One of the astonishing things about the commercial airline business is the paradoxical way it is characterised by both rapid change and stubborn resistance to change. This is particularly evident when it comes to providing ground handling services for commercial airlines. In essence this is a highly capital intensive and people intensive business, where players have to contend with high volumes and extremely thin margins. Ramp service equipment requires a substantial capital outlay or commitment to a major leasing contract from day one. The high cost of training staff to the required standards is a constant theme. Moreover, where airports have opened up to multiple ground handling companies, retaining the business of airlines who can switch suppliers more easily today than ever before, is a huge challenge.
The ground services market is also an extremely mixed affair. There are niche providers located at a single airport, others who provide services at a handful of airports all within the same state, and a sprinkling of giants with operations in multiple countries and a strong appetite for global growth. Many who started out as simply the ground services division of an airport authority or a national carrier have become independent entities and have expanded far beyond their national borders, to become major players in their own right. Other suppliers have only recently, or more recently, become independent companies and are at a much earlier stage in formulating anything resembling a global ambition.
The high costs associated with launching services for a supplier who is new to a particular airport, along with the steady returns that can be generated once that supplier has built up contracts with several of the airlines based at that airport, make ground handling an ideal business opportunity for venture capital companies. They can help the supplier meet the high start up costs and in effect bankroll the supplier as it seeks to move into airport after airport.
The biggest barrier to growth for every ground services company is probably the grip on the provision of services that airport authorities and national airlines had from the early days of air travel, and which many of them still retain. In a number of countries the monopoly grip of the airport authority or the dominant airline continues to be hard to shake, though in Europe this “closed shop” arrangement was broken as long ago as 1996, when the Ground Handling Directive came into force. Since the directive stipulated that access to the market by suppliers should be free and that for some categories of service there should be at least two suppliers at larger airports (one of which had to be independent of the airport or the dominant carrier) the stage was set for some ground handling suppliers to grow rapidly.
Moreover, in November 2011 the EC decided to compel airports to allow at least three independent ground handling providers to operate services, instead of the original two, which helped to speed up the competitive process.
As the market analysis specialist, CAPA, which provides fleet analysis and statistics on the airline sector, notes: “At one time, ground handling was probably the least competitive business segment within the airports sector in Europe.” All that has changed and where airlines had complained for years that they were paying exorbitant prices for poor service and poor quality as far as ground handling services were concerned, there is now a real emphasis by suppliers on quality and competition. The benefits of competition are now so marked that it is becoming ever more difficult for those airports and national airlines outside Europe that continue to hold monopoly rights over the provision of ground handling services to resist opening up. Those that remain monopolies have had to raise their game to deliver services comparable to the levels that airlines enjoy at airports with multiple competing suppliers.
Competition is, of course, a double edged sword. On the one hand the continuing liberalisation process generates opportunities for expansion. On the other hand, ground handling service providers frequently complain that competition is now so fierce that airlines – which themselves have been under torrid cost pressures – are tempted to buy services on a “lowest tender” basis. Barry Nassberg, Group Chief Operating Officer at Worldwide Flight Services (WFS) argues that where airlines insist on rates that barely cover costs, especially where there are large passenger numbers involved, suppliers who take those contracts will struggle to keep their service delivery standards up to the required level.
“High volume business is fine as long as the rates meet the cost requirement of high quality services. Maintaining quality levels requires intensive and on-going training and quality assurance, strong supervision and committed management, or airlines and passengers will be disappointed with the results. In many cases like that we make the choice to turn away business. We would rather serve a few and do it very well,” he comments.
The end result of an inappropriate focus on price by airlines as the only differentiator among competing providers is likely ultimately to be serious reputational damage both for the airline concerned and the unfortunate supplier caught in that price trap.
WFS has made itself one of the front runners in the race to achieve a global footprint for ground handling services. It began life in 1983 as an offshoot of American Airlines, which formed AMR Services Corporation to outsource its ramp, passenger and terminal services and opened its first Asian regional office in Hong Kong in 1996. The name WFS came with the sale of AMR to Castle Harlan as part of a divestiture of AA’s non-core business. Since then WFS has changed hands several times and has kept on growing, to the point where it now has a presence at 120 airports around the world. At the start of October 2014 it took its first step into Latin America, buying a controlling stake in Orbital Group, one of Brazil’s leading providers of ramp, passenger and airport security services.
As Nassberg notes opening services at a new airport requires a serious commitment. “Offering services at the level demanded by the top airlines is very capital intensive. It starts with ramp ground services equipment (GSE), especially where wide-body handling is involved. Opening a new station requires well into the seven digits in euros, and that is before you take into account working capital for staff and other expenses. This is not for the faint hearted,” he comments. However, he points out that once you have a solid reputation for delivering quality, this in itself helps to drive network growth as your client airlines look to take you with them to an expanding number of airports around the world.
Of course, there is nothing guaranteed about this. Any new airline taking up a base at a new airport is going to receive a significant number of offers of service from third party suppliers and price will always be a factor. “Generally speaking, this is a highly competitive sector. In some parts of the world, with the USA being a good example, the market is open to just about any operator that can secure an airline contract and it is not unusual to find a half dozen or more suppliers at a given station. Europe is somewhat more controlled, but the EU has been working to ease market access and mandating a certain number of handlers based on airport size. Other parts of the world are still a bit behind this evolution, but slowly the notion is taking hold that ground handling should not be the preserve of the national carrier and/or the airport authority,” he comments.
