AIRPORT BUSINESS

Aerlines

The Winds of Change are in the Air

Altering Relations in the Aviation Industry
Redefine the Business Scope and Approach
of Ground Handling Service Providers
Since the beginning of the credit crisis, companies around the world are massively cutting their tra-
velling budgets, devastating the profitability of airlines and related companies. The combination with
ever-increasing fuel prices, foreseen to increase again as from 2011 onwards, makes that airlines and
their supportive industries are forced another time to decrease their operational costs. One way to ac-
complish this is by outsourcing business processes. Because many of these are currently rendered by
ground handling companies, it is expected that these developments will alter the strategic development
of the ground handling sector in relation to the airport and airline sectors. In this article, the trends are
discussed that will drive the strategic and operational development of the aviation industry in the on-
coming 10-15 years. Based on this, a prediction is made on the strategic outlook of the global ground
handling industry.
by: Matthijs Lamberts airport lounges and passenger boarding bridges, and helping
Passengers with Reduced Mobility (PRMs); examples of airside
Ground Handling Services operations are marshalling, towing and fuelling of aircraft, in-
Ground handling companies position themselves between the flight catering, cabin cleaning, positioning of passenger steps
services provided by the airport and the airline. They connect and operating cargo loaders (Swissport, 2007; Zerbib, 2004).
the physical infrastructure of the airport with the travelling
service of the airline. The range of services that can be provided Interdependency in the Aviation Industry
by ground handling companies varies widely and is very broad. For a ground handling company, the airline and the airport
In essence, they relate to the aircraft turnaround process, which are the most important players in the aviation industry. This
can refer to airside or terminal side. Where terminal operations is because the airport fulfils the role of supplier of necessary
are structured around the process that passengers go through infrastructure for the ground handler in the form of, for
when flying, airside operations concentrate on turning around example, operating licenses and operation-enabling systems
Aircraft (A/C) that are parked at the apron. Examples of like fuel distribution systems and baggage handling systems.
terminal operations are manning check-in desks, operating The airline on the other hand has the relatively largest influence
on the buying decisions of passengers
through its routing network,
punctuality and ticket price (Albers,
Koch & Ruff, 2005) and through that
has a large influence on the ultimate
profitability of the entire aviation
industry. A different role is played
by the National Aviation Authorities.
These set the rules of the game and
vary per country, state or even airport,
which makes that the competitive
playground and development stage
of the aviation industry can differ per
region.

