Going up…

If nothing else, 2008 will be remembered for escalating fuel costs. First, the carriers were hit and in due course, the handlers began to suffer. What has the reaction been to this steady erosion of the bottom line?

Handlers may be feeling the pinch when it comes to their GSE fuel bills but they would do well to consider, if only for a moment, the health of their clients. Higher fuel prices have been particularly acute for airlines simply because it is their single, biggest item of expenditure. Go back eight years, and 15% of the price of a ticket went to pay for the fuel consumed. Today, in the US at least, that figure has risen to 40%. These are the findings of the Air Transport Association, the industry’s trade group.

Every increase in the price of aviation fuel, which is already up 84% compared with last year, in turn squeezes the profitability of the carrier. And let’s face facts here: whilst a B737 will swallow over 6,000 US gallons, as much as 50,000 US gallons can be uploaded into its bigger brother, the B747. It doesn’t require training in higher level mathematics to work out what that means when the price of crude moves up by a dollar a barrel; multiply that result by the size of a fleet and suddenly the zeros seem to take on a life of their own.

United, for example, announced in June that it would be putting into retirement its entire fleet of B737 aircraft and that it was going to ground six wide-body B747s and release upwards of 1,100 employees. Other airlines are taking similar actions. Moreover, US carriers are predicting that they could lose upwards of US$10bn during the course of this year if oil continues to make the headlines. Not every carrier, though, is endorsing AirAsia’s pragmatic approach to the problem.

“We will sell washing machines if we have to,” Tony Fernandes said recently in a speech, adding that fuel hedges would result in a saving of US$10m in the June quarter. He is not anticipating further hedges, however. “Only a lunatic will hedge fuel. It's too volatile. We will have to ride it until there is some stability,” he concluded.
But if carriers are wincing, what about their handlers?

Against the tide?
Swissport International is one handler that has decided to take the bull by the horns. Recently it took the unprecedented step of applying a separate fuel surcharge (of up to 2%) in response to the continued steep rises in fuel prices. The handler countered that it had been obliged to make this increase “despite all internal cost efforts and significant endeavours on all levels.” A company spokesperson added by way of explanation that most airlines had been suffering from higher fuel prices and had passed on some of these costs to their passengers in the form of fuel surcharges, which had been added to their fares.

To justify its position, Swissport stated that its fleet of vehicles (which numbers several thousand) and energy-generating facilities worldwide have seen fuel costs rise by up to 50% over the past few months.

The precise details of the new surcharge for the company’s products, services and tariffs that involve fuel and energy-dependant activities will be determined and implemented locally by Swissport’s various stations around the world. Swissport further added that this situation might possibly lead in due course to a re-thinking and a re-evaluation of completely new ground handling models and approaches, all of which would be geared towards helping the airlines with their current cost pressures.

In fact, the move could set a precedent for other airport services providers, including caterers, MRO providers and others, by encouraging them in turn to introduce their own surcharges. Airlines, it feels, will have little option but to attempt to pass on these charges to passengers in the form of higher ticket prices.

It almost goes without saying that if more providers follow Swissport's lead, an airport services surcharge levied on passengers will not be beyond the realms of possibility. Unfortunately, this has the effect of further pressurising travel costs, at a time when demand for flying is levelling off or even, in some regions, declining.

Speaking on behalf of Swissport, Stephan Beerli confirmed that the move was going ahead.

“Yes, the local Swissport Commercial Managers are right now in contact with all their airline customers but Swissport is not only requesting a surcharge but is also proposing a fresh look at new collaboration models and outsourcing opportunities: take, for example, our Myport model. Such approaches are really helping the airlines make substantial savings.”

What has been the general reaction?

“Nobody was delighted to hear it. But there are ways and means to come to a compromise,” relates Stephan.
 Did he feel that other handlers would be following suit? 

“We are convinced that other handlers will react in the same way, or will simply increase their fees during the next tariff negotiations.” 

Juggling the rises
At Aires, the specialist integrated energy provider, which is based in the UK, Paul Jefferson reports that overall the price of diesel has risen by an almost unbelievable 240% since 2004. Indeed, the first six months of this year alone have seen the cost of diesel rocket by 37%.

Today, any competitive ground handling operation needs to be aware of the cost of its fuel element and whilst this is dwarfed by labour costs, nonetheless the sum might range from between 9-15% of its overall expenditure.
“This figure can be quite substantial if the handler is involved in a bussing operation,” notes Paul. “People are beginning to appreciate the value of the data that we can supply and indeed, we’re getting more and more requests for reports and details when it comes to fuel usage.”

He cites an operational scenario that might involve a handler with upwards of 100 items of GSE in a mixed fleet. A possible 300,000 litres /year consumption would not be outside the realms of possibility here. This, coupled with a low price/ margin flexibility, has made his kind of service, which promises full accountability, suddenly a very attractive proposition to the handler.

Mervyn Walker, Menzies EVP Operations, states that the handler has long had in place fuel charges within its air cargo trucking business. “In these business units our biggest cost is fuel. We have a responsibility to our customers to look internally first to ensure that we have done everything possible to ensure that our own cost base is as lean and productive as we can make it. This is what we are reviewing now and will continue to review. I think the last thing that our airline customers need at the moment is a further fuel cost increase.”

Aviance UK’s spokesperson affirms that it introduced a mechanism earlier in the year in response to what it perceived to be a growing problem: that of rising fuel costs. Its clients have accepted the modification.
Worldwide Flight Services did not wish to comment on the idea, saying that it is not something that it feels concerned about at present. Servisair, also, did not wish to talk about the strategy: it has in place a trucking surcharge but has not looked at its ramp operations in this context.

In contrast, Aviapartner’s spokesperson underlines the fact the cost of fuel has certainly been a topic uppermost in the minds of its clients, to the point that some have been asking for reductions in SLA tariffs. Although aware of Swissport’s strategy, Aviapartner has no plans at present for the introduction of such a surcharge.
At Changi, CIAS’s Georgie Ong belives that the Swiss handler is quite brave in going ahead with a fuel surcharge. “It’s something we would, frankly, love to introduce. Unfortunately, it would be difficult in my view for such a surcharge to be implemented in Singapore because of the very competitive market environment.  It will indeed be interesting to see if Swissport does impose this on their clients here. We have currently no similar device planned or in operation but will keep our options open as rising fuel costs affect not only airlines but ground handlers as well, although perhaps to a lesser extent.”