The cost of consolidation

posted on 8th June 2018

With ambitious international handlers like Swissport, WFS, Çelebi and Dnata acquiring market share, network coverage and capabilities around the world, what does this mean for quality, choice and costs, and where does it leave the independents? Megan Ramsay talks to airlines and handlers about the challenges and opportunities that consolidation brings

 

 

The world’s two biggest air cargo handlers have been on the acquisition trail again in a major way during the last few months, underlining their ambitions to become genuinely global players. For Paris-based Worldwide Flight Services (WFS) it was the acquisition of Brussels-headquartered Aviapartner, bringing Aviapartner’s considerable European passenger ground handling capabilities within the WFS group, as well as its significant cargo business, mainly in Belgium, the Netherlands and Germany
Meanwhile, rapidly expanding Swissport International followed up its relatively minor acquisition this summer of Finand’s Inter Handling with the far more significant purchase of Flightcare’s businesses in Spain and Belgium – effectively the whole Flightcare organisation apart from its small Italian business. The deal was completed in September, giving Swissport cargo handling services for the first time in all of Spain’s major markets, as well as finally giving it access to the cargo handling market in Brussels, where the award of its own handling licences remains under legal review.

Although Menzies Aviation’s expansion phase is currently on hold, at least in terms of acquisitions, Dnata is gradually developing an international portfolio, and Turkey’s ambitious Çelebi continues to expand its international presence. With air cargo handling operations in Turkey, India, Hungary and Germany, Çelebi is now looking at extending its ground handling activities in Austria to include cargo handling, and it also has the Benelux countries in its sights. Over in North America, Cargo Airport Services – itself bought last year by private-equity group ICV Partners – has continued its expansion programme and expects to complete the takeover of three companies by the end of this year – CSI, PHS and another yet to be announced.

The general arguments for consolidation include the creation of critical mass, the amalgamation of back-office functions such as IT, payroll and marketing, as well as the ability to standardise processes and offer consistent service standards across multiple markets. These hold true for cargo handling, much as they do for other sectors, with cargo handling acquisitions also providing the additional benefit of access to completely new markets where the number of handling licences is restricted.

“You can achieve greater reach, faster, through acquisitions than through organic growth,” observes John Batten, executive vice president for global cargo at Swissport.

These benefits outweigh the challenge of ensuring continuity for the customer during the integration phase, he believes. For example, the integration of Flightcare in Spain will be relatively easy, requiring simply the extension of the company’s ground handling activities to include cargo handling too, although in Belgium, the situation is reversed and will be somewhat more difficult.

As with any acquisition, it is also necessary to put new standards and branding in place and ensure the newly acquired company understands and implements its new owner’s processes, although Swissport has established procedures for managing its now-regular integration activities.

One of the arguments for consolidation is that large international airlines are often in a position to dictate terms to small independent suppliers, whereas handlers with significant financial muscle can be treated more as partners to airlines, rather than commodity suppliers.

Indeed, Michael Duffy, CEO of Cargo Airport Services (USA), feels that consolidation is necessary in order to improve pricing models for handlers. “Of course this is a con for the airlines,” he recognises. “But handlers can’t survive if they have to continue negotiating piecemeal. Some airlines may see consolidation as negative as they would rather have competition and choice. But others are consolidating themselves and don’t want to have to manage hundreds of handlers; they’re narrowing down contracts to two or three per region.”

His colleague Phil Jensen, director of sales and marketing, points out that many airlines prefer larger, more-established handlers that can grow alongside them and that have the resources to invest.

Indeed, according to Tony Randgaard, manager for cargo marketing at United Cargo, consolidation will enable companies to serve global carriers more efficiently by extending their relationship across many borders.

But Batten says “it’s a mix”, varying according to the airline and the location. “Some airlines put in place a handling programme where larger handlers get preference, but it’s all driven by markets and conditions,” he says.

Such is the case for some of the major European carriers. Lufthansa Cargo, for example, relies on ground handling agents worldwide, although at a few large stations it performs handling operations at its own facilities with its own staff, outlines Michael Göntgens, senior manager communications.

“As far as services by handling agents are concerned, and with regards to our customers’ expectations, Lufthansa Cargo strives for the ‘best local package’. The criteria include the capabilities of the available handler, IT-compatibility and financial stability,” he adds.

