rate, says Clifford. In a sector that finds it notoriously difficult to find and retain staff, Menzies had 40 applicants for each of the 70 jobs at KISS, perhaps attracted by its branding and association with the fashionable low-cost sector, he says.

MARK PILLING IN LONDON

Source: Airline Business