All the World's a Stage

To many airlines, it’s the best response to today’s competitive, cost-driven industry. Cooperating with your rival — even going so far as to combine companies — provides economies of scale, access to precious slots and routes and the chance to secure expanded market share at a global level.

To many ground handlers, however, it’s a response that spells trouble. Christine Karels, communications manager at Aviapartner, admits consolidation in the airline market generally leads to lower volumes. “This trend can be a concern,” she says.

Karels points out that profitability isn’t necessarily dented, however, but rather depends on the strategy adopted by the airlines in question. “It’s like when airlines review their fleet mix types, and start using smaller aircraft. This does not always mean a proportional loss in revenue for us, as we can put less staff on a smaller aircraft, for example.”

Merger activity
Nevertheless, the sheer extent of airline consolidation will inevitably affect the ground handling market.

All the major alliances are alive and well and there are merger talks aplenty. For example, Lufthansa and TUI are reported to have agreed on the main points of a merger of their TUIfly and Germanwings airlines.

Meanwhile, Delta and Northwest are in deep discussion and Alitalia has just agreed its sale to Air France-KLM — itself in the merger vanguard. The deal has some way to go though with Italian unions fighting hard to stop suspected cutbacks, particularly at the Milan Malpensa hub. Air France-KLM is also interested in taking a stake in any tie-up between Delta and Northwest. The carriers are all part of the SkyTeam Alliance and Air France and Delta on the one hand and KLM and Northwest on the other already have antitrust immunity from their transatlantic codeshares.

There’s plenty of negotiating being done in the Asia Pacific region too, with Singapore and Cathay Pacific reportedly interested in securing a foothold in China, which itself always has an eye on consolidation of its airlines.

“As liberalization comes and ownership restrictions go, consolidation is all but inevitable,” opines Philip Harnden, executive vice president, commercial, at Menzies. “This issue is probably on the agenda now more than ever before.”

The question is whether this represents an opportunity for ground handlers or a severe limitation on future prospects.

Harnden is in no doubt that it’s the former. “Weaker airlines will go and there will be some mega-carriers with a massive global presence,” he explains. “These huge networks mean that longed-for global deals for ground handlers are finally on the horizon.”

Such agreements would certainly transform the industry — creating some big winners and losers. For the winners it would usher in a new business model, more efficient and almost certainly more lucrative. “Lots more can be done with a global deal,” Harnden agrees. “There’s standardization, for example. This would lower costs and increase familiarization with check-in systems, reservations and equipment. In short, it would mean lower costs, a much better service and a stronger partnership with the airline client.”

For the losers though, it could represent oblivion or, at best, a position on the sidelines of the market.

Market changes
Not surprisingly then, all the major ground handling companies are positioning themselves to respond to airline mergers and acquisitions. Exactly what is the best strategy, however, is open to question.

Harnden says this isn’t too much of a problem seeing as the ground support market is — and always has been — very much in flux. “It’s a peculiar industry in that if it didn’t exist the way it does, you certainly wouldn’t invent it that way,” he says. “However, it means that change is nothing new and so in that respect the market isn’t changing at all!”

Ground handling was traditionally an in-house function of the home airline and in some parts of the world that’s still very much the case. Germany, for example, is quite restrictive and the only real hope for a would-be entrant is to acquire another company with a license. But in other markets independent players have come through. The United Kingdom, for example, has a very open structure.

“Overall, it means trying to create a coherent network is remarkably difficult and so ground handlers tend to be opportunistic,” Harnden notes.

That quick-moving philosophy could be tested by mergers and acquisitions in the airline industry. These are big money deals, coming during an economic downturn and a rising trend for outsourcing. Ground handlers need to be prepared to invest heavily — and invest now for long-term success.

“Airlines are showing that they’re not going to be prepared to put money into ground support areas any more and are focusing simply on managing their assets,” Harnden says.

Major ground handling companies have spotted the trend and are working now on standardizing the various systems and procedures on offer. Menzies, for example, invested in its cargo systems a few years back and is now rolling out the ‘Hermes’ product across its network.

“We knew those old cargo systems had to go,” Harnden says, “so we took the plunge. But it is a big gamble for any company — even one the size of Menzies — because you’re effectively guessing about market trends and the investment required.”

But those big winners on global deals will be a company that can step up to the plate so it should be a gamble worth taking. “Sometimes there are more operational staff than warehouse staff at a station,” comments Harnden. “If you have six airlines, they could all have different systems — that’s crazy! So any company that can offer a good package that can be rolled out across a number of stations will be a winner.”

Square pegs and round holes
In any case, there is always a need to innovate given the limitations of infrastructure — which don’t look likely to change any time soon. Airlines are forcing the issue but there is a lot of catching up to do at most airports.

Alliances and mergers alike want to combine operations under one roof. At London Heathrow, with the new T5 now open, oneworld carriers will consolidate from four terminals to just two. It’s similar to Tokyo Narita and Paris Charles de Gaulle, both of which have worked to put airline groups together. There are many other examples with plenty more on the drawing board.

Airport facilities will play a crucial role in attempted cost cuts at these mega-airlines/alliances so it could be a busy time ahead for ground handling management. They will have to secure the infrastructure necessary for improved services, which could be a classic case of square pegs and round holes.

Low cost terminals may be a good indicator of the way things will go — even if those mega-airlines do appear. LCC facilities are designed with the ground support functions very much in mind because the airlines must have quick turnarounds and efficient ground operations. It could be the model for network carriers to follow.

Such facilities will also help the niche player — which will still feature in the ground handling landscape of the future. However, their numbers will almost certainly dwindle. Consolidation is happening in the ground handling market too and by definition the winners of global deals will have to be global players.

Combined efforts
According to Swissport, consolidation is happening all the time and the company has different collaboration models in place be it regional or global as well as full outsourcing packages of ground handling activities.
Menzies Aviation, meanwhile, has bought Northport Norway AS and Finnhandling AB from Northport Oy, a wholly owned subsidiary of Finnair. As part of the agreement Menzies will provide the ground handling services for all Finnair flights and will also offer full handling service to international airlines at Stockholm and Oslo international airports.

Jukka Hämäläinen, managing director, Northport Oy, says the sale is part of Northport’s restructuring program. “It does not have an immediate effect on Helsinki ground handling activities, but our work to turn the company around continues.”

And in China, China Southern has signed a new ground handling agreement with China Northern and Xinjiang Airlines — a first step in the proposed merger of the three carriers. Air India and Indian Airlines are also reported to be looking at how to merge ground services.

Airline consolidation, it seems, is having a profound effect on ground support. Whether it is the reorganization of practical measures such as staff, systems or infrastructure or the adoption of a strategic mirroring of airline mergers, the ground handling market is set for change. But as Harnden says, that’s really nothing new.

The more things change, the more they stay the same.