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Third party ground handling business in India could increase by USD130 million overnight

After more than three years of legal challenges, India’s Supreme Court is likely to rule in mid-Apr-2014 in favour of the government’s ground handling policy which was first proposed in 2007.

Things can move slowly in India; but when they do move, the scope of change can often be transformative. Such would be the case with the country's ground handling industry. But it would not all be smooth sailing.

If the Court does rule to uphold the policy, the size and structure of India’s ground handling sector will be dramatically transformed - significantly increasing the size of the contestable market for third party handlers almost overnight. CAPA estimates the market will be worth USD1 billion annually within the next ten years.

Indian carriers currently self-handle the majority of their domestic and international operations. The primary customers of third party handlers in India are foreign airlines, who are not permitted to self-handle. This is supplemented by some under-the-wing activities for Indian carriers. CAPA estimates the third party handling market was worth around USD200-220 million in FY2013.

However, under the incoming policy Indian carriers will no longer be permitted to self-handle at the six metro airports or at Cochin, and will be required to appoint one of the licensed handlers at each airport for both terminal and ramp handling.

This would open up a significantly larger market opportunity for third party providers. New business for third party handlers could be worth an additional USD130 million per annum.

The size of India's contestable ground handling market could increase to up to USD350 million almost overnight.

With air traffic in India projected to triple over the next decade CAPA expects to see India become a USD1 billion ground handling market by FY2023.

Coinciding with this important development, CAPA will release its 250 page India Ground Handling Report on 19-May-2014, the first ever comprehensive study on the sector - involving unprecedented research into the size, structure, cost base, key operators and strategic outlook for ground handling in India.

The full CAPA India India Ground Handling Report includes a detailed composition of the market broken up by domestic and international services, and by foreign and Indian carriers. Forecasts will be presented through to FY2023 for market size and profitability by airport.

Under the new policy Indian carriers would have to outsource all ground handling to an authorised provider

Parties authorised to offer handling services at metro airports include:

  • Airport operator or its JV handling company;
  • Air India or its JV handling company;
  • Independent third party handler appointed through a bidding process;
  • At airports other than Delhi and Mumbai airport operators may award additional concessions as and when the traffic reaches defined thresholds.

Air India has partnered with SATS of Singapore, while several other international handling companies – such as Celebi, Menzies, NAS and Worldwide Flight Services - also have a presence in the Indian market.

Authorised Ground Handlers at the Six Metro Airports

Metro Airport

Authorised Ground Handlers

Delhi

AISATS

Bird – Worldwide Flight Services

Cambata Aviation

Celebi Ground Handling Delhi

Mumbai

Air India

Cambata Aviation

Celebi-NAS Airport Services India

Chennai

Air India

Bhadra International

Cambata Aviation

Bangalore

AISATS

GlobeGround

Hyderabad

AISATS

Menzies Bobba Ground Handling

Kolkata

Air India

Bhadra International

The full CAPA India India Ground Handling Report presents financial and SWOT analyses for each of the handlers in India, their prospective partnerships, how they are perceived in the market and their key risks and challenges.

But airlines continue to express strong concerns about outsourcing to a third party due to the potential impact on costs, quality of service and efficiency of turnarounds

When the policy was first proposed airlines protested that the new regulations would increase their costs and that the outsourcing of terminal handling would diminish their ability to control the service quality of critical customer-facing roles.

Costs are expected to increase because of a number of factors - not the least the higher wages and benefits that handlers are required to offer their staff; also the investment that handlers will have to make in new equipment; the royalties payable to airport operators by third party providers; and the need to factor in the handlers' margins.

Airlines are also very concerned that the volume of additional business which third party service providers will have to handle will overwhelm them and lead to a deterioration in service quality, turnaround efficiency and on-time performance, all of which will have a material impact on the passenger experience and the airlines’ bottom lines.

In light of these concerns the government deferred the introduction of the policy several times while stakeholder consultations continued. But following a failure to reach agreement the Federation of Indian Airlines took the matter to the Delhi High Court in 2010 and then to the Supreme Court, where it has remained since.

