On The Bubble

Feature

On The Bubble

GSEAviation industry insiders do not anticipate Year 2003 to be the Year of the Rebound, but it should provide some hope toward recovery, writes Michelle Garetson

By Michelle Garetson/p>

By Michelle Garetson

December 2002

Certainly, 2002 was going to be an incredible year of shake ups, let downs, and cautious optimism following the tragic events of September 11, 2001. Looking back, much of this proved true with a few high-profile bankruptcies such as US Airways and aircraft manufacturer Fairchild Dornier, as well as the continuing saga with United Airlines. Successful models such as Southwest Airlines, Ryannair, easyJet, and JetBlue surfaced from the rubble of legacy carriers' shifting and showed profits despite news reports of dwindling numbers of business and leisure travellers. The ground support equipment and ground support services sectors were captive audiences in watching how much effect the airline troubles would have and for how long the effect would last.

Overview
August 2000 was the last time an in-depth analysis was conducted for GSE Today and even that report was more specific to the ground support equipment sector than the ground support industry as a whole. Still, a lot of good information came out in that study and painted a fairly rosy picture for our industry for five years out.

But no one could have or would have predicted the tragedy that occured a year later. No one could have known that the aviation industry would be sabotaged with its own equipment. In the air and on the ground, everyone felt the continental shift when airplanes were grounded, personnel layoffs ensued, filled order books emptied, and bankruptcy lawyers circled crippled aviation businesses.

This report will attempt to provide a snapshot of where the aviation ground support industry is at this moment, as well as to offer a view to trends for the coming year, and how the past and present have interacted with each other in order to shape the future. Information featured has been gathered from news data, industry correspondence and interviews.

Then and Now
Some of the August 2000 predictions stayed the course, although there were slight dips and detours in the road forward. The prediction of cargo increasing, especially in the Asian markets, came true and is a continuing trend. Mergers, acquisitions, and alliances continued, although some probably out of necessity rather than desire. American Airlines Chairman and CEO, Don Carty in a speech in May called for the lifting of investment restrictions citing that "In other industries, globalization is fueling mergers and acquisitions and other sorts of business combinations." Carty went on to encourage Congress to amend the law to provide the right for foreign investment on a fully reciprocal basis.

While the potential for greater efficiencies in operations throughout — If aviation did move to a truly globalized industry, oversight of this entity would fall on whose shoulders? FAA? JAA? CAA? There would probably have to be a WAA (World Aviation Administration) developed to ensure policies and procedures were consistent for all of the continents involved and that there would be equitable enforcement of the rules and regulations. Oversight and management of ground services companies also may have to change as a result of a globalized aviation industry. Presently, companies such as GlobeGround, Swissport, and Signature Flight Support have operations worldwide, but are seen by their parent companies as being distinctly different in the North American and European markets — with different management 'trees' and objectives, as well as separate budgets and decision making powers.

2002 Mergers, Acquisitions,
& Alliances
Some of the key M&As in 2002

January: Taylor-Dunn purchase of United Tractor.
February: Candover acquires Swissport.
March: Air BP forms a joint venture with Valley Oil Company, LLC, and will be called Air BP Aviation Services.
April: Sage Parts purchase of CREG International.
May: EasyJet acquires Go Airlines.
June: China Southern Airlines acquires 49 percent of China Postal Airlines.
July: ASIG acquires Ontario Aircraft Services (OAS).
August: Swissport International acquires all the activities of Cargo Service Center B.V.
September: Douglas Equipment is acquired by Aquarius Group.
September: Taylor-Dunn purchase of TIGER Mfg.
October: Deutsche Post attains full control of DHL International Ltd.
October: ITW GSE Group purchase of J&B Aviation Inc.
October: Swissport Cargo Services acquires the cargo handling activities of CS-Lux.
November: Skytanking Holding GmbH acquires Merlin Fuel NV.

The August 2000 report also predicted considerable growth in the regional aircraft market, more specifically, the 30 to 70 seat models of aircraft, with the most demand coming from North America and Europe. Regional aircraft has come on strong most recently, with Embraer's new jet family - 170/175/190/195, that offers 70 to 110 seat class of aircraft, as well as Bombardier's CRJ700, 70-seater aircraft and its new CRJ900, 90-seater aircraft, that in November 2002 received FAA type approval and is currently awaiting JAA approval.

