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Airport ground handling – industry overview 2014. Part 2: Consolidation and alliances

This second part of CAPA's report on airport ground handling reviews the consolidation of the ground handling industry and emerging alliances.

With the global airport ground handling business estimated at over USD80-100 billion per annum in revenues, this is a sizeable activity, with new paradigms emerging as liberalisation spreads and as new major forces like China and (potentially) India and other emerging markets adopt new principles.

Consolidation has occurred and new alliance moves are being made, but added competition has conspired to ensure that in most cases profit margins are small. So there may be more moves to come.

See also Part 1 of this report: 
Airport ground handling – industry overview 2014. Part 1: Liberalisation, efficiency & compensation

Airport Ground Handler consolidation is occurring - but no ‘stranglehold’

So, how is the industry faring from an organisational and financial viewpoint? The first thing to note is that just as we aren’t YET down to a handful of full service/network airlines and a single LCC in different global regions, as has long been forecasted, neither has there been a similar degree of consolidation in the ground handling world, where a ‘top 10’ that would have a stranglehold on the segment was predicted.

Part of the reason for that, according to Tim Ornellas, is there is a distinct lack of homogeneity amongst the ground handling community, unlike the airlines. A surprising number are in the nature of small, long established independent family firms that have made and secured their reputation at one airport or a small number of them.

For many Ground Service Providers (GSP) though, those at the other end of the scale from Swissport/Servisair, the world’s largest GH company, industry cost pressures remain, with margins narrowing and cost‐sensitive airlines still seeking to drive out all other sources of cost through tighter commercial contracts that also transfer liability.

There is also an administrative anomaly to contend with. Carriers are driving quality performance improvement through the GSPs by imposing standard operating procedures (ISAGO), yet the airports at which GSPs operate have accountability for coordinating safety under the ICAO SMS requirements. SMS (safety management systems) are the product of a new ICAO Annex, #19, and while principally concerned with organisations responsible for the type, design and manufacture of aircraft, they are in the process of being applied to the oversight of all product and service providers to those aircraft. Yet another burden that is eminently justifiable, but which this business segment could do without all the same.

From a financial standpoint, and taking Dr Smith’s pooling proposals (see Part 1 of this report) a stage further, Tim Ornellas counters that financial vehicles such as equipment pooling and leasing are not often as applicable as they are in other industry segments as it takes many years to amortise equipment on low ground handling margins. Consequently there is much shifting around of equipment to meet urgent demand and a worrying degree of loss leader activity, which collectively has a knock-on effect on corporate branding in the segment.

Swissport is the giant of the segment - but it can’t avoid its pitfalls

The largest operators are led by Swissport, the World’s largest Ground Handling company, and its subsidiary, the UK-based Servisair. Swissport International Ltd was owned by Ferrovial until it was bought in Feb-2011 (98%) by PAI Partners, a Paris based private equity firm, originally Paribas Affairs Industrille, which is displaying a growing interest in the air transport sector.

Swissport provides ground services services for around 224 million passengers and handles 4.1 million tonnes of cargo a year on behalf of some 700 client-companies, with a workforce of around 55,000 personnel, Swissport is active at more than 260 stations in 45 countries across five continents, and generates consolidated operating revenue of CHF 3.0 billion (EUR2.5 bn/USD3.1 bn). Swissport would be considered a giant no matter segment of the business it was in. Only four airport operating groups (Heathrow Airport Holdings; AENA Aeropuertos; Aeroports de Paris; and Fraport) had larger revenues in 2013. And it would have been the 52nd largest airline in that year.

It consolidated its position in Dec-2013 when the acquisition of competitor Servisair was approved, subject to conditions set by the European Commission that concerned a small number of airports in the UK and Finland where the Commission considered a monopoly situation would arise. Other than that, the Commission concluded that the proposed acquisition, as modified by the commitments, would not raise any competition concerns.

Servisair, originally a Manchester, UK-based company and which itself reached a turnover in excess of EUR4 billion at one time, has had a chequered history, having been acquired by the French Penauille Polyservices in 1999, later merging with what had been Lufthansa’s ground handling subsidiary to form Servisair/Globeground, that company then becoming Penauille Servisair, which switched its HQ back from Germany back to Manchester. Then, in 2007, Penauille, which is better known as a recycling company, merged with another firm in the same sector, CFF Recycling, to form Derichebourg, which was the company that ultimately sold it to Swissport.

