Ground Services: To Have and To Hold?
by Richard Rowe
With cost always a major driver, there can be few airlines that have not deliberated on whether to turn existing ground services divisions into separate profit centers or outsource them altogether. Richard Rowe reports on a decision that is rarely straightforward.
In the "us-and-them" game played between the airlines, the customers, and the ground handlers and service providers, nothing gets the blood pumping quite like an airline analyzing whether or not to outsource its ground services. On the airline side, unions bristle; on the handler side, there is a rush of contract fever.
For an airline, it is a question of price, performance, and personnel, often in that order. The ground handling community encourages analysis as best it can, suggesting that airlines should no more dirty their hands with ground services than ground handlers should start up an airline.
While airlines busy themselves on seductive marketing campaigns and the pursuit of in-flight excellence, there is a host of less glamorous services that nonetheless have to be performed on the ground. Aircraft maintenance, ramp handling, cleaning, and catering will not go away. The question is how should an airline approach them?
There has already been a genuine shift in the industry from the established practice of major airlines performing their own services to contracting out. It is a theme matched only by the establishment of so many specialist ground service providers. Competition on the ground is moving to another level, with the result that certain ground services have become separate, global industries.
Even in the relatively niche market of GSE maintenance, the industry has seen the arrival of companies such as Ryder Ground Fleet Services, KLM Equipment Services, the new Mecanix GSE maintenance business from Menzies at London Heathrow, and Pan Asia Pacific Aviation Services (PAPAS) operating in Hong Kong.
The arrival of such professional organizations could prove persuasive to some airlines. For the first time, carriers can genuinely evaluate how successful outsourcing of ground handling can be.
That’s not to say that the presence of so many options for airlines is doing anything to simplify the process. The pros and cons of outsourcing can be different from airline to airline. One carrier’s meat may well be another one’s poison.
"One of the major pros [of outsourcing] is that airline managers can concentrate on their ‘core’ activity, that is selling seats in a very competitive market and reduce costs by entering into long term contracts with their ‘non core’ service providers," José María Pérez Llonch, head of Iberia’s handling division, told GSE Today.
"Another big pro is that airline managers can concentrate on their pilot and cabin crew issues and forget about all other union problems. After all, it is very difficult to manage an airline when any concession made to pilots means a concession to ground handlers, and again any concession made to mechanics means a concession to cabin crew."
Jukka Rahko, VP Ground Services at Finnair picks up the baton, albeit with a word of caution: "The first goal of outsourcing is naturally the savings that it would create, while the other main benefit is the relief in administrative work. However, after having been in this business for nearly 30 years, I have grown a bit skeptical about the quality everybody is talking about so much. Unfortunately, many of those promises are just thrown in the air and too often only a very close supervision by the carrier guarantees you the quality that has been agreed upon by the service provider."
While the outsourcing of, say, GSE maintenance might be of interest in that it removes expensive items from the balance sheet, genuine obstacles still remain. "It is difficult to find organizations, at least at smaller airports, who would be interested in operating only that service on your behalf at an agreeable cost," believes Rahko. "What you need is a very efficient supplier evaluation and management. If you only trust on the promises or even written agreements on the quality issues, you are bound to fail in most cases. This is something that most airlines are still not very good at, and we have a long way to go."
Several airlines have, however, taken the outsourcing plunge. Most comprehensively, Irish national carrier Aer Lingus divested its ground handling operations at London Heathrow at the end of 1999. Swissport turned itself into a major player at the airport when it picked up the airline’s ramp business, while Menzies Transport Services, which has just added Ogden Aviation Services to its portfolio, took on the Irish airline’s former cargo handling business.
Aer Lingus was once the largest third party ground handler at Heathrow, but had lost business to Air France Servisair Limited and faced the prospect of losing Lufthansa to GlobeGround when the German airline’s handling subsidiary gained a license at the airport last year.
Significantly, this outsourcing took place at an outstation rather than at the airline’s Dublin home base. While Aer Lingus was unable to comment further at this time on such a sensitive issue, others were able to comment more generally.
"For an airline it is no big issue to self handle or to contract out at overseas stations," comments Llonch at Iberia. "The decision to go for one or the other depends normally on the local market conditions and not on industrial relations issues. However, to contract out ground handling at a home base is a very different, and generally very difficult, decision as most of the larger airlines have had their own ground handling staff for decades."
Industrial relations is clearly a central issue and one that the handling community is becoming more sensitive towards.
