Market forces
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Posted Date: 06/05/2008
Issue: Airline Handling International June 2008
Publication: Airline Handling International
Lufthansa has seen it all on the handling front. Let us remember the establishment of Lufthansa Airport and Ground Services (LAGS) in 1990 as airlines worldwide retreated to core business and hived off ancillary operations into stand alone operating units. LAGS became GlobeGround in 1998 and acquired Hudson General Corporation before being sold to Penauille Polyservices in 2001 and combined with Penauille’s previous acquisition, Servisair, in 2003.
More recently, Lufthansa has adopted a market forces approach to the procurement of third party handling contracts, especially in the EU. Stephan Klar, Vice President Commercial Airport and Handling Relations at Lufthansa, is emphatic that Lufthansa has turned away from self-handling on the ramp and will not pursue it as a core competency for the foreseeable future.
With outsourced aircraft handling on the ramp very much the order of the day, Lufthansa’s strategy is to allow competition amongst service providers to result in the highest quality services. Although IATA’s standard ground handling agreement is the tool of choice for contracting with third party ramp handlers at destination stations, Klar points out that mainly in Germany – because Lufthansa has such an extensive operation in its home market – this contract is modified to fit Lufthansa’s far-reaching handling needs.
Klar comments that wherever service levels can be agreed – and let’s not forget that in many areas of the world there still exist monopolies and so service level agreements are purely an aspiration – Lufthansa puts in place targets for core tasks. But the prevailing dearth of liberalisation results in less scope for market forces to produce the quality handling of which Klar speaks.
“In Europe there are few relevant countries where there is total liberalisation. Among them are the United Kingdom and the Netherlands. Throughout the rest of Europe you have either two or three handlers. In Germany, especially, we only have two handlers at each station and one of the two is the airport. This means there is only one independent third-party handler at German airports and that is definitely not what we would call a fully functional market place,” comments Klar.
Of course the EU Commission is the only body that can ensure the full and proper implementation of the EU Directive ground handling Directive by EU Member States. “In Germany, the interpretation of the Directive seems to be the most conservative. In the transition into German law, what is a minimum requirement in the Directive is a maximum requirement in Germany,” bemoans Klar.
In other words, Germany has protected the status quo at its airports and the knock on effect has been that market forces have not been allowed to produce the best deals for airlines. In the UK and the Netherlands, however, Klar points out that the ground handling market was already fully liberalised prior to the European Commission promulgating the legislation, making the EU legislation simply a formality.
Going out to tender
When tendering for ground handling services, Klar says Lufthansa is looking for a combination of quality and appropriate cost. He comments that there will always be tenders that are priced very low from handlers that are not able to provide a full portfolio of services to Lufthansa’s specification. He hints that this is especially true of handlers who cannot handle widebody fleets; largely because they are reluctant to invest in the appropriate GSE. Since Lufthansa does not put GSE on its balance sheet, forging relationships with appropriately equipped ramp handlers is imperative.
“First of all we want to make sure the quality is right, that handlers can deliver a service that will result in on-time performance. But we also need to ensure they can use our systems that we have for passenger handling and that they can accommodate passenger transfers at our hubs in Frankfurt and Munich,” comments Klar.
When tendering in markets in which there is a fair amount of choice, does Lufthansa seek framework agreements across the network to achieve economies of scale, niche local suppliers or does the airline simply go out to tender and evaluate the responses on their own merits? Klar reiterates the quality and cost criteria but adds: “We used to have more network deals but after a while we found there is no real advantage for us in having these deals. The efficiency of a handler operator working worldwide or regionally seems to us to be limited. We have found that dealing with handlers on a local or individual basis gives the best results. Quality seems to depend more on the qualification of local management and not so much on supplier brand.”
So while Lufthansa does have ground handling agreements with agents that operate in more than one location, these agreements are dealt with on a case by case basis. “Once in a while there is an advantage,” comments Klar. “But it is not our policy to look for network deals.”
Meeting expectations
As for meeting expectations, Klar is blunt about what is required. “We have certain quality levels and if they are met, that is fine; if there is over performance of these levels, that is for the handler to decide,” comments Klar. He says Lufthansa likes to see handlers put in place incentive schemes for their employees but that is not for Lufthansa to involve itself in. However, he is aware that such schemes may have union implications, especially in Europe.
