A third-party ground handling service provider (GHSP) is naturally tied to the airline customers it serves. That symbiotic relationship may lead to shared successes. However, shared challenges are also a possibility.
When an airline files for Chapter 11 bankruptcy to reorganize its debt while continuing to operate, there are direct impacts that influence the vendors it works with – including ground service providers.
“In the end, of course, there’s a contractual tie between a customer and a provider. Obviously, what happens to the customer will affect the provider,” says Fabio Gamba, director general of ASA World – the trade association representing ground handlers.
“Once you’re in a contract with a customer, you’re sharing a little bit of fates,” he continues. “If the customer goes into Chapter 11, this will have direct repercussions for providers – meaning jobs and profitability. There’s no question about this.”
When an airline declares Chapter 11 bankruptcy, Gamba says this announcement is always a matter of stress for a ground handling partner.
“Chapter 11 may be quite brutal. In the way it’s been designed in the U.S., obviously the focus is on making the survival of the company the priority. Then this company may escape its obligations vis-à-vis with its providers,” Gamba says. “It probably will be different in other parts of the world. In fact, in some other parts of the world, there is no Chapter 11.”
If an airline cannot honor its contracts while restructuring its debt, the GHSP may have to weather this interruption in the contract.
According to Gamba, larger ground handlers may be able to survive this, but small or medium contracts could be more harshly impacted by the trickle-down effects of Chapter 11.
“It’s always complicated, and in the end, it’s the fattest or the biggest that survives. And the smaller companies, unfortunately, have to bear the consequences of this,” Gamba says.
If an airline reduces its flight schedule to stay in business, a contracted GHSP may find themselves with too much personnel or equipment at a station, which directly impacts the ground handler’s business.
“You have made investments that will have an ROI that will then be delayed,” Gamba says. “Whether then the duration of the contract will allow this ROI to happen or not, is the question. In any case, the consequence is direct and it hits directly all the providers.”
Throught the world, Gamba says GHSPs are subject to drastic conditions for payments imposed by airlines.
“They can say, ‘We will pay up to 90 days after service rendered,’” Gamba explains. “Unfortunately, because we are in such a situation, a lot of ground service providers would say, ‘OK, I’ll take it.’
“The industry should not accept these types of terms because then, in these situations, they can become quickly dramatic for the providers.”
A GHSP may be able to protect itself from volatility if any risk is known prior to signing the contract. A short-term contract is one such way. However, Gamba explains short-term contracts are not usually of interest for GHSPs.
“Normally, when you entered your contract, especially with a relatively big company [i.e. an airline], a short-term contract is never that interesting because you have a lot of initial investments that you have to make. You have to get prepared,” he says. “So theoretically, the contract should be longer. But there is a risk that you need to assess.”
What’s more, the International Air Transport Association (IATA) produces its Standard Ground Handling Agreement (SGHA) to assist ground service providers when agreeing to contracted services with airlines.
The SGHA is published as an industry template, designed to serve as a baseline for the negotiation of ground handling services. It is comprised of three sections – the main agreement; Annex A, which includes a list of services; and Annex B, which details location, services agreed upon, negotiated details and charges.
The SGHA includes language that states a provider is free to leave if an airline customer cannot honor its contract. However, the document merely serves as a template. What is actually in the contract signed is another question.
“You do whatever you want with a contract. But the template says you could (terminate the contract),” Gamba says. “Then it’s just a question of calculation from the provider. Is it in its interest to do so or not?”
A GHSP could also negotiate prepayment before the services are done. But Gamba says this is very rare and is almost impossible to obtain.
“There are mechanisms (to protect ground handlers). But in the end, you still are confronted with an airline whole doesn’t make it or cannot honor its obligations anymore,” he says.
Gamba emphasizes the importance of a balanced contract between a GHSP and an airline customer.
Normally, contracts between airlines and GHSPs are sealed, meaning whatever terms are agreed to at signing remain in place for the duration of the contract.
“This is something, that as providers, we’ve denounced many times in the sense that things change – things evolve,” Gamba says, pointing to natural disasters, changes to flight schedules and economic factors that could impact the dynamic of an agreement.
Competition can also be a factor in ground handling contract negotiations. In the United States, the amount of competition varies from station to station. It is slightly different in Europe and other places around the world, Gamba explains. Outside of the U.S., many airports have a maximum number of ground handlers permitted.
Too much competition can accelerate the race to the bottom, forcing smaller companies to accept poor terms in order to retain customers and survive.
In Europe, even though the race to the bottom exists, many airports may limit the number of ground service providers at a given station.
“You’re limiting the number of competition, which may be seen as counterintuitive,” Gamba says. “We’re for competition. Competition is good. But it needs to be a fair competition and a competition that makes sense. A competition that protects, rather than stifles the competition amongst a group of competitors.”
Too many providers at a given station becomes unsustainable, Gamba notes.
“Then you can be sure that the consequences of airlines going under Chapter 11 will have direct and very brutal consequences on one, two or three of these providers,” he says. “If you are restricting that number, you have more solid possibilities or more concrete possibilities of having them get through this crisis.”
