Anthony Harrington looks at some of the latest developments in the ground handling sector and where they might lead
The ground handling sector had no choice other than to come into being as a hugely fragmented accumulation of isolated businesses, each springing up to handle the local requirements of one or two local airports. Many either started out as a part of a national airline, or quickly forged long-lasting agreements at a particular airport with a national airline or a handful of foreign airlines.
Sometimes, when a carrier opened up new routes at a new airport they would (and still do) take their own in-house or their favourite outsourcing baggage and cargo handler with them. However, for a couple of decades, as air travel developed and passenger numbers mushroomed, new ground handling operations found it very difficult to break through established monopolies to offer competitive services.
Even today, in a number of airports, the monopoly provider is still entrenched, but there is no doubt that the sector is undergoing a radical change that is steadily transforming the landscape. Established suppliers from outside a region are increasingly seeking to outbid incumbents, offering airlines better pricing and promising better quality services. Big ground handling companies are getting bigger. Mid-sized companies are getting squeezed and smaller single-airport organisations are under incredible cost pressure.
The reason for the ‘big squeeze’ is simple economics. Ground handling today is an increasingly capital intensive business. Modern ground handling equipment is expensive and service providers have little choice other than to automate every possible process in order to hold down costs. Airlines are themselves trading on wafer thin margins and are constantly pressuring their suppliers to do more for less, more efficiently.
No surprise then that we are seeing one acquisition after another. The stakes are reasonably high, given the asset base and staffing levels that many ground handling companies have built up. However, funders rather like the sector since it is comprised of solid, cash generative businesses that require significant funding both for acquisitions and for capital equipment. At a time of low to negative returns for cash, investing in ground handling companies is essentially a bet on the onwards and upwards march of commercial air traffic.
Taken in its totality the global ground handling business is expected to be worth around US$7.4 billion annually by 2025, according to the latest research report from Research and Markets. This represents a forecast compound annual growth rate (CAGR) of around 7.3% for the next 10 years. At that level of growth, funding for a general and potentially long-running consolidation of the sector, with a number of mid-size and large players running ‘buy-and-build’ strategies, is virtually guaranteed.
Leading the charge
The history of all the larger ground handling operators shows much the same pattern. Dubai-headquartered dnata, which started life back in 1959 as a team of five to provide ground handling services to the then new Dubai International Airport, has been at the forefront of international acquisitions.
Time and again, the purchase of established ground handling companies in new regions has helped dnata to accelerate its growth. The firm’s acquisitions of ground handling operations at London Heathrow and Manchester Airports in 2009 are an obvious case in point.
Earlier this year, dnata reportedly purchased US ground handling specialist, Ground Services International, which has operations in more than 20 airports across the USA. This was dnata’s first US acquisition and gives it a significant presence in the US market.
Moreover, it seems that a second US acquisition is already on the cards. dnata president Gary Chapman was recently quoted in Gulf News saying that dnata is in discussions with a small Canadian cargo handling operator. The company is said to have a war chest of some AED3.5 billion (nearly US$1 billion) for further acquisitions. Chapman reckons that the company is well positioned to expand its presence in the States through further takeovers and he signalled an interest in acquiring part or all of two other US airport service companies.
Like dnata, Menzies is another supplier leading the growth-through-acquisition charge. The group’s aviation business, comprising a range of services including cargo and ground handling, got off to a flying start in 2000, when it bought the global ground handling operations of the US-based Ogden Aviation Services. At a stroke the $118 million acquisition doubled Menzies’ aviation support business and announced the group’s arrival as a major ground handling player.
Since then a series of acquisitions around the world, from Ireland to Sweden, as well as more in the US, have added to the Menzies portfolio. The latest move is the proposed acquisition of ASIG, an aviation services and fuel services provider, with a useful ground handling operation as well.
The deal for the Orlando, Florida-headquartered company is said to be worth $202 million. When it goes through it will give Menzies an added presence in 88 locations across seven countries and will double the size of the company’s North American operations. One of the huge benefits that deals of this scale bring to the acquiring company is that they greatly enhance the relationship with key airline customers by making more services available in more locations around the world.
Dr Dermot Smurfit, chairman of Menzies called the deal “transformational”, adding: “It will create one of the largest aviation services businesses in the world and will strengthen Menzies Aviation’s service offering at major international gateways such as London Heathrow, San Francisco, Denver and Los Angeles.”
Despite the success stories, there is no easy way for a ground handling company that begins life in a single location to transform itself into a global player. Çelebi started out back in 1958 as the first privately owned ground handling company in Turkey. It took the company just shy of 50 years to take its first step on the road to becoming an international player, when it commenced ground handling operations at Budapest Airport. Since then progress has been steady rather than spectacular. In 2009 it began operating in Mumbai, India, adding Delhi a year later. In 2011 it began providing services in Frankfurt.
The company is building up contract wins with major carriers on the ground handling side as well as providing cargo services. Çelebi’s Delhi operation, for example, began providing ramp handling services to Cathay Pacific Cargo from 1 February 2016. It now has more than 300 customers around the world and is active in 30 airports in Turkey, one in Hungary, one in Austria and two in India.
Swissport International began life as Swissair Ground Services, when it was simply the ground handling arm of Swissair, formerly Switzerland’s national airline until, after various misadventures, the airline became part of Lufthansa. The private equity (PE) house Candover acquired Swissport, then a wholly owned subsidiary of Swissair in 2002 and sold it on to the Spanish infrastructure firm Ferrovial in 2006. It was acquired by its present owners, the French PE firm PAI Partners in 2010 for Ä654 million – a price that already signalled the extent to which Swissport had become a powerhouse in the international ground handling game.
