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.
The price of ground services has dropped in recent years and even the service providers admit that quality can be "all over the board," with only a few able, or willing, to invest heavily in quality. Decreasing profit margins make it difficult for ground service providers to compete in the market. "In some cases," says one, "it’s just ruinous competition, which handlers can’t afford to counter."
The mix of service quality is matched by the mixed buying behavior of the airlines. Some shop predominantly on price, while others buy primarily on service. Interestingly, some service providers remark that those carriers with good service levels and profits buy more on price, while those with lower service levels and lower profits buy more on service.
Relationships driven largely by price have become precarious. "Some carriers only care about price right now due to their internal pressures on cost," says Doug Pinckney, Senior Vice President, Marketing and Sales, Worldwide Flight Services, headquartered in Fort Worth, Texas.
"The attitude of some of the carriers is that they will take a chance on a ground handler that offers a cheap rate and hope they perform," adds Pinckney. "Over time, this doesn't work out, but short-term many feel they don't have a choice."
Most airlines have looked carefully at how they do business on the ground. Some have chosen specific paths, while others continue to struggle with their options, swayed by economic reasoning on the one hand, but controlled by stringent labor laws on the other. Unions remain alive and kicking amongst U.S. airlines and have demonstrated their strength of late. This summer has already seen United, Northwest, American and Comair all embroiled in labor disputes involving pilots, mechanics, and ground staff.
However, and whether airlines are prepared to admit it or not--and several declined to participate in this report--many are looking for creative ways to outsource at least some of their ground services. The challenge, as in any business, is to trim costs and keep service levels high, while successfully managing a disparate workforce.
History weighs against the service providers. U.S. majors have traditionally performed their own work, at least domestically, with little or no outsourcing. Self-handling has been the culture of preference, reinforced by stringent labor laws.
At an airline such as United, contractual obligations call for only marginal outsourcing of specific services--although the arrival of additional cities as part of the now seemingly defunct $4.3 billion USAirways deal might have shaken things up. The only exceptions are aircraft and GSE maintenance, cabin appearance, and some air cargo handling, but even then only where it makes good business sense.
In addition, United currently outsources passenger and ramp handling at three U.S. locations. "We do outsource cargo handling and non-routine aircraft and GSE at many locations and the quality, price and choice of providers is generally quite good," Jerry Bell, Manager - Contract Services, United Airlines, told GSE Today. "Where we encounter problems is at the smaller cities where the major providers continue to shut down marginal operations."
Overseas, where frequencies are lower, outsourcing is more prevalent not least because the handling structure is often mandated by the restrictions of the specific airport authority. United has overseas locations that vary from contracting all handling to third parties to almost complete self-handling.
"Internationally, the decision is based on several factors," says Bell, "such as the size of our operation, the availability of options and the cost."
Similarly, Southwest Airlines provides all ramp and baggage handling services, but sometimes outsources into-plane fueling, cargo warehousing, plus aircraft and GSE maintenance whenever a station is too small to accommodate a maintenance group. Southwest considers ground handling a core competency and only outsources whenever necessary.
Elsewhere, Delta Air Lines has done a little of everything in its attempt to get the ground services it wants. In recent years, it has stepped up to the plate aggressively to curb what it considered unacceptable financial and service level problems on the ground. Delta initiated a company wide restructuring program in the mid-1990s which included reducing the cost of airport services and redesigning those services outside of its major stations.
The questions faced by Delta were familiar ones--should it outsource services to third parties, acquire a service company, form a joint venture, or create an airline subsidiary? Delta opted to contract ground services to third party service providers at 91 U.S. airports. This brought the desired lower costs, but customer service levels were negatively impacted. Something more was required, and in 1996 Delta Air Lines Global Services (DGS) was created to replace those domestic third party providers who were not making the grade. Service providers were ranked in order of performance, and DGS replaced third parties at selected stations. Today, it provides services at 43 locations.
Although this seems like massive duplication--forming a company to take over from operations born out of not wanting to form a company--Delta claims many benefits. After all, Delta and DGS operate with parallel objectives, and the trouble shooting DGS is fleet footed enough to be dispatched whenever and wherever desirable. In addition, DGS is not financially bound to the Delta cost structure, and it can generate additional third party revenue. There are also savings attributable to better service and DGS serves the mother airline by potentially supplying it with highly trained personnel (also attractive for employees).
