A balancing act: the market for ground handling services

posted on 5th June 2018

Airport operators are seeing greater benefits by restructuring their in-house ground handling activities to form fully owned subsidiaries. New regulations particularly in Europe are giving airport operators more control over the co-ordination of ground handling, the challenge now is to create a level playing field for all, discovers Keith Mwanalushi

Today, third-party handling is the norm at most large international airports with the exception of parts of the Middle East where state control of the sector is common. In Abu Dhabi for instance, airport operator ADAC (Abu Dhabi Airport Company) has employed its own Abu Dhabi Airport Services (ADAS) subsidiary as the sole ground handling company at all of its government-owned airports.

In the Americas self-handling by the airlines is very common; a classic example is Denver International where airlines take care of their own handling operations or hire a contractor. It is also worth noting that airport-imposed limits on the number of handlers are rare in the Americas – and it is very different to Europe.

However, despite these regional differences in operational philosophies, airports that perform in-house ground handling are quickly moving towards establishing their own independent handling operations, especially at busier gateways.

Since the opening of the market for ground handling services began in the 1990s, prices in this segment have fallen sharply. At Munich Airport for example, this resulted in several years of heavy losses in the ground handling division. “Consequently, the restructuring of the ground handling business became inevitable,” admits Siegfried Pasler, managing director and CEO of AeroGround, which is owned by airport operator Flughafen München GmbH – FMG (Munich Airport).

The restructuring included a new competitive collective agreement, new working time models and a new organisational structure he says. “These restructuring moves could not have been fully implemented within Flughafen München. We therefore decided to set up AeroGround – a 100 percent subsidiary of FMG that combines a highly customer-oriented approach and efficiency with reasonable terms and conditions for its employees,” says Pasler.

Since its launch on January 1, 2011, Pasler says AeroGround has successfully established itself in the market and was immediately able to post a profit from its operations at Munich Airport. AeroGround now handles approximately 250,000 aircraft movements per year, and according to figures from FMG, this translates into a market share of about 70 percent.

Airline consolidation and global alliances are two trends that are seeing a reduction in the number of potential airline clients, thus increasing competition among ground handlers. Airline consolidation will also put downward pressure on handling rates according to analysts ICF SH&E. This will force the remaining handlers to be more efficient, but without sacrificing safety and service standards.

Growing airline partnerships are seen to reduce the pool of clients in two ways: first, merged entities will generally replace outsourced handling with self-handling at airports where one of the merger partners self-handles; secondly, merged entities will seek to achieve economies of scale by rationalising supplier relationships, including with ground handlers.

Meanwhile, alliances have a similar effect since alliance members are increasingly likely to terminal co-locate at major partner hubs, making it easier for hub carriers that self-handle or use a common handler to offer ground handling to alliance partners.

“During the past 12 months alone, we have signed long-term contracts with the Star Alliance members Air China, Singapore Airlines, South African Airways and LOT Polish Airlines,” concurs Pasler. “We have also managed to bring airberlin back on board as a customer, after it initially chose to work with a competing provider before AeroGround was established.”

At the end of March 2012 AeroGround signed a long-term full handling agreement with airberlin, which has approximately 35,000 take-offs and landings per year, “it is the second-largest carrier at Munich Airport and in addition, long-term agreements have been signed with Delta Airlines, Air France/KLM, Rossiya, SATA International, Royal Jordanian and UPS.”

Pasler notes that AeroGround successfully handles the daily Emirates A380 with minimal turnaround times and currently preparations are underway to handle the new Boeing 787 of Qatar Airways before the end 2012.

Coming back to the current heated debate in Europe, the proposals included in the ‘Airport Package’ adopted by the European Commission in December last year on ground handling include measures directly impacting airports as handlers including their ground handling subsidiaries. The proposals introduce full opening of the self-handling market for airlines. At the same time they will increase the minimum number of service providers (in restricted services) from two to three at large airports.

