Balancing Quality and Cost

Features

Balancing Quality and Cost

By Richard Rowe

June 2001

The level of airline outsourcing of ground services was again a topic of rich discussion at this year’s IATA Ground Handling Council meeting in Hong Kong, as Martin Lamprecht and Richard Rowe report.

The quality of life for today’s specialist ground handler stands and falls on the airline community’s decision whether or not to outsource its ground services. The problem, for ground handlers at least, is that attitudes towards outsourcing vary from airline to airline.

Today, most major international airlines self-handle at important domestic hubs and outsource some or all services at overseas stations. Very few have completely turned over major stations (domestic or international) to specialist ground handlers. One of the best examples (see GSE Today, September 2000) is Aer Lingus which handed over its considerable ramp handling operations to Swissport at London Heathrow in 1999.

The decision to outsource is rarely easy and is full of complexities. Not surprisingly, those ground handlers who feel they have the managerial and financial strength required argue that the industry is better served when ground handling is outsourced to specialists which can then become an extension of the carrier’s operations in the eyes of the airline and its passengers. They also argue the emergence of a genuinely efficient supply market that gives airlines a chance to really evaluate the financial benefits of outsourcing. They also talk of the need for airlines to focus their managerial resources on core competencies, economies of scale, the scarcity of capital to buy GSE, and sheer cost reduction.

Sound arguments all, but they do little to minimize the challenges for airlines. After all, if not carefully managed, changing from self-handling to contracting out a business process to a third party can involve the kind of operational changes that are hard to bear. And then there is the high number of staff to be taken over. While outsourcing would remove high cost labor from the balance sheet, question marks still surround employee acceptance of such a transfer, not to mention managing any changes in salaries and benefits.

In addition, the very notion of outsourcing threatens the age old (but crumbling) issue of ground handling reciprocity--mutual agreements between carriers to handle each other at domestic stations. As ground handlers are fond of pointing out, such reciprocity is often based more on protecting so-called home interests than because it is a cheaper or even a higher quality option. Outsourcing would, of course, eliminate reciprocity, removing any sense of obligation between airlines and allow them to choose the genuinely best option in ground handling.

What must not be forgotten is that many major airlines come from a background where they have historically always performed their own work. United Airlines, for example, has outsourced some services at domestic stations, such as aircraft and GSE maintenance, but has found it more cost effective to perform its own work on the ramp in the U.S. (although more work is outsourced overseas). Its operational knowledge and considerable resources mean that it is an efficient and cost effective ground handler in its own right, so why turn to someone else?

Ground handlers have plenty of challenges of their own when looking at taking on an airline’s ground operations. From cultural and operational fit to market acceptance, there are almost as many questions to be answered. No ground handler wants to be too dependent on one carrier, but if the business volume is big enough it might be hard to resist. Also, in this world of strengthening airline alliances would taking on the handling of a major player in Alliance A impact on existing contracts with members of Alliance B? It also raises the strategic question about whether a ground handler should position itself to serve a specific airline alliance or as a general service provider (the latter being the position of companies such as Worldwide Flight Services).

The German ground handling behemoth GlobeGround has long been an excellent source of industry statistics. As Chief Executive Peter Bluth highlighted at an industry conference last year, the shape of the ground handling market is undergoing a gradual change. According to GlobeGround, the current market volume stands at Euro 42 billion (US$36 billion) and the industry can be broken down into three sections: airline handling (55 percent), airports with free market access (35 percent), and airports with ground handling monopolies (10 percent).

By 2005, GlobeGround envisages a shift to airline handling (53 percent), free market access (40 percent), and monopolies (7 percent). Clearly, the 2001 airline handling statistic of 55 percent is of primary interest to ground handlers looking for market share. The German handler adds that the ground handling market is dominated by North America (50 percent), which completely overshadows Asia (20 percent), Europe (15 percent) and the rest of the world (10 percent).

With these statistics in mind, it is interesting to look at the approach of a large North American airline such as Air Canada. An airline of its time, Air Canada is still experiencing the effects of the recent acquisition and merger of Canadian Airlines, which has moved it up to the rank of 11th largest airline in the world. Integrating a large, diverse workforce, including ground staff remains an on-going effort.

Air Canada self-handles on the ramp at all of its Canadian stations, including those served by its regional affiliates which have their own ground staff looking after the aircraft turnaround operations within their station network. A rare exception is a new seasonal service into Abbotsford in British Columbia this summer where no Air Canada staff or that of a regional affiliate is in place. The local FBO is the only handler on site and Air Canada has contracted its services.

