Cost-cutting and branding are the mantras of today's airline managers and nowhere are the two more entwined than in the catering product - one of the main elements of inflight service that governs customer loyalty. By Mark Odell. In the dual battle for profitability and greater competitiveness the drive for lower costs means less spending in all areas, including catering. Carriers around the globe are having to cut costs without losing passengers, a trend which is in turn driving changes in the airline catering suppliers market.

On board catering is a sensitive subject, which becomes even more so when linked with the cost-cutting motif. The world's leading carriers are keen to stress that quality is not sacrificed for savings, an understandable concern as food vies with cabin crew performance for the top inflight customer-satisfaction criterion.

In many cases, at airports where competition between catering suppliers exists, it is the supply sector that has borne the brunt of airlines' desire to pay less for the same or better. The result is that airlines are insisting on pricing transparency and working with their subcontractors to reduce the latter's costs. The labour intensive nature of food preparation means that more and more carriers are also outsourcing catering at their own home stations and relying on the third-party supply sector, which is starting to consolidate globally in response (see chart 1). The two largest global suppliers (see chart 2) each retain links with a major carrier. Lufthansa holds a 100 per cent stake in LSG/Sky Chefs and Swissair controls 100 per cent of Gate Gourmet through Swissair Associated Companies. The third largest supplier, Dobbs International Services, is independent and secured its position as the largest caterer in the US after taking over United Airlines' 15 flight kitchens in 1994.

As in most areas, almost two decades of deregulation has meant that US carriers are ringing the changes. But as David Stern, a partner at London-based consultants The LEK Partnership, points out: 'All airlines are looking to reduce the cost of providing meals without detracting from the quality perceived by the passenger.' Inflight service managers already face a tough challenge to devise menus that actually deliver taste at 36,000 feet, because of both atmospheric conditions and the extremely limited scope of on board galleys. They have also had to spread the savings across every aspect of airline catering, including substituting raw ingredients or sourcing dishes that require less processing; reducing portion sizes and waste; replacing or removing materials used in on board service; tapping new food processing technologies or cutting inflight catering out altogether. Typically, the latter two trends are being driven by the US carriers.

As the largest domestic operator in the US, it is perhaps surprising that Delta Air Lines was the last to react to the challenge of low-cost, no-frills competition that saw all the other major carriers resort to operating shorter stage-length flights with little or no on board catering. But the successful penetration of Delta's Atlanta hub by ValuJet meant the incumbent had to respond. 'We were overdelivering far above our competition until December 1994 and were serving food on flights of up to two hours until then,' admits Anne Corry, Delta's director on board services.

But having cut services from full trays to snacks to match its competitors, Delta suffered the typical customer backlash that befalls many quality airlines which start tinkering with the main on board embodiment of 'quality'. The drop in customer satisfaction was significant, despite the fact that Delta only downgraded to match the standards of service offered by other carriers. Delta's response was an innovation borrowed from Lufthansa, the Gate Buffet, which the Atlanta-based carrier dubbed Sky Deli. But with 58 per cent of the carrier's flights under 600 miles (970Km), management devised three criteria, including the percentage of connecting passengers on a flight, which had to be met to secure the food service at the gate. The Sky Deli is currently made available at breakfast and lunch times and so far extends to 157 daily departures.

Internationally, Corry says she is trying to minimise the impact of cost cutting where it is transparent to the customer. The carrier is pinning its hopes on 'pop-out frozen foods' for its main cabin. This new food processing technology, pioneered in Europe, produces ready-to-eat meals in automated factories, which are flash-frozen and only require the caterers 'to thaw them out and put them on trays,' explains Corry. The carrier has served the pop-out food in economy on its UK services for a year and is extending this to the German market by the end of April and in the US from June.

Corry passes the savings generated by the use of pop-out frozen food on to 'maintain our reputation as the best US premium class carrier.' She says the carrier has slashed some $200 million of its annual catering budget since 1994, including $65 million in food costs alone, but stresses that a large part of this stems from the block on hot meals on flights under two hours. The removal of one single item from salads - the lettuce liner - contributed annual savings of $1.5 million. This saving was brought to management's attention by cabin crew who reported it was seldom eaten by the passenger.

