Grand Designs

April 2004

Mainland China has long been considered something of a Holy Grail for overseas aviation businesses, with carriers - and the complex service infrastructure that supports them - eager to get in on the ground floor of something big: the emergence of the world's most populous country as a major force in air transport.

In recent years, China has undergone phenomenal social and economic change, the latter now accelerated by the country's entry into the World Trade Organisation in late 2001. Inbound passenger traffic continues to grow, while China's position as the manufacturing centre of the world has created a phenomenally strong air cargo export market.

But there is much more to China than just production; as the country's growing middles classes become increasingly affluent, analysts expect the Chinese to become major consumers of goods and services in their own right.

Menzies hopes that its new found venture in Chengdu will be the first of many in mainland China (photo: Menzies Chengdu Airport Aviation Services.) Menzies hopes that its new found venture in Chengdu will be the first of many in mainland China (photo: Menzies Chengdu Airport Aviation Services.)

Meanwhile, China's preparations for showcase international events such as the Beijing Olympics in 2008 and the World Expo in Shanghai two years later have triggered massive development in retail, ground infrastructure and transportation services. Airports, in particular, are developing fast, with carriers lining up for traffic rights and ground handlers keen to serve them.

Expansionist handlers have been cheered by the transitioning operating climate in China and elsewhere in the region. Traditionally, most first- and second-tier airports in Asia operated highly regulated handling environments, with competition restricted to the airport operator and national carrier, or at best a severely limited number of licences on offer.

But such a stance has softened somewhat, perhaps as a result of fending off seemingly one industry crisis after another and culminating in last year's SARS epidemic. Certainly, airports of all shapes and sizes are now acutely aware of the need to remain competitive on the ground. Developing their ground service infrastructure is perceived as one way of achieving this.

"Airlines have had to learn to control costs and respond quickly to crisis after crisis," says one China-based observer. "The support industry has had to move in line with the airlines in order to survive, and we are seeing the gradual opening up of the ground handling market in this part of the world as airports and airlines look to spread the risk and stick to core businesses."

One major airport, Singapore Changi, recently announced the tender for a third ground handling licence at the airport. This is a major development, although the interest of would-be entrants is likely to be tempered by cold, hard economics; Changi already has two strong incumbents and there are legitimate question marks about just how much third-party market there is left to go after.

Taking the plunge
But some western handlers have been successful in the region. US service provider Worldwide Flight Services recently signed a joint venture with Thai regional carrier Bangkok Airways and the two made a successful bid for a 20-year contract to operate as the second ramp and cargo handler at Bangkok's new Suvarnabhumi International Airport. The new airport, scheduled to open on 29 September 2005, will replace the city's old Don Muang facility.

SATS was one of the first overseas ground handlers to enter mainland China following its joint venture with Beijing Capital Airport in 1994 (photo:BGS.) SATS was one of the first overseas ground handlers to enter mainland China following its joint venture with Beijing Capital Airport in 1994 (photo:BGS.)

"This fits our strategy of moving further into Asia which is something we have wanted to do for some time," explains Barry Nassberg, Senior Vice President - International at Worldwide.

Worldwide is making a habit of entering new airports in Asia having also begun operations at Hong Kong International Airport when the airport first opened in 1998. The US handler has built a solid business in Hong Kong where, unusually, it operates a variety of non-core services such as baggage handling for the Airport Authority, into-plane fuelling and baggage handling on the airport's Mass Transit Railway connection. Most recently, Worldwide was awarded the management operation of the marine ferry terminal, which now allows direct connections from the airport to the Chinese mainland.

"Hong Kong has been a great anchor [in the region], but has not taken away our desire to establish core businesses elsewhere," comments Nassberg. "We looked at numerous opportunities, but Bangkok was far and away the most exciting."

Worldwide sees great potential at Bangkok and has earmarked an investment of some $28 million, which includes the development of new cargo handling facilities and the purchase of ground support equipment. The company predicts annual net sales of $26 million from cargo handling alone at the new airport.

In January, the UK's Menzies Aviation Group went a step further by establishing a joint venture with the Chengdu Shuangliu International Airport Authority in China's western province of Sichuan. The deal involves a 10-year, 60:40 joint venture (in favour of the Airport Authority) with a potential five-year extension.

Menzies enjoys a solid relationship with the Civil Aviation Administration of China (CAAC) thanks to long-standing operations in Hong Kong and Macau. "They certainly helped," explains Chris Hutchinson, General Manager, Menzies Chengdu Airport Aviation Services. "The CAAC got to know what our quality standards and management approach were like."

In recent years outsourcing to ground handling service providers has become more popular in Asia. Proving this statement is the Singapore Changi Airport, which has recently decided to take on a third ground handling license. In recent years outsourcing to ground handling service providers has become more popular in Asia. Proving this statement is the Singapore Changi Airport, which has recently decided to take on a third ground handling license.