In the U.S., Air Canada has its own passenger service staff at just 13 out of the 36 stations it serves, while the ramp service is outsourced to either Star Alliance partner United Airlines, or handling firms like Hudson General (part of the GlobeGround empire).

Internationally, the airline has both passenger service and ramp handling personnel at London Heathrow and passenger service employees at Frankfurt. At all other stations, the service functions are outsourced, with some local station managers. In addition, the Canadian carrier maintains passenger service staff at eight Caribbean stations.

"At new stations, the trend is to go to outsourcing services and to see how the market develops," Patrice Ouellette, Air Canada’s new Manager of Customer Service - Airport Resource Planning told GSE Today. "Our vision is to have our Star Alliance partners handle us where we don’t have any staff, or to go to a ground handler."

At some stations like Heathrow where there are several Star Alliance partners there is much ground work to be done in terms of standardizing service procedures. "What we are trying to do in London, for example, is to have our schedules changed among partners to have the best connections possible and to really work on the hub concept," explains Ouellette. "Then we are looking at changing facilities and either sharing them or at least all going to the same terminal to really facilitate connections."

One member in the alliance is British Midland which is developing into a more international airline from its regional roots. To make it fit into the group with Air Canada and the other group partners, it is changing its corporate image and enhancing its ability to become part of the new global network.

"Now, in London we have our own staff. With British Midland having its own staff at Heathrow, I can not tell you yet what is going to happen there in the long term. Elsewhere, at Seoul’s new airport [Incheon], all the alliance partners facilities are together in the terminal and use the same handler."

So, how important is it for Air Canada to use one preferred global handler at stations where no alliance partner is present to achieve a more consistent service level? "It is important," concedes Ouellette, " but you want to make sure that the market forces are respected. There has always been a cost side that is related to that issue. I suppose being with a Star partner is always a good thing to start with. Everybody in the Star Alliance is working to have the same procedures, the same type of IT, etc. That would be something to weigh also. Maybe it would cost me more in some regard, but there are all the other expenses that we have to consider, like training."

According to Ouellette, there is an alliance subcommittee for ground handling that includes all Star partners which meets regularly, working toward the goal of uniform service standards. "There are also security matters that need to be included in the standard contract," explains Ouellette. "In my opinion, we may have that in five years, but there is still lots of work to be done."

There is no target date for the adoption of a uniform service standard across the Star Alliance. Saying that, the group has not remained static, with new members added recently and major changes such as United’s take over of US Airways (which could precipitate changes as the new merged operation picks up cities). In the past, Star carriers have concentrated harmonization efforts on areas most visible to its passengers such as integrating flight schedules, frequent flyer programs, premium class airport lounges, and other customer services.

A worldwide quality standard of service is a noble goal for any global airline alliance, but there is only so much the companies can do before hitting certain limits set by the realities of airport infrastructure in various countries. Airport facilities around the globe continue to differ in quality, capacity and layout, defying implementation of the ultimate level of seamless service. "There are also big challenges in handling a greater range of aircraft from a growing fleet of regional jets to the new Airbus A380, all needing different kind of facilities," adds Ouellette.

Information technology is a case in point. On the IT side, there are many different systems in place among partners so the first goal is to allow the systems to at least talk to each other. "When a company has to replace its system because of lacking performance or because it is too old, then they will consult the Star Alliance partners to see what they can put in place that will be easier for everybody to use," elaborates Ouellette.

Currently, Air Canada is implementing its Airport Resource Management System (ARMS), supplied by Inform. "There are many components to ARMS," Ouellette points out. "You’ve got the gate management, staff deployment, the plan design, so there is still lots of work to be done."

The airline alliance question is crucial and could be the one issue that genuinely shapes the ground handling market of the future. The four major alliances (oneworld, Star, Wings and SkyTeam) currently control 60 percent of global traffic. As mentioned, to improve cost structures they are likely to leverage purchasing power, reduce the number of suppliers, utilize handling expertise within the alliance, and harmonize service standards. The big question is whether possible future global purchasing strategies will require parallel global supply strategies.

According to Wolfgang Schmalen, Vice President and Head of Key Account Management at GlobeGround, airline alliances, to date, have yet to have an impact on his discussions with customers. While airlines come to the table together as an alliance each airline contract manager invariably asks for a better offer. "At the end, they split and you have separate contracts," Schmalen told GSE Today.

