Ground Handling: One Year On
Faced with an intensely challenging market over the last 12 months, many ground handlers have spent much of the past year rethinking what services to offer and where, writes Richard Rowe
By Richard Rowe
After the rise, comes if not a fall, certainly a rethink. A ground handling market characterised of late by a feeding frenzy of internationalisation, bullish network growth and big money buyouts has been forced to take stock of new business realities.
One year on from 9/11, the industry's recovery has begun, but the global economy remains shaky. The low cost and business aviation segments are buoyant, but mainline carriers remain bruised and vulnerable. Carriers have demanded greater productivity from their suppliers and made it clear that requested service levels must come at a lower price.
On the supply side, these customer demands have been met with considerable analysis. Smaller operators are struggling with higher insurance premiums, while larger operators have looked closely at their regional and international networks. In some cases, they have even re-examined their whole service offering.
It seems that the propping up of marginal stations, unless of extreme strategic importance, is no longer tenable. Handlers are now more brutal when analysing specific markets. If no potential exists for long-term benefits, an operation is more likely to get the chop.
"We are more inclined to cut marginal stations than before," admits Conrad Clifford, Commercial Director at Menzies Aviation Group (MAG). "Generally speaking, however, we have simply cut back on some operations and taken advantage of other opportunities,"
One such opportunity is in Australia where MAG recently
acquired the lease for the former Ansett domestic cargo terminal at Sydney's
Kingsford Smith Airport. Elsewhere, from October 1, MAG will also phase in the
opening of nine new cities in Mexico on the back of a ramp handling contract
with Continental Airlines. MAG is already present in 10
This is good news for a company that has seen retreats from other markets this year. In March, MAG called an end to its passenger and ramp handling operations at Korea's Incheon International Airport, having only begun operations a year before when all international traffic switched from the old Seoul Gimpo airport.
Operating with a modest customer base — passenger services for Northwest Airlines and ramp services for Federal Express - the operation was hampered by lack of access to cargo facilities that were needed to provide a comprehensive handling service. MAG has, however, retained a presence, and its operating licence, in Korea through a local partner and does not rule out restarting operations in the future. Discussions continue about an interim solution to the cargo facility problem.
Back in Europe, MAG also retreated from the German market when it sold its shares to Swissport, which, in turn, pulled out from San Juan (Puerto Rico) in June and pulled the plug on its Dutchport venture at Amsterdam Schiphol in January.
Also in Germany, a challenging market for independent handlers, Servisair stepped out of Stuttgart, while Aviapartner retreated from the cargo handling market in Munich (although it retains a ramp handling presence at the airport).
The question of how much such retreats have to do with
9/11 and how much they were influenced by local operating conditions is moot,
but the events of last year may have represented the final straw for
operators at each location.
As service providers re-examine customer requirements in specific markets, they have also analyzed what spread of services they should offer. Above all, there is a move to persuade airlines to buy multiple ground services from just one supplier across a network of stations. As such, many service providers are looking beyond traditional ground handling functions to examine ancillary activities such as cabin cleaning, lounge management, cargo handling and line maintenance. It's about adding synergies and economies of scale, as well as reducing the risk from potentially cyclical business lines.
Conrad Clifford cites how MAG has already "moved up and down the chain pretty effectively." MAG may not be interested in heavy maintenance, fueling or catering, but the group's three core businesses — Menzies World Cargo, Menzies Ground Services and Menzies Support Services — essentially cover the whole gamut of integrated cargo and ground handling, plus specialist activities from executive aircraft handling to passenger complaints handling and baggage claims.
Such versatility can pay dividends in times of difficulty, as Germany's GlobeGround has discovered. Overall, the company's strategy is to concentrate on what it regards as core services, in this case passenger handling (which includes lounge management) and ramp handling (which includes cabin cleaning). However, this does not preclude the possibility of offering additional services on a local basis in specific markets. For its part, GlobeGround offers transportation services (mainly in the U.S.), plus snow removal and deicing services. The fact that such services are less dependent on passenger movements has helped GlobeGround cope with the impact of 9/11 better than some.
But many handlers are not yet satisfied and are hell-bent on becoming better rounded still. Swissport's acquisition of MAG's German business, which gained a first foothold in the German cargo market, proved a mere appetiser to a much larger piece of business concluded at the end of August when Swissport acquired Cargo Service Center (CSC) from D. Logistics.
The Netherlands-based CSC Group is a major air cargo handling company — its 2,000 employees handle some 1.2 million tonnes of airfreight a year for over 100 customers, and generated total turnover of around CHF 200 million (US$130 million) in 2001. The acquisition of CSC's 61 stations in 15 countries represents a massive step in Swissport's ongoing expansion and diversification strategy.
The Zurich-based handler's rationale is that while the airport services sector continues to both consolidate and expand, the development of a global network and a broad product range is essential to future prosperity. With the acquisition of CSC, Swissport believes it has achieved both.
Swissport is not alone in driving its business forward despite the
difficult operating climate. Singapore-based SATS Airport Services has also continued its overseas growth strategy.
"While we have been cautious, we have continued to seek out business and acquisition opportunities throughout Asia and further a field," confirms Karmjit Singh, Chief Executive, SATS Airport Services.
SATS, a subsidiary of Singapore Airlines, has looked particularly carefully at the developing Chinese market, where the company already has three joint ventures in Beijing (Beijing Aviation Ground Services), Hong Kong (Asia Airfreight Terminal) and Macau (Macau Catering Services). The company also has its eye on opportunities in the U.S. and Europe.
"India is also a promising market, with its large and growing middle class and increasing aviation industry liberalization," adds Singh.
The last financial year has seen SATS sign three joint venture agreements for new associate companies in India, Taiwan and Singapore. In September 2001, an agreement was signed with the Indian Hotels Company Ltd. to form a joint venture, Taj SATS Air Catering. The new company operates catering units in six major cities across India.