While the segment might be considered the ‘bottom feeder’ of the air transport sector it had no place as part of a metal recycling business.

For all its size and scope, Swissport faces much the same issues as any other in the segment. To take just one recent example, Ryanair, which has started to grow its business at Madrid Airport again recently after cutting back on services two years ago in an argument over charges, rescinded its ground handling contract there with Swissport. It did so in order to engage in self-handling activities, having received authorisation from AENA in what might have been a tacit quid-pro-quo. Ryanair had been seeking self-handling authorisation for several years. Swissport is one of three ground handlers at Madrid, where EU decisions on the matter are academic and Ryanair accounted for 10% of its operations.

This action by Ryanair bucked the trend of airline outsourcing of Ground Handling but then again Ryanair has never been one to follow trends.

The other issue that Swissport has been notable for in 2014 was a severe delay in baggage delivery at London Gatwick Airport during a Bank (public) Holiday weekend earlier this year, which elicited severe criticism of the airport operator at a time when it was submitting its final plans for expansion to the UK’s Airports Commission in competition with Heathrow Airport.

The delays were apparently caused by the dismissal by Swissport of 60 staff earlier, and the difficulties in attracting short-term replacements for a known high demand period at the low levels of remuneration in the segment, which are alleged to be not much higher than the national minimum wage. One airline, Monarch, gave notice to withdraw from its contract with Swissport as a result, awarding its business to Airline Services Ltd (ASL) in the first week of Nov-2014.

Some of the other large ground handling companies are detailed in the table below, derived from a presentation by KPMG. The revenue, EBITDA and EBITDA/EBIT margins are from 2011, in USD (Nov-2014 rate).

Main ground handlers by revenue (2011)

Operator

Revenues USD million

EBITDA where known

EBITDA margin where known

EBIT margin where known

5-year rev growth

5-year EBITDA growth

Swissport

1710

n/k

n/k

n/k

20%

n/k

DNATA

1298

169

13%

11.5%

189%

(-47%)

SATS

1212

194

16%

10.9%

112%

(-38%)

Menzies

969

75

7.7%

4.8%

67%

(-4%)

Fraport AG

815

67

8.3%

3.1%

(-5%)

(-18%)

Servisair

800

91

11.3%

8.1%

(-24%)

242%

Aviapartner

476

n/k

n/k

n/k

37%

n/k

ASIG

368

n/k

n/k

n/k

11%

n/k

Celebi

237

48

20.3%

9%

54%

(-26%)

Average

12.76%

7.5%

51.2%

18.1% (but see comment below)

INDIA GROUND HANDLING 2014
For CAPA's unique comprehensive 280-page report, including airport by airport SWOTs, please see:
CAPA India Ground Handling Report 2014

Profitability – not bad but could be much better

There are two clear messages to take away from this table. Firstly, the profitability of the business, at least as far as the big companies are concerned, and as measured by the limited data in this table is not bad (many airlines would be happy) , but could be much better.

At the same time as this data was produced, at the end of 2011, the average EBITDA margin of a basket of 55 airport operators reported in the CAPA report Airport Investor Monthly was 46.07%, with the highest being Sydney Airport (86.03%) and the lowest Airports of Thailand (0%, actually a small EBITDA loss). That compares with an average of 12.76% for the ground handling operators; roughly one quarter. One would expect margins to be worse at smaller ground handling companies that do not enjoy economies of scale.

Secondly, revenue growth over the previous five years (since 2006) was impressive but this is largely accounted for by consolidation, which is detailed below, in addition to the fact that the air transport industry as a whole was enjoying a solid period of growth at least in 2006-7. EBITDA growth though was poor in the same period. An average of 18.1% is recorded in the table but ignoring the statistical outlier Servisair – the only one actually to record EBITDA growth in that period – a more realistic average is (-133/5) -26.6%.

This is almost certainly accounted for the consistent squeezing of margins both before and during the global financial and economic crises.

Another interesting fact picked up by the KPMG study is that the Asia Pacific region is under served by the main segment ground handling players apart from those that are based there, as can be observed in the table below again from 2011).

Distribution of stations – main Ground Handling companies  

Operator

Number of stations

Europe

N America

Asia & M.E.