Swissport has become a highly successful acquisition management operation, with one transaction after another turning cash positive for the company. It is now, with some justification, able to claim the title of the world’s largest ground handing group, with more than 270 locations in 48 countries, and an annual turnover in excess of three billion Swiss francs.
Not surprisingly, with that kind of reach, announcements from Swissport of new contract wins with airlines and new ground handling agreements that extend its presence globally, are a frequent occurrence. The latest announcements of this sort at the time of writing were an agreement with COBALT, the new Cypriot national carrier that takes Swissport into 13 airports where COBALT has a presence, and an agreement with Jazeera Airways KSC to provide ground and air cargo services at King Abdulaziz International airport in Jeddah, and King Khaled International in Riyadh.
Jazeera Airways therefore becomes Swissport’s launch customer in the Saudi capital. It has also picked up the contract for low-cost carrier Scoot, a subsidiary of Singapore Airlines, at King Abdulaziz International.
There are clear overlaps between cargo handling and ground services, not least because airlines like Delta carry substantial cargo loads on passenger flights. So the larger ground handling companies also tend to have large cargo handling arms. Worldwide Flight Services (WFS), the world’s leading cargo handler, also has one of the most extensive global ground handling operations. In March this year WFS became even bigger when it acquired Consolidated Aviation Services (CAS), the largest cargo handler in North America.
Once again, the deal was basically an exchange between two PE houses. Platinum Equity acquired WFS in 2015, and CAS was part of the portfolio of investment firm ICV Partners, which specialises in middle market companies. CAS has operations in 45 North American and South American airports.
WFS provides an example of yet another expansion strategy available to ground handlers as they seek to benefit from consolidation in the sector: its subsidiary Bangkok Flight Services (BFS) is a joint venture with Bangkok Airways, Thailand’s second-largest regional carrier. BFS is based at Bangkok Suvarnabhumi Airport. Its latest carrier win was in February this year when it provided ground handling, passenger and cargo services for the inaugural flight of Myanmar National Airlines.
Like many carriers, SAS, the Scandanavian carrier, had a long tradition of using its own ground handling arm. However, it has had a steady programme of outsourcing these services in recent years at various airports around the world. In May this year, SAS signed a letter of intent with Aviator Airport Alliance Europe (Aviator) whereby it agreed to outsource ground handling at Gothenburg and Malmö.
However, SAS decided to continue to do its own ground handling at the main Scandinavian airports. According to SAS, outsourcing has saved the group some SEK 300 million ($33.3 million) over the past two years. But the carrier argues that a major digitisation programme currently underway will enable further streamlining and customer improvements to be made in ground handling, and that it is best placed to do this at the major Scandinavian airports.
Dave Sheddon, head of communications at Menzies Aviation, feels that resourcing is the biggest challenge at major airports. “Whether it’s getting the right people and keeping them, or optimising the way we deploy our teams and equipment, it remains an area on which we must always focus. Beyond that, the typically competitive nature of the handling environment at large stations is a big pressure, as is the complexity of managing an operation with so many moving parts.”
Sheddon says ground handling is always equally demanding both in terms of the capital investment in equipment that it requires, and the human resources that need to be deployed. “Put simply, companies need a sufficient base of capital on which to build. Without such a base, there’s a danger that a growing handler might find itself spread too thin when challenges arise; the good times are easy to work through, but it’s tough to weather the harder times if a business is overstretched.”
Menzies, for its part, is confident of its continued success and rapid future growth, having announced its intention to acquire ASIG earlier this year.
As to whether the market is consolidating, Sheddon believes that “the dynamics of the market are moving things in that direction. There have been a number of major acquisitions in recent years, signalling a process of increasing consolidation, and we’ve contributed to that trend in announcing our proposed acquisition of ASIG.”
Stewart Sinclair, CEO, Bangkok Fuel Services, gives his perspective on the pressures facing a ground handling operation in a busy airport.
“The major pressures … frequently stem from the airport operating over its original design capacity. This creates infrastructure-related issues such as limited check-in counters at peak periods, immigration congestion, overloaded baggage systems requiring transfer bags to be handled in a separate facility, lack of contact gates at peak periods, especially A380-capable gates, runways, taxiways and some apron areas requiring repair due to heavy usage.
“Other challenges revolve around staff retention and suitable language skills. In our case, all of these infrastructure issues are being addressed by the airport and other authorities. However, the growth at the airport is such that it continually outpaces the infrastructure upgrades.
“Ground handling is equally testing both in terms of the investment it requires in capital equipment and in human resources.
“Expanding out from a local base is very challenging, and most local ground handling companies never make the transition to becoming an international operator with multiple sites, unless they are able to make acquisitions or are themselves acquired by an international brand. BFS is fortunate in that we are part of the WFS Group, so we have access to the global network of WFS operating at over 145 locations worldwide. As a special purpose company BFS is limited to operating at BKK. However, BFS has an investment in BFS Cargo DMK, which provides cargo handling services at DMK airport. All expansion outside Thailand is undertaken by WFS.
“It is worth noting that for widebody aircraft there is really no difference between the requirements of cargo handling and passenger baggage handling, as the vast majority of the cargo and baggage is loaded in containers and loaded and offloaded using heavy loading equipment. This being so, a few more pallets or containers to load/offload does not take up much time.
“Curiously the bigger challenge is with narrowbody aircraft – and especially low-cost carriers who carry cargo. Whilst the weight may not look to be significant, the number of pieces that need to be loaded and offloaded can be significant. The challenge is further compounded by this being a labour-intensive process, with relatively little automation, and a requirement to complete the task in minimal ground times.”