Special Report: Ground Services in North America
Mergers and Apparitions
By Richard Rowe
North America represents the largest ground services market in the world, but with airlines continuing to dominate it is also one of the hardest to penetrate for specialist service providers. In this extensive report, Richard Rowe explores what the future might hold.
By any stretch, it’s a big deal. In June, ground services multinational GlobeGround was bought by the parent of another heavyweight, Servisair, to create the most comprehensive ground services network in the world. Although still subject to cartel office approval, the US$333 million acquisition of Lufthansa subsidiary GlobeGround by French logistics group Penauille Polyservices is a significant development in the world of ground services. It is also a continuation of the consolidation that has become a hallmark of the industry in recent years. But has it ruffled many feathers in North America? Not in the least.
GlobeGround and Servisair will preside over the world’s largest ground service operation, with the addition of Servisair’s business giving the combined company annual sales of $798 million. In the U.S. and Canada, GlobeGround’s Hudson General operation, bought by the German handler in March 1999 and rebranded as GlobeGround North America on July 1, represents the main chunk of Penauille’s purchase. In 2000, GlobeGround’s North American operations made 70.9 percent of its turnover ($234 million). The arrival of Servisair USA, which entered the market in January 2000, adds its own annual sales of $50 million.
If approved, the merged GlobeGround/Servisair will become a formidable operation. But life goes on in North America with airlines continuing to dominate the ground services market; the combined might of GlobeGround and Servisair will still only have a five-percent share of the market.
The paradox in North America is that despite its size, opportunities for service companies are relatively limited. Most of the larger carriers self-handle, certainly at hub operations, leaving service providers fighting largely for the business of regional and international airlines. The number of third party service providers has grown rapidly, and there are currently six or seven with a significant market presence and a string of smaller operators with more localized networks. Some argue that there are simply too many handlers chasing too few available airlines.
North American airlines are faced with a bewildering choice of ground service options and can shop across the whole spectrum of price, quality, and service. Whereas Europe has a relatively short history of liberalization, and Asia still has many airport monopolies on ground services, the North American market has been liberalized for years.
Airlines are able to calculate their prices based on the marginal cost of ground services, which gives them considerable advantage over the specialist service providers. The disadvantage of using fellow airlines to provide ground services, say the service providers, is that the sheer size of many U.S. carriers’ operations makes individually tailored services difficult.
It’s a tough business and the playing field is rarely level. As major airlines expand their fleets to include larger and more sophisticated aircraft, the level of capital investment required by service providers is likely to increase, as will the costs of liability insurance coverage. Already, with airport infrastructure largely owned by the airlines themselves, service providers find themselves without counter and terminal space and unable to offer synergies such as common check-in. They are further hampered by brutal competition, tight margins, and crippling turnover in a tough labor market. Such problems hardly convince airlines that service providers represent a better option. Some airlines joke that with a service provider’s lower pay rates, relatively poor benefits, and high turnover, the revolving door sees many of the best people end up working for them anyway.
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