Asia & M.E. % of total station

Other countries

GH

Cargo

Other

Swissport

195

64

43

7

3.6%

81

Y

Y

N

Menzies

136

50

53

3

2.2%

30

Y

Y

N

Servisair

121

56

32

3

2.5%

30

Y

Y

N

WFS-Aviapartner

155

75

60

6

3.9%

14

Y

Y

N

SATS (Singapore)

10

 

 

9

90%

1

Y

Y

N

DNATA (Dubai)

18

4

 

8

44.4%

6

Y

Y

N

Fraport

13

5

 

5

38.5%

3

Y

Y

N

Celebi

35

33

 

2

5.7%

 

Y

Y

N

Average

 

23.8% (9.4%)

 

Again, the average of Asia/ME stations (23.8%) reduces to 9.4% if the outliers of the home-based companies in Singapore and Dubai are taken out.

Finally, segmental consolidation has been referred to frequently throughout this report. In the recent past there was a spate of consolidations and mergers and acquisitions, just some of which are referred to in this table.

Table (a) Ground Handling consolidation  

HAVAS

ASIG

WFS

AVIAPARTNER

MENZIES

FLIGHTCARE

SWISSPORT

SERVISAIR

Turkish Airlines

AGI

SEN

Aeroground

World Cargo

Sabena

Ground Star

Hudson

Northern Hub Services

Boker

France Handling

SAT

Ogden

Aeroporti di Roma

Dynair

Global

SAS

SFS

Aeroground

Genair

Aer Lingus Handling

Globeground

BA Regional Cargo

Novia Sverige

CSC

Tristar

Flight Support

Handlex

Comino Cargo

Prague Airport

SWISSPORT

HAVAS/TGS

BBA

WFS AVIAPARTNER

MENZIES

SWISSPORT

Table (b) Ground Handling consolidation 

ACCIONA

CELEBI

FRAPORT

SPdH

DNATA

SATS

SAS

Budapest

Globia

Jet Aviation

TFK

Fraport Vienna

Alpha Flight

Air India

Go-Ahead

China Air

Plane Handling Ltd

Adel Abuljadayel

Consolidation has continued but not all deals have been successful. It can be observed though that in general the earnings multiples on the transactions are declining and seller and buyer pricing expectations are sometimes misaligned.

Those multiples may yet increase. Two sets of financial results covering parts of 2014 that were released while this report was being prepared indicate that business is on the up in line with the performance of the segment’s clients, the airlines. The conglomerate John Menzies for example reported mixed results in its aviation division in the four months between 01-Jul and 31-Oct-2014, to the degree that its MD stood down immediately.

But hidden within those results was a strong performance from ground handling (+15%) due to new business in the Americas. It is in home-based markets that the company has experienced most of its recent difficulties, and especially at Heathrow.

Meanwhile, Fraport’s Ground Handling business segment recorded a 1.3% increase in revenue in the first nine months of 2014, growing by EUR6.2 million to EUR496 million. Segment EBITDA markedly improved by EUR8.8 million (+33.3%) to EUR35.2 million. With depreciation and amortisation declining slightly, segment EBIT increased by EUR9.7 million, from the previous year’s negative territory of minus EUR2.5 million to EUR7.2 million in the reporting period.

Ground Handling alliance building is on the increase

New entrants do still appear of course and there is evidence of alliance behaviours. In early Nov-2014 an alliance was announced between Aeroground Flughafen München GmbH (Germany), Goldair Handling of Greece and AAS Airline Assistance Switzerland, offering ground handling services across various locations to airline customers in Europe under the generic name ground.net.

The first two are well-established but Airline Assistance is a relatively young company.

ground.net was founded in order to offer airline customers with network agreements an alternative to global players in the market for ground handling services. Apart from sales and marketing, the cooperation will also cover information technology, procurement of equipment, employee qualification and establishment of standardised operating processes.

The intention in the long term is to expand the alliance to further ground handling companies and to establish a European ground handling network within ground.net. It will be a loose association of providers but also a cross-linked partnership able to offer and provide services across the network as a single group.

To conclude, as with other areas of the air transport business, future growth in the segment will come from emerging markets. Especially Asia and the Middle East where, as it was shown earlier, some of the main companies have yet made little impact; and also Latin America. It will have to continue to adapt to new regulatory frameworks, and not only in Europe. Airlines and smaller operators may continue to exit the business as both consolidation/M&A and low margins take their toll. But the business will still be open to niche opportunities.

For the remaining participants there is no pot of gold at the end of the rainbow but the natural knock-on effect of a recovering airline business should at least ensure that a living is to be made.

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