Figure 1: Terminal/Airside operations

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Figure 2: Schematic ground handling business model concepts
Self-handling model:
Centralised handling model:
Independent handling model:
Self-handling model:
Centralised handling model:
Independent handling model:
Self-handling model:
Centralised handling model:
Independent handling model:
One could say that the ground handling market has relatively
low bargaining power towards the airline and airport market
because ground handling services can be characterised as simple
and low-tech, and pretty much standardised across the globe
(Zerbib). In addition, there are ample handlers for an airline or
airport to choose from, so in theory (if the NAA does not limit the
number of handlers) ground handling has an underdog position.
Since the processes of these three markets are complementary
and therefore highly interdependent, it can be expected that the
future strategic and operational development of ground handling
services are based on those of the worldwide airline and airport
markets.
Business Models Ground Handling
In general, there are three business models that can be identified
for the provision of ground handling services, and the difference
between them relates to the party that is responsible for the
performance of the ground handling services. These business
models are self handling airlines, centralised handling airports,
and independent ground handling service providers.
As can be seen in figure 2, the main difference between these
business models relates to the issue of which party arranges
for the ground handling services that are provided on a certain
airport. In the self handling model, airlines handle their
aircraft themselves; either in-house with own resources or by
subcontracting the work to a third party handling company. In this
model, the airport provides a licence to the ground handlers that
the airlines appoint. The ground handlers pay an access fee to the
airport for the use of the centralised infrastructure (CI); which
is infrastructure that is commonly used by handling companies
and that is arranged for by the airport (SH&E, 2002). In the
centralised handling business model, the managing body of the
airport arranges for the ground handling activities at the airport
site itself. According to SH&E, the main motivator of this type of
ground handling arrangement is that the airport authorities have
full control over the ground handling activities that take place at
their area. In the independent handling business model, aircraft
handling services are provided by third party ground handling
companies. The difference of this model with the self handling
model refers to the process of appointing handlers for ground
handling operations. In the independent handling model, third
party ground handlers apply for performing handling services
at the airport without having a contract with an airline yet. The
managing body of the airport has the final say in that and bases
its decision on self (or NAA) established criteria.
Obviously, the type of business model used has a strong relation
with the costing structure and efficiency of ground handling
services that are provided. Which model is used at an airport is
related to the degree of liberalisation of the aviation industry of
that country. Considering countries with extensively liberalised
aviation industries it seems that a higher degree of liberalisation
is related to a higher degree of implementation of the independent
ground handling business model. In more regulated economies
the centralised handling model appears to be applied more
widely (Black, 2007; CAPA, 2007).
Trends in the Aviation Industry
The changes that the worldwide aviation markets have undergone
during the past decades show a striking pattern along 4 sequential
trends. These appear to underlie the development of all aviation
markets, and it can therefore be expected that they influence
future aviation development as well:
Liberalisation (deregulation)  Privatisation
 Commercialisation  Globalisation
The effects that these trends have on the business development of
companies in the aviation industry evolve around the competitive
market outlook, and are related in the following way:
1. The strength of competition in the aviation industry will
increase because of ongoing liberalisations of airline markets and
increasing implementation of Air Service Agreements (ASAs).
2. Competition among airlines will be based on operational
costs and service levels, as the factors “ticket price”, “routing
network” and “punctuality” will remain the most important
buying decision drivers for passengers.
3. The increasing competitiveness of the industry will increasingly
commercialise the business approach of companies other than
airlines as well; among them airports and ground handlers.
4. The increased commercial awareness of airlines, airports and
ground handling companies that is driven by a need to decrease
operational costs will drive companies to outsource business
activities that do not belong to their core-business activities.
Competitive pressure  Market demand for lower prices and
higher service quality levels  Pressure on operational costs
 Outsourcing non-core business activities
These trends are related through the passenger, the eventual
customer of the aviation industry. They are the main business
enabler of airlines and through that, indirectly also of airports
and ground handling companies. If an airline does not carry
traffic, neither the airport nor the ground handler has business.
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This implies that the overall business driver of the sectors in the
aviation industry will remain the pricing level of a ticket.
Airline Market Developments
Zooming in on the strategic development trends in the global
airline market, two major tendencies can be observed:
1) The increasing accessibility of the international airline
markets, and 2) the necessity to decrease operational costs.
First, the accessibility of the market is driven by countries that
liberalise their air transport markets and that, in a further stage,
enter into Air Service Agreements (ASA) with other countries.
This drives a harmonisation trend of the airline sector in terms
of standards, processes and regulations and lowers the barriers
of entry for newly competing airlines.
The second trend is to decrease the operational cost base. This is
driven by the buying decision factors of passengers, of which the
most important one is predicted to remain “ticket price”, and to a
lesser extent “routing network” and “punctuality” (Albers, Koch
& Ruff, 2005). The weight of these factors increases along with
the accessibility of the international airline markets and the role
that Low Cost Carriers (LCCs) play on short-haul routes, which
feed the Legacy Carrier (LC) hubs. In order to protect themselves
from these growing competitive pressures and to structurally
decrease their operational cost base, airlines outsource as
many supportive business processes as possible. In order to
simultaneously capitalise on the route network possibilities that
the increasing market accessibility brings with limited additional
investments required, LCs (unlike LCCs) increasingly combine
their forces by forming alliances. This results in a larger scope
of competition on the global airline market, which will increase
the homogeneity of the services and the operational standards
offered and used by airlines.
Airport Market Developments
The strategic development of the global airport market is driven
by the same tendencies as the global airline market: the larger
scale of competition and the requirement to decrease costs,
driven by deregulating air transport markets worldwide and
countries entering into ASAs.
Because in a deregulated environment airlines are (to a certain
