Entry into the UK In-Flight Catering Market
All businesses have the same history that they grow from demands or they create the needs in a market. Sometimes the demands exist in markets and some players have served them; others, service providers or manufacturers create the needs. For instances, in broadcasting business, often broadcasters should create a television program that would be an idol such as worldwide famous program, Fox’s American Idol is one example of attractive TV program that in turn creates huge and expensive advertising spots.
It also applies to catering business; entrepreneur could buy a franchise license from a well-recognize caterers or create new firm, with exceptional menu and packaging, to create needs in markets for our products or services. Therefore, the key into breaking new market is to create unique products instead of deliver products those exactly similar characteristics to ones already in the market. 3. 4 Airlines Industry 3. 4. 1 9/11 Impacts on the Global Air Traveling Industry Economy will always become major concerns when a country experiences various disasters including ones caused by terrorism.
Flash back to three and half years ago, when there was a terrorist attack on the famous building in the world, World Trade Center and Pentagon, we witness that
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Soon after the attack, Boeing and Airbus, as the leading manufacturers of airplanes, faced declining demands for new airplanes from airlines. The declining trends in air traveling during 2001 until 2003 reflect a number of economic and social issues. As said above, one big factor contributing to this declining trend during the period included the effects of the 9/11 attack, which led air travelers to choose other transportation due to an increased fear of terrorist attacks. Another factor was global weak economy and the changing in air travelers’ preference to take economy class instead of business class.
At present, although it is still early in the recovery process, fuel prices that tend to increase over years and phobia of another terrorist attack cause another setback in the air traveling industry. However, current fierce competition in the industry causes unexpected growth in deploying small airplanes such as Boeing 737s or Airbus A320s. This appetite for smaller airplanes underscores the strength of the discount-airline model like one cast successfully by Southwest Airlines. 3. 4. 2 UK Airlines Industry
Airlines industry in UK experienced similar situation to other countries’ airlines industry since the 9/11 tragedy. However, according to one research as reported by Market & Business Development, the UK airlines industry have rebounded sometime in 2003 and achieved the peak achievement in 2004 where the industry recorded an estimated ? 17. 6 billion market and predicted that in 2009 the industry will record real term growth of 11% compared with 2004 (“UK Airlines” 2005). 3. 5 Global In-flight Catering Industry 3. 5. 1 Distribution of US$14 Billion In-Flight Catering Market
In-flight catering is considered a global industry since players in the industry usually serve a broad range of customers (airlines and airports) not only in the home country but also in the other countries. Some players are growing from regular catering companies that serve wedding, exhibitions or manufacturers; others are subsidiaries of airlines that become worldwide in-flight catering companies. According to a report, global in-flight catering market has an annual turnover over US$14 billion where the big part of the revenue comes from Asia Pacific region (“Student Fact Sheet”).
The chart below better describes the contribution of worldwide in-flight catering market. Figure 1. Global Contribution of In-Flight Catering Revenue Source: “Inflight Catering – Student Fact Sheet. ” 2001. IFCA. Retrieved February 24, 2005 from <http://www. ifcanet. com/teams/education/student. asp> Currently, airlines industry faces two major shifts that in turn affect the in-flight catering as well. First is the passengers’ preference who likely takes economy class instead of business one. Second is on the growing competition on delivering discounted air traveling by using smaller airplanes as discussed above.
The situation renders the decline in airfares, which in turn influences the quality, and quantity of food provided in airplanes I order to minimize costs. Although the situation seems to discourage in-flight catering industry, the analysts’ estimation telling In-flight Catering industry to grow in turnover by 2%-3% per annum over the next five years at least favor the industry as a whole (“Student Fact Sheet”). According to International In-Flight Catering Association (IFCA), currently, there are approximately 600 flight kitchens worldwide in which each serves approximately between 6,000 and 7,000 meals every day.
On the average, the number of employee per unit kitchen is 150 people with some of larger kitchen might employ over 1,000 people and producing in excess of 9 million meals per year (“Student Fact Sheet”). 3. 5. 2 In-Flight Catering Industrial Structure Like other consumer industries, the In-Flight industry also composes of several distribution channels