The following article is from the archives of The Economist. It provides some interesting facts and figures.
Its hard being a supplier these days. Ask the firms that make airline food.
Customers and suppliers.
WHO has the toughest logistical job at JFK ? The New York airport’s traffic controllers handle around 40 flights an hour. In the same time, James Anderson, the general manager of LSG Sky Chefs’ kitchen at the airport, co-ordinates 7,000 pieces of food. Each day, his kitchen--the most modern of the 151 kitchens belonging to the world’s biggest airline caterer--turns a mountain of ingredients, including 400lbs of beef and 100lbs of shrimp, into 7,500 meals for customers such as British Airways, All Nippon Airways and South African Airways.
Despite the aroma of grilled salmon and the presence of 18 white-hatted chefs, the football-field sized facility still feels more like a Silicon Valley “fab” than a kitchen. The 275 employees all wear gloves and hospital-style haircovers. Using “cell” production methods, adopted from General Motors’ Saturn car factories, they take, on average, a minute-and-a-half to “build” a single meal.
The kitchen may be making potato chips, but it is as much a supplier of components as is Intel or Motorola. Nearly all of the world’s airlines used to make their own food--just as computer makers originally designed most of their own computer chips and car makers once thought they should smelt steel. Now many airlines, like the computer and car firms, are trying to be “virtual”, contracting out their food to specialist suppliers.
On the face of it, this has worked a treat. Costs have fallen and food is slightly better. (Though, because altitude dulls the taste buds, even the best airline food usually seems something of an oxymoron to diners.) Sky Chefs, just like other specialist suppliers, keeps on investing in its niche. Its new coolers at JFK can chill part-cooked food from 150°F (66°C) to 39°F in less than 15 minutes, rapidly sealing in juices before the final blast in aircraft ovens.
The caterers have grown into a sizeable industry. Six firms control nearly two-thirds of the US$ 9.5 billion world market. Sky Chefs, which is 23.5% owned by LSG , the services arm of the German airline, Lufthansa, has a fifth of the world market. On March 11th Sky Chefs announced that LSG is increasing its stake to 47%, and may eventually buy the entire firm. Because relatively little of LSG Sky Chef’s sales come from Lufthansa, it depends upon airlines’ willingness to outsource. Sky Chefs has grown at rates that its customers must envy, tripling revenues over the past five years to US$ 1.7 billion in 1998. And it may get bigger again. Sky Chefs’ chief executive, Michael Kay, hopes that most of Asia’s loss-making airlines will eventually outsource their own inefficient catering businesses.
However, Sky Chefs’ thin margins and dangerous dependence on large accounts (four-fifths of the business with the international kitchen at JFK is with British Airways) indicate who calls the shots in their business. With direct costs often hard to cut, the airlines have squeezed their suppliers. According to GKMG Consultants, the average meal on a domestic flight in America now costs just US$ 4.13 per passenger, compared with US$ 5.62 in 1992. Even on Concorde, food accounts for only US$ 45 on a US$ 5,620 transatlantic ticket. In the past two-and-half years, the “crate to plate” time for airline food at JFK has halved to 30 hours.
The squeeze is even beginning to tell on the plate. A Harvard Business School study at the end of 1997 noted that, on short-haul economy flights in America, “Sky Chefs was often forced to provide the food . . . beverages and service for under US$ 3.- a passenger.” South African Airways has swapped its meat and potatoes for fancier pasta dishes that cost less to produce, but for which it pays the same (US$ 10.- for an economy, long-haul flight). Some of the resulting shortcuts--replacing an “expensive” wedge of lemon with a little more cheap rice, for instance--are hard to notice, but they do not augur well.
Who ate the fish
This squeeze will seem familiar to every small supplier, from disk-drive makers to cheque-book printers. Behind all the talk about “partnerships” and “supply-chain management”, there is the simple fact that most suppliers are easy meat (or cheap rice) for their customers whenever the going gets hard. Is there a way for suppliers to strengthen their position?
Consolidation is an answer of sorts. Having seen a deal between Sky Chefs and LSG , the betting is on a merger between Gate Gourmet (a subsidiary of Swissair) and Dobbs (part of America’s Viad group), the number two and three, respectively. The hitch is that, even if the industry shrank to, say, three firms, an airline would still have enough of a choice to bully its suppliers. And in some businesses, including airline catering, there may even be the prospect of being cut out altogether. A few low-cost carriers, such as Britain’s easyJet, have done away with food altogether. On American domestic flights it is now unusual to be served anything more than some stale biscuits, a sandwich or a packet of nuts.
If scale is not the answer, what about diversification into related and, with luck, higher-margin businesses? Sky Chefs is branching out into convenience foods, while Britain’s Alpha Airports runs airport shops. Yet this risks blunting the great advantage of the specialist--that you know your industry inside out.
In the end, the only satisfactory answer is for suppliers to persuade their customers to value them more highly. The airline food industry’s best chance to improve its margins seems to lie in persuading the airlines that food is not a necessary evil whose cost should be minimised, but a way for them to differentiate themselves. Most airlines are now fairly good at delivering passengers safely and punctually to their destination for roughly the same price.
In a new book, Leonard Berry, a professor of marketing at Texas A&M University, claims that investment in food has helped turn Midwest Express Airlines into one of America’s two most consistently profitable airlines. Midwest is the only American carrier listed in the world’s top ten for service and food. It spends around US$ 10.- per head on food, twice as much as most domestic airlines. Though all seats are classed economy, chairs are leather and meals are served on china plates. Wine and champagne is free and cookies are baked on board. Attendants are taught to hold the wine bottles and coffee cups “as though they were serving in a fine restaurant”.
In 1997 Mr Kay offered US$ 1m to any airline prepared to launch a marketing campaign based on better food. United Airlines took him up. With bigger helpings and extras such as dips, muffins and bagels, UAL boosted traffic on the test routes by 2%, equal to US$ 2.4m in annual revenue. More important, 10% more passengers also said they would fly with UAL again. Bob Sobczewski, manager of UAL ’s on-board service, credits the process with “forcing us to develop a financial model to tell us when improved service leads to higher revenues”.
Still, it looks like a bumpy ride for the caterers. The airline industry remains obsessed with cutting costs, and suppliers remain the easiest place to look. Travellers facing meagre portions, limp lettuce and overcooked beef can only hope that this will change.
COPYRIGHT : THE ECONOMIST , 1999