Revisions and amendments to the current policy have created many grey areas; Supreme Court decision may deliver some clarity

In order to allay airline concerns the government has over the years proposed a number of revisions and amendments. For example, in 2010 it was suggested that airlines would be permitted to directly employ staff for any customer-facing roles.

It is not clear whether this option remains on the table. And then in Mar-2013 the government proposed an amendment which would permit airlines to form joint venture subsidiaries with official ground handlers to bid for handling concessions at metro airports. However, the airlines did not accept this as providing a practical solution to their concerns.

Indeed the core issues over which the airlines went to court remain unaddressed. But ultimately the Supreme Court might rule largely in favour of the government’s stated policy and Indian carriers will have to appoint third party providers to handle their domestic and international operations.

Indian carriers make extensive use of sub-contracted manpower agencies to provide low cost labour to support their self-handling

Whilst Indian carriers self-handle and largely deploy their own employees for in-terminal roles, they nevertheless sub-contract to manpower agencies most of the labour-intensive handling activities which do not involve customer touch points e.g. baggage handling, check-in porterage and cabin cleaning.

There are multiple such agencies operating at some airports; there were up to 40 at one stage in certain cities, although this has since been rationalised to around 11-12 companies.

Security concerns were the primary driver of the ground handling policy; however safety and social issues were also important considerations

At metro airports around 10,000 of the more than 15,000 staff employed to handle Indian carries are in fact sub-contractors. Security concerns about the significant presence of unregulated manpower agencies were the primary driver of the new policy.

However safety and social aspects were also important considerations.

The government was of the view that transitioning to a limited number of professional ground handling agencies would enable improved monitoring of personnel for security purposes; there would be a greater emphasis on occupational health and safety in the workplace; and staff would benefit from enhanced employment terms compliant with statutory regulations.

Sensitivities about competition, quality, structural challenges and strategic issues may limit genuine competition between handlers for an airline’s business

While Delhi Airport offers a choice of four providers, Mumbai and Chennai have three, while Bengaluru, Hyderabad and Kolkata have just two. After eliminating some handlers on competitive, strategic, structural or quality grounds the actual number of competing providers available for an airline to choose from may in practice be much less.

Firstly, at every airport one of the authorised handlers is Air India or its JV subsidiary AISATS. Some carriers are likely to be reluctant to appoint a competing carrier’s JV for a role which is so central to their passenger interface, on-time performance and brand reputation.

Secondly, certain carriers may also rule out other authorised handlers due to broader strategic reasons.

And finally some authorised handlers may be considered less attractive because of perceptions of poor service quality and other structural challenges.

The full CAPA India Ground Handling Report presents scenarios of which airlines are likely to be matched with which handlers and why, and the outlook for competition in the sector. We outline the logic that each airline is likely to pursue in their choice of handler and consider the implications for other carriers as a result of partnerships formed.

After taking these issues into account, airlines will still be faced with very limited options from which to choose at most airports

Practical considerations may mean that after a process of elimination an airline has no option but to appoint a handler which it does not believe is of the requisite standard.

The lack of competition could leave some handlers in a very strong negotiating position. Given the potential challenges in matching airlines with appropriate handlers there may be a need to award additional handling licences at the metro airports.

Negotiations between airlines and handlers will be tough across cost, service delivery and efficiency parameters

When ground handlers sit down with Indian carriers to discuss the provision of services the negotiations will be tough. The starting point for discussions on pricing will be the current costs which airlines claim to incur for their handling activities. Carriers will push ground handlers to deliver the required level of service at the same price which they believe it currently costs them to self-handle. A key challenge will be identifying and agreeing those costs.

For most airlines their self-handling does not take place at arm’s length and many expenses are captured in different parts of the organisation. As a result airlines tend to under-estimate the costs they incur for handling and will assess any proposals relative to an assumed cost base which may be less than the actual.