DGS has even seen third party success with airlines such as Continental and America West among others, confounding the thought that one major’s product can not be sold to another. DGS continues to grow at a rate of 25 percent, and now has 10-15 percent of its business with carriers outside of the parent airline.
Second tier and regional airlines look equally carefully at their ground services. Mike Bowers, VP Station Operations and Customer Service at Denver-based Frontier Airlines looks at the market and sees very mixed quality, and sometimes limited choice. Frontier has made multiple changes in its approach to contract services since Bowers came on board in August 2000 from Horizon Air.
Some of Frontier’s contracts date back to 1995 when the airline began life at the new Denver International Airport. The price for ground services mirrored the fact that Frontier was a start up and considered a risky bet at the time. Seven years on, and with a route network that stretches to 23 cities, Frontier feels that the risk factor is no longer relevant. It is in the middle of what Bowers calls "a period of balanced, planned growth," with two more cities coming on stream in the fall. "We are now going back contract by contract, bringing in performance related items and penalty systems," he explains.
In the early days, Frontier contracted everything out on the ramp at Denver. The philosophy has gradually changed, however, not least now that Frontier has some 60 plus flights a day leaving Denver. Ramp handling has since been taken back in house, supported by an in house GSE maintenance division, although the airline still contracts out cargo handling and overnight aircraft cleaning.
"We pay a very competitive wage and it [self handling] still works out a lot cheaper," says Bowers. "Now we have a proper preventative maintenance program, and more control." Frontier also started to offer its own wheelchair and Skycap services at Denver in mid-August.
Bowers admits that outside of Denver there is a different business model based on frequency. When Frontier went in to Houston recently it did so with just three flights a day. "We have not got the volume so outside contractors are more economical."
Bowers says that he analyses three factors when looking at his ground services options--quality, price, and the bid itself. "While obviously important, economic factors are not overriding. With our past model this was just not the case. We self handled perhaps 5 out of 23 stations, but we are now reevaluating and making changes where appropriate."
On July 1, Frontier started passenger handling at Atlanta--traditionally the first service to be brought back, and the last one to be outsourced by airlines nervous about external companies gaining "face time" with passengers. In a move reminiscent of Delta Global Services, Bowers says that the on time performance at Atlanta "was probably the worst of the whole network," and so it was brought back in house. Similar contracts have also been taken back at Boston.
"We are taking the necessary steps as there are too many different flavors and not enough consistency," believes Bowers. "Historically, we have issued blanket contracts and accepted shell contracts in return. Now we are much more service specific. We have already implemented this thinking in several maintenance agreements and are now finalizing the ground handling contracts."
Where outsourcing prevails, the pattern sees Frontier handled by fellow airlines at the ticket counters and more of a mix between airlines and service providers on the ramp. It’s a fine balancing act. "The majors are more expensive, but with ground handlers service levels can vary within the life of a contract," says Bowers. "Ground handlers can use you to get into an airport and become successful through you, only to drop their standards when a bigger and more prestigious client comes along. There is also the question of high turnover, with the new staff ending up on your flight while the veterans are assigned to the new customer."
Some of Frontier’s outsourced services are provided by Delta (at Houston, Orlando, and on the ground at San Diego), and other majors are also contacting Frontier about providing handling services at its outstations. "With the softening of the market, we do see some major carriers that have typically eaten up space looking to offset rising costs."
So, does Frontier’s reevaluation and taking back of some ground services mean that it is now considered an airline core competence? Bowers hesitates before saying, "It’s not a core competency yet but we have assumed many contracts and it could well become that way."
It must, of course, prove economically viable to self-handle. Frontier has signaled its intentions having just spent some US$1.5 million on GSE--$600,000 on a quick overall face lift, $500,000 specifically at Denver, and now a further $500,000 on the rest of its operations.
The airline is also looking hard at its people. "It is important to provide a good working schedule for people to help keep them." It is difficult to keep staff occupied with just two flights a day and is hardly the best use of their time. Clearly, contracting out can be more efficient in this case. Frontier is tackling the issue head on with innovations that Bowers brought with him from Horizon. "We are utilizing current technology to set up reservation systems at each airport station," he explains. "Once a flight has gone, they [ticket agents] go back and become live reservation agents. The efficiency skyrockets, and employees learn both sides of the business. They can work on their technical skills without us having to hire a new person. It is a better use of their time and gives them a better work schedule."