extent) free to select the airports that they want to include in their
routing network (depending on the degree of Freedom that has
been agreed to in the ASA), airports are increasingly required
to compete since airlines are known for changing their routing
airports relatively easy (Conlon, 2007; Foster, 2007; Molloy,
2007), especially in areas with a high-airport density like in most
Western countries.
In order to have an answer to these market forces, governments
increasingly leave the management of their airports to
private investment groups (e.g. ADP Management, Ferrovial
Aeropuertos, Fraport, Changi Airport Investments). These
investment groups focus on the development of the airport
business concept and merely provide a framework within which
aviation related operations can take place. Despite the fact that
the degree of control and the distribution of revenues between
the government and the investment party can differ per case (De
Neufville & Odoni, 2003), in general private investment parties
base their management and development on market forces
and implement homogeneous development concepts along the
airports in their portfolio.
Just as with the airline market, this practice drives a worldwide
trend to decrease the airport’s operational costing structure and
a trend to harmonise airport operations, both also based on
the buying decision factors of airlines and passengers that use
the airport. Earlier studies show that these comprise “airport
security, network compatibility, transfer possibilities, airport
handling fees, marketing support, competition and environmental
restrictions” (for airlines) and “ticket price, destinations of
flights, frequency of service, image and reliability of the airport
and airline” (for passengers) (Albers, Koch & Ruff, 2005; Kazda
& Caves, 2007). Which factors are most important depend on
the local market conditions of the airport and may differ along
with the type of airline(s) and passenger demand(s).
An important issue at present is the question as to which extent
LC or LCC-dedicated services should be offered, in the light
of the increasing market shares that LCCs account for on short
and medium-haul routes worldwide (30-50% in the EU; Dennis,
2007). This is particularly interesting for major hub airports
since the hub-and-spoke system is expected to represent the
largest growth in airline routes until 2015 (Airbus, 2006; Boeing,
2006), and low cost carriers are expected to capture large market
shares on the short-haul feeding routes. In order to maintain their
competitive hub-position, large airports should therefore develop
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themselves as “hybrid” airports at which both LCs and LCCs
can be handled. Since smaller airports act as traffic feeders (i.e.
short and medium-haul) for their large counterparts, these are
expected to focus at offering primarily LCC-dedicated services.
Conclusions on the Developments in the Worldwide
Ground Handling Market
ll these developments will definately affect the strategic and
operational development of ground handling businesses in the
oncoming decade. It is indicated that the global developments
are driven by a harmonisation of business operations and easier
market access, stimulating worldwide competition between
airlines, airports and also ground handlers. For that reason, the key
for successful competition in the aviation industry of tomorrow
seems to be a combination of offering high service quality levels
against low operational costs. For airlines and airports, this is
expected to result in outsourcing business activities that are
not part of the core business, and forming alliances and interest
groups, which will drive a worldwide standardisation of business
concepts and processes.
For ground handling, this has three major results. The most direct
result is that handlers will perform a wider scope of services on
a larger scale. An average handler is expected to operate at more
airports and to offer more services than at present, especially
services that are not directly related to flying (e.g. security
services, terminal cleaning; Van Grunsven, 2007). By expanding
and by diversifying their service and customer portfolio, handlers
spread their business risk and will become less dependent of the
flying service itself (like check-in, baggage and A/C handling).
It can be expected that this will increase their bargaining position
in the airline and airport market.
The second result is that handling will be based on standardised
and automated equipment and processes. This is driven by the
worldwide harmonisation of aviation processes and a necessity
to decrease operational costs. Since labour and capital costs
are the largest cost drivers for ground handlers (Black, 2007;
Lloyd, 2007), it is expected that handling equipment and
communication/IT systems will be standardised and automated
as much possible, e.g. by introducing automatic cart/ULD
loading (Vanderlande Industries, 2008)
The low entry barriers and the large-scale standardisation and
automation of processes and equipment will result in a third
effect, namely a consolidation trend among ground handling
companies. This has two major outcomes. Firstly, independent
multinational handling companies are expected to profit from
the expansion possibilities. They are expected to extend their
operations to multiple countries and to smaller airports in order
to spread their portfolio risk. However, ground handling is known
to be under considerable influence by national governments, who
regard handling activities as a way to express national sentiments
(InterVISTAS, 2006; WILLIS, 2007). Partly because of the
regulatory measurements they implement, it is foreseen that the
world’s 4 largest ground handling companies together (Menzies
Aviation, Swissport, ServisAir & Worldwide Flight Services)
will only account for 10-15% of total independent handling
market revenue (Willis, 2007). Because of this, the second major
outcome of the consolidation trend is that there will remain a
large market for locally-based handling companies.
Based on the changes that are expected to take place on the global
handling playground, it is likely that the independent ground
handling model has the largest potential to grow in the oncoming
decade. According to a research conducted by Swissport (2002),
already in the period 2002-2006, in the aftermath of 9/11 with its
drastic costs reductions, the worldwide market turnover of the
independent handling model increased by 33%, increasing its
market share from 30% to 40%. In the same period, centralised
handling services decreased by 33%, decreasing market share
from 15% to 10%, as less airports provided centralised handling
services. This is logical when you realise that more airports
are being liberalised; these stress airport development and
outsource aviation related activities. For self-handling airlines,
it is expected that the market will decrease as well, but not as
rapidly as with centralised handling; 9% over the same period,
thereby decreasing its total market share from 55% to 50%. This
relatively slower decrease can be explained by the fact that the
major airlines remain to rely on their in-house handling division
at their base airports. Because of that, the largest airports
worldwide will remain to be handled by the handling division of
their LC, which in addition will also serve the other airlines of
the alliance in which it takes part.
With the eye on the ever growing pressure on operational costs in
the worldwide aviation industry, the ongoing wave of countries
that liberalise their aviation industries and the effects that
harmonised business processes and easier market access have on
the competitive rules of the game, it is expected that the ground
handling market of the oncoming decade will be dominated by
small ground handling companies that operate locally on one
4

