Finnair's ground handling business unit has grand plans for the future, including possible overseas expansion. But, for now, its fortunes remain closely tied to the mother airline, writers Richard Rowe.
Finland's national carrier, Finnair, may be relatively small in stature, but its typically Nordic approach to quality and impressive Asian route development has seen it compete stoutly with much larger airlines. The result is a balance sheet that makes it one of the more financially secure airlines in Europe. The carrier has remained buoyant thanks largely to a series of pre-emptive initiatives; with profits up in 2002, cost cuts and capacity adjustments initiated as the economy softened, even before 9/11, have clearly paid dividends. However, the continued uncertainty about a recovery in economic growth, plus the ongoing conflict in Iraq, means that 2003 promises to be grim even for Finnair. The fact that the much-hyped 'outbreak' of SARS has its roots in Asia makes that almost certain.
It was no surprise then that CEO Keijo Suila recently pointed to a need for even deeper cuts than previously implemented. Discussions began with labour unions in early April following announced plans to create Euro 60 million in personnel savings - a move likely to trim 1,200 staff from the Finnair Group workforce.
These most recently announced job losses form part of a wider Euro 160 million cost cutting exercise designed to achieve permanent changes in cost and operating structures.
Just how much such action will impact the carrier's ambitious business unit, Finnair Ground Handling (FGH), remains to be seen. Formed in January 2001 following perhaps the largest structural shake-up in the Finnair Group's 80-year history, FGH was spun out together with the carrier's catering and technical arms as part of a wider Aviation Services division.
Operations at capital city airport Helsinki Vantaa - which currently sees 10.5 million passengers a year - dominate FGH's agenda. Activity at Helsinki includes a full range of handling services, together with the provision of manpower for the Finnair Plus lounges, ticketing for overseas airlines, and some technical activities such as water and toilet servicing.
Although still a relatively new operation, at least in its current form, FGH has managed to forge a solid business that supports not only Finnair's needs, but also the ground service requirements of up to 20 other airline customers. Last year, the unit's 1,200-strong workforce handled more than 100,000 flights and eight million passengers.
"At Helsinki, legally we are a self-handler, but we increasingly look to operate as an [independent] ground handling agent," explains Tero Vauraste, Vice President, FGH. "The majority of third-party flights operate outside of peak times, but with Finnair at its busiest in the morning and mid-afternoon, the two businesses work well together and allow excellent utilisation of resources throughout the day."
FGH's annual turnover hit Euro 60 million (US$64 million) in 2002, although the division incurred a loss for the calendar year; much the same is expected in 2003, but the plan, says Vauraste, is to turn a profit in 2004.
Much will depend on the fortunes of Finnair itself - which accounts for 70 to 80 percent of FGH's total revenue - and the unit's ability to generate additional third-party revenue. Current third-party work includes the handling of British Airways - the only fellow oneworld member that flies in to Helsinki following the exit of Iberia in January 2001 - plus most other non-Star Alliance flights.
There is no doubt that FGH has undergone a period of considerable adjustment following its restructuring, says Jukka Rahko, now VP, Ground Operations at Finnair, but previously in charge of all ground handling activities at the airline.
"FGH is now responsible for handling services and selling them to airlines like Finnair," says Rahko who is now the unit's largest customer. "The first year was difficult not least because it involved such a huge change in thinking. However, the dust has now settled and the airline/ground handling agent relationship works well."
Crucially, says Rahko, the ground handling operation has benefited from the kind of business focus and cost transparency that was impossible while part of the larger Finnair Group. This in turn has allowed Vauraste to successfully tackle some of FGH's initial failings such as poor punctuality, particularly on long-haul flights.
"We now also have much better systems and day-to-day coordination software in place, together with a new organisational model which makes it absolutely clear where each person's responsibilities lie," explains Vauraste.
But with focus comes additional challenges, not least in the area of baggage services. Finnair is gradually moving to Airbus aircraft and last year it purchased two A319s and took delivery of five new aircraft from the A320 family. This means the use of containers, something that the current baggage area at Helsinki is not well equipped to handle.
Meanwhile, Finnair's strategy of developing Far East routes has created several banks of traffic throughout the day and Helsinki now functions as more of a traditional hub operation. "The challenge is to get the baggage moving in a similar way, although this will be difficult given the current infrastructure," admits Vauraste.
Elsewhere in Finland, cost cutting by all airlines has led to intense price competition in the handling sector and placed enormous pressure on FGH to streamline its own cost structure. One solution adopted last year was to outsource nearly 400 items of motorised GSE, which was acquired by Swiss multinational ABB. Today, FGH uses the equipment under a maintenance leasing agreement.
FGH has also increased its cooperation with a variety of local companies by outsourcing ground handling services at select domestic airports. Services are now provided through cooperation agreements at 10 airports, while FGH provides services through its own organisation at Helsinki and a further 10 stations in Finland.
FGH's gradual process of outsourcing is designed to provide a more flexible and efficient use of labour - the idea being to match resources with the daily cycle of flights that can vary greatly at Finland's smaller airports.
