In a perfect world, Clickair would procure its ground handling services from less than a handful of providers. In this imperfect world, however, the Spanish LCC deals with some 25 different companies for a network that spans 45 stations. "I believe that the nirvana solution would be to have two major network ground handlers," CEO Alex Cruz tells Airline Procurement.
The reasons are straightforward, he notes: "You minimize overhead and you play one against the other." But he quickly adds, "Of course, there are no two network ground handlers that cover any medium-size airline network, so the problems start . . . What is the optimum number of network handlers? It all depends how much they are competing with each other within your airport network. We have done our analysis and we have some goals but I have to admit, perhaps because of our size, we are not attracting the type of attention which I thought we would."
Air France, on the other hand, is not convinced that so-called network deals are all that desirable. It operates to 170 or so stations outside its home market, around 80 of which are in its European network that also includes North Africa. Ground services at these 170 airports are covered by no fewer than 275 contracts.
"Some years ago we thought, like everybody else, [that] we could favor country packages or multistation accords and, like everybody else, we tried to have a one-stop shopping for a number of stations, which would have been an improvement for our procurement process," concedes VP-International Purchasing Denis Hasdenteufel. "Our multistation approaches in the past have not always been satisfactory because the provider underestimated the local constraints," he adds straightforwardly. "We consider that in some cases the local provider knowing the home situation through and through is in a better position."
Air France is a fervent advocate of implementing an IATA Safety Audit for Ground Operations, scheduled for next year. "This would considerably facilitate our procurement process," says Hasdenteufel, who views the lack of a uniform safety standard for ground handlers as a "weakness" in the business. "We spend a lot of time checking if a provider is compatible with our safety and quality expectations."
An executive at a major European airline, who prefers not to be named, tells AP he's puzzled by the lack of network-spanning consistency in the levels of service and quality provided. "You think that certainly with the big players you know what you get. Take McDonald's, where you get exactly the same wherever [you are] in the world. With handlers, you never know what you get. The business is so local. It always depends on the local station manager of this third-party supplier whether you get good service or not. This is probably why network deals do not make sense."
Nigel Daniel, executive VP-ground handling at Aviapartner, which provides full handling services at 32 stations in five European countries, does not hide the fact that like most of his competitors he prefers network deals. "It's one sales pitch with a multiple effect on our revenues and you can deliver good news at several stations simultaneously," he explains. "What we don't like is to give networkwide discounts. It is dangerous to assume that a contract covering ten stations comes with a 5% discount across the network. Operational synergies between individual stations are almost nonexistent, and carriers often have separate SLAs [service level agreements] per station. The only saving we can achieve is on management time."
There is also a negative side to network deals, he reckons: "If the handler does not perform well at one station, the customer quickly threatens to pull the contract at several stations." Nevertheless, increasing network sales is one of the strategic goals of the Brussels Airport-based handler. "Major airlines and alliances are increasingly seeking to consolidate their supply base and partner with ground handlers with global or regional strength," Aviapartner CEO Theo Dilissen believes, citing a 2005 KPMG "Market Intelligence Survey" that predicts the estimated share of network contracts in Europe will grow from less than 20% in 2005 to 50%-60% by 2010.
CLOSE TO HOME
Most major European network carriers, including British Airways, Air France, Iberia and SAS, still perform their own handling at their hubs, directly or through their handling subsidiaries, and only purchase third-party ground services at their outstations. "Network carriers still see it as a major risk to procure their ground operations at their hub from a third party. They believeI think wronglythat they need the control because of the size of that network," reasons Daniel. Moreover, he says, most airlines are not convinced that the savings from outsourcing are high enough to offset the perceived risk. "There is limited scope for saving money in the short term because 70% to 80% of the costs [labor and equipment] are fixed. But there are savings to be made, [for example] in management structures and time." He asserts that "every independent handling agent" questions why airlines want to continue to self-handle.
Lufthansa outsources all its ramp handling at Frankfurt to Fraport, which owns and operates the airport (and in which LH is an investor), as well as at its second hub Munich. "Historically in Germany, all aircraft handling is done by the airports," VP-Commercial Airport and Handling Relations Stephan Klar explains. Third-party contracting for ramp services also became a strategic choice in the late 1990s when LH sold GlobeGround, which provided ramp handling at its outstations.
"We buy ramp handling at all the airports we fly to, we do self-handling on the passenger side in our home market and have a mixture [of] self-handling and third-party handling in the non-German stations," he sums up. LH does not have a general rule that dictates it has to procure passenger handling at outstations but looks at each airport on a case-by-case basis and even will divide services among providers at the same airport. "In half of our stations, ramp and passenger services are procured from a different provider," Klar points out.
Nor is there a general rule stipulating that Lufthansa has to procure ground services in cooperation with its partners, whether a regional such as Air Dolomiti or a fellow Star Alliance member. "It might be better to split the load over two handlers to assure quality," he says. LH is, however, in the process of combining procurement of airport services with Swiss, which it now fully owns.
Air France, likewise, is combining its procurement with that of KLM. "On the whole, we now work with a common provider to reduce our costs and to help our station to provide same-standard, same-level-of-service to our customers on the ground," notes Hasdenteufel. The process should be completed by the end of 2008 or early 2009.
At Lufthansa, procurement of handling services is the responsibility of Commercial Airport and Handling Relations. Tendering of the contracts is 70%-80% automated but negotiations always are face-to-face. Price is never the main deciding factor, Klar insists. In the wake of the opening up of the European ground handling market following the EU Directive of 1996, there was a "little trial and error" at a few stations, he admits. "There were some deals where the price was very appealing. We quickly found out that the cost of bad quality and bad operations exceeded the savings."
