The first alliances to influence the ground handling industry were those of the airlines. Now handlers and airports are joining in the game. Six handlers, with bases from Israel and Turkey to the UK, have joined to create Aviance, an independent alliance aimed at negotiating handling deals across their national stations, and jointly buying and sharing information technology solutions. Amsterdam Schiphol and Frankfurt airports have similarly conceived Pantares, a joint venture designed in large part to seek out ground handling business opportunities worldwide.
These activities are just two of the many facets of an industry undergoing profound re-structuring. The two most global handlers - SAir's Swissport and Lufthansa's GlobeGround - are continuously expanding their empires and the Menzies Aviation Group has entered the limelight with the purchase of Ogden Aviation Services for $105 million.
Although much has already taken place, the industry is far from finding its final shape or reaching any kind of equilibrium. This turbulence can be attributed to players jockeying to create regional or global handling networks, and the on-going race to secure position for an anticipated large-scale outsourcing of ground handling by airlines.
At stake is a global market, estimated by GlobeGround to be worth $31 billion this year - but only a relatively small section is currently up for grabs. Airlines still perform 55% of handling themselves, and airport monopoly providers account for a further 10% of the market.
"The consolidation of the handling market will go more or less exactly the way of the catering business, resulting in a maximum of three global players," believes Peter Bluth, managing director of GlobeGround. He further predicts that his own firm, Swissport, and Menzies are the companies most likely to succeed. "When I first started discussions on consolidation four years ago, I said it would take at least 10-15 years. Now my view is two to three years."
Menzies chief executive Peter Smith agrees that consolidation is inevitable, but he does not see it as clearly as Bluth: "There will be a relatively small number of big providers, but also some regional providers, and some form of alliances where the brand is global but the ownership is varied," he says.
Investors that were originally attracted to buying into high-growth handling companies have been plunged into a highly competitive market. With margins being squeezed to the limit, their investment does not look likely to provide speedy returns, and the time to exit the market may have come. In addition, the biggest players, GlobeGround and Swissport, are seen as good candidates to be spun off sooner or later.
Menzies acquisition
Indicative of the consolidation has been the purchase of Ogden by Menzies, which instantly propelled the UK firm - and international newcomer - near to the forefront of the industry. As Smith explains: "Menzies is now a player in the market re-alignment. It is not an end in itself, but it gives us a platform to take a place in the market changes."
A former director of British Caledonian, Smith joined Menzies in the mid-1990s after a spell in Malaysia trying to get a competitor to Malaysia Airlines - Air Asia - off the ground. With its roots in newspaper distribution, $2 billion company Menzies specialises in distribution and logistics services. It began to move into aviation in 1995 with a cargo operation at London Heathrow airport.
From this early stage it began forging a relationship with GlobeGround in the UK as the two took over Lufthansa's cargo handling for the country. The two have since agreed to develop their UK operations jointly, with Menzies leading on the cargo front and GlobeGround leading in passenger handling.
A logical extension of the close partnership already forged between the two would be a full global merger, but that is too simplistic for Smith: "We get on very well with GlobeGround and it would be foolish not to recognise how good that relationship is," he says. "But the Ogden merger is the biggest thing Menzies has ever done, and top of the agenda is to deliver value to the shareholders."
Smith's main task is to integrate Ogden's American, Asian and European handling operations into the Menzies team. "With Ogden, we got a good geographical spread and some good management and processes. But there are problems: it has a very complicated corporate structure; a number of difficult stations, such as Schiphol and in Germany, which have impacted on results; and Ogden recently lost the American Airlines cargo contract at Heathrow." He does, however, believe these all to be fixable.
Menzies is not alone with a major integration challenge. GlobeGround and Swissport are still digesting their big acquisitions in the USA - HudsonGeneral and Dynair, respectively - plus other regional handlers around the globe.
Despite this frenetic activity, both are still a long way from creating a true global network, or matching the type of global market-share the sister companies LSG Skychefs and GateGourmet have built in the in-flight catering sector. Also owned by Lufthansa and SAir, these caterers have jointly grabbed about 55% of global in-flight business. In contrast, GlobeGround and Swissport have less than 10% of the global handling market between them. The main difference is that outsourcing is a well-beaten path in in-flight catering, while it has failed to take hold in any substantial way in handling to date.
With the huge former monopoly handling market at Frankfurt behind it, the airport's Aviation Ground Services (AGS) arm is, in revenue terms, a major player. Now it is seeking to translate its success at home to the world stage, and wants to be among the top three global players, says Rainer Ruppel, vice-president joint ventures and acquisitions.
So far, it has limited itself to ventures in Austria, Greece, Spain and Portugal in a cautious expansion with the aim of moving into profitable markets rather than simply increasing the number of stations where it operates, he says.
The initial motivation of AGS to expand was a desire to compensate for business lost at home as European Union liberalisation rules forced it to open up to competition. Ironically, this process has created as many opportunities as threats: "All the markets we have entered were previously monopoly providers or self-handling," says Ruppel.
Frankfurt expands
AGS also wants to expand in the USA and Asia, either alone or as part of Pantares, but it asserts that it will not be rushed: "It is not our opinion that we are late to the market. We realise our brand is very valuable, and we know we have a Mercedes image," says Ruppel. Although it is being offered a lot of opportunities, the AGS priority is to move only into high-quality operations.