"The strategy sees local entrepreneurial companies take on our workforce to grow their business in the area," explains Vauraste. "It is all about local partners rather than franchising and recognising that passengers are very different depending on the market."
This process began as far back as the 1980s when Finnair used a local travel agency at Kittila, which serves northern ski resorts, to provide full handling services for the airline and other operators. Two years ago, a former Finnair station manager at Kuusamo Airport in Finnish Lapland set up his own company and took on the airline's handling operations.
Most recently, in October 2002, FGH outsourced services at three other smaller stations - Ivalo, Kajaani, and Joensuu - to RTG (Ready To Go), a Finnish company that is itself part of a larger group that provides travel-related services such as cottage rentals and bus tours. Vauraste contends that a company such as RTG is much better able to provide scale benefits for Finnair customers.
Vauraste admits that this outsourcing process has involved intensive discussions with the country's labour unions, but says in most cases that partner companies have been able to take on Finnair and FGH staff with relatively few job losses.
"We continue to supervise and check our partners' performance and come down hard when service is not up to standard," he says. "But service levels have been maintained and financial results have improved by as much as 15 to 20 percent at some stations."
Such moves are also designed to help FGH cope with the intense ground handling competition that now exists in Finland and throughout Scandinavia. In the domestic market alone, FGH competes with GlobeGround/Servisair and Airpro, a small handling subsidiary of the Finnish Civil Aviation Authority.
Two years after the last structural change, Vauraste says that similar discussions are now underway, albeit this time to turn FGH into a full-blown subsidiary of the mother airline.
"We might look for a strategic handling partner to help us create a network," explains Vauraste. "This is very important when developing a third-party handling business."
As Vauraste points out, many ground handling agents in the region are loss making, "so something has to give". And while Scandinavia might not appear too attractive at the moment in its own right, large handling companies might see its worth as part of a wider network.
In addition to Scandinavia, Vauraste is eyeing the Baltic States of Estonia, Latvia, and Lithuania for expansion - all of which are scheduled to join the European Union (EU) in May 2004. Estonia, in particular, traditionally has very strong links with Finland.
"I think the market opportunities are greater in the Baltic States and would imagine that western companies flying into those airports would like western handlers on the ground," suggests Vauraste.
Currently, handling is monopolised by the various airport companies and/or national airlines, but EU entry would make each state subject to EC liberalisation laws. The only sticking point is likely to be the size of the market - although that, too, could develop following EU membership.
As Vauraste points out, existing competition throughout the rest of Scandinavia is another story and he sees various possibilities for market entry: establishing a niche operation such as lounge and ticketing services to wave the FGH flag (an operation already in place at Stockholm Arlanda); or to enter some kind of deeper, more comprehensive strategic partnership with an established handling organisation.
Naturally, he points out, handling markets can also change rapidly, something that tends to generate other new possibilities.
The main difficulty is that while Vauraste would like to explore possible expansion overseas, FGH's immediate future is likely to be determined by events closer to home. Serious job cuts loom large at Finnair, while there is also the threat of routes being dropped, particularly in European and domestic markets.
"The key question is the extent to which Finnair wants to cut costs and what outsourcing opportunities might appear from other sources," explains Vauraste. "But the main focus for us is to plan and continue preparing ourselves for when the good times return."
Home and Away
Once upon a time - or at least before 9/11 - Finnair, like many airlines, used to have a station manager and several supervisors on the ground to keep tabs on contracted handlers at many of its overseas stations. However, the economic and operating climate over the last few years precipitated the need for deep and long-term cost cuts. Finnair recognised the painful fact that, if true cost savings were to be realised, it had to go beyond trimming staff numbers; instead the airline had to face up to the prospect of closing offices at various airport around the world.
As such, Finnair adopted an area manager approach a little over a year ago. Five key personnel now work under Jukka Rahko as overall VP, Ground Operations - one each serving the North American and Asian markets, and three in Europe.
The approach was implemented airport-by-airport, with the decision heavily influenced by the strategic importance of certain stations and the ground handling options available. At some stations, Finnair has retained a presence using a station manager; elsewhere, it has withdrawn airline staff altogether and handed over completely to contracted ground handling agents, or signed a deal with a local supervision company to act as the carrier's eyes and ears on the ground.
Rahko reports that the strategy has worked well so far, with quality up in 2002. Key to this is that, unlike the previous station manager approach, each area manager now has true, overall responsibility for each region's operations.
The travel and workload expected of each area manager is gruelling, but that comes with the territory. "Each area manager is now much more active and although we are still learning, we have defined their roles very clearly," says Rahko. "We have also managed to pinpoint through service level agreements exactly what it is we want from ground handlers."
Rahko offers that the strategy has worked particularly well in regions such as Asia - a crucial growth market for Finnair - where the prevailing culture is naturally focussed on service and quality. When Finnair began operations at Hong Kong, for instance, it selected a manager from the contracted ground handler to operate as an in-house station manager.
"Today, the ground handling agent has taken on a bigger role than was traditionally expected," says Rahko.
Finnair will adopt a similar
approach when it reopens its Osaka Kansai route in June, although Rahko says
no decision has been made whether to use airline staff when the carrier opens
its Shanghai route in September.