But how do Klar and Wagner (on the passenger side) work with handlers to ensure they deliver a Lufthansa-style service? They respond that the training is basically the same for Lufthansa and third- party agents and although geographical and cultural differences may make the seamless integration of Lufthansa and third-party agents impossible, the two Vice Presidents are proponents of handlers becoming as in tune with Lufthansa’s philosophy as possible.
Finally, we get to the pricing conundrum. “In Europe and the US we have seen it all,” says Klar. “Before liberalisation we had a mix of good and bad quality. With liberalisation, prices fell and the quality more or less stayed the same. Now we are seeing a consolidation in the handling market with increasing pressure on the quality side.”
He says Lufthansa has a good understanding of the way in which third-party handlers work, of handlers’ costs associated with staff and GSE, of the margins they need to achieve and of their efficiency schemes. “For the bigger stations we are trying to implement what we have learned from the automotive industry in terms of building relationships based on open books and best practices,” comments Klar. “We would like to have an influence on steering this way of working and having a common understanding between us and third-party handlers to improve quality together with as few interfaces as possible.”
Klar’s final words on the matter? “We really want to move away from pure price negotiations and towards longer term partnerships with open book policies.”
Passenger and baggage handling: delivering customer choice
Lufthansa has left few stones unturned when it comes to passenger check-in. Be it online, SMS, telephone, kiosk or counter check-in, the German airline recommends different check-in methods for different passenger scenarios. The reasons for so many options are multifold, comments Oliver Wagner, Lufthansa’s Vice President Global Airport Products and Services, who has responsibility for all ground products, ground processes, passenger check in, baggage processes, aircraft turn around and Lufthansa lounges.
“First of all, the customer oriented design of our products gives the customer the choice. Be it online at home, at a kiosk, via his mobile device or telephone or via common check-in alternatives, it is all about delivering a service to our customers,” explains Wagner. “Secondly, check-in technology is a measure that allows us to increase the productivity of our staff which means it helps us to reduce costs. Lastly, it also enables airports to handle more passengers within restricted infrastructure.”
He comments that airports – despite the massive surge of investment in their facilities – grow much slower than the airline and passenger market demands of them. This prompts airlines to innovate through addressing passenger flows and making available technology to speed up that flow of passengers through the check-in hall.
So to what extent is Lufthansa working with different airport authorities to develop specific environments that work best for Lufthansa? Wagner responds: “We have two hubs at Frankfurt and Munich as well as other huge stations such as Hamburg and Düsseldorf. At these stations our strategy is to have our own check-in self-service kiosks. This makes sense because of our brand appearance as well as from the economics point of view. For other airports, the strategy is that if the CUSS offer is viable and economically feasible, there is no reason not to use it.”
Today, Lufthansa makes use of nearly 90 CUSS kiosks worldwide; but the airline has some 360 of its own kiosks made available in check-in halls at its key locations. In the case of the CUSS kiosks, Lufthansa simply loads its applications onto the hardware and the facility is then available to Lufthansa passengers. Wagner is pleased with the CUSS environment available today, saying that the only limitations are in terms of making the economics work; not in terms of the technology itself. “If check-in via a kiosk is more expensive than manual check-in it does not make sense for us to use CUSS kiosks – this is sometimes the case in some Asia Pacific stations,” he comments.
When asked whether online and kiosk check-in have proved themselves at Lufthansa given there is still the baggage issue to be resolved, Wagner responds: “From the customer point of view, we have three types of baggage drop: traditional baggage check-in; bag drop where the passenger receives a boarding pass online or via a kiosk and then drops the bag at a special counter; and in Munich we have self-service bag drop. Again this is about customer choice.”
Lufthansa works increasingly with automated baggage reconciliation systems in all important airports; in other locations, baggage reconciliation is performed manually. The baggage reconciliation systems are usually owned by the airports with interfaces to the airline’s systems that are aligned with Lufthansa’s check-in system.
In terms of handling Passengers with Reduced Mobility (PRM), Lufthansa claims to be one of the most advanced airlines for accommodating special needs. The German airline used to have its own department to handle PRMs but, since EU legislation puts the onus on airports to ensure a level playing field for all passengers travelling by air, Lufthansa and Fraport have set up a joint venture called “Fracare Services Ltd” which manages the whole PRM experience at Frankfurt International Airport based upon processes and IT solutions supplied by Lufthansa. Beyond Frankfurt, a PRM service is supplied via airport partners to ensure that passenger handling across Lufthansa’s network is delivered to the same satisfaction levels regardless of passenger ability.
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