or a few airports in their region, and large multinational ground
handling companies that operate across continents, offering
a highly standardised range of services. Eventually, it can be
expected that the independent handling business model will be
the prevailing model based on which ground handling services
at airports around the world are be provided.
These developments are likely to alter the bargaining power of
ground handlers in relation to airports and airlines. Namely, as
they perform more and more activities that airports and airlines
previously did in-house, they become closer intertwined with
the operations of airports and airlines. Because of this, and
because of the expectation that ground handlers will expand and
offer standardised services around the world, it is expected that
ground handling services will be sourced more than currently
on basis of strategic relationships and less on basis of routine
handling contracts (Kraljic, 1983) in the next 2 decades.
About the Author
Matthijs Lamberts holds a Master degree in Supply Chain Management
at the Erasmus University Rotterdam and in International Business
Administration at the University Maastricht, The Netherlands. He works
at KLM Royal Dutch Airlines as Management Trainee Procurement,
and is interested in the general dynamics of the aviation industry.
References
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flying, market analysis.
Albers, S.; Koch, K. & Ruff, R. (2005) Strategic alliances between
airlines and airports,
Journal of Air Transport Management, Vol. 11, Issue 2, pp. 49-58.
Black, F. (2007). Director Africa Menzies Aviation PLC, personal
interview.
Boeing Commercial Airplanes (2006). Current market outlook, market
analysis.
Boston Consulting Group (2004). Airports, dawn of a new era:
preparing for one of the industry’s biggest shake-ups, report on the long-
term developments in the airport sector.
Centre for Asia Pacific Aviation, CAPA (2007). Middle East Aviation
Aerlines
Outlook: The ‘Next Gen’ Aviation market, Centre for Asia Pacific
Aviation, Sydney.
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Airlines, personal interview.
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European airlines to the low-cost carrier threat, Journal of Air Transport
Management, Vol. 13, Issue 3, pp. 311-321.
De Neufville, R. & Odoni, A. (2003). Airport Systems Planning,
Design and Management, McGraw Hill, New York. N.Y.
Foster, M. (2007). Regional manager Delta Airlines Corporate Real
Estate, personal interview.
Hoefkens, P. (2008). Senior Systems Engineer Vanderlande Industries,
personal interview.
InterVISTAS (2006). The economic impact of air service liberalization,
consultation report,
Kazda, A. & Caves, R. (2007). Airport Design and Operation, Elsevier,
Amsterdam.
Kraljic, P. (1983). Purchasing must become supply chain management,
Harvard Business Review, Vol. 61, Issue 5, pp. 109-117.
Lloyd, N. (2007). Head of financial planning Menzies Aviation PLC,
personal interview.
Molloy, D. (2007). Assistant general manager city of Atlanta department
of aviation, personal interview.
SH&E Limited (2002). Study on the quality and efficiency of ground
handling services at EU airports as a result of the implementation of
Council Directive 96/67/EC, final report to the European Commission.
Swissport (2002). Swissport business review, report on corporate
performance and market developments.
Swissport (2007). Profile 2007, report on corporate performance and
market developments.
Van Grunsven M. (2007). Director Operations Eindhoven Airport,
personal interview.
Willis, J. (2007). Chairman of the International Aviation Handlers
Association IAHA, personal interview.
Zerbib, G. (2004). Ground handling operations, a technical perspective,
MIT student paper,
Photo credits page 3 (column 1): Courtesy of KLM Royal
Dutch Airlines, page 3 (column 2): Courtesy Airport International
and page 4: Courtesy of Fraport AG

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