Once highly fragmented, and in many respects one of the hidden sectors of aviation, the airport ground handling industry has started to coalesce in the last few years. A recent report by the CAPA Centre for Aviation suggests that globally it could be worth US$80-100bn, which would make it a sizeable chunk of the estimated US$700bn world aviation industry as a whole. It would also appear to be a growing sector. Not only is ground handling benefiting from the general global increase in flying, but it’s also an activity that many of the world’s airlines are increasingly outsourcing – particularly outside their home markets, though in some cases even in their home countries.
Lately, the industry has been pulled in a number of directions. On the one hand there has been an increase in the level of competition in many airports as governments – notably the European Union (EU) – have opened up hitherto closed handling markets to competition; the EU now insists that airports above a certain size have at least two handlers in competition with each other. Some airports that were previously monopolies have become competitive free-for-alls.
However, the European Commission (EC) has since drawn in its horns, withdrawing on 17 December a proposed directive to further liberalise ground handling services at European airports. The December 2011 proposal would have required airports to allow a larger number of providers to offer services such as cargo and baggage handling. While the plan had the support of airlines, the European Parliament was very lukewarm and considerably watered down the text which, moreover, now applied only to a handful of major airports handling over 15 million passengers a year.
On the other hand, mergers and acquisitions have swallowed up some players. Ground handling was in many respects quite a fragmented, localised industry, with many small or family-owned players competing with the big international groups. Now the latter have started to acquire the former, although there is still plenty of scope for more M&A activity. And there has also been one major merger at the top level with the sale of UK-headquartered Servisair to Swissport in December 2013 to create the world’s largest handling company. The industry hasn’t yet quite reached the point where there are very large, globally spread companies able to handle airlines in any corner of the world, but it is a goal that many of the larger firms are working towards through a combination of acquisition and organic growth. Swissport is currently the nearest to a global handler, with 260 stations in 45 countries around the world.
Other countries in other parts of the world have watched the EU liberalisation process with interest. There is a feeling that, in some markets at least, the EU went too far too fast and the number of competing handlers in some airports has become unsustainable. There is evidence that Brussels is having second thoughts on forcing airports too quickly towards liberalisation and it has since introduced a ‘social’ dimension to the process.
There is evidence, too, that many ground handlers are becoming increasingly dissatisfied with the low margins available in many instances.
WFS chief is optimistic
Olivier Bijaoui, executive chairman, president and chief executive at global handler WFS, is confident that the market will see at least some growth in 2015. “Last year, 2014, was much better than 2013, when we saw some nice growth,” he told AGS in an interview. “Confidence is there.” The UK and Northern Europe in particular saw good growth, as did cargo handling, which accounts for 60% of WFS’s global business.
Bijaoui also predicts that the rest of Europe – including recession-hit Spain and Italy – will get back on track. Business in WFS’s home country, France, is also progressing nicely especially with new contracts from the Air France-KLM group’s Transavia subsidiary in Paris.
Globally, WFS is following the trend of buying up local players. In October last year, for instance, it acquired Brazil’s Orbital, “a well-run, family-owned company”, which gives WFS an entry into 19 airports in the country. Bijaoui sees South America as particularly fertile ground, along with Africa, where the handler has started out on a contract management basis in Tanzania and Kenya but is looking for more business there, as well as in South Africa.
In the Middle East, WFS recently opened a VIP passenger terminal in Amman in partnership with Royal Jordanian.
Asia – specifically, Thailand, Singapore and Hong Kong – is also a good market but in the latter WFS has gone in an interesting new direction, having become the manager of the new Hong Kong Cruise Terminal in a joint venture with Royal Caribbean. This might seem surprising for an airline handler but, as Bijaoui points out: “There are a lot of similarities, particularly in areas such as check-in and baggage handling – it’s just that the numbers, in terms of the passengers on any one arrival or departure, are much bigger.”
WFS’s involvement in the Hong Kong cruise market was partly a response to limited opportunities in the local airline industry, but Bijaoui would welcome the chance to set up other cruise (or ferry) related businesses in other parts of the world. “When you first do something like this, you create credentials. The difficult stage is getting into the market.”
Even in its airline handling, WFS takes a different approach compared with some of its competitors, Bijaoui believes. “For example, we can check bags in for passengers going to the airport on the Mass Transit Railway.”
He sees the process of takeover and consolidation in the airline handling industry continuing. “I think we, for instance, are getting to the point where the global offering to airlines is there. And the airlines are starting to outsource – even their hub operations in some cases – because they can see that they have partners like us who are able to employ massive numbers of staff, as we do in Paris, for example.” Airlines are taking a back-to-basics approach in which they concentrate on what they really do best – flying planes – and nothing is sacrosanct – even home hub handling operations.
