I wish you all a very happy and prosperous 2020!
Last year, I wrote about an important Direct Operating Cost (DOC) viz Fuel. I hope it helped address or identify some issues that you as an airline would be facing / have faced in the area of Fuel.
In this blog, I will write about another DOC viz Ground Handling.
In the airline industry, Ground Handling [ GH ] cost is one of the most complicated costs. Complicated because it is a generic umbrella that encompasses a large variety of services. For eg - under-wings and over-wings ramp services, passenger services like check-in, baggage handling, lounge, VIP passenger services, cargo handling services to other exceptional services like de-icing, mishandling baggage and many others.
Sheer variation of services and volume of work generated due to these services brings in complications. Depending on the frequency of utilization, some of these services are bundled together and negotiated with ground handlers while other less frequently used services are availed on ad-hoc basis. These bundled and ad-hoc services are priced separately based on many operational parameters like aircraft type, turnaround time, flight type (scheduled / technical / training etc.), in addition to quantity parameters for that particular service.
Considering these operational realities, having robust (ability to manage all pricing parameters), effective (ability to correctly identify discrepancies irrespective of invoice side variations) and comprehensive (100% invoices validated entirely) cost control process for GH services is extremely challenging. As a standard principle, cost of implementing control processes should not exceed benefits that you can expect from such processes. So, rather than going for big bang approach, airlines should focus on selective cost elements which can be controlled effectively and relatively easily. My experience points out that around 75% of total GH costs can be managed effectively with the right cost control process.
Controlling GH Costs
Now that we discussed variations in services and their cost drivers, one can imagine the complexity involved in controlling these costs. In order to manage an entire ground handling cost area; a controller would need to refer to:
- Vendor contracts with appropriate pricing conditions
- Actual service delivery records
Impact of availability of service delivery records on cost control
GH service remains one of the most fragmented and resource extensive areas of airline operations. Suppliers i.e. ground handlers do not deploy high-end automation. Their service delivery records and invoices are mostly on paper, with minimal information.
In the absence of accurate and electronic service delivery records, airlines need to invest additional efforts to ensure all services consumed are recorded on time and in a central repository. Thus, cost control processes can refer to central service repository. This is overhead and additional cost to manage GH costs.
Therefore, airlines need to be judicious in enforcing cost control processes that are effective. Plus, they need to be less expensive to implement than expected potential.
For ease of understanding and in order to be more realistic in establishing right processes, I have classified GH services into 3 types –
- Which have predictable delivery chargeable per flight movement
- Which can be computed based on vendor contracts and flight movement data alone. These services do not require any additional data. E.g. - Basic Handling or bundled service applicable per turnaround.
- Which are easy to automate
- Which require additional data that is easily available from external sources
- Whose computation depends on external data availability apart from flight movement data. E.g. – services dependent on PAX counts [handling fee], lounge charges; PAX counts could easily be referred in various airlines systems like revenue accounting, departure control etc.
- Which are easy to automate but additional interface is required
- Which are completely dependent on actual service delivery records
- Which are typically not available in any system and mostly maintained in paper forms.
- Have no way / method of computation without referring actual service delivery records. E.g. – GPU, wheel chairs, de-icing
- Are difficult to automate as additional efforts from airline are essential to gather service delivery records in central repository.
When you closely look at the above classification, you will realize that each service has its own billing peculiarity and hence, would require unique approach to enforce cost control processes. Moreover, core services contribute roughly 60% of total GH costs while extended services are another 15% of total GH cost.
Impact of ground handling vendor contracts on cost control
Unlike Airport and Navigation charges, GH contracts are often negotiated. Depending on volume and other operational conditions, airlines negotiate optimum rates with ground handlers. Various operational parameters like origin, destination, flight duration, layover duration, aircraft type, intended passengers (leisure passenger vs business passenger) on which the services are dependent will determine frequently required ground handling services.
Once frequently required ground services are determined, a bundled rate is negotiated for these services. Other services consumed on demand will be negotiated at individual service level.
All bundled services are negotiated as “basic handling charges”. Typically, “basic handling charges” are priced based on parameters like aircraft type, flight type (scheduled, technical, ferry-in, ferry-out etc.).
All these variations in service requirements are reflected in GH contracts. Ground handling contracts have volume-based pricing, multiple dependent parameters to determine rates, charges based on exceptional scenarios, time-based charges etc. Thus, interpretation and application of contract clauses for cost control become tedious.
Impact of invoicing practices on cost control
Ground handlers may not have highly automated systems and processes themselves. This lack of automation is reflected in invoicing practices and formats. Most invoices lack granular details and are summarized. Each ground handler follows its own invoicing format and method to dispatch invoices to airlines.
At an airline’s side, handling variation on invoicing practices adds additional overheads. Having said this, errors in invoices do lead to over-billing to airlines. I have observed that duplicate billing across same or multiple invoices, quantity or rate mismatch, incorrect value of rate drivers, additional billing for non-operated flight, are the prominent reasons that lead to airlines over paying their GH suppliers. In the absence of an adequate cost control process, airlines are subject to cost overrun to the tune of 1% of total ground handling expenses. This is huge considering the margins airlines work with.
How can you identify billing discrepancies and minimize overpayments to suppliers?
Getting rid of paper-based processes, automation and effective dispute management mechanism is the key to minimizing overpayments.
- Manual invoice verification is no longer a feasible option
- Automated invoice reconciliation can help identify incorrect and additional billing
- This will also help automate recovery process and reconcile credit notes received against correct rejections
In addition, airlines should also be focused on implementing most effective cost control processes. Targeting highest level of control with mandatory verification to each dollar spent may not be the smartest way. Thus, prioritizing cost control processes for “core and extended” services would give you significant benefits.
To summarize, significant savings can be realized by adopting paper less processes, improving automation and having an effective cost control procedure.
If you liked this post, click below to learn more about Ground Handling cost management.