Much to the handlers' joy, easyJet, like most European budget carriers, embraces the principle that if it's not core to your business you shouldn't be doing it. Airport services are procured in the vast majority of the LCC's network, spanning 75 airports in 22 countries. EasyJet self-handles "only as a last resort" when the third-party market is not able to supply the product at the right price or level of quality, Airport Development Manager Nigel Fanning stresses. The latter was the case at Luton, its home and still main base; the former situation applied to Geneva, where there was a "cozy duopoly and prohibitive prices."
However, the experience of taking full airport ground services in-house came with a level of complexity "which we did not appreciate," Fanning confesses. GVA was tendered again in 2005 and ground handling now is procured from Swissport, which declined to comment for this article. Luton evolved from self-handling to a JV with Menzies called The Big Orange Ground Handling Co. Employees remained on the easyJet payroll and are dedicated exclusively to easyJet ramp and passenger handling at the airport, while Menzies took up management of the operation. But this has come full circle; at press time, the airline was running tender meetings for giving the operation back to a third party from January.
The LCC still self-handles in Spain. Fanning says: "In most of the airports you have only two providers, of which one is Iberia, and we were paying quite exceptionally high prices. This was effective enough for easyJet, which is a big operator in Spain, to set up self-handling operations in many of the airports we use even though [we find] the economies of scale of having only a couple flights a day and the resource planning inefficient in its own right." As at Luton, handling employees are on the easyJet payroll and Menzies provides the expertise and resource planning.
"Airlines won't admit it, but price is the main driver in the procurement of ground services," maintains a representative of a major airport services provider.
"Rates play an important part in our decision in contracting," confirms Jet Airways CEO Wolfgang Prock-Schauer. The Indian carrier currently flies to two destinations in Europe, London Heathrow and Brussels, where it is building a European hub linking India with North America. "But we use several criteria to determine which company we should contract ground services from. We check the customer base, the service quality, tie-ups. As more and more airlines move to codeshares and alliances, we may have to contract the ground handling service from our imminent codeshare partners."
To counter the tedious price debate, some handling companies have an Open Book Costing agreement with carrier procurement teams. "We are very happy on the large contracts [over €1 million per year] to give them a full detailed costing of everything . . . We show them the same cost model that we use internally, including declaring the profit margin we make on their deal," says Daniel, who is moving to Fernley/International Aviation Services in December.
But this margin does not sit well with all customers. "We definitely need more competition," states Klar. "The EU Directive has opened up some markets, but a lot of markets still have very restrictive access. For example, in my home market, which is the biggest contributor to my ground handling cost, I have only [a] choice between two providers. This is not enough."
Hasdenteufel sees another, and more recent, concern: Venture capitalists driving margins artificially high. He says he is ready to pay "the right price" for the level of quality and safety AF expects but not to pay "any investor or any equity fund which is investing in handling activity for a margin which has a pure capitalistic basis and is not directly linked to any tangible performance. I know we are not always easy to deal with; we certainly have levels of expectations in terms of services that are higher than competitors, including some other full-service carriers . . . Our station managers and controller are pressing and pushing permanently. We don't give them [providers] too much room to maneuver. This is sometimes seen as a constraint by our providers. Some airlines let them operate for a full season without any control."
He also finds that providers in recent years have paid too much attention to trying to attract and please the budget carriers. "When you have in front of you an old lady of 75 and a young sexy lady coming out from nowhere, you easily concentrate your effort on the new sexy one," he says philosophically. However, he argues, "We are here, we were there in the past and we give guarantees for the future. We also give guarantees in all kinds of fields; for example, we don't stop operating every six weeks; we have good credit."
RESPONSIBILITY AND RISK
One airline that is moving to hand over more control to its providers is easyJet. Earlier this year it introduced a new type of SLA that breaks away from the traditional model that lays out most of the parameters for ground handling services including how many staff must man check-in kiosks, how many baggage loaders, when check-in desks are open or closed, etc. In return for a "fair rate," says Fanning, the handling agent takes full responsibilityand the riskover the ground operation. The LCC only measures output on the customer experience side and aircraft ontime performance.
On the latter there is no room for debate, as all of the carrier's new Airbus narrowbodies are equipped with ACARS linked to its operations management system. Ontime performance is measured on every flight with a three-tier system: Plus 3 min., plus 15 min. and over 15 min. There is a larger emphasis on first-wave departures as well. If the ground handler fails to deliver the ontime performance, it pays a rebate to easyJet. The longer the delay, the bigger the refund, although overall the airline is targeting a revenue-neutral operation.
"We are seeking a change in ontime performance and accountability. Managing the contracts has become a lot simpler," Fanning explains. In the past, "We spent most of the time trying to manage the contract, trying to define whose fault the delay was, etc. It was mainly retrospective-looking with a lot of wasted management time and resource." In addition, at a lot of stations overall ontime performance was poor, "yet we were still paying substantial amounts in bonuses."
The new framework is forward-looking. "We are trying to stimulate the ground handler to be proactive, to step in more, to intervene where there are issues with airport suppliers or any other suppliers around the airport." The first airport to adopt the new SLA was London Gatwick, where easyJet operates more than 70 daily flights. After positive results, it was introduced at other larger bases including Amsterdam Schiphol, Berlin Schoenefeld and Basel-Mulhouse-Freiburg. Says Fanning, "We are rolling it out right across our bigger stations, but smaller stations will eventually get it too."