Standardization
One of the biggest headaches for ground support equipment manufacturers and equipment end-users has been that of a lack of standardization of aircraft, which in turn, results in having to manufacture, as well as purchase, several versions of the same theme to accommodate the many aircraft types on the runway. The new business model is that of the Southwests and Ryanairs of the world that have moved to one type of aircraft - Boeing 737s - for the entire fleet. Delta Air Lines is launching a yet-to-be-named low cost carrier that will feature a fleet of 36 B757s. This move may pave the way for more airlines to follow suit and streamline operations to one or two types of aircraft models.

A lack of standardization for equipment parts - sometimes within the same product line - concerns GSE customers. Many customers, especially airline GSE customers, are looking to streamline their GSE fleets and would like manufacturers to take a look at what can be standardized on equipment to reduce parts inventories and overall operational costs.

Man vs Machine
It's a fact - as technological power increases, the need for manpower decreases. Given the number of layoffs since September 11, 2001, these enhancements to equipment are coming on board at the right time to bring savings in labor and time costs, as well as increased safety.

RampSnake came on the scene earlier this year with a new baggage loader for narrow body aircraft. This equipment is designed to lessen the opportunities for back injuries and allows for one less handler to perform the loading and unloading tasks, saving on labor and potential injury to personnel.

United Parcel Service (UPS) has installed a new machine at its main sorting center in Louisville, Kentucky that is expected to handle increased demand over the holidays that will eliminate the need to hire seasonal workers this year - providing considerable savings to UPS in labor costs.

GSE customers, airline customers especially, have asked manufacturers for development of interchangeability of products in order to help them adhere to safety and environmental compliance requirements at airports, as well as to help reduce ramp congestion and labor costs.

Environmental Issues
Electric and other alternative-fueled vehicles will continue to be developed and used at airports worldwide to reduce emissions. A comprehensive study done for the U.S. Environmental Protection Agency in 1998, entitled Technical Support for Development of Airport Ground Support Equipment Emission Reductions, offers data on potential control strategies, GSE emissions and activity estimates, and more and is available for viewing or download (144 pages) from www.epa.gov.

The Royal Commission on Environmental Pollution (RCEP) just released its special report The Environmental Effects of Civil Aircraft in Flight. The report offers the prediction from the Department for Transport, Local Government and the Regions (DTLR) that air traffic at UK airports will grow at an average of 4.25 percent per annum, which is based on "unconstrained forecasts of the underlying demand for air travel" up to 2030 and is intended to cover all market segments. The Department's highest and lowest growth scenarios are for growth at 4.9 percent and 3.6 percent, respectively and barring any major restrictions or catastrophic events, these forecasts imply that British airports will be serving over one billion passengers per year by 2050. RCEP raises concerns that increased aviation emissions could possibly produce a climate change over time.

While industry and governmental analysts say that roughly 10 to 15 percent of airport-related pollution is caused by airside vehicles, including GSE, the problem becomes a bit fuzzier when there is no clear count as to how much GSE exists in the world. An increasing number of service vehicles such as fuelers, water and lavatory trucks have engines that adhere to emissions standards for on-road use, but much of the older GSE on the ramp use engines not designed for low-emission output. Due to the lack of regulation and industry representation, the aviation ground support equipment sector would be the easiest to target for emissions restrictions on products.

Cargo Transport on the Rise
The USA's and Europe's love of all things electronic continues to grow and demand for electronics from the East shows no sign of slowing. The events of September 11, 2001 created a surge in the world, especially in the U.S., to funnel travel dollars into hearth and home. Sales of home entertainment systems and home security products increased steadily after the tragedy and the Asia market gladly stepped up to the task of producing and shipping these goods. Current sales reports from holiday shopping show strong numbers continuing in home electronics and small appliances. Case in point, the Singapore Airport Terminal Services (SATS) reported that revenue contributions from its ground handling business increased by 2.3 percent to S$226.5 million (US$127.9 million), which was attributed to an 11.6 percent increase in cargo volumes handled.