Chengdu was chosen as Menzies' first venture into mainland China largely for its location and growth potential. Situated well away from the bright lights and public gaze of Shanghai and Beijing, Chengdu illustrates the commitment of China's central and provincial governments to develop cities in the interior of the country as well as on the coast.

Government support has seen investment and big business pour into the region: Intel and Toyota are building production facilities, while Germany is in the process of establishing a consulate in the province. GDP is rocketing, says Hutchinson, with the airport benefiting on the back of it.

Although hardly a household name in the west, Chengdu has a population of 3.5 million. "A lot of people now have heard of Chengdu, but it is the number six airport in the country, both in terms of passengers and airfreight," explains Hutchinson. "It is also enjoying double digit growth in air traffic."

Menzies knew it needed a local partner when entering the country, but for the sake of neutrality has so far preferred to work with airport authorities rather than airlines. "We have chosen to focus on airports with strong partners and with good growth prospects," confirms Hutchinson. "It [Chengdu] was a relatively small investment and we have management control of the operation. Everything just made sense."

Although Hutchinson points to the importance of having management control - something that other western handlers have struggled to attain when looking at similar joint ventures in the region - he is quick to add that the airport is far from backwards in its approach. On the contrary, Chengdu is "one of the most innovative and progressive in the country," he says.

Prior to Menzies' arrival, the Airport Authority performed the majority of third-party handling at Chengdu, including the majority of the overseas carriers currently serving the airport. However, the operation involved three companies: one for passenger, ramp and cargo handling, one for aircraft line maintenance and a GSE maintenance company.

"With the joint venture, they have all come together," says Hutchinson. "Now, we have a full service provider that can offer whatever a customer wants, aside from catering."

Chris Hutchinson: Chris Hutchinson: "Strong traditional beliefs still play a large part in doing business [in China]. Those who ignore this do so at their own peril."

As the joint venture beds down, the emphasis will be split between the passenger and cargo sides of the business, although the latter is growing faster. "With Chengdu designated as the regional international hub for southwest China it will be big [on air cargo]," explains Hutchinson. As such, the Airport Authority is already in an advanced stage of planning for a new cargo terminal.

Pan Xiao Jun, General Manager, Chengdu Shuangliu International Airport Authority, points to the continued economic development of Sichuan province as the main driver for seeking such collaboration. "We want to exploit new markets and develop foreign trade and economic co-operation with other countries," says Pan, who is also Board Chairman of the joint venture. "However, global enterprises are now investing here and there is heavy competition so we recognised a need to invest in our management and services."
Pan has high hopes for the new venture. "The transfer of knowledge, advanced technologies and management expertise from our partner will enable the joint venture to take full advantage of our position as late starters, and attain rapid progress."

Hutchinson hopes that the Chengdu venture will represent just the tip of an iceberg for Menzies in China. "We see a lot of opportunity and this is just the kind of mainland airport that appeals," he says.

As such, the onus now is on developing an operational blueprint that can be taken to other airports in China. "Each airport will be different in terms of partner requirements and customer needs, but there should be a template that can be transferred."

Secrets of success
Hutchinson is an old hand in the region, having first moved to Beijing full-time in 1996 with British Airways, and knows well the vagaries of doing business in China. While the differences between Chinese and western business cultures are often mentioned they are not always understood, he suggests. "Strong traditional beliefs still play a large part in doing business. Those who ignore this do so at their own peril," says Hutchinson.

Here, perhaps more than anywhere else in the world, patience is key. Relationships have to be built, with respect, trust and loyalty earned - none of which happens overnight. Follow these rules and new business practices and management styles can be successfully introduced, believes Hutchinson.

Of course, time is not always on the side of ground handlers whose shareholders invariably seek speedy returns. This is perhaps one reason why western players continue to circle airports in China and elsewhere in Asia, but often end up entering markets closer to home.

Much can be learnt from Singapore Airport Terminal Services (SATS), which has successfully exported expertise gained from its showcase operation at Singapore Changi to create a string of associate companies in Taiwan, the Maldives, Macao and Hong Kong.

Since August 1994, SATS has also held a 40 percent shareholding in Beijing Aviation Ground Services Co Ltd (BGS) together with Beijing Capital International Airport (60 percent). BGS provides the full gamut of ground services and currently has 22 international and four domestic Chinese carriers on its books.

Although BGS was hit as hard as anyone else by SARS, the number of flights handled still increased by 64 percent in 2003 thanks to additional contracts with the likes of Shanghai Airlines, Cathay Pacific and Northwest. "Going forward, business is expected to grow quite strongly," says Chief Executive Karmjit Singh.

Like Menzies and Worldwide, SATS is another handler keen to develop a wider presence in Asia's key hubs and emerging regional airports. To achieve this, the company plans to stick to a proven recipe that includes sourcing good, like-minded local partners and developing win-win relationships. Perhaps most tellingly, it will also continue to require "genormous patience," adds Singh.

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