Frontier plans to roll this program out starting September 1 at El Paso. The rest of the airline’s stations will be wired by the end of the year and then it will just be about training, says Bowers.
What do airlines want?
What airlines want and what service providers think airlines want can be two different things. Current market conditions do not help matters. Today, there are few entry barriers into the North American ground handling market, with no license restrictions to circumvent, plenty of used GSE to help facilitate a ground handling start up, and no real quality check when a new handler enters an airport. Service providers argue that airlines encourage these start-ups because it means lower costs for them.
Global service providers believe they can counter this by providing services throughout a large network with standardized processes and consistent quality levels. They repeat a familiar refrain--airlines really want one-stop-shopping, regional/global purchasing, local full service providers, and long-term contracts.
"The trend now is to globalize relationships with airlines by matching as much as possible the ground handlers’ network with that of their airline customers," believes Sylvie Greleau, Director, Sales and Marketing, Menzies Aviation Group (MAG), The Americas (formerly Ogden Aviation Services).
"The ability to provide a complete range of services at multiple airports is very important to our customers," adds Erich Bodenmann, CEO, Swissport North America, which provides comprehensive ground services at over 60 airports in the U.S. "Globalization is a good thing for Swissport’s customers. It allows them to secure services worldwide and minimize the number of providers with whom they have to work. Having too many vendors is a problem as most airline purchasing departments are very lean and already overburdened. Having global vendors with universal quality standards allows our customers not only peace of mind with respect to the quality expectations but also allows both of us the ability to benefit through economies of scale."
The airline view is somewhat different, at least in the U.S. The concept of "universal quality" is questioned strongly, whoever says they can provide it. We don’t seek one-stop-shopping just for the sake of dealing with only one company, says Jerry Bell at United. "This would be done only when there was financial benefit to United Airlines." He also dismisses the pursuit of regional/global purchasing "since the quality of the service can vary by location." Often, he says, "local management is more influential than ‘corporate’ standards."
He does agree, however, with the need for full service local providers "as long as the product and cost make this a good option." United looks for high quality through the network as a given, "but I still believe local management has more influence in some companies."
Very true, believes Jim Malone, Services Buyer at Southwest Airlines. "The largest, best known companies do well in some airports and poorly in others. The major key to being successful whether large, medium, or small in size is the contractor's station manager. The onsite manager must be committed to the customer. He must be a leader that is respected by the workforce and must have quality support from regional and corporate management."
Where Southwest does turn to third parties it tends to look at existing relationships and their ability to service an airport. "Then we look at contractors with a presence and get feedback from the airlines using them," Malone told GSE Today.
Others believe that the whole "one-stop-shop" argument is too sweeping. The feeling is that some airlines just do not have the cash flow to feed "thirsty, top-heavy contracting companies." There are also cases where a handful of majors have entered into one-stop-shops agreements only to find the single source providers to be "jacks of all trades and masters of none." It begs the question, can service providers genuinely cope with managing large programs?
While several airlines are thought to be exploring outsourcing ground handling agreements, fleet appearance needs, and even locating a third party to manage all contractors, they are not seeking a one-stop-shop. Such a view goes against the grain of the volume building consolidators in the industry. Names such as DynAir, Hudson General, Ogden Aviation Services and others have been swallowed by the new multi-nationals such as Swissport, GlobeGround/Servisair, and Menzies Aviation Group.
But these points are not just whistled in the wind—the suppliers say they are listening. While Greleau at MAG says, "The focus of the relationship [between airline and handler] has moved from a localized level to headquarters," she acknowledges without question that "the quality of the service delivery is dependent upon local management and ultimately upon the resources devoted at corporate level."
The integration of the Ogden Ground Services network in the Americas (acquired in November 2000) means that MAG can now use its additional resources to map out those all-important airline relationships with customers throughout its network. "Ground handling is primarily a people business, independent from global corporate strategies," says Greleau. "Creating a common culture and a single vision requires very careful planning and management to build a brand synonymous with high performance, quality delivery, and reliability."
MAG wants to develop relationships with key customers over a network rather than just acquire market share. The focus is on contract retention and expanding the range of services. Currently, MAG’s North American operations cover four stations in Canada, and 11 in the U.S., mostly on the West Coast. "This strategy recognizes that constant investment in staff training and capital investment in the fleet are imperative to support a quality offer over the long term," explains Greleau.
