David Smith investigates how two of the big ground handlers are making the most of opportunities for growth across Asia
The Asian aviation market has proved difficult to crack for the giants of the ground handling world. But there is a growing sense that the boom in business is opening up Asia fast to competition and will provide a lot more opportunities over the next decade. Two of the biggest global players – Worldwide Flight Services (WFS) and Menzies – are laying out plans to seize their share of the spoils, even though to date both have small footholds in Asia.
“As it stands, Asia is a much more restricted market for ground handling than Europe, or North America, but we expect it to open up to competition over the next decade,” says Stewart Sinclair, WFS executive vice president Asia, Middle East and Africa. “We believe there will be great opportunities for the entire range of ground handling given the right regional, or local, partnerships. It will also be essential to invest significantly in infrastructure to support operations.”
Sinclair expects to see continuing growth of around 6% in passenger volumes across the whole of Asia for the near to mid-term. The low-cost carrier segment, he says, will show the fastest growth by generating new markets through competitive pricing and by increasing the number of routes to secondary cities.
The growth of these regional airports will bring opportunities for the major ground handlers to land new business. “South-East Asia is very dynamic and the further development of ASEAN links will increase trade and tourism,” he remarks. “China also offers exceptional growth potential both domestically and within the wider Asian region. Meanwhile, India is showing similar traits in terms of the rapid development of new routes coupled with a fast-emerging demographic with discretionary spending power.”
In fact, India has the fastest-growing aviation market in the world. Between April 2015 and January 2016, the number of international passengers flying to and from India grew by 7.6%, while domestic passenger traffic was up 20.6%. A recent report from KPMG predicted that India would become the world’s third-largest aviation market by 2020, after the US and China. That’s a big leap from its current ninth position.
By that stage India’s airports will carry about 370 million passengers compared to the current figure of 190 million. After 2020, the market will continue to boom and by 2030, the report says, it will have overtaken both the US and China. According to Boeing and Airbus, India is expected to order more than 1,600 aircraft over the next 20 years.
The authors of the KPMG report try to explain why the Indian market is the world’s most dynamic: “This expansion is possible due to a host of factors, including increased competition, low-cost carriers, modern airports which are expanding, improved technology in both airside and city-side operations, foreign direct investment (FDI) and increased emphasis on regional connectivity.”
Menzies is building its long-term strategy in India around winning new business in tier two airports as the expansion of business spills over from the major airports. Kamesh Peri, senior vice president of Indian operations at Menzies Aviation, says the company has altered its strategy to keep pace with trends in the market.
For a long time, he says, Menzies focused its attention exclusively on developing business at the six metropolitan Indian airports in Mumbai, Delhi, Bangalore, Hyderabad, Calcutta and Chennai. Although Menzies has made some progress in landing ground handling contracts at Hyderabad and Bangalore it has failed to get business in the biggest markets in Delhi and Mumbai, despite coming close to striking deals.
“The six metropolitan airports account for 80% of volume right now, but the real potential for growth is at the tier two airports in the regions,” believes Peri. “For too long the vast majority of Indians have seen flying as an elitist mode of transport – and it’s still true that only 2% of people take flights – but the chance is now opening up for all sections of society, which is the main reason domestic air travel is exploding. It’s a relatively small market now, but the continual growth is giving us the economies of scale we need to work with.”
One of the keys to the ongoing boom at India’s regional airports, he confirms, is the government’s far-sighted 2016 Civil Aviation Policy, which was announced in June. The Government wants the policy to drive an increase in sales of domestic tickets from 80 million a year to 300 million by 2022.
To achieve those numbers, the government also plans to increase the number of regional airports servicing commercial flights from the current 77 to 127 by 2019. To create more demand from passengers, it has capped ticket prices at Rs2,500 (US$37) for an hour journey and Rs1,200 ($18) for a half-hour trip. Local and national government will have to make up the difference for passengers and also pay the losses of airlines wanting to fly from regional airports. The aim is to make flying the preferred mode of travel between tier two and tier three Indian towns, as trains will no longer be the cheaper option.
