When an airline decides whether to outsource ground handling services or take care of them in-house, it’s a juggling act of variables. From local staffing considerations to overreaching global concerns – such as the COVID-19 pandemic – there is no singular nor static factor influencing an airline’s decision. As the aviation landscape shifts, so do the pros and cons of outsourcing.
Silvio Tano, CEO of Total Airport Services, says the decision often comes down to four factors: cost savings; providing the airline more management-focused time on maximizing aircraft payloads; shifting labor management and contracting responsibilities to a third party; and shifting exposure and general liabilities cost to third party handlers.
“While insourcing had become more attractive for US legacy passenger domestic carriers during the growth years, the reverse is being presently evaluated as it typically happens during down cycles such as the one created by COVID-19,” Tano says.
“For the cargo business, an appetite for carriers to invest in their own facilities is being weakened by the long-term infrastructure costs and liabilities created by up and down cycles, plus the lack of adequate inside the airport fence space,” he continues. “A significant amount of customers are meeting the space challenge by replacing it with efficiency challenges created by off-airport warehouse operations.”
Airport Terminal Services’ chief commercial officer, Ingrid Braeuninger, agrees that outsourcing ground handling services has been the growing trend of recent years.
“We continue to see a growing trend on outsourcing. Previously, much of the ramp functions of ground operations was outsourced. Over time, we have seen the passenger side of services increasingly outsourced and even full airline management at particular locations. Outsourcing will continue to show a solid growth trend,” she says.
Braeuninger says that while she is not on the buying side of the equation, she speculates that airlines take into consideration several factors when making decisions, including:
- Is the brand considered compromised if direct employees, rather than contracted employees, deliver the brand?
- Does the return on investment (ROI) on the analysis suggest an equal to or less than proposition than insourcing?
- Is there evidence to suggest sub-par performance when outsourcing the activity?
“The fundamental reason for outsourcing a role comes down to several factors from the buyside of the equation,” Braeuninger says. “Up to now, some of the reasons for outsourcing were cost reduction from the perspective of wage and benefits, or redirection of company resources in order to invest in other areas of the core business.
“In today’s environment, this list could be expanded to include risk mitigation of exploring new markets and even enhanced performance,” Braeuninger adds. “In my opinion, unless a company has trade secrets that could cause irreparable harm if shared or exposed, I don’t see a case where outsourcing doesn’t have some intrinsic benefit.”
An important factor in the outsourcing equation is flight activity, Tano notes. The lack of critical mass due to lean flight activity results in a lot of costly idle labor. Depreciation and/or leasing costs when clustered around lower flight activity also results in an exaggerated or prohibited per flight unit cost in this area.
“The more flight activity, the more productive an operation is from asset and staff cross utilization points of view,” Tano says. “This type of analysis is very evident by taking into account that most international operators with less robust weekly flight activity will subcontract while domestic narrow body operations carriers with larger volume will typically insource.
“Low-cost domestic carriers have been subcontracting to third parties with some exceptions such as JetBlue. However, these carriers won’t hesitate to have a hybrid business model in which they subcontract at smaller locations while insourcing at larger operations,” he adds.
Braeuninger adds that low volume or the type of aircraft can be a determining factor to insource due to the ROI of an airline’s investment.
“If an airline is operating fives times per week into a city with an A380, there will probably be a significant ROI to the airline by not having to spend on GSE to support that low volume of activity,” she says.
And of course, another important point of consideration is the airport the airline will be operating out of.
“The airport plays ‘Mayor,’ the critical role of the airport ecosystem. It is the governing authority in terms of its rules and regulations for any operators,” Braeuninger says. “As this ecosystem continues to evolve with more and more entities being a part of that ecosystem, rules and regulations need to evolve to standards under which an entity should be licensed to operate.
“The safety and security of the whole ecosystem is dependent on not only airports and airlines but all of the concession operators and service providers that work within it,” she adds. “Ultimately, the airport decides who will be permitted to operate and should do so by setting standards that are the same for every operator, whether they are an airline or a ground service provider.”
Braeuninger says that Airport Terminal Services has seen restriction for entry into airports due to lack of facilities primarily – although, she adds, there are airports that have restricted entry to multiple ground service providers simply due to history.
“Additionally, in cities where deicing is prevalent, we have seen more and more airports move to one service provider in the thought that there is better control of any deicing contaminants,” Braeuninger points out.
Tano notes also that expensive on airport rental space costs for ground support equipment (GSE) and staff are reduced on a per equipment or per headcount cost when spread against larger GSE inventory or staff.
When all is said and done, both Braeuninger and Tano say the most critical aspects of the outsourcing equation boil down to:
- Safety, risk mitigation and safety and service record
- Cost savings and financial strength
- Performance and the relationship between price and quality service
- Company culture and innovation
- Ability to communicate with senior management
- One stop shop abilities
One last factor influencing an outsourcing decision is technology. While it is not a major factor currently, as GSE grows more advanced with automation and the implementation of technologies such as the Internet of Things (IoT), Braeuninger predicts that the workforce make up will change.
“There will be a shift in the type of experience required in the workforce as well as a reduction in the number of workforces required. The shift will undoubtedly mean more skills around technology to both operate and repair the new equipment. We should be placing emphasis around developing this type of talent within our ranks now in order to move into autonomous vehicles. That said, the pace to which this occurs surely has slowed compared to forecast given the global economic impact to our industry and, its ability to recover, let alone invest in new technologies,” Braeuninger says.