AGS has experience on both sides of the fence when it comes to the alliance purchasing of handling. It has signed a framework deal with the Arab Air Carriers Organisation (AACO) to provide member airlines with handling services at Frankfurt and Vienna airports. The five-year deal is the first signed by AGS to cover more than one airport. It encompasses the contracts of 12 AACO airlines at Frankfurt, and will see AGS subsidiary VAS begin handling these carriers at Vienna this year. The framework arrangement could be extended to other locations where AGS is active later.
While it won out with AACO, AGS has suffered setbacks elsewhere. In January, Cathay Pacific joined the rest of the oneworld carriers in transferring handling services from AGS to Acciona Airport Services at Frankfurt. Oneworld's global handling procurement group has been quietly pursuing joint buying, notably at Schiphol, where it signed a $33 million contract with AviaPartner last year. The oneworld switch was a bitter blow for AGS, helping contribute to market-share losses of 5.5% last year.
The Frankfurt case also illustrates the difficulty airline alliances can have with centralised buying, as not all partners may want to move suppliers, for quality reasons or because of long-standing supplier relationships. American Airlines, for instance, initially part of the Frankfurt oneworld tender, pulled out, and Aer Lingus did not take part at all.
This is frustrating for partners looking at maximum participation to maximise downward price pressure: "It is difficult to get a pure experience, but it is a very complex area and hard to make everyone happy," says Gaston Quezada, airports manager for oneworld partner LanChile. Nonetheless, he expects many more joint deals - offering savings from 10-20% over current contracts as was achieved at Frankfurt - and hopes the pace can be stepped up in securing them.
Qualiflyer Ground Services pioneered the alliance purchasing of handling, and is responsible for European ground services for member airlines outside their home markets. The Star Alliance and oneworld have since joined in, and SkyTeam is making its first moves towards using collective buying power. It is, however, taking some time for decent-sized deals to come along, as airlines have to wait for contracts to lapse. The timing of these is often out of sync with other alliance partners, making joint deals problematic. The simplest deals can be done at new airports or terminals such as Athens Spata and Korea Inchon where there is no contract history.
A large alliance contract can be a bonus and a burden for a handler: "If you lose a major package of work you are not necessarily totally out of a market," says GlobeGround's Bluth. "You need to have enough capacity to get another package back if you are good enough. One piece of substantial business may also make you dependent on one customer - it could be preferable to have a stabler business with lots of carriers."
Some airlines are reluctant to use either a home-based airline handler or a handler affiliated to a major airline because they do not want any risk of getting a second-class service. GlobeGround is studying how it can structure its operations to cope with a major alliance contract yet keep its third-party customers happy too, says Bluth.
Peter Smith sees the alliance-buying trend only going so far: "Alliances will buy handling on a national or regional basis from a single provider, procure on a more uniform basis and lean on the handler with their purchasing mass, but they won't be buying universally. They need some competitive tension. If an alliance had one worldwide global supplier, for example, it would be a nightmare - how would you unhook from that?"
Alliance buying threat
Teething troubles aside, the threat of alliance buying prompted several independent handlers to join forces and form Aviance, and more are welcome to join. The six partners had to respond to the desire for airlines to buy handling in bulk, says Peter O'Boyle, managing director of UK-based GHI, and spokesman for Aviance. They needed to find another route apart from buying into others, or being bought, in the consolidation race.
There will be no exchange of equity between the partners, although a limited company has been formed in the UK for joint ventures and tenders at outstations new to Aviance, says Urs Zorn, managing director of Switzerland's Jet Aviation.
The emphasis here is to keep the independence and national identities of the partners in their local markets, while offering a common service level so that carriers can be confident of uniform service in stations as far apart as Madrid and Tel Aviv, says O'Boyle.
As handlers react to airline alliances they are keeping one eye on more airline outsourcing. "To scale up, Menzies will continue to look for outsourcing opportunities. Airlines will come out of handling, other than at their hubs, and give it to contractors," says Smith. "At some stage airlines will even sub-contract at their hubs, although this is years away."
Unlike some areas that have been outsourced, handling is seen as getting very close to the core airline product: "It's a labour issue and a very touchy business," says Bluth. For it to be undertaken successfully, unions and staff need to be properly brought into the loop. Job security and confidence in the new contractor are the highest priorities.
Swissport has conducted one of the world's largest outsourcing projects in taking over the Aer Lingus handling operation at Heathrow. Now it is talking to two airlines who would like to hand over their outstation and main hub handling to Swissport, says Stephan Beerli, vice-president sales & marketing. Such a move would give Swissport the volume necessary to reduce unit costs and prices. Beerli concedes both potential deals are highly politically charged: "It all comes down to negotiations with the unions and how you treat the staff."
It is up to airlines to decide how far they can travel down the outsourcing road. Some have already met intense resistance to it even as a concept. For now, most are content with the advantages currently being delivered: "Airlines have benefited tremendously from the consolidation and liberalisation process, enjoying many reductions in handling costs," says Bluth. With handler margins cut to the bone, many feel that in order to maintain service quality, either the market must stabilise or prices rise.
Source: Airline Business