Industry consolidation may well give service providers more pricing power in a market where margins have not been attractive in the past. The argument also goes that airlines gain in terms of working with fewer specialized companies that are more in tune with their needs. Many service providers also feel that industry consolidation is actually being driven by the airlines. It is, as Greleau suggests, "a matter of survival driven by the airlines as they consolidate their operations, strike partnership deals to push costs down, and streamline the quality and price of their ground handling by reducing the vendor base."
It is a thinking that has helped others such as Swissport North America develop their business. "At the time of integration, DynAir had a significant customer base," explains Bodenmann. "We have expanded our North American customer base through a refocus on providing quality services and through harmonizing our extensive worldwide contacts. Our network in North America has grown 11 percent in the past eighteen months while at the same time we have greatly expanded our service lines at our existing locations."
Doug Pinckney at Worldwide concurs based on his own company’s business philosophy. "Many carriers look for a handler they can do network deals with, simplifying their vendor relationships in training, so providing ease of use and pricing leverage. In this way, breadth in services and stations becomes very important."
Consolidation is likely to continue. In July, the BBA Group announced through its BBA Aviation North America subsidiary that it had finalized its acquisition of Aircraft Service International Group (ASIG) from Ranger Aerospace, at a price tag of $137.9 million. This is just the latest power play following the GlobeGround/Servisair news. Elsewhere, operators such as Fraport (formerly Frankfurt Airport) epitomize a new breed of, in this case airport-related, operators with fingers in many pies around the world, including ground handling. There has also long been talk about companies from outside the industry, such as oil companies, stepping in to try their hand. After all, barely anyone in ground handling had heard of Menzies, and later MAG, a few years ago when it was just distributing newspapers.
Airlines watch developments with interest and question strongly what such consolidation actually brings to the industry. "The contracting process may become simpler, but I believe the prices will be higher and in some instances, service levels will suffer," says Jerry Bell at United.
Others believe that service companies are making a fundamental mistake in buying each other up. "The number of companies may be shrinking, but the players are all still the same," says one U.S. major. "You have clashing personalities that have bloodied each other up coming together under one roof, and then you expect them to all skip and hold hands?" In spite of the clever branding, and carefully constructed "corporate speak," he believes "there are still a lot of old school thoughts, archaic ideas in managing low income work groups, a lack of benefits for employees, and a shrinking labor pool from which to draw."
And then there is the question of culture. The international service providers argue that they can take the best of every culture in every region, mold the perfect employee group, and generate perfect service—all tied up in global contracts.
"People think it is much easier to have a global contract, but the devil is in the detail," comments Philipp Huber, the Swiss-born President of Hallmark Aviation Service, which prides itself on its passenger handling service at its predominantly west coast-based operations. It’s very hard, he says, to have a series of contracts in different countries. Labor laws, minimum salary levels, and local cultures all impact on the provision of uniform service.
Serious issues can arise when world and even regional cultures are thrown together. Some suggest globalization and consolidation of the ground services business is a little like taking the pieces from 100 different jigsaw puzzles, throwing them into one big box, and shaking it up. It is very difficult to make one large picture out of so many misshapen pieces. There are also question marks over whether one time fierce competitors, from vastly different cultures, can ever make good allies.
The benefit or otherwise of consolidation is also a tough one to call for many medium-sized handlers, many of whom have to work out whether to grow or be swallowed. "As some of the medium contract providers have participated in the consolidation, the distance from a very small niche player is widening from the large global players, and there are fewer quality medium sized players [left]," says Sally Leible, CEO, Airport Terminal Services (ATS), headquartered in St. Louis, Missouri.
Leible would categorize her own company as just one of those quality medium sized players--one that has shown its grit and determination to grow without succumbing to take over with its recent entry into the Canadian market. Earlier this year ATS purchased the ground handling and cargo operations of Canadian Commercial Airline Overhaul (CanCom). CanCom has operations in Calgary, Edmonton and Winnipeg.
"ATS continues to enjoy steady growth which deepens our resolve that our niche position will continue to support us," adds Leible. "At the request of many clients, we have expanded in to Canada and that expansion has already exceeded our expectations."
Leible says she continually looks at the pros and cons of the effects of consolidation. "Our niche position has afforded the opportunity to execute our ‘nimble and quick’ philosophy on behalf of our clients. Our clients are asking for solutions quickly and our size has allowed us to focus on the issue immediately.