Despite premium class remaining sacrosanct to Delta, Corry says savings may nonetheless result from a change in eating habits. Delta identified a predisposition towards healthy eating in market research for a relaunch of first class. There is a tendency to prefer fish or pasta over meat and 'we can save costs here because pasta is cheaper than steak,' explains Corry. She hopes that this 'new type of saving' can be used to reallocate costs to the main cabin which may see the return of breakfast on some flights.

The only European carriers currently trialling pop-out frozen food technology in Europe are the UK charter operators, according to LEK's Stern. But, assuming Delta's pioneering efforts are rewarded, it wouldn't take long to adopt across the Atlantic, as the manufacturers are already supplying Europe's supermarkets.

Elsewhere, however, the European majors are starting to apply cost-cutting measures to their catering budgets. Lufthansa is still assessing what it can do with its products on flights with shorter stage-lengths. One of the few innovations Lufthansa retained after abandoning its domestic Express product was its Gate Buffet, which it uses for economy passengers on some short domestic hops. The carrier is now weighing up whether to use the buffet for all such flights. But the head of product development, Holger Hätty, insists this is because cabin crew cannot provide a full tray service to the entire main cabin in this time.

Similarly, Hätty says he is questioning the need for tray service on the shorter European flights, like Munich-Zurich: 'We have to question whether it is worth giving the passenger a tray on a 40-minute flight,' and goes on to stress, 'but we are only questioning it.' He points to the fact that Lufthansa must still compete with rivals' products. Hätty predicts that Lufthansa will launch a new European product by 'summer or autumn this year with a new on board service concept.' But he says no decision has been taken as yet, although he hints: 'Just because we have had the tray for 20 years doesn't mean it's the right concept.'

Rainer Rauenbusch, manager on board service product at Lufthansa, says after taking passenger growth into account average catering costs were cut by 3 per cent between 1993-5, but stresses that cost-cutting was 'not done on the tray.' The savings came mainly from cuts in the handling, processing and equipment costs and the renegotiation of supplier contracts handled by LSG/Sky Chef. Lufthansa's all-encompassing management contract with its sister company is renewable annually. The carrier uses LSG/Sky Chef at every station where the supplier has a presence - some 80 per cent of Lufthansa's destinations - and the caterer negotiates with suppliers on Lufthansa's behalf at stations where it has no operation. One airline catering expert suggests Lufthansa could negotiate better supplier contracts for itself where LSG has no presence. In some instances, LSG will inevitably have to negotiate with rivals, whose managements will be less inclined to disclose financial data to the global market leader.

Hard bargaining has largely contributed to Swissair's cut in its catering budget by some 3.5 to 4 per cent annually since 1993, although with passenger growth this rises to 7 per cent, says Hansruedi Felchlin, general manager inflight product planning. In food costs alone, Felchlin estimates the carrier has saved up to SFr25 million ($21 million) annually over the last three years, in cooperation with partner Gate Gourmet, which has to pass all its in-house savings on to the airline under a five-year contract. But as Swissair only has Gate Gourmet outlets at about a third of its uplift stations, the carrier has a significant amount of negotiating to do with other suppliers.

Felchlin uses Gate Gourmet's realistic pricing policy as the standard in all negotiations with suppliers. 'We try to force other suppliers to adopt [this policy]. LSG and other big suppliers realise the necessity of having this system but smaller suppliers still use the markup approach.' Realistic pricing provides a transparent breakdown of the cost of food production. Gate Gourmet provides a brochure which lists the purchase, processing and sales price of each product. This helps Swissair identify where the costs fall and can add value by enabling the carrier to offer the passenger an apparently 'higher quality' product at a lower price than a 'standard' dish. 'It can be cheaper to offer steak rather than goulash, as the latter requires a lot more work on it,' says Felchlin.