“We … have an issue with the Commission’s proposal to allow subcontracting of self-handling”

Klas Nilsson head of public relations, Swedavia

Klas Nilsson head of public relations at Swedavia, which operates a group of 11 airports across Sweden, says at their largest airport this development has already taken place. “At Stockholm Arlanda, which is the only one of our airports affected by the Commission’s proposal to increase the minimum number of service providers, we presently have five ground handling companies operating. We have no objections to self-handling by airlines but we, as with Airports Council International (ACI) Europe, have an issue with the Commission’s proposal to allow subcontracting of self-handling,” remarks Nilsson.

He says the exception is Stockholm-Bromma Airport, which just recently reached two million annual passengers. “With regards to the ‘Airport Package’ we are now looking closer at how to best develop the airport from a ground handling perspective,” Nilsson states. “One challenge is that the available space at Stockholm-Bromma is very limited, but we have plans to develop the airport and ground handling will be an important matter in that development.”

According to ACI Europe, the uncontrolled deregulation of ground handling services proposed by the European Commission will negatively impact the efficient provision of quality ground handling services at European airports, put at risk jobs and employment and jeopardise fair competition not only in the sector, but also in the wider aviation market. In addition, ACI says: “It fails to tackle important shortcomings of the current Directive to improve the passenger experience as well as safety and security at European airports.”

Pasler agrees; “Additional competitors will result in productivity losses by each and every ground handling provider and will also lead to increased cost pressures. This would have negative effects on the quality of services and for ground handling employees.” He further says stepping up the competitive pressures, where margins are already squeezed, would mainly mean supporting further wage decreases.”

He goes on: “I cannot see how a further liberalisation of the ground handling market is supposed to bring about greater quality and efficiency. With its draft regulation, the EU Commission is clearly on the wrong path. A further liberalisation will lead to productivity losses for some service providers, harm the profitability of companies, and thus limit the scope for quality improvements.”

The amount of ground handling business that can be done at a particular airport will not increase by further liberalising these activities according to Pasler. He considers that having more providers on an already limited playing field would mean that more handling equipment will have to be kept on hand, and that companies will have to accept more staff downtime.

“Moreover, the market environment for ground services will remain difficult in the medium term as well. We are confident, however, that with the establishment of AeroGround, we have created a structure capable of remaining competitive in the long term and responding flexibly to economic changes and differing customer needs.”

However, airport operators in Europe are also being given more control by the Commission over the co-ordination of ground handling services and for the airport to act as the ground coordinator of ground services, so does this change the way ground handling operations are carried out by the airport?

“We recognise the airport’s importance in coordinating ground services,” says Nilsson from Swedavia. “Under-performance by individual ground handlers can have a major impact on the overall operations at the airport and affect the entire aviation system. We have chosen to stimulate good practices and we believe that by aiming incentives towards employees we get the best impact on the system. The impact of the new proposal is therefore not as great at our airports.”

In Munich, Pasler indicates that they would like to see a balanced solution that does not unduly disadvantage either the airport operator or the ground services providers. “In general, of course, it only makes sense to introduce a ground coordinator if the coordinator can also impose penalties. A toothless tiger that only creates costs would be of no use to us.”

What’s more, he adds that it is still entirely unclear how the ground coordinator is supposed to be financed. “Naturally it would be unacceptable for the airport operator to be saddled with all of the costs.” Of concern to Pasler is that there is a threat of unequal treatment in connection with subcontracting. “The EU Commission is planning to ban us from working with subcontractors because we are a subsidiary of an airport operating company. Noting that our competitors will still have that possibility, we would be at a direct disadvantage. That’s not what a level playing field looks like,” he concludes.

OLYMPUS DIGITAL CAMERA“The EU Commission is planning to ban us from working with subcontractors because we are a subsidiary of an airport operating company”

Siegfried Pasler, managing director and CEO of AeroGround, Flughafen München GmbH