Central Sourcing

KLM has changed its approach to purchasing ground services by forging what it considers a breakthrough global procurement agreement.

June/July 2004

The difficult financial situation that has haunted so many carriers around the world has resulted in airline executives exploring a raft of potential solutions to drive down costs and help return their businesses to profitable ways.

One potential beneficiary could be the industry's handful of multinational ground handling organizations, which continue to report a greater willingness amongst carriers to adopt a more strategic approach to buying ground services.

The pace of change remains slow, and almost non-existent at hub locations, but there are signs that carriers large and small are increasingly open to replacing traditional local and ad hoc purchasing arrangements at outstations by developing longer-term deals struck with fewer, and usually larger, key suppliers.

In the current climate, the arguments for doing so can sound persuasive. Carriers have an opportunity to reduce costs by working close

The global frame agreement, which now covers some 27,000 flights, significantly extends KLM's existing relationahip with Swissport. Capital Photos for KLM The global frame agreement, which now covers some 27,000 flights, significantly extends KLM's existing relationahip with Swissport. Capitol Photos for KLM

ly with a supplier on handling processes and specifications. And while close coordination between parties can bring greater standardization to a handling product, the concentration of business volume with fewer suppliers can also simplify a carrier's communication of its needs across its network. This, in turn, can result in products being rolled out much faster and with greater flexibility in terms of network development.

These are certainly some of the benefits that KLM had in mind when it announced, on April 1, the conclusion of a five-year global cooperation frame agreement with Swissport International, a multinational handler headquartered in Zurich. The agreement sees Swissport provide ground services at more than 60 of KLM's outstations worldwide. The Dutch carrier's Amsterdam Schiphol hub remains unaffected.

The agreement is complex in scale and scope in that it covers the handling operations of three distinct entities: KLM Ground Services (the carrier's ground handling division), KLM Cityhopper (a subsidiary that flies European routes) and KLM Cargo (the carrier's cargo arm).

KLM's decision to adopt this approach can be attributed to a wider cost-cutting exercise that began in early 2002 and has since touched every part of the carrier's business. The need was certainly great: following 9/11 and the subsequent SARS outbreak last year, KLM, like many of its competitors, was posting seven-digit losses on a daily basis.

Capital Photos for KLM Capital Photos for KLM

With procurement efficiency central to the overall program, KLM managers were charged with concentrating business volume placed with third-party suppliers and pursuing discounts wherever possible.

"We looked carefully at what we could do more effectively," explains Mark Kramer, project manager, Ground Services, KLM. "Concentrating our [business] volume in one place is one method as we found the traditional way of sourcing was just not contributing enough to achieve the necessary cost savings."

Initially, the centralized sourcing project began under the KLM Cargo banner, but it was soon decided that bundling the total KLM ground handling spending towards certain suppliers would deliver a better result in terms of cost and service quality.

Understandably, developing the overall framework for the agreement, as well as buy-in from the entities involved, proved a complex and highly sensitive task. "We have essentially concentrated the activities of three handling entities," explains Kramer. "It was important to make sure that the business aims of all three companies were closely aligned."

In bundling the procurement for the three entities, it made sense to work with suppliers that already took care of a sizeable part of the business. Swissport clearly fit the bill as it held a critical mass of KLM Cargo's overseas business following the acquisition in 2003 of CSC, KLM's former cargo handling operation, from D. Logistics. It also accounted for a large portion of KLM's overseas passenger and ramp handling business.

KLM has become one of the first carriers in ground handling history to bundle its purchasing power in this way.
Capital Photos for KLM KLM has become one of the first carriers in ground handling history to bundle its purchasing power in this way. Capitol Photos for KLM

Now signed and sealed, the agreement has significantly extended KLM's existing relationship with Swissport and covers the handling of some 27,000 flights. This includes the provision of passenger/ramp services at more than 20 stations and the handling of around 333,500 tons of cargo at more than 45 stations.

Emerging trend
KLM is the third major airline in 12 months to transfer a significant chunk of its ground handing business to Swissport. Last July, United Airlines announced the outsourcing of 80 percent of its total US warehouse operations to the handler.

This was followed later in the year by the development of a new collaboration model with Swiss that saw Swissport take care of the troubled national carrier's entire ground handling operation, including station management and the negotiation of third-party contracts on the airline's behalf.

"Despite the fact that the deal with Swiss is a truly innovative approach, the industry was not surprised because we were so closely bound together," comments David Harman, Swissport's project manager on the KLM agreement. "We should also not underestimate the innovation that KLM has shown here. By bundling their volume potential they have achieved significant benefits."

Dr. Ludwig Bertsch, EVP, Corporate Services and Cargo and Swissport's overall project leader on the agreement, points out that this is the first time in ground handling history that a major carrier has combined its purchasing power in such a way.

"We already have a special relationship with Swiss and have now reinforced our already close collaboration with KLM," he adds. "To have such a relationship with our top two customers is a new development for the industry."

Although not as far reaching in scope as the Swiss deal, the agreement with KLM means that Swissport has secured preferred supplier status for passenger, ramp and cargo handling at all stations where the handler provides such services and the carrier flies.

Such status means that whenever either party opens a new station in the future, there will be an opportunity to bid for KLM's business and, potentially, develop new product lines. "KLM will become an important foundation customer as Swissport expands into Asia," confirms Harman.

The long-term nature of the agreement is also crucial, adds Bertsch. "It demonstrates our willingness to invest in achieving greater efficiencies and cost savings, something we could only do with the security of a long-term deal."

These are still very early days but, led by dedicated key account managers (KAMs) from both
organizations, KLM is now gradually migrating its business to Swissport at each location. The speed of transition will vary from station to station, although much of the migration will be completed in 2005.

Swissport's KAMs, one each for cargo and passenger/ramp, are now working closely with individual country and station managers to standardize contracts and identify ways of reducing KLM's operating costs. In addition, each KAM will also act as "gatekeepers" between the two organizations, while both KLM and Swissport have appointed
board level sponsors to ensure that the process
remains on track.

From a Swissport point of view, KLM's decision vindicates the long-standing strategy of becoming the world's leading service provider in terms of scope. "Had we not been able to provide a service to KLM at a large number of stations we would not have been selected to make the proposal," argues Harman.

Not surprisingly, Harman hopes that this new style collaboration will encourage other carriers to build deeper relationships with key suppliers. "The fact that we have been able to successfully conclude a deal of this magnitude with a major international carrier like KLM will most definitely generate interest from other major carriers."

For his part, and despite all the hard work that remains, Kramer is convinced that KLM has sent an important signal to an industry that now expects more from its handling agents. "This can be seen as the first truly global proposal and I would expect to see such global RFPs from other carriers,"
he believes.

Above all, he says, "it shows that the market is ready for globalization" as all carriers and handlers look to make ground handling more professional.

Of course, this agreement also opens up the possibility of generating business with KLM's current partner airlines, as well as its soon-to-be fellow members of the SkyTeam Alliance following the Dutch carrier's official merger with Air France in May.

While, again, little can be said at the moment, partners such as Northwest and Air France are reported to be watching the implementation with great interest. Certainly, the agreement has been structured with incentive devices in place should partner carriers wish to join at a later date, and Swissport can be expected to be aggressive in its pursuit of such additional business.

The prospect of more network purchasing, and even joint procurement between alliance partners, in future is an intriguing one. Ultimately, much will depend on whether carriers adopt a more centralized approach to procurement rather than sourcing out in the field, but time may yet prove the potentially groundbreaking nature of the KLM/Swissport agreement.