Similarly, Air France-KLM Cargo does its own handling at its home hubs of Paris Charles de Gaulle and Amsterdam Airport Schiphol, but uses a mix of multinational and independent handlers at its outstations.

Mattijs ten Brink, senior vice president of sales and distribution for Air France-KLM Cargo and Martinair Cargo, observes: “The three main drivers for choosing a handler are: Can they deliver the service we need? Can they offer the high quality that we want to give to our customers? And can they offer this at an acceptable price level? Sometimes we choose to work with a multinational, because we have good experience with this handler at other locations, but not always. We are looking to strengthen partnerships with our key suppliers and build longer-term relationships, which could lead to a smaller number of suppliers. But first and foremost we expect handlers to deliver high quality.”

For example, AF-KL Cargo wants its handlers to embrace the Cargo 2000 concept and to become ISAGO certified. It sees global and strategic partnerships with its suppliers – including handlers – as the only way to make progress in terms of quality, security and cost reduction.

Consequences

“The trend for consolidation is not necessarily a disadvantage for airlines,” explains Jean-Claude Sénèque, vice president of operations and logistics for Air France Cargo. “If consolidation leads to more synchronisation and standardisation throughout the world, it can make the supply chain worldwide more smooth and lower costs.”

But Jensen observes that it is certainly not easy to ensure consistent standards across a network and meeting local needs, while also taking into account the varying requirements of different commodities such as perishables.

So, could quality be affected in the long run, as the trend for consolidation continues?

Not according to Swissport’s Batten. “I don’t think so – every market has two or three suppliers and if the customer has choice, you have to keep up the quality,” he argues. “Even if you were the only handler in a given market, you’d have to maintain the quality to keep your reputation. Because of our large network, if we get a bad name in one place, we get a bad name everywhere, so we always have the impetus to keep the quality high.”

In fact, creating consistent high quality standards and ‘professionalising’ operations worldwide is one of Swissport’s key objectives for its expansion, and it has a rolling programme to apply its ‘Swissport Formula’ – a set of key performance indicators, targets and processes – across its global network.

For cargo, this includes applying and measuring performance each week using the Cargo 2000 programme.

“It’s not easy to have high quality and standards – it takes time and lots of training, whether the new office is an acquisition or an organic development,” Batten adds.

However, the experience of some airline representatives is that most acquisitions only involve a change in ownership. They argue that personnel, processes and corporate culture tend not to be altered, meaning that the capabilities of merged handling agents remain more or less the same as before the acquisition.

In any case, according to Lufthansa’s Göntgens, there is still a future for the independents. “We as an airline need independent handlers, especially at the smaller stations,” he comments. “Competition between a larger number of handlers is beneficial to raise the quality and cost-efficiency of the handlers.”

At independent ALHA Group in Italy, sales manager Andrea Piai believes that consolidation will lead to a reduction in choice for airlines and, in turn, a loss of talents in the industry due to standardisation of services. He says the competition between handlers – especially between the big multinationals and the independent companies – is what makes this industry “so dynamic and exciting and, most importantly, efficient”.

Heath White, CEO of Çelebi Germany, believes that the really big players have the network advantage, “but they have a specific focus on a type of product, serving offline airports with trucking services but not necessarily being that big in the major distribution hubs like Amsterdam, Frankfurt or Brussels”.

He continues: “We at Çelebi focus on a different type of product delivery, looking at technology and information management; this is underdeveloped at the larger handlers. We try to make everything paperless and extremely efficient – this is lacking in western Europe.”

For Çelebi, Frankfurt serves as the model for the rest of the network. “We set things up there and then relay them to other stations,” he says. “But you’ve got to keep local integrity – we have the standard model in Frankfurt but we focus on a localisation of competence rather than putting central management into every country, because the way things work can be very different.”

Duffy feels that although consolidation will gather speed next year, there will always be room for independent handlers, which can offer a highly customised service “with a ‘mom and pop’ feeling” and can be extremely sensitive to a carrier’s needs. And there are other options ­­– Jensen says CAS uses alliances for some markets rather than consolidation, submitting bids in collaboration with other companies so as to be able to compete with the very large multinationals, while retaining flexibility.