As one of the highest cost carriers in the world, Swissair was forced to look at its on board product and appears to have learned a similar lesson to its US partner Delta. With a reputation as one of the world's leading premium class carriers, Felchlin was under strict instructions to leave first class alone, improve business class 'and see what savings we can make in economy.' But the high expectations of economy class passengers gave him little room for manoeuvre and, after 'identifying the added value,' the savings came from substituting materials, like china for plastic crockery, while 'still serving salmon.'

Swissair has gone further on flights under 90 minutes. Three years ago, the carrier removed cold meals from routes like Zurich-London and introduced a sandwich service served from one big tray. 'This cut out all materials but retained the quality of the sandwich,' explains Felchlin. However, after eight months of experimenting Swissair compromised by offering each passengers a sandwich on a plate, but without the traditional tray.

Swissair, like Delta and Lufthansa, is having to overcome passenger resistance to rebranding. As Robert Kahn, senior vp at consultants Diefenbach Elkins, explains: 'Brand in essence is a promise and cuisine is one of the main components that fulfils the promise.' One of the leading proponents of branding is British Airways, which has relaunched its first class and European and international business products in the last two years. The carrier is currently looking at its long-haul economy product but does not promise a relaunch this year. In the redesign of each product 'we drive all catering aspects, but the [project] is led by the brand management department,' explains Kurt Hafner, BA's manager of culinary concepts.

Unfortunately, Hafner is not forthcoming about any specific lessons learned from the rebranding of on board catering, saying only that his department contributes 'millions of pounds in savings.'

However the advent of low-cost, no-frills carriers in Europe, specifically Ryanair and EasyJet in Ireland and the UK, is likely to drive all the European majors to rethink catering on shorter sectors along the lines of their US counterparts, suggests Stephen Shaw of marketing consultants SSA. Aer Lingus, which has had to put up with Ryanair operating out of Dublin since the early 1990s, has already gone part of the way. Although the Irish flag carrier denies it competes with Ryanair 'from a product point of view', catering manager Dick Butler confirms that the carrier dropped food 'from the back of the aircraft' on UK routes in February 1995, apart from breakfast served until 10am. Hafner agrees BA will have to address this issue but believes some service will continue in economy and says it is too early to say how customer preferences may evolve.

Carriers in Asia-Pacific are also having to cut back on their catering budgets, but the lack of no-frills startups means the full-service concept is not being challenged. However, cost pressures exist, particularly for a carrier like Cathay Pacific based in the high inflation environment of Hong Kong. Adrian Ort, Cathay's manager catering services, estimates average meal costs fell by 4 per cent in 1992 and 1993 but levelled out again afterwards. He says these savings were made possible by a dramatic change in the carrier's passenger profile, with more Asian travellers. This meant buying in more local produce, which is cheaper than western food. Cathay has managed to cut back on the amount of food carried on shorter sectors, like Hong Kong-Koahsiung, but when it tried to serve cold instead of hot meals it met a wall of resistance. In certain dishes, Ort has also substituted some ingredients, like dry shitake mushrooms for fresh ones, which are 40 per cent more expensive, and replaced prepared desserts with fresh fruit; not only do passengers prefer this, but minimal preparation and the local sourcing of the fruit makes it cheaper.

Singapore Airlines has mainly focused on cutting out waste and retendering its supplier contracts at 'the more competitive stations,' explains George Lee, senior manager inflight service, adding that in practical terms there are still over 50 per cent of destinations with no competition. Like Cathay, SIA has little option but to supply a full service in all classes but it has reduced the amount of food carried on regional night flights. It has also introduced a service to Singapore-based frequent flyers in first and business class which allows them to pre-select their entree, further reducing waste. Lee says he is watching the developments in frozen food technology with interest, but believes this would not be considered until 'yields start to fall dramatically.'

There is general agreement among catering managers that price pressures are not going to let up and consolidation among suppliers will continue in the search for greater economies of scale and a global presence. In combination with new food technologies, this will help further reduce airline catering costs. But any major changes to the inflight catering product run the risk of a passenger backlash and airlines will need to proceed with caution in this area.

Source: Airline Business