For Schmalen and GlobeGround, it’s not just about volume. "Of course, volume counts for us, but it is not the only decisive factor." Five airlines and 50 flights a week might sound attractive, but not if their handling procedures are vastly different. "It’s not healthy if each airline’s handling procedures are different," explains Schmalen. "It can be very difficult to talk to alliances, and there is not yet a single alliance who comes up and says I am the one person who can negotiate on behalf of the alliance."

Such an alliance contract sounds almost impossible to write. "You can’t give the same price for a B-737 as, say, an A-340." Different aircraft need different equipment. "Partners want the same price but what about airline’s with different frequencies? As long as these questions remain unsolved and until there is just one contact person talking on behalf of five airlines, it won’t happen."

Of course, each airline is looking to save money, but there are other areas where the alliance idea works well such as exchanging passengers. "I know a lot of them would prefer to pay more for their ground handling with their partner due to the fact that they are in the same terminal maybe sharing same counters so the flow of passengers is good and ease of transit," believes Schmalen echoing earlier comments from Ouellette at Air Canada. It comes down to priorities. Connection times are key, even if it involves paying a bit more for ground handling

The feeling at GlobeGround is that alliances are not quite ready to concentrate on just a couple of handlers, although it would be a good idea. "Why not say ‘here are a couple of good handling companies’ and then pass the handling over to them, including station management" suggests Schmalen. "It would be total outsourcing. They are thinking about it but are not yet ready."

The pitfalls of outsourcing are clear for both sides, and many issues have to be dealt with across a global system of members, like different work rules, national regulations, and industrial relations issues. In some countries, the decision to outsource might be based purely on the quality (as well as cost) of local labor. Some airlines might feel that having an expatriate local presence is also the only way to guarantee the quality of service agreed upon and signed for in the initial contract.

As it stands, organizations such as GlobeGround are positioning themselves to cater for what they believe the airlines want--one-stop shopping, global (or at least regional) purchasing, local full service providers, consistent high quality through the network, and long-term contracts.

GlobeGround has committed much time and energy to retaining its most important customers through a key account management philosophy. This program is headed up by Wolfgang Schmalen who was brought on board from Lufthansa two years ago to pursue the initiative.

"The idea is to offer our top customers global contracting around the world though all our companies," says Schmalen. GlobeGround is currently active at 111 locations in 31 countries. "We wanted to tackle our key customers to see how we can bind them on a worldwide basis."

There is little doubt that this is the direction the industry is heading in. The big ground handlers are providing global offers combined with incentive programs that act a little like loyalty programs. The more business an airline gives at more locations (and the longer the contract) the higher the incentive percentage of the program.

"It means we give some money away, but on the other hand we also secure our business," explains Schmalen. "And of course we are going for the five-year contracts as much as we can.

"The idea behind key account management is not only selling services but also really taking care of the customer--something which doesn’t end with the signing of a contract. In the past, you would sign a contract for maybe three years and then the airline would not see its handler for three years until it came time for contract renewal/renegotiation."

Schmalen encourages his newly expanded team--Montserrat Casas has just come on board from Lufthansa as General Manager, Key Accounts--to pay regular visits to airline customers to obtain valuable feedback.

In truth, what GlobeGround and others find is that the decision to outsource is as much dependent on the personal vision of the person in charge of an airline as any operational factors. Good ideas from far flung station managers about outsourcing ground handling to save money for the airline can fall on deaf ears if they are contrary to the party line.

Conversely, station managers might dig their heels in if their job is under threat from head office or if they are about to lose their staff. It’s a question of chain of command. Does the decision lie with the local station manager, or the regional contracts manager? It’s a difficult question to answer given how differently many airlines are structured.

From discussions at this year’s IGHC event in Hong Kong, however, it does seem that there is more of a partnership approach in the air between airlines and handlers. And rightly so. After all, why shouldn’t airlines accept good ideas from a handling company--particularly if they save the airline money and also improve service and quality.

The overall message from handlers is that airlines should understand how tight margins can be at certain airports. As such, airlines should be ready to accept a fair price for the service offered and accept handlers as genuine business partners. The message from the airlines, on the other hand, is that handlers need to assume total ownership for the provision of ground services and use their specialist expertise to manage out any kinks (delays) in the system. Who knows, if both sides deliver, the industry may see that percentage of airline handling come down even faster than forecasted.

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