CAPA conducted extensive research to quantify the ground handling costs incurred by Indian carriers on a fully allocated and capitalised basis, a figure which the airlines themselves are hard pushed to define. CAPA's estimates that domestic services ground handling accounts for close to 2.5% of operating costs.

Labour is by far the largest single cost item and is likely to increase over time as a proportion of the total to more than 60%, as thousands of staff are brought above minimum wages and are extended statutory benefits such as overtime, leave and provident fund contributions.

Airlines will need to convince handlers, firstly that their cost estimates include all incurred items including an appropriate allocation of overheads, and secondly, that their stated costs for each item are correct and achievable. Having established this they will need to reach agreement on pricing and by consequence the margin that the handler will be able to earn. Due to their current financial stress airlines will strongly resist any increase in expenses above their current levels.

Ground handlers meanwhile will be faced with significant costs associated with the absorption and integration of thousands of staff from manpower agencies; capital expenditure on modern ground services equipment to handle the increased volume of movements; royalties payable to the airport operator which airlines do not pay currently; and investment in internal corporate strengthening to be able to manage the increased scale and complexity of their business operations which will result from the formalisation of the policy.

The full CAPA India Ground Handling Report uniquely establishes turnaround costs for low cost and full service airlines at each of the key airports on a fully allocated and capitalised basis, an exercise which most airlines have not conducted themselves.

Ground handlers may have to accept lower than expected margins on domestic business

As a consequence, handlers will need to compensate by leveraging increased scale to drive efficiencies and reduce costs – this may not be possible in the short-term during what is expected to be a complex transition phase

Given this starting point, ground handlers will need to price competitively to secure the domestic business of Indian carriers. As a result, their operating margins on domestic operations may be below expectations. The exceptions to this may be those handlers that are in a strong position due to limited competition. A clear directive from the Supreme Court in favour of the government’s policy will also enhance the handlers’ position.

And, as noted, bringing domestic handling under third party providers will enhance the size and scale of professional ground handling in India and may result in economies being achieved which could offset the increased costs.

For Indian airlines the issue of service standards in customer facing roles is as important as costs

Service delivery in an outsourced model is a major concern for airlines and will be a key issue in negotiations.

The domestic market has become increasingly commoditised and there is little to distinguish between full service and low cost airlines either in terms of product or price. In this context personal service and customer touch points become a key differentiator of a carrier’s market proposition. India is a market where even LCCs are heavily focused on investing in improved customer service.

IndiGo, which has established quality service as a core feature of its brand, is actively addressing service deficiencies identified during peak hour operations; while SpiceJet and GoAir are both targeting service enhancements as a core strategic objective.

As a result airlines are very protective of this aspect of their offering. They perceive that handlers will be focused on standardisation and throughput rather than personalisation and warmth of service. Ground handlers will need to work hard to convince airlines that they can deliver a level of service which matches that which they would achieve themselves.

New operating models are expected to emerge allowing airlines to maintain control over service delivery

If the decision of the Supreme Court reequires airlines to outsource all of their handling operations including customer-facing roles, new operating models may emerge.

Such models could involve a high degree of coordination between airlines and handlers to allow carriers to continue to exert control over service delivery, at least in the short term, until airlines are confident and convinced that outsourced handlers can meet their standards.

This approach may in fact be welcomed by the handlers as it would assist them in becoming comfortable and familiar with the airline’s modus operandi and provide them with some support during the transition phase.

A competitive battle will emerge between a couple of existing players to establish a leading pan-India presence

This battle will likely trigger consolidation in the market through mergers and acquisitions.

In order to generate critical economies of scale and a strong competitive footprint, several ground handlers will seek to establish a pan-India presence. The outcome could spark a competitive battle between two or more existing players. At least one of the incumbent providers has very ambitious plans for the Indian market.

The search for market dominance will also likely precipitate consolidation and acquisitions in the sector or the entry of new investors, resulting in a significant re-drawing of the ground handling landscape in India.

The full CAPA India Ground Handling Report presents in-depth analysis of the new models which could emerge, together with the prospects for mergers and acquisitions and consolidation in the sector.