Dnata Cargo, part of the Emirates Group, at Dubai International Airport, reported a record throughput of 167,076 tons handled from April to September 2002 - a 23 percent increase over the same period in 2001.

The U.S. Department of Transportation's phones must be ringing non-stop as UPS and FedEx are wasting no time in trying to gain a foothold in the Chinese market by applying for additional flight frequencies resulting from an air liberalization deal between the U.S. and Hong Kong in October. The agreement approves an additional 56 frequencies over the next two years (currently, only 8 frequencies are authorized for cargo aircraft) and the DOT is in charge of allocation among interested U.S. carriers.

Meanwhile, China Southern Airlines, in June, bought 49 percent of China Postal Airlines to position itself as the premier cargo, mail, and overnight mail carrier in China.

However, a TIACA (The International Air Cargo Association) survey in September of some 500 senior executives revealed that yield decline is the biggest concern for the air cargo industry. Over-regulation of the industry and security finished second and third, respectively. A majority, 60 percent, replied that they were optimistic about prospects for the industry over the next 12 months, but 41 percent of the group thought that it would take at least two years to rise up from the present downturn, and 30 percent forecasted recovery in three years or more.

The Price of Security
Aside from the staggering costs, both physical and emotional, suffered by the aviation industry post-September 11, 2001, costs continue to mount for those products and services meant to enhance security for passengers, crew, and aircraft — but who ultimately has to pay? Airlines? Government? The public?

The price of security for airlines that carry the mail got a lot steeper as the Transportation Security Administration (TSA) put a halt to airlines hauling U.S. mail packages weighing over one pound (0.5 kg) until a security screening process can be developed. Cargo carriers such as FedEx and trucking transport companies are not affected by the TSA restriction and the airlines are lobbying hard in Congress to end this policy. The Post Office has created a new truck hub in Atlanta to compensate for the loss of volume handled previously by Delta Air Lines, which reportedly had generated an extra US$50 million a year in revenue. The TSA does not have a deadline for the implementation of a screening program to allow airlines to renew mail contracts with the Postal Service.

Aviation insurance companies also inflicted monetary pain on airlines and aerospace equipment manufacturers, citing that the price of security had gone up. Product liability insurance premiums increased in some cases, nearly 300 percent for one manufacturer, while the scope of coverage dropped 50 percent. In July, The International Air Transport Association (IATA) proposed Globaltime, a global aviation war risk insurance program to cover the risks left open by the withdrawal of commercial insurance coverage following September 11, 2001. It would provide third-party coverage for airlines and others involved in civil aviation, through a non-profit insurance entity backed by state guarantees.

Future Trends
Probably the biggest trend will be the growth of the Chinese aviation market with Hong Kong poised to receive the most attention as a primary hub for cargo and passenger transport. Fifty new airports are scheduled for construction within China over the next five years to meet the higher demand. Feeder traffic — that segment serviced by regional jets — could grow 12 percent annually over the next 20 years.

Brazilian regional jet builder Embraer has set up a US$25 million joint venture with China Aviation Industry Corp ll, to manufacture its 30 to 50 seat, ERJ145 aircraft under license. The new company, called Harbin Embraer, expects to produce 24 planes each year, with deliveries are scheduled to start in 2003.

In November, AVIC I Commercial Aircraft Co. Ltd. (ACAC) of China signed a cooperative Letter of Intent with GE Aircraft Engines (GEAE) selecting GE's CF34-10A engine to power the ARJ21 regional jet now in development. ACAC and GEAE see a potential market for 500 ARJ21s over the next 20 years, representing a potential value to GE of US$3 billion.

Same Song, Second Verse...
Development of electric and alternative fueled vehicles will continue but purchase of such equipment will hinge on slim budgets and the speed at which airport infrastructure will improve to accommodate the necessary accessories for this equipment.

Mergers, acquisitions, and alliances will continue but may have a more Eastern look to the resulting ventures.

Demand for GSE maintenance services as well as GSE parts and components will also continue as airlines remain in a "repair, not replace" mode.

Year 2003 will find the aviation industry "on the bubble" and poised for recovery. Let's hope the industry can rebound before that bubble bursts.

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