Kayode Oluwasegun-Ojo, the CEO of Nahco Aviance, reckons that despite the competition ground handling can still be seen as a fairly fragmented industry. “Several airports in developed countries still have restricted numbers of operators, where state-backed or owned monopolies operate and where these monopolies are supported by the policies in place,” he notes. He points out that on the back of these restrictions, it is difficult for private capital to commit to the level of costs that are inevitably incurred when setting up ground handling operations at a new station. “This requires a huge investment in both ground support equipment and human capital, as international standards must be maintained,” he comments.
Nahco Aviation Handling Company currently serves some 35 airlines at seven airports across Nigeria and has plans to expand operations to other African countries. It handles around 70% of the domestic and foreign airlines operating in Nigeria. It started off life part state owned and part owned by Air France, BA, Sabena and Lufthansa before being privatised in 2005 and then becoming a listed company on the Nigerian Stock Exchange. Air France and Lufthansa are still shareholders.
Axel Feil, Executive Director for Sales, Marketing and Business Development at AeroGround Flughafen, Munich, emphasises that ground services companies need to invest constantly in staff training in order to maintain quality. “Providing high quality ground services is very capital intensive, particularly for wide-body operations. Not only do you need to have a large GSE fleet, including back-ups in case of breakdowns, but you also need to keep staff standards at the highest levels,” he says.
For example, Feil points out that at AeroGround, 72% of the ramp staff possess the German Chamber of Commerce and Industry IHK Certificate, called “Certified Aircraft Ground Services Handler”. “Fluctuations in employee numbers make it necessary to constantly offer training courses. Moreover refreshers for staff are mandated by regulations. Every year we organize some 9,000 staff training days,” he comments.
Feil says that while Munich Airport is a very competitive environment, with constant pressure on prices, it is very difficult to expand out to other airports in Germany, let alone beyond the borders. Legally, German airports are only permitted to hold two ramp handling licenses and the size of the airport determines the size of the ramp handling companies that can operate there profitably. On top of everything else, Germany has a high cost of living, which impacts salaries and an unemployment level that is below two percent, making it difficult to find staff. As Feil notes, this immediately ratchets up the cost of providing services. “We believe in a one stop shop approach to the provision of ground services, which means that we will look to provide a seamless portfolio of services, from aircraft handling and passenger and cargo handling. However, we regard refuelling, catering and de-icing as outside the scope of ground services so we do not look to cover those,” he comments.
Ahmed Janna, General Manager of the Saudi Arabian based SGS, which provides ground services at most airports in the kingdom, points out that SGS has some uniquely challenging issues to deal with, since it has to cater for the huge influx of pilgrims during the Hajj period, as far as both inbound and especially outbound flights are concerned. “Every year we face this challenge of an extreme increase in traffic at this time. This year this amounts to some 6,500 additional flights, over and above our normal schedule. In 2013 we handled the same volume of traffic without a single delay, catering for well in excess of two million passengers, which is quite an achievement!”
Janna points out that after each year’s peak operation the management team and staff scrutinise all the procedures, looking to find opportunities to effect further improvements in service. “Once we have done this, we start planning for the year ahead, with a special focus on staffing, since we need to recruit and train several thousand additional staff to deal with demand over the Hajj period. People make the difference in this business, which is why we invest so much in training. The SGS Training Academy is an IATA certified training facility, providing the full range of training for our employees. We also work with external partners who are internationally recognised training experts, such as Levenbert, who are presently conducting tailor made courses for all the management staff at SGS,” he explains. Expansion outside Saudi Arabia is not on SGS’s agenda at this point. As Janna notes, Saudi Arabia has a vibrant construction programme of new airports at locations such as Medina, Jeddah and Riyadh, and will also be building a number of smaller airports to cater for international traffic.
Paul Williams, Commercial Director at dnata’s London Heathrow operation points out that dnata has had considerable success in expanding out from its beginnings as a five person operation in 1959 at Dubai. It now employs some 20,000 employees across 36 countries. “The UK is now one of eight countries where dnata has ground and cargo services. Whilst the local management are empowered to run the business locally, there is a great deal of expertise and support provided by the dnata international team. This is especially true after an acquisition, where the team will assist local management with the change process required when you move from being a local handler to being part of a much larger global organisation,” he comments.
Williams points out that the last 12 months have been very dynamic for dnata’s UK operation, as it has for the whole of the UK ground handling industry, and this is particularly true of Heathrow, with the opening of the new Terminal 2. “This terminal is predominantly for Star Alliance carriers and it has acted as a catalyst for a number of carriers to change their ground handlers as they migrate between terminals – not just to terminal 2, but within other terminals as well as carriers move to take up positions vacated by those moving to Terminal 2. Inevitably dnata parted company with some carriers as a result of this process but we were very pleased to be awarded the ground handling for a number of others, including Qatar Airways, TAM Brazil, All Nippon Airways and US Airways, to add to our existing prestigious customer portfolio,” he comments.
Training is seen as an absolutely vital part of maintaining standards. “The UK training team have been decentralised and now live and work airside, alongside the ramp, passenger and cargo operations. This dedicated intimate support provides excellent training support to staff and is also on hand to assist with peak demand when required. Quality control is key to ensure that robust service levels are delivered on a consistent basis. As well as carrier audits, the dnata quality team conduct regular internal audits to ensure that we are following processes and delivering or exceeding agreed carrier service levels. ISAGO is a key initiative for dnata worldwide, and within the UK we are working towards gaining the accreditation and are currently waiting to be audited by IATA,” Williams notes.
As an instance of the continued investment in both GSE and cargo handling facilities required to deliver top quality services, Williams points out that dnata has built three brand new, bespoke cargo handling facilities at Heathrow, which became operational in 2014, providing an additional 206,000 square feet of cargo handling capacity.