"In the end," she says, "there is business that the global players fight heavily for, leaving other opportunities unaddressed. We hear clients wondering who the parent of these companies will be in the short and long term."
Consolidation is a major challenge, adds Huber at Hallmark, but every threat has an opportunity. "There is a rat race going on, but when that happens mistakes are made and others can pick up the business. Global operators try to take care of the customer, but again this really happens only at a local level. You might strike an excellent deal at head office with plenty of stations and multiple discounting. However, if the quality is to be provided at a local level you have to make sure you have dedicated, motivated, and excellent staff. You don’t get that by cutting corners."
Gaining the edge
In such a mixed market, it is difficult to say whether a service provider can really be all things to all airlines. Realistically, service providers might be better off targeting a certain strata of the market and sticking to it. "Be wary of customers that might want to bring you right down on price," warns one U.S.-based handler.
While airlines remain reluctant to put all their eggs in one basket, there are signs that they at least want to minimize their supply bases and deal with fewer suppliers. So, what does this mean for the niche players?
"Some airlines may see an advantage in a niche regional player mainly because they may have a lower price in a market and be perceived as more flexible in certain markets," says Doug Pinckney at Worldwide.
However, he warns, "The niche player will face more severe pricing pressure due to the lack of a network and we have seen cases lately where many have lost business because they didn't have the breadth leverage."
The winners will be those who find the magic formula to provide consistent quality service at the lowest cost. According to Menzies, the service provider best suited to survive is one that establishes relationships beyond North America. "Success is not going to be about the coverage of the North American network of airports but more about coverage of strategic airports that service key customers around the world," believes Greleau.
Others have less far-reaching plans and believe that the way forward is to achieve excellence in one niche area, such as passenger handling. "Passenger handling is one of the most delicate areas, and it takes a lot of faith for an airline as it is usually the first contact an airline has with an end user," says Huber at Hallmark.
Hallmark launched its business with Qantas at Los Angles International and has now expanded to San Francisco, San Jose, Oakland, San Diego, Honolulu and John Wayne (Orange County) airports. Qantas has been joined by other international carriers such as Air New Zealand, Mexicana, Varig and Singapore Airlines. Hallmark has stuck to its passenger handling guns although it has diversified slightly by also offering load control services.
We are better able to adapt to the ebb and flow of their business, believes Huber. "With our focus, we are also a smaller business risk than a full service ground handler." Huber questions whether service providers involved in the current consolidation have the management resources and training facilities to cope. "Naturally, we look for other locations, but we are very conservative about where and how we expand. It is even more important to me that when you expand it doesn’t happen at the cost of existing customers."
Not being a full service provider doesn’t bother Huber. "There are different philosophies," he says, "and there are good arguments about the economies of scale of global contract management. On the other hand, the business is really done on a very local level. There can be no ivory tower."
Hallmark’s structure is deliberately flat with much of the decision making power divested to individual, local account managers. It helps this way, says Huber, particularly when you find different labor and contract laws at stations as close together geographically as even San Francisco and Los Angeles.
Service companies can be caught between a rock and a hard place. Competition is fierce; consequently carriers can enjoy deep discounting to get the price they want. The ground handlers then struggle to provide the service that carriers want at the price they are prepared to pay. "More contracts include performance criteria that are sanctioned by penalties and, rarely, rewards to acknowledge a quality delivery," comments Sylvie Greleau at MAG.
The feeling is that sustained investment in staff training and retention is needed to meet performance criteria. MAG argues that this demands substantial resources and longer contract periods to amortize costs and secure the business. "This is still not the case in an industry driven by 60-day termination clauses in the IATA contract and still driven by turn prices where a few dollars less may mean the move of a contract from one handler to another and back again," adds Greleau.
Greleau strongly believes that such short term considerations are hardly in the industry’s best interest, "Least of all the airlines as reduction in prices from one player to another is usually the result of less investment or corner-cutting on services." She feels that, "There is a gap between expectations and an appreciation of their true value," although "this is likely to evolve as the market further consolidates and the playing field levels."
Given the difficulties of the operating environment, it is perhaps not surprising when Jerry Bell at United reiterates, "Good and reliable service providers continue to be scattered, especially at the smaller domestic U.S. locations. Many of the emerging large companies are choosing to pull down their operations as we have experienced during the past couple of years."
