Icelandic Saga

April 5, 2005
The ground handling market at Keflavik International Airport is awaiting the outcome of a classic David and Goliath confrontation as Graham Newton explains.

Despite the notoriously cold weather, temperatures in Iceland are rising fast. The heat is emanating from the ground handling agents at Keflavik International Airport, where the two principal companies are locked in a stormy struggle for market share.

Keflavik International Airport, which labels itself 'technically one of the most sophisticated and secure airports in the world,' is located about 50km south-west of the Icelandic capital, Reykjavik, and occupies approximately 25km2. It has an impressive array of four runways and, during the heyday of piston-powered propeller aircraft, was an important stop on trans-Atlantic routes.

The airport was built by the US armed forces during World War II and Keflavik retains its joint military-civil status to this day although US activity has significantly decreased since the end of the Cold War.

In 1967, home carrier Icelandair transferred its international operations to the gateway from the smaller Reykjavik Airport, a move which has prompted almost uninterrupted growth. In 1987, the 24,000m2 Lefiur Eiriksson Air Terminal opened with a 15,000m2 expansion built especially for Schengen flights coming online in 2001.

Today, over 1.5 million passengers and 50,000 tons of cargo pass through the airport, with Icelandair alone serving six US gateway cities and 16 European destinations.

Ground Handling History

The ground handling market at Keflavik has grown along with the airport. Three companies now offer services: SouthAir AVITAT (Sudurflug), Icelandair Ground Services (IGS) and Airport Associates.

SouthAir doesn't compete in the main passenger and cargo markets though, the company is Iceland's only Fixed Base Operator (FBO). Its 1,450m2 complex contains two V.I.P. lounges, a crew rest room and fully computerized weather and flight planning facilities. Its hangar is even geothermally heated to keep aircraft warm.

IGS is the local heavyweight and once had a total monopoly at Keflavik. Wholly owned by the Flugleidir Group - the holding company behind Icelandair - IGS offers a comprehensive range of ground handling services.

On the passenger side, it not only utilizes its vast stock of equipment and infrastructural development to cater to every type of aircraft and customer requirement but also operates a variety of restaurants, caf's and bars within the terminal.

On the cargo side, IGS owns and operates a new Cargo Terminal, built in 2001. The facility comes complete with the latest equipment and technology and again serves all types of aircraft. Its main operation, however, remains Icelandair Cargo's Boeing 757 and 737 fleet.

Notes Gunnar Olsen, general manager, IGS: "In addition, we operate a flight kitchen, bonded stores and our sister company, ITS, provides aircraft technical services. We have operated over the past years with a healthy profit and the forecast for this year is also good."

The Sling Shot

Airport Associates is the David confronting this Nordic Goliath. It may not have fired a fatal sling shot but it has undoubtedly managed to attract its competitor's attention.

Its list of customers include passenger carriers, First Choice Airways, Spanair and Condor, while cargo clients range from Cargolux to Polar Air Cargo and UPS. The company also handles Bluebird Cargo but as the carrier is currently awaiting official approval for purchase by the Flugleidir Icelandair Group, this situation is likely to change.

"Airport Associates began operations in 1997," informs Sigthor Skulason, operations manager, Airport Associates. "IGS basically had a monopoly at Keflavik but new regulations came into force and the first opportunity to enter the market came in cargo.

"Our first client was Cargolux," he continues. "They listened to our service proposal and we won the contract. It seemed to us the ideal opportunity to gain a foothold in the market."

Despite landing such an illustrious client, starting up was far from easy for such a small concern as Skulason explains: "Cargolux operated a Boeing 747 so we needed the correct push-back tractors, high-loaders and the suchlike. And we also needed a full set of back-up equipment as well. Naturally enough, IGS was not about to assist us so we had to be completely independent and fully equipped from the very beginning. If equipment broke down we had no option but to repair it and cover the loss ourselves."

Compounding the difficulty was the fact that airport regulations forced the company to have equipment and staff available 24/7, 365 days a year, even if it didn't have any work. Add to this the necessity of equipping to handle a plethora of aircraft types, plus the unavoidable expense of de-icing and snow removal, and it is clear why entering the Icelandic ground handling market was such tough going.

There were other start-up pressures as well. Although the company now has a warehouse and offices at the airport, initially none of the warehouse space was available for rent.

A local fuel company provided a small building from which Airport Associates could direct its operations but the new entrant to the market still had to get all the relevant equipment shipped out and prepare for its storage. Eventually there was no option but to build a new warehouse complete with office space.

Price Pressure

Airport Associates overcame all these challenges, however, and established itself in cargo handling at Keflavik. But if breaking into the cargo market was an uphill climb then establishing a share of the passenger market has become an assault on Mount Everest. "In passenger services we started with the German carrier, LTU International Airways and then got their compatriot, Condor," says Skulason. "We've been successful enough that our client list now includes the likes of Spanair as well."

Skulason admits, however, that competition is intense and prices reflect the rivalry rather than the level of service. "Prices are very low," agrees the Operations Manager. "In the beginning, when we first entered the market, they went down by over 50 percent but that's because there was a monopoly before us and so the price drop was natural and necessary."

Skulason contends that Airport Associates' learning curve was a sharp one and the intent of its management was not to enter into a price war. "We had to learn very quickly," he accepts. "It was all new to us and we were only interested in providing a better service in order to win clients.

"However, prices have not stabilized and in fact have continued to drop," he adds. "For example, our offer to LTU International Airways was 55 percent down on their previous contract but IGS then offered them a contract 30 percent below that level, which of course they accepted. But there is no common sense in this at all!"

IGS General Manager Olsen disagrees, believing "the handling prices are very competitive but reasonable for all concerned."

However, Airport Associates allege that the IGS-LTU contract is an example of unfair competitive practices. Like most countries Iceland is protected by competition laws and Airport Associates management has taken its complaint to the Competition Board.

The case is still pending and a final decision in the saga is expected sometime in the next few months. "We feel positive the Board will issue clear guidelines regarding future competition here," notes Skulason.

Whatever the future may hold, cargo will remain the bedrock of Airport Associates' business. Keflavik is a good O&D (Origin and Destination) cargo airport - Iceland is an island after all - and the company now has all the necessary tools in place to compete effectively.

"Cargo is very successful and this is helping us forward on the passenger side of the business," reveals Skulason. "However, the cargo market is now relatively stable and so growth will have to come in passenger services."

The level of growth will presumably be affected by the Board ruling but, characteristically, Skulason prefers to see the positive in this situation. "It's because we have everything, from warehousing and offices to equipment to fully trained staff, that it's logical to try and expand," he believes.

"If we can properly utilize everything we have, we'll be able to build a sustainable business, whatever the competition does."