"The first thing we [handlers] have to do is create a situation where it [the airline] begins to get competitive rates," says Peter Smith, Managing Director, Menzies Transport Services. "What that usually means is that you have a workforce that is too large or too expensive against market rates. But on the other hand, it is skilled, often committed to the operation, and not something you just dismiss and throw away.
"You have to try and create an environment of managing your way through it. You should deliver a menu of different arrangements where there is a solution for every person you come across."
As already mentioned, outsourcing is not for everyone. An important revenue source for one airline can be an intolerable drain for another. What it boils down to is what is best for the airline in question.
One airline that looked long and hard at its ground handling operations is Qantas. In its quest for increased efficiency on the ground – primarily for its own operations, but also for third parties – and with one eye on embryonic competition in its traditionally strong domestic market, Qantas began a process of Competitive Tendering three years ago.
Qantas’ in-house ground divisions essentially had to put in a bid to retain their jobs. They were responsible for putting together the bid, identifying cost drivers, and suggesting how they could be driven down. They found out very quickly what it cost the airline to do business in certain ways.
"They owned the bid and were totally responsible for meeting the standards and outcomes that they promised during the bidding process," explains David Payne, General Manager, Airport Services Purchasing, Qantas. "It was not just a matter of driving cost down, but also a cultural impact on our workforce."
The bid was genuinely competitive and came in three phases. Each time the work stayed with the in-house team. Although bidding for their own jobs can not have been easy, the airline’s ground staff responded with vigor.
One of the most interesting points highlighted by the process was the fact that there were a lot of "sleepers" out there – employees with tremendous, untapped potential. The combination of intimate knowledge of what was required plus experience from past lives as, say, teachers and other professional positions saw plenty of useful insight, says Qantas.
As Jukka Rahko at Finnair points out, "When facing the wall, your own staff may be able to create savings that are equal or almost equal to the savings to be gained through outsourcing."
Another model sees ground handling as a major profit center for airlines, something perhaps best exploited by creating dedicated subsidiary organizations. This is the model so successfully carried out by Lufthansa (with GlobeGround) and the SAir Group (with Swissport). Between them, the two handling heavyweights are now present at nearly 200 airports in more than 40 countries.
"Most airlines still consider ground handling, or at least ramp handling, not to be among their core functions, but if it can be provided by a subsidiary of their own, then it is a different situation," says Rahko. "Being separated from the mother company gives the ground handling unit an opportunity to grow outside an airline’s own activities and even handle the competition."
Airline managers see several advantages in evolving such a subsidiary practice. Not only can they concentrate on pure ground handling activities – forgetting about the peaks and troughs of the parent airline – but they can also provide tailor made products to different customers. The parent airline then becomes just another customer, albeit a very large one.
Just as importantly, says Llonch, "You can concentrate on ground handling industrial relations, knowing that they will not interfere with the parent airline."
In the U.S., American Airlines went down a similar route with AMR Services – now the Castle Harlan funded Worldwide Flight Services – while Delta Air Lines formed Delta Air Lines Global Services (DGS) a little over two years ago.
Delta didn’t necessarily want its subsidiary to take over all of its handling at outstations. "Quite the opposite," says Jim McCarthy, General Manager. "There is a realization that we can’t be in every place. In some places a competitor could actually do a better job for whatever reason. Nor do we [DGS] want to be in all of Delta’s locations because that would clearly say we are just consumed with Delta."
As it is, McCarthy sees DGS developing by securing external business, as well as through selective partnering, possibly at specific strategic locations. "We would not rule out an overall strategic alliance or locally based joint ventures or arrangements," he says. "We should look at the issue as broadly as possible, and will adapt to how airlines want us to behave."
While McCarthy can be pretty certain what his parent airline is looking for, other ground handlers claim to be working more in the dark. Some airlines, they say, give the impression of not knowing what they want on the ground from one year to the next. Some handlers even argue that the decision to outsource or not is as much dependent on the personality at the top at the time as any prevailing economic factors.
Llonch acknowledges that airline strategy can very much depend on who is sitting in the airline hot seat. He points to the example of Bob Crandall, the ex-chair of American Airlines, who always said that American’s profits were coming from its "non core" business, only for the new Chair, Donald J. Carty, to sell AMR Services and other subsidiaries and concentrate on flying aircraft.
Llonch continues: "Iberia has decided to establish a fully owned subsidiary for ground handling, maintenance, and EDP systems, despite some years ago our ex-chairman signing an agreement with the unions accepting not to dismantle the company and non core business units."