This does, however, mean that opportunities exist for the financially sound, and fleet of foot. "I have seen carriers ‘experiment’ with outsourcing non-traditional services such as baggage services and small package freight services," says Leible. "Carriers will continue to find creative ways to outsource."
Airlines often say they are not in the business of keeping ground handlers in business, but clearly the outsourcing question is more than just a dirty word. They, too, are trying to fathom out what it is exactly they want.
"Many carriers are requesting fully bundled services at specific locations," comments Leible. "One carrier has asked for all traditional outsourced services to be managed by one entity, and to include services ranging from pre-board security, cleaning to janitorial to ramp services. This has created partnering amongst contract providers. The results of this bundling are still unknown as it is still in its infancy."
That said, she adds, some locations have abandoned this concept because of the lack of true savings. "This concept is very creative and will force contractors to look carefully at how synergies can be created to enhance services and reduce costs for the carriers," says Leible.
For some, foreign flag carriers flying into North America appear more lucrative. "Many [service providers] are looking at the high frequencies of the domestics and the low rates and worker’s comp exposure they are yielding and opting instead to focus on the foreign long haul carriers that have less frequency, require higher service levels, and have generally paid a fair price for the services they demand," confirms Pinckney. "The pricing here is changing quickly as the competition for this part of the market heats up. From a choice perspective, we see many ground handlers going after new business. Much of this is due to the lack of margins they are making on the current business and thus the desire to grow and earn economies of scale."
Bodenmann at Swissport agrees. "Ground handling in North America [involves] primarily handling for international airlines as most but not all of the U.S. carriers self handle. In many instances, the unions which perform the self handling are partial owners of the airline, so we do not anticipate a rush to outsourcing on the part of these North American carriers. The growth in the foreseeable future will come from international carriers increasing flight activity in existing markets and expanding into new markets."
Pinckney adds that the postal contract deal with FedEx in the U.S. cost many service providers significant business. The result is they now have assets lying idle and are going after business they might not have chased last year. "We are seeing companies move out of their traditional core competencies in search of new business," he comments. "Security companies are looking at passenger work, ramp companies are getting into the cargo business and so on. Some of this is also driven by the carriers wanting a simpler arrangement with their vendors and are paring down their list and asking surviving handlers to do more or lose the business they have."
Other handlers feel that the industry has entered a new phase, already hinted at by Leible. "Ground handling companies are partnering together to utilize their [joint] expertise," comments Mark Doggett, President of GAT Airline Support, an Alabama-based handler that has itself diversified in recent years. "It is not uncommon to see a company that specializes in ramp services partner with a company that specializes in security services and so forth. Instead of a one-stop-shop from one company, airlines can obtain a diversity from the best that is out there. This gives the airlines not only a lower price, but also a more equitable one for the services and quality needed."
Doggett believes that it is the company that proves "most flexible in its ability to either offer an all inclusive package from within its organization, or one that can offer and manage the all inclusive package," that will best survive.
He also has an interesting take on industry consolidation. "It will be imperative that companies ensure that they market themselves not only to the airlines but also to competitors to ensure full exposure to the industry. Ground handlers will be expected to not only work directly with the airlines but also be part of a subcontract in some cases.
"I do not think that the global companies actually want to be the providers, but rather the managers in a city contract utilizing other companies to provide the services they specialize in, i.e., ramp, passenger, security. There will always be a market for the smaller companies to hold ground but that ground will be smaller and much more competitive."
As well as dealing with the kind of economic cycles that are rife in the airline industry, much of the challenge for service providers involves finding and then securing the right people. Operating during a 40-year record low in unemployment is not easy. Everyone has staff turnover, but the key is to keep it at a manageable level and lower than your competitor.
Labor is also a key issue that service providers feel that airlines do not consider when negotiating contracts. After all, there are regional labor cost differences which need to be accommodated in contracts which is not currently the case. Menzies says that it is investing in systems that assist local management in optimizing staff utilization and building databases that identify the pool of skills it can draw upon across North America. The company is also developing management training programs "as well as incentives at all levels to minimize staff turnover and reward performance."
"Skilled management will continue to be a challenge for us," confirms Sally Leible at ATS. "As the economy has slowed down, we have begun to see a loosening in the labor market. Our other challenge will be to find creative and alternative ways to provide solutions for our clients in order to maintain our status as a value added strategic partner rather than just a low cost provider of services."