Local heroes

Patrik Tschirch, manager key account sales and business development at Frankfurt-based independent handler LUG aircargo handling, concedes that it can be easier for the customer carrier to deal with a one-stop shop. But he cautions: “The concentration in the air cargo handling sector will put airlines in a position where they don’t have much choice – look at Brussels, which now has only two handlers following the acquisition of Flightcare by Swissport and the merger between Aviapartner and WFS. In the future there will always be space for us, the local heroes. We can offer a personalised service that is adjusted to individual needs.”

Piai says Italy’s ALHA Group also offers “the flexibility, the quick response to challenges and problems, and most importantly the ‘family feeling’ that only an independent company can give”. He considers that the company’s competitive edge stems from the energy and enthusiasm among employees working in the unique environment of an independent business.

In contrast, he feels large multinationals can sometimes overlook personal talent and commitment as “everything is procedurised and standardised”.

It seems therefore that there are pros and cons for multinationals and independents alike.

Radharamanan Panicker, group CEO at Cargo Service Center India, observes: “As an independent handler, we can be very flexible and nimble in our response to the local environment and modify to local conditions, whereas a multinational has to look into so many elements before taking a decision.

“But there are challenges for independents: in a developing country, you need to invest a lot. This is hard if you are not big enough to handle the risk. There is tremendous financial pressure if something doesn’t go as planned – unlike for the multinationals, who can balance it out across their network.

“Also, airlines want networked handlers with just one contract, and will tend to choose a big company they have worked with in another location because they already know them. If you are an independent handler, they will scrutinise you more strongly before appointing you,” he says.

Panicker feels consolidation will help spread good international practices and notes the value of service level agreements (SLAs). “Even if you are a multinational, the chances of quality dropping are remote if you have SLAs in place,” he notes.

But he believes the future of independent handlers will vary from country to country. “For example, some airports in India are tendering and we can stay as an independent handler because the concessions are very tailored to each airport,” he observes. “Having a network doesn’t help you here because all the revenue streams are related to each airport. So, in some countries consolidation won’t happen.”

He also points out that smaller handlers can work together through associations, to benefit from a network without the need to consolidate.

Future perspective

Overall the feeling among handlers seems to be that there will always be a future for the independents alongside the multinationals; there are markets where they thrive – for example, where there are licence constraints and independents hold the licences. And some airlines simply prefer to use independent handlers in certain contexts.

While it has been argued that consolidation will lead to a reduction in competition and a resulting drop in quality, Batten argues the contrary: “Swissport has huge financial backing compared to many independent handlers and we continually invest in our network to ensure continuous improvement, while keeping our costs under control.”

Winfried Hartmann, managing director at Germany’s Fraport Cargo Services, expects that the future for independent handlers will be tough, but “they can play an important role, especially where complex service menus have to be performed. Network providers have a more ‘one size fits all’ approach, which is fine for those customers without specific demands and requirements.”

He believes some of the independent handlers may disappear or be eaten up by multinational providers, but those able to serve very particular needs “or those with a very dedicated service portfolio” will remain.

“In a difficult economic environment, I see an accelerated trend to go for the multinationals because of their ability to compensate losses at one station with the profits of other stations,” he adds. “This trend clearly goes against the independent and neglects local requirements and circumstances completely. I personally see this trend as very critical because it’s high time that airlines should start realising that the success of their product, transporting cargo from A to B, is determined on the ground – by their handling companies.”

The recent acquisition activity by WFS and Swissport suggests that the current challenging economic conditions are doing little to dampen the ambitions of these two international players at least, and CAS’s Duffy says he expects more consolidation than ever before in 2013, due to the projected economic developments.

Indeed, as ever-tightening competition puts further financial pressure on airlines, handlers and airports, struggling independents may decide it is time to get out, and more airlines and airports may also come to the conclusion that ground handling is not a core business of theirs and that they would prefer to convert fixed costs into variable costs, creating further opportunities for those with global ambitions.

But for the time being it seems that although consolidation may not yet have had the full desired effect in terms of elevating quality, it hasn’t noticeably damaged the competitive landscape, in part because there is still a role for focused and well-resourced independents.