The transition from self-handling to outsourced handling will not be easy

Ground handlers will be faced with a massive task to upscale their organisations, absorb thousands of staff from the unorganised sector and meet the cost and service expectations of reluctant new customers.

Service providers will need to transform their own resourcing and capabilities to be ready for the new operating environment. Taking on the operations of Indian carriers will result in a substantial increase in the number of movements that the third party providers will need to be able to handle, a massive undertaking, and much of this may be low margin business. Those handlers which are seen as being independent and of higher quality may simply not be able to take on the volume of business which could potentially be directed to them.

Significant coordination will be required both with the airlines and the sub-contractor manpower agencies and their staff. Ground handlers will also be subject to tight service level agreements which airlines will be monitoring carefully.

All of this will require handlers to strengthen significantly their senior management ranks and build an entirely new organisation structure – with investment in staff, training and equipment - to support a much expanded scale of operations.

Given the uncertainty for several years about the timing of the introduction of the new policy, ground handlers have not been in a position to prepare their organisations to be able to execute what is likely to be a herculean challenge. This in itself is a concern for airlines.

The complexity of the transition from self-handling to third party handling should not be under-estimated. It will require extensive planning and take longer than expected to implement.

The full CAPA India Ground Handling Report assesses the corporate capabilities of the handling agencies to scale up to be able to take advantage of the emerging opportunities.

India will shortly see the award of multiple new ground handling licences

As 15 airports are privatised and additional concessions are issued at some metro airports the scene will inevitably change significantly - but handlers will need to be selective about identifying the genuine opportunities.

The proposed privatisation of 15 airports should resume soon after the general elections conclude in May-2014. This will likely lead to the award of new ground handling concessions. However, land constraints at several of these non-metro airports may limit their growth prospects beyond the next few years and impact the viability of any concessions.

It will be vital for handlers to understand fully the entire, often quirky, aviation value chain in India in order to be able to assess and recognise the genuine opportunities. 

The full CAPA India Ground Handling Report identifies upcoming airport privatisation projects and highlights issues which could impact the viability of their ground handling concessions.

Ground handlers must keep pace with the fast changing landscape to remain competitive and relevant

India's aviation industry is in a constant state of flux, where trends and developments on multiple fronts can each exert an influence on a ground handler’s business. Airline business models are evolving fast as low cost and full service carriers hybridise, which can impact the volume of baggage to be handled, the need for interlining or the speed of turnaround.

In other parts of the world alliances between LCCs have led to the concept of ‘virtual interlining’ in which ground handlers and airport operators have taken a pro-active approach to facilitating connectivity between carriers which would not traditionally interline. Such innovation will be essential for ground handlers to succeed in India.

Meanwhile issues such as foreign direct investment, the 5 year/20 aircraft rule, global alliances and the re-negotiation of bilateral air services agreements can all directly influence the volume and structure of international traffic to/from India, including the aircraft types deployed and the nature of hubbing at Indian airports.

For handlers the implications will be significant. Under the expected pricing structures for third party handling for example, the same volume of passengers carried on narrow body aircraft as opposed to wide bodies could result in significantly lower margins for ground handlers. The aircraft mix will be the outcome of a complex interplay of strategic industry issues.

Based on CAPA's continuous monitoring of key global and Indian industry trends CAPA has identified developments in airline business models, alliances, fleet and network strategies, and overall industry risks which could impact the ground handling business in India.

CAPA India Ground Handling Report 2014

This short overview highlights some of the key themes from CAPA's India Ground Handling Report, to be released on 19-May-2014. This is the most detailed study ever conducted on the current and potential structure of India’s ground handling industry.

Order the report online or contact Vishal Bhadola for more information on +91 11 4692 1052 or capaindia@centreforaviation.com

CAPA India is the leading aviation advisory, research and knowledge practice in South Asia with the largest dedicated team of aviation analysts in the region and a portfolio of more than 100 consulting and research projects - visit www.capaindia.com

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