Meanwhile, at Taipei's Chiang Kai-Shek International Airport, SATS' new associated company, Evergreen Air Cargo Services (EGAC), began operations at a new 500,000 tonne-a-year airfreight terminal. Finally, back on home turf in Singapore, SATS introduced a new subsidiary, Aerolog Express - a logistics company offering air cargo delivery services.
But how has the company managed to attain such growth while others have struggled just with existing operations?
"Our external growth strategy has been underpinned by a stringent internal cost control and efficiency program," explains Singh. "This has enabled us to continue overseas growth, with the aim of delivering long-term value for shareholders."
The cost and productivity drives have clearly worked: SATS recorded an after tax full year profit of S$213 million (US$ 121 million) for 2002.
The company's continued focus on outward expansion is driven by two key factors. "First, our belief is that the growth rates we have enjoyed in Singapore will not continue," says Singh. Second, in times of difficulty, SATS likes to focus on opportunities rather than threats. Singh points to a strong balance sheet and an enviable investment "war chest" of S$300 million. "We see the current environment, where valuations are depressed, as an excellent time to invest for future growth," he contends.
Singh also notes that not all of the industry has been hit during the recent economic downturn. "The China market has experienced strong growth and is the fastest growing aviation market in the world."
This means the industry can expect more of the same from SATS: cargo handling, ramp handling, passenger services, baggage handling, catering, laundry, and airport security will all remain core business activities.
"We see ourselves as an integrated service provider and have no plans to retreat in these areas," says Singh. "In fact we want to strengthen them and replicate this at overseas airports through joint ventures."
For others, the priorities are somewhat different. After three different owners in as many years, Worldwide Flight Services is looking forward to a period of continuity with its latest parent, France's Vinci Group, which bought the company from investment bank, Castle Harlan in September last year.
"The fact that Vinci purchased the company when it did speaks volumes," believes John Vittas, Senior Advisor, Worldwide Flight Services.
One year on, Vittas reports the difference between the two owners is like night and day, and certainly indicative of their different backgrounds. As an investment bank, Castle Harlan approached its ownership of Worldwide from a purely financial standpoint.
"It was financially-driven with less effort on the customer side," says Vittas. Not surprisingly, as Vittas points out, "It felt very transitional and was not good for employees or customers."
Vinci, on the other hand, arrives with strong airport
management expertise -subsidiary Vinci Airports manages some 30 airports around
the world under long-term concession agreements - and wanted to add a complementary
service arm. "Vinci has brought with it a new sense of security,"
Times may be tough, but it seems that the French group has not flinched since the purchase. "Customers certainly want more efficiency and more cost savings, but Vinci has also not lost sight of the need to have a business plan," contends Vittas.
Vinci has brought to the table the kind of clear strategy that had been missing for some time at Worldwide: a strategic plan that takes into account customers, shareholders, employees and competitors. "We really need to address each," says Vittas.
Under Vinci, Worldwide will continue to develop its international business and explore additional service lines. Cargo handling remains a mainstay for the company in Europe, although the purchase of French handler SEN brings a major ground handling presence at Paris CDG's terminals one and two. In fact, the arrival of SEN means that passenger/ramp handling is now Worldwide's largest business segment.
Worldwide is also trying to leverage the presence of Vinci in specific markets, but is equally keen to stick to what it does well. But where does a company draw the line?
"It's hard to say, as it depends on the city, current services offered, the customer base and other factors," comments Vittas.
Certainly, Worldwide has already highlighted its versatility, particularly in Hong Kong where it provides ancillary passenger services on behalf of the Airport Authority and more than 60 airlines at Hong Kong International Airport. These include porter service, electric vehicle gate transportation, wheelchair services, unaccompanied minor and VIP escort services, plus airport to city baggage delivery and pick-up services. Worldwide also provides services for the MTR Corporation's Airport Express Line baggage handling system.
Vittas is happy with Worldwide's renewed confidence in its future direction and says the priority now is to improve on a market image dented by past changes. "The market perception is not where it should be if we are to satisfy our goal of being recognised as the world's leading ground handler," he concedes. "This stems from the problems we have had in the last two years with transitional owners. But we are well positioned now and have the long-term ownership to show for it."
In many ways, MAG is in a similar situation, albeit not one driven by the arrival of a new parent. According to Conrad Clifford, MAG upper management feels that it has turned a corner from being a loose collection of aviation businesses to a major player with an outstanding portfolio of services. The trick now is to inform customers. "People are still surprised to learn that we have 8,000 employees in 25 countries around the world," says Clifford.
MAG has now strengthened its commercial team as it rallies around the Menzies name. Plans are afoot to rebrand its US operation with the Ogden name gradually giving way to the MAG brand by the end of the year.
Elsewhere, MAG continues to explore alternative ways to grow the business, including more joint ventures, and a different approach to franchises, rather than taking on all of the risk itself.
MAG will continue to invest where propositions are attractive, such as the old Ansett terminal in Sydney, and in technology designed to make existing business more efficient. A £2.7 million commitment to Hermes, a cargo handling business management system, is a case in point.
Importantly, MAG is only able to make such investments thanks to the backing of a solid parent, John Menzies plc. It is the kind of backing and financial clout that could prove crucial as the industry moves forward, believes Clifford. "Putting flags on a map is fine when you have the financial backing, but it's not a bottomless pit. At some point, the financiers will ask for a return."
As the industry moves towards the end of another year there is a growing feeling that the caution or otherwise, and long-term commitment, of financial backers could prove as influential as any management teams. Customers and competitors alike will probably nod in agreement when Clifford comments that, "The whole climate at the moment has reinforced our belief in technology and people."