The Indian aviation industry has already come a long way since the early 1990s when it was largely a state-run enterprise. Once the government opened it up to private participation, the number of carriers grew. In 2005, there were just four main carriers operating full-service models – Air India, Indian Airlines, Jet Airways and Air Sahara – plus a few smaller airlines. But by 2015, there were seven national air carriers: IndiGo, Jet Airways, Air India, SpiceJet, GoAir, Vistara and AirAsia India. In addition, regional carriers such as Air Costa, Air Pegasus and Trujet are increasing the number of routes from smaller airports.
Another important part of the new Civil Aviation Policy was to abandon the rule requiring domestic airlines to have 20 aircraft and five years of domestic operations before they are allowed to fly overseas. Under the new policy, any domestic airline wanting to fly abroad can do so as long as it allocates at least 20 aircraft, or 20% of its total aircraft capacity, to domestic operations. Again, this move helps to encourage more regional flights.
India’s newer airlines, such as AirAsia and Vistara, are delighted by the change. They have long argued that it would help them to compete with the more established airlines and they see it as a green light to expand their domestic fleets.
In a statement, Amar Arbol, CEO of AirAsia India, said the new policy “gives us clear direction to ramp up our operations in India and grow our business in the domestic segment before we scale our operations to fly internationally. We will now focus on aggressively investing in India and increasing the fleet size from six at present and achieving the target of 20 aircraft”.
Menzies’ Peri declares that there are no magical ways to earn a slice of the expanding ground handling market. It is a question of bidding and winning licences, or making acquisitions of smaller ground handlers that have regional bases. “At the moment there is limited scope, but we are on the lookout,” he says.
Menzies’ policy of growing its business through acquisitions was in evidence when they chose to pay $202 million for ASIG, a plane refueller operating across four continents. The deal should go through at the end of the year, bringing new ground handling opportunities for Menzies – including within Asia. “The acquisition of ASIG offers new products and a new geography, including a ground handling operation at Bangkok. Straight off the bat we will have something tangible to work with in Southeast Asia,” comments Australia-based Alistair Reid, Menzies SVP for Oceania and South East Asia.
Menzies has established a strong position in Oceania, where it provides ground handling at 12 airports in Australia and five more in New Zealand. Australia is the strategic hub for a large area that includes Southeast Asia. Outside Oceania, however, Menzies has found it harder to break through and is only offering ground handling services at Macau International Airport, although Bangkok will be added to the list soon. Reid, though, expects Menzies to land more business in the expanding Southeast Asian market.
“One of Menzies’ strategic objectives is growth in emerging markets and a number of countries in Southeast Asia fit the bill,” he observes. “One of the challenges is the capacity of major airports as passenger numbers grow and that will inevitably lead to the growth of smaller airports. Chinese investment has led a lot of the growth in Asia, but other countries, such as Indonesia, are also experiencing rapid growth.”
One of the strategic difficulties in emerging markets is that foreign ownership rules frequently restrict access. “One of the answers is to set up joint ventures with local investors and partners. For example, our business in Macau is a partnership with the China National Aviation Corporation, which is the parent company of Air China. We also have a partnership with Eva Air based out of Taiwan,” says Reid. Plus: “We also frequently get international business from our key customer base, a number of which are based in the Asian region, including Hong Kong Airlines, Singapore Airlines and Malaysia Airlines.”
WFS has been present in Asia since it began operations at Hong Kong Airport 18 years ago. WFS still offers comprehensive services in Hong Kong, including significant baggage handling, a large aircraft refuelling operation, the provision of precision runway monitoring (PRM) and ancillary services. One of WFS’s largest global operations is in Bangkok, where it provides ramp, passenger and cargo handling to over 60 airlines. Meanwhile, in Singapore, WFS operates JetQuay, a unique CIP Terminal offering a comprehensive suite of VIP services, and Haven, offering a pay-per-use landside arrivals lounge. Though the Singapore services are not ground handling operations, they could represent a strategic toehold in the market.
“Most Asian airports have limited competition in ground handling so it would be logical for many of them to be opened up to greater competition over time,” points out WFS’s Sinclair. “Every country in Asia offers different opportunities and each is unique, which necessitates a range of diverse strategies for market entry. In general, Asia requires a more long-term approach for ground handling than some of the markets that have a more mature, competitive and independent ground handling market.”