Others suggest that ground handlers need to look at themselves pretty closely, too. "The lack of continuity may be a problem, but it is the same on both sides," argues Rahko. "The constant changes in the ground handling community, the takeovers, reorganizations, changes in management and the key personnel is a true problem for us also.
"The credibility of some of these companies is getting worse as the turnover of staff in some functions, for example passenger handling, may be so huge that you see new faces almost every day serving your customers," he adds. "And even after a period of good service by a handling company, you may suddenly face a situation where your service worsens because the handling company has started with a new customer that gets all their attention – also at your expense!"
The outsourcing question is further complicated by the arrival of powerful airline alliances. By definition, airline alliances are designed to maximize and maintain market share, which means that ground services--often a long way down the list of priorities--can find themselves relegated to just one element of a package agreement between carriers.
Consequently, handlers can lose business based on higher alliance decisions rather than on actual performance issues.
"Alliances will be buying handling jointly and some members may start providing handling to the rest of the group using their own staff, which they would have anyway and thus be able to allocate some of the costs to the other partners," says Finnair (and oneworld’s) Rahko.
"On the other hand, there may also be an occasion when a self-handling carrier gives up its own staff in favor of third party handling so that the alliance members can use their full buying power in the negotiations," he adds.
At key stations, an airline’s own staff may be favored for the good of the alliance, but elsewhere outsourcing is a very viable option with the alliance leaving only a skeleton supervisory staff at the station.
Both the Star Alliance (13 members) and oneworld (8 members) recently announced additions to their central management teams, as the focus has begun to shift from expanding each alliance to deepening the degree of cooperation between its members.
Examples of wholesale alliance shopping on the ground remain few and far between, but that is not to discount it happening in the future. The purchase of ground services may not be top priority for alliances, but it is nonetheless an area of operations where good results can be achieved in a relatively short time.
Amsterdam Schiphol is perhaps the best example of a major international airport where the ground handling market has been shaped fundamentally by airline alliances. In March, independent handler AviaPartner picked up its largest single contract when it secured a contract from oneworld worth Euro 30 million (US$30 million). The deal covers 210 flights a week at Schiphol involving BA, Iberia, Cathay Pacific, and Finnair.
The oneworld contract followed a Qualiflyer tender late last year, which was won by Dutchport, the Swissport/Cargo Service Center joint venture. The contract covered 125 flights per week.
Despite these "mega" contracts, the largest chunk of alliance-related handling is still conducted by KLM Ground Services, which looks after its parent and sister carriers and Wings alliance partner, Northwest Airlines.
The other two handlers at the airport, Aero Groundservices (recently bought by GlobeGround), and Ogden (even more recently bought by Menzies), are so far without any alliance agreements and both will be keen to pick up Star, which has hinted that it will tender for ground services at the airport later this year.
With Aero Groundservices now owned by GlobeGround, many feel that Star will head in their direction rather than Ogden’s. Currently, Aero Groundservices handles Lufthansa and SAS, while Ogden handles United Airlines and British Midland.
The question of whether Star will side with Aero Groundservices/GlobeGround highlights just how complex an issue this is. Will alliances in the future simply line up with specific handlers around the world, or will individual members manage to retain service providers at certain stations?
Further complexities arise when it is also considered how many ground service providers have strong relationships with competing alliances. After Lufthansa (Star), for instance, GlobeGround’s principal customer is BA (oneworld).
"One view is that everything will line up with the appropriate alliances, but I think that is simplistic because we are very aware that there are different needs in different locations, and some of the smaller players in an alliance are concerned about not being swamped at a major hub location of the principal carrier," says Peter Smith at Menzies. "Although they work commercially with one another, operationally they see advantages in keeping a little further apart.
While no one handler can currently serve Star at all of its destinations (815 at last count), one or two of the larger ones could possibly manage the top 100 Star locations. Similarly a major airline might shun the idea of buying ground handling at 100 stations worldwide from a single handler, but would be interested in buying a single handling contract in a specific country, or a region such as Scandinavia.
"All handlers are trying to work out the way forward, and I don’t think the die has yet been cast," says Smith.
Back at Finnair and oneworld, Jukka Rahko’s only hope is that the process is properly thought through. "Centralized purchasing is something all alliances are probably planning and even doing to some extent already today," he says, "but I do feel that ground handling is a rather specific area where you need good expertise in the subject.
"For this reason, I trust that it will be left in the hands of a group of experts from each company in the future. In our case, the results have already shown that this works well, provided the process is carefully planned and prepared. Then it is only a question of reporting to the purchasing management organization within the alliance."
If only it were that simple.