Enter the paradox

4/23/2020

It is highly likely that the ground handling industry will face the situation where market opportunities are greater than ever before but the financial strength to grasp them will not be there says Wolfgang Fasching, Owner & MD at AGORA Consulting

“Last week I argued that the opportunities for independent ground handlers will be greatly enhanced when aviation tries to find its ‘new normal’. The reason for this is the fact that airlines and airports will have to refocus in their core businesses. They will try to get rid of low margin business segments and staff intensive units that are not needed to fulfil their business philosophies.

This development might not happen immediately after business activities will resume and it might not happen everywhere, but the foundations will be laid as soon as circumstances will allow. Of course, it will be a politically tricky issue at many airports and for many airlines, because there is a perception that ground handling jobs provided by ground service providers are inferior to the same jobs at airlines and airports. Still the tendency to off-load ground services from the portfolio of carriers and infrastructure companies will start to gain attraction.

But what does this mean for the GSPs? First of all in order to profit from this once in a life-time situation it will be necessary that GSPs will somehow come through this current crisis.

Cost had to be cut quickly and thoroughly. Staff have either laid off or government sponsored wage-replacement schemes were utilized. With only a tiny fraction of revenue left (and more often than not bills were left unsettled by customers!), the struggle to stay solvent is still brutal. Although the big players have already approached governments for support it remains to be seen if governmental rescue schemes cover the service providers in the same way as they will cover airlines and airports.

It is highly likely that the ground handling industry will face the paradoxical situation where on the one hand market opportunities will be greater than ever before but on the other hand the financial strength to grasp these opportunities will not be there. If you just recover from a near-death experience, you will not rush into the next big adventure. But this is exactly what should be the plan because airports need functioning ground services.

If there is no convincing alternative, airports and some hub carriers will either find other solutions or stick to the status quo, although nobody really likes it. What a crazy situation!

For nearly three decades vocal voices demanded a market structure that looked like this:



Each market participant should be active in its core business only. With airlines and airports no longer participating in ground handling most of the regulation would become obsolete. All the bad blood about unfair advantages, captive market share, monopolistic structures or too few suppliers would evaporate.

It is unlikely that this scenario will come with a big bang. But in order to do the next big step in this direction the community of independent ground handlers should start to consider how it could gain advantage of these developments.

If I write about the ground handling community, it is worthwhile to take a brief look on its structure. There are the big players that have managed to build global networks, like WFS, dnata, Menzies or Swissport. The number of stations in their portfolio exceeds 100 and they cover many parts of the world. All of them pressed ahead with consolidation by acquiring other providers. Still their total market share is tiny compared with other industries.

Apart from the big players there are many mid-size providers that focus on certain parts of the world like Celebi, Havas, Acciona, Avia Partner or SATS to mention but a few (sorry if I have omitted one or the other).

These players are often strong in certain countries or regions, often operating in countries that share a common language. Although they all had ambitious plans to grow, they did not manage to close the gap with the big players. Some gave up and were swallowed by their competitors (e.g. Flightcare, France Handling, ASIG or Jet Aviation to mention but a few). And then there is the biggest group of GSPs – the so-called local heroes. They often operate in just one airport or in just one country. But in their local environment they are often the biggest and strongest player. Surprisingly even after three decades of liberalisation of ground handling in Europe many local heroes are still ‘alive and kickin’. The predicted consolidation has not happened in scope and speed.

If we add to airlines´ and airports´ ground handlers – some of them outsourced companies, some units within their corporations – we see how fragmented this industry still is.

Who is best placed to take the lead in the consolidation quest? It is tempting to say that the big players will be in the vanguard of this development. But many have invested heavily in the past. If their pockets are deep enough, remains to be seen. Nevertheless, some of them will try to buy smaller competitors.

This could be the time for the mid-sized GSPs as well. But, do they have enough financial strength to do so? And are they prepared to take the risk of entering markets they are unfamiliar with? My opinion is that some of them will do. The temptation will prove too big to resist. The healthiest among them will snap up what is available. And surely the one or the other bargain is on offer.

Many companies will also consider merging with peers. As far as the local heroes are concerned, I think that many will try to defend their current market position, but will resist the temptation to venture out. They do not have the management resources and structures and some of them burnt their fingers in the past!

And so, we will possibly see the next paradox. It is highly likely that instead of clearing the ground handling market of airline and airport handling units, the consolidation drive could wipe out many GSPs as the big and healthy buy the small and weak. If this development is the dominant one, the fragmentation of the ground handling industry with airlines, airports and GSPs as players on the playing field is here to stay for decades to come.

Finally, it could be the time for newcomers! Companies that have expertise in services and logistics might be tempted to try or try again to get a foothold in the ground services market. In the past many attempts failed as market potential was not there. Available market share was often below 50% of the total. And access to many markets was limited. Therefore, these outsiders (forgive me the term) tried to establish themselves mainly in aircraft cleaning or passenger handling, as these market segments usually were free of access limits. Though these segments prooved to be the most difficult to operate as margins in these segments are the lowest in our industry. Many left disappointed. It was the exception to the rule that one or the other newcomer won a licence to operate in the access limited areas.

Whoever is considering enlarging the network will need funds, funds and funds. So, the time has come for investors. Private equity firms, which have mountains of cash, may start buying up fundamentally sound service providers, aware that when demand returns to aviation the strong and healthy will be the first to drive again.

But haven´t we been here before? Some of the biggest players in our industry are already owned by private equity funds. Ownership changed rather quickly in the past. Will the same private-equity funds try to enlarge their footprint in aviation services, or will new investors step in? I think that we will see many new investors entering the ground handling industry. The disruption will be so fundamental that completely new opportunities will be on offer, which will attract them.

But the last couple of weeks gave evidence that predictions currently are extremely difficult. As long as there is no clear path visible how and when aviation around the world will climb out of the pit, all considerations about the structure and the market participants in the ground handling industry are just speculation. An industry that prided itself for its precision and accuracy has no clear plan for the months to come. A paradox indeed!”