There are also quite a few family-owned handlers in many parts of the world, Bijaoui considers. “Yes, in Europe, it’s beginning to consolidate, in the USA possibly a bit more, but even there, there are opportunities.”
However, he does see some governments drawing back from allowing the total free-for-all competition that has occurred in some markets such as Italy, where life has become unsustainable for handlers at many airports. Ironically, it is countries where monopolies were tolerated but then thrown open to competition that have suffered the most, whereas the UK and northern Europe, where competition has always been allowed and has evolved over time, are the most mature markets, in his opinion. “WFS has stayed away from a number of markets, because of the sheer amount of competition.” That said, it will be bidding for opportunities at all 42 Spanish airports and would certainly consider opportunities in Germany and elsewhere.
“It’s hard to say what the right balance is, but personally, I think it is better if there are some limits on the number of players.” He points out that handling companies have to make often large investments in very specialised ground support equipment and it takes time to get a return on capital invested.
Competitive pressures increase in Germany
The three affiliated companies, AeroGround, Aerogate and Cargogate, say they maintained their position as the only full-service provider at Munich Airport in 2014. Nevertheless, the competitive environment for AeroGround “will continue to be challenging and exciting in the future,” they predict – mainly because of the competitive pressure on German aviation companies in particular (for example through civil aviation tax) and the resultant cuts which have a great influence on price competition for ground handling services.
Both low-cost and network carriers are putting high cost pressure on ground handling companies, while at the same time the requirements on quality and on-time-performance are continuously rising. Success depends on ensuring a high flexibility in response to constantly changing market needs; continuous, efficient cost control; and improvement and adaptation of processes and services according to customer needs.
Despite this, AeroGround Flughafen München sees further growth opportunities in the satellite extension project at Terminal 2. Physical completion of the scheme, which will give 27 additional aircraft parking positions, is scheduled for end of 2015 and promises extra ground handling volume for the airport’s own ground handling operators. In 2014, AeroGround extended its strategic focus on off-campus activities and signed a strategic alliance agreement with the Greek Goldair Handling and AAS Airline Assistance Switzerland under the name of ground.net. The agreement covers close co-operation in marketing and sales at the airports that all three ground handlers currently operate.
According to AeroGround, “the added value for our customers is represented by simplified administrative procedures, a centralised key contact management and the comprehensive use of operational know-how for innovation and cost reduction.” With the creation of a European ground handling network of local and regional experts, it is planned to add further members in 2015.
Dnata – outsourcing is viable but take care
At Middle East-owned global group dnata, divisional senior vice president, international airport operations Stewart Angus sees “a definite trend by major carriers to outsource their hub handling. The low-cost carriers (LCCs) have always worked to this model, but there is a growing realisation amongst the major network carriers that they are carrying legacy costs in an area that is not their core expertise – an investment which could be better deployed elsewhere.”
So: “There is real scope for the major handlers to grow their business in partnership with the network carriers.”
But he adds a word of caution: “There are several examples recently where outsourcing has gone wrong, with significant reputational damage to the airlines involved. This does not mean the outsourcing model is flawed, rather a reflection that their hub handling is a vital element of their product and brand. Airlines need to think carefully about whether their chosen handler is deploying sufficient resources to ensure safety and on-time performance.”
Angus predicts that it is likely that several companies will change hands in the next few years and acquisition of smaller handlers is also probable. He says: “The ground handling market seems to be following the same path as the in-flight catering industry during the past decade, which left two main players through consolidation. I don’t think the ground handling market will necessarily follow the same ‘two-player’ model, but I believe we are in for a period of significant consolidation.”
But as for new players entering the market, “if you look at the margins of the ground handlers, it is difficult to imagine anyone would want to enter this market – if anything, as noted above, we are more likely to see consolidation,” he considers.
Dnata has targeted growth in the Middle East and Asia Pacific – its home regions, which are displaying strong growth. In mature markets such as Europe and North America, the tide is turning. “We sense a mood change from many in the airline community who have suffered the consequences of deteriorating handling service for several years, including flight delays, aircraft damage and poor passenger perception.”
As for the LCCs, there is no longer a homogeneous model, Angus believes, with different new-generation airlines carving their own product point in the market as they evolve. A growing number of new-generation airlines recognise service differentiation is an important tool to maximise yield.
Crucially, for a short-haul airline operating an 80-minute sector, product differentiation on the ground is as important as in the air. This creates a growing scope for handlers to genuinely add value to new-generation airlines, rather than simply being a commoditised supplier.
Angus concludes: “We have been told by several observers our cargo complex at Heathrow dnata City is the most technology-enabled airport cargo facility in the world. We are also working on several projects to use mobile technology to improve efficiency and reduce turnaround times. As a company, we recognise the important role technology plays in our operations and work to be ahead of the industry standard, rather than catching up to our competitors.”