Optimizing Processes

These are busy times for Munich Airport (MUC). Since the opening of the greenfield site in 1992 the number of passengers has more than doubled. In 2004, 27 million passengers passed through the gateway compared to 12 million in the first year of operation. Aircraft movements have similarly taken off, increasing from an initial 175,000 to 2004’s total of 370,000.

Early indications are that 2005 will continue the trend. In the first six months of the year, passenger traffic has increased by approximately seven percent and there has been a six percent hike in take-offs and landings. Munich is now Europe’s eighth largest hub airport and, in 2004, the fastest growing airport in the European top 10.

The airport’s success has many contributory factors, perhaps chief of which is its location at the heart of Europe. With the expansion of the European Union (EU) Munich’s catchment area includes not only Southern Germany and parts of Switzerland, Austria and northern Italy but also the Czech Republic. Flights to most parts of Europe are plentiful and short. It also benefits from Bavaria’s per-capita income levels — one of the highest in Europe.

Another important step was taken in June 2003 with the opening of Terminal 2. The facility was built in conjunction with German flag carrier — Lufthansa — and doubled the capacity of the gateway to 50 million passengers per annum, establishing the airport as a true hub in the process.

New long-haul routes to destinations such as Montreal and Delhi soon followed and the 2005 summer schedule has also brought twice-daily flights to Chicago O’Hare and Washington Dulles — the type of service only viable or profitable from a hub.

Other developments include the reorganization of Terminal 1, now primed for more efficient operations. The building has been split into three distinct areas; low-cost carriers operate from one sector; high-security flights, such as those to the US, are in another and charter and leisure traffic operate from a third zone.

In addition, the airport operating company, Flughafen München GmbH (FMG), has just announced plans for a third runway. Management has stressed the necessity of avoiding anticipated bottlenecks in the coming years and the existing system — two parallel, 4,000 meter-long runways with independent operations and a limit of 89 movements per hour — would be operating at full capacity as early as 2008 if growth continues at current levels. By 2010 demand will have outstripped capacity.

A New Player

FMG has also been looking behind the scenes at its structure and processes, aware that the vagaries of the airline market and the surety of new legislation cannot be answered by bricks and mortar alone.

Ground handling has been a particular focus. Currently, an airport division offers a service alongside pan-European concern, Aviapartner. It has been difficult for the airport to compete effectively, however and higher operating costs, resulting largely from public-sector wage agreements, coupled with ever-decreasing margins in a fiercely competitive market, has led to significant losses.

Accordingly, FMG has decided a third entity should enter the fray—a new ground handling subsidiary by the name of MUC Ground Services Flughafen München GmbH. MUC Ground started operations end March 2005 with ramp handling of Air Dolomiti, and before the end of the 2005 summer schedule will handle about 20 percent of the daily movements at Munich Airport. It will initially recruit through temping agencies and then hire on a permanent basis after a collective agreement is signed.

There are plenty of good reasons for the new company. To begin with, EU regulations stipulate that ground handling services must be separate from airport operating companies as of 2007. Furthermore, airports of Munich’s size must open up the market by allowing at least one additional competitor.

Wolfgang Hammerstaedt, who will oversee the new set-up, also points to MUC’s need to meet airline requirements for more flexible and more customized ground handling processes and products. “The existing framework gives us only limited options to act amid the increasing competition of the ground handling market and the high market pressure from the airline industry,” he says.

“To be successful in the ground handling market today, it is necessary to have flexible working shifts corresponding to peak hours, to establish multi-functional employees, to offer innovative and tailor-made products for both low-cost carriers and network carriers and last but not least to reduce overhead costs to a minimum.”

Munich Airport’s advantage will be to have a choice of production — the existing ground handling division and the new start-up, MUC Ground, are both an offer. Although FMG remains the contract owner as far as the airline client is concerned, ground services can be delegated to either, depending on production cost. It is believed cost-optimized production will be a major boon for the airlines; lower production costs mean all-important price reductions.

Improving the Airport Division

FMG will not concentrate solely on its new subsidiary and will continue with its efforts to boost the efficiency and productivity of its existing ground services division. As part of the FMG ‘M-Power’ project, a working group has been established with the aim of boosting the long-term profitability and competitiveness of the airport division. Optimizing operational processes, implementing innovative working time models and adjusting qualifications and hierarchies are all on the agenda.

Hammerstaedt outlines three reasons for this need to pursue the existing set-up. “First, a new ground service supplier cannot handle 500 aircraft from day one without any disturbance,” he says. “Our airline customers expect — and we provide — high quality in ground handling services without problems caused by restructuring measures or developing new processes.”

“Second is our aim to re-work and optimize all processes in MUC Ground. MUC Ground is a kind of laboratory to identify and perform best-practice processes. We believe that it is more efficient to first optimize the process and then operate with a larger number of customers and aircraft. If you start directly in large amounts, it is more difficult to create cost-efficient services and products.

“Third, we have responsibility for more than 2,500 employees in the ground handling division and it is our task to keep them in work,” he adds.

MUC Ground will act as a sub-contractor for FMG, offering everything from check-in and loading to the complete range of ramp services. It will act completely independently with its own employees and management. Equipment and costs are kept strictly separate from the airport division; MUC Ground has it own business plan with its own sales and ROI (Return on Investment) targets.

Once the FMG ground handling sales department has acquired a new airline client, the production costs of each company will decide if FMG or MUC Ground gets the job. In short, there will be internal cost competition, ensuring both entities remain on their toes.

Long-Term Future

Hammerstaedt admits that MUC Ground is the long-term strategic tool for FMG to compete and keep market share in the ground handling business at Munich Airport. “MUC Ground is being established with competitive cost structures from the outset and is able to react to changing and different airline customer needs in the future,” he informs.

“From the beginning, demand-driven working shifts and multi-functional employees enable low cost and customized services. With a network of several suppliers organized under the one roof of MUC Ground and a very small administration, we can guarantee best-practice and quality at reasonable prices.”

It has not yet been decided how the airport ground handling division will fit into the equation. Notes Hammerstaedt: “The question of joining the two companies together cannot be definitively answered at the moment. It depends on the success of the cost-saving program in FMG and also on the results of the new EU-directive concerning access to the ground handling market and the ‘unbundling’ issue of ground services from the airport authority.”

Whatever the outcome, Hammerstaedt is keen on the liberalization of the market—assuming it is done in a fair and timely manner. “In general we appreciate a further liberalization of the European ground handling market,” he admits. “More competition is positive, but the timing and the basic conditions for realizing the liberalization should allow airports to do the necessary preparations.”

“This means that airports must get the chance to prepare for a liberalized open market,” he concludes. “For example, airports need to restructure and optimize existing procedures and processes, get financially and organizationally independent from the airport authority and achieve marketable union agreements and more flexible working time models. The main task is to assure that liberalization is socially fair for the existing staff.”