There is a similar theme at Worldwide. "Our challenges will be in recruiting and training labor in a tight environment, getting the return on new investments given the market pricing levels and 60 day cancellation clauses, plus getting adjustments on our pricing when macro factors drive up costs," lists Pinckney.
"Our priorities will be to continue to drive cost out of our organization while maintaining the high service standards that we have delivered," he continues. "We will look for ways to continue to grow our company both organically and by acquisition and work to broaden our service offerings and network to make Worldwide a true one-stop-shop."
The escalating cost of labor, including wages and health insurance, is also on the mind of Erich Bodenmann at Swissport North America. "We must control the impact of these escalations on our customers and on our own financial results." Bodenmann says that Swissport North America has also made expansion of existing service lines a priority. "There will be particular focus on aircraft maintenance within our existing network and to new locations."
Service providers may also have to watch carefully for the impact of further consolidation of U.S. airlines. Certainly airlines coming together (witness American and PanAm if not United and USAirways) invariably creates excess labor pools. "This is an issue which will come back again and again," says one senior industry observer. Although the United/USAirways merger is seen as largely unpalatable from a regulatory point of view, "Consolidation amongst airlines will continue, perhaps more with the regionals." Some handlers have already suffered from this in a minor way following TWA/AA. Many feel that the concentration process amongst airlines will continue and alliances will become increasingly important (see alliance sidebar).
Other observers see the prospect of more handling spins-off in the same vein as American Airlines (AMR Services, and now Worldwide Flight Services) and Delta if only because, "People are not going to expand a unionized labor pool if they don’t have to, so spin-offs are attractive."
Looking to the future, one senior airline observer envisions a handful of majors entering into one-stop-shop agreements for bundled services such as cargo, ramp, into-plane, pushback, interior and exterior aircraft cleaning, facility cleaning, aircraft and GSE maintenance, but questions the wisdom of such a move. "Some may even put all of those into one agreement, but I personally believe that the agreements that include too many services will either fail or only be marginally successful," he says.
Meanwhile, Jim Malone at Southwest returns to his earlier theme that "a contractor's airport manager is either the strongest or weakest link in the service organization." Finding people who not only have the necessary skills, but also the stamina and commitment to last the pace in an industry that exacts such a huge toll on body and spirit, is no easy task. Perhaps some of the service companies that are consolidating are too top-heavy in senior management, and are not putting enough emphasis on front-line management personnel.
Service companies also need to be aware of one other major issue. Many airlines targeted by the service providers carry U.S. mail, military personnel, or are involved in other federal government contracts. The U.S. Small Business Administration (SBA) has target spending goals for airlines with government contracts (in some cases as much as 23 percent of annual procurement). If an airline wants to keep its government contracts--and presumably most do--then it has to meet the spending goals by entering into agreements with small businesses that meet the SBA’s criteria.
In their attempt to gain an edge, the smart players may well look outside of aviation to find the right value proposition. One example is Iberia, which turned to IT giant Hewlett-Packard to help maximize the use of its resources. The two have a long history of working together. Hewlett-Packard’s aviation and transportation business specialists developed a ramp management decision support tool known as GEMAR. Iberia’s operations have profited strongly as a result.
Meanwhile, ATS talks of continually exploring technology as a way of enhancing cost control as well as "sharing real time information to help ease the process of doing business with us." Pinckney says that Worldwide is "also focusing hard on technology that will bring value to its customers such as a deeper form of real time performance measurement."
Worldwide has also embraced the online world, albeit tentatively for now. "We had our first online auction of aviation services with a major U.S. carrier in June," says Pinckney. "It remains to be seen how successful this auction for ground handling will be given the dichotomy of such varied service levels in this business and the desire for major carriers to cut their number of vendors."
What can be sure is that the positioning, and posturing, of the ground services community will continue in North America, as it has in other parts of the world. All will watch with interest how airlines tackle their ground service needs now and in the future. Creativity will be everything.
As some argue, the industry takes its cue from the airlines themselves, with the customer always able to determine the level of competition by where it puts its business. Clearly, flexibility in adapting to demand, whatever it may be, will remain a key success factor. In a contracting market, it would also make sense for airlines and service providers to forge closer, mutually beneficial, relationships.
Whatever happens, service providers seeking longevity must work hard on gaining credibility and demonstrating customer commitment throughout the life of a contract. They must deliver what they say they can deliver and convince airlines to pay a sensible price or the talk of uniform quality among those that have survived consolidation will remain just an apparition.