Fresh Ideas

June 30, 2008
Despite the airport’s outstanding success, the ground handling unit at Munich Airport continues to take a loss.

Germany’s Munich Airport has gone from strength to even greater strength in recent times. Buoyed by the addition of a second terminal, built in conjunction with national carrier Lufthansa, traffic figures have soared. In 2007 it handled some 34 million passengers — a 10.4 percent increase over the previous year.

2008 shows no sign of letting up with a 6.5 percent increase in the first quarter, equating to 7.7 million people.

The booming traffic figures are reflected in the airport’s business results. Flughafen München GmbH (FMG), the airport operating company, reports a 2007 profit of €45 million on a turnover of near €800 million. Combined with subsidiary revenues, it means the company passed the €1 billion mark for the first time.

The only black spot — or rather the only red one — is the ground handling unit, which despite FMG’s achievements continues to post losses in the tens of millions.

Why this is the case when clients at the airport read like a who’s who of the world’s airlines, is something of a mystery. Airlines ranging from Lufthansa and its Star Alliance partners at Terminal 2 to the likes of Delta, Emirates and the Air Berlin Group at Terminal 1 — not to mention a host of smaller concerns such as Norwegian, Tunis Air and Rossija — all contract to FMG ground handling.

The bare statistics don’t ease the confusion. Last year the unit handled nearly 23 million bags and 178,000 aircraft, representing an 87 percent share of the passenger market. It also dealt with more than 250,000 tons of cargo, customers such as DHL, Fed Ex, UPS and Korean Air Cargo giving it all but a monopoly in the area.

And there has been a steady rise in all volumes over the past five years, the 8.4 percent growth in cargo handling in 2007 indicative of the upwards trend.

A history lesson
The search for an answer and possible solutions start with a trek back in time. After World War II, German law limited ground service provision to the airport company, a monopoly scenario that suffered little interference until European Commission (EC) Directive 96/67/EC in late 1996. This required all airports in the European community to open up their ground handling markets and was duly adopted — with some modification — by the Germans in 1997.

There was a degree of movement in the market as a whole, though hardly an opening of the floodgates. Those German modifications ensured it wasn’t the free-for-all that might have been expected, insisting for example that new entrants take over staff from the airport managing body in accordance with the handling services passing to the new supplier. The penalty was increased fees for access to airport installations.

This was challenged by the EC and the upshot of all the wranglings is that major gateways such as Frankfurt and Munich added just one ramp handler apiece.

Still, the increased competition did cause prices to drop according to Siegfried Pasler, executive vice president of FMG’s Ground Handling Division, although he says the negativity didn’t stop there. For ground handling employees in the industry as a whole, their companies watching revenues fall, it meant less training, poorer work conditions and ultimately a decline in service quality.

This didn’t really register with the airlines though, whose own competitive pressures kept them very much focused on low prices. It meant the strain on a ground handler like Munich — determined to carry on bringing high standards to the table — was further intensified.

And, complains Pasler, the company also suffered from being an airport operator-owned concern. A changing of the guard was in order, putting Munich at something of a disadvantage compared to new entrants, which to the airlines represented the necessary diversification of the market. Many competitors also offered a multi-airport product to the international airlines, with all the cross-subsidization and standardization benefits this implies.

At the same time, costs were on the rise. Along with the struggle to maintain quality amid a shrinking income, facilities now came at a premium. “More handling companies always results in an increasing demand for space and thus higher costs,” says Pasler.

However, there is one expense that has proven the real difference and it is this that has continually forced FMG’s ground handling division into the red.

Union stranglehold
Pasler estimates the salary structure of his unit is approximately 20 to 30 percent above his competitors. The only way out of this obvious disadvantage is a rapid restructuring, which is dependent on the goodwill of the union involved.

The Supervisory Board of FMG has urged management to open negotiations with the union — which represents about 2,000 ground workers at Munich — without delay. The aim is a collective target agreement as well as works agreements, which will keep the division out of the red into the future.

In addition, discussions are to be held with customers on the continuation of long-term contracts. A successful conclusion of this twin-pronged attack should enable the ground handling business segment to be rebuilt on terms that are economically viable for the company as a whole.

However, if the negotiations are unsuccessful, the management team has until the end of the year to come up with some fresh ideas or face FMG’s likely withdrawal from the market.

Dr. Michael Kerkloh, CEO of FMG, explains: “We are currently searching … for ways and means of achieving our restructuring goal and retaining the ground handling division as a business segment in the FMG Group in the long-term,” he says. “Under the terms of the public-sector collective agreement, however, this will in all likelihood not be possible because we would otherwise be at a permanent disadvantage with our competitors, who do not apply this collective agreement and therefore have a different basis for cost calculations.”

He believes there are some positive signs but issues a clear warning about future prospects. “For the entire FMG Group it is very pleasing to note that productivity in passenger handling, airfreight and airmail, adjusted in terms of staff capacity, improved by more than 10 percent during 2007 as compared with 2006,” he notes.

“Nevertheless, our efforts have not yet resulted in a long-term solution to the structural problems in the ground handling segment. The losses are still in the tens of millions, and the measures so far carried out will not be enough on their own to get us back to profit.

“Regardless of which solution is ultimately found, one thing is certain: many new jobs will be created over the coming years at Munich Airport in general and in ground handling in particular, because personnel requirements on the ramp are increasing in line with the rising traffic volume,” he continues. “Whether FMG as a company will be part of this employment growth will be determined to a very large extent by crucial decisions and choices that we will now be making."

Fresh ideas
So, union talks aside, the ground handling management has lined up a number of improvements — those all-important “fresh ideas” — in a bid to enhance both its service offering and its revenue.

For example, a quality control system measures the various functions of the department in terms of quality, speed and customer satisfaction, allowing a review team to assess the results in terms of the overall product. “That allows us to adapt processes in line with customers’ needs and to initiate improvements selectively and rapidly,” says Pasler.

He notes such flexibility means the operational business cannot afford to stand still — new and innovative products must be, and are, in constant development. The EVP reveals that new lines such as the Eagle Baggage Reconciliation System are being combined with the recommendations of an external consulting firm. “We are now working on gearing best-practice processes to the requirements of customers so as to ensure optimum deployment of service providers and resources,” he says.

A case in point is the extensive training being given to staff to enable “integrated handling.” In the future, there will be fewer interfaces between the individual handling areas so a single employee can solve pretty much any problem directly and in quick time.

Moreover, several million euros have been invested in new ground service equipment. “Stagnation in our business is not possible if you want to be a competitive service provider,” confides Pasler. “You must innovate and offer high quality levels and increase revenue this way.”

The EVP adds that changing market dynamics make it very hard to predict the future. He does confirm, however, that the aim is to make Munich Airport ground handling a reliable and attractive partner for airlines, expanding its expertise in hub handling processes and supporting FMG’s vision to have the most attractive and efficient hub airport by 2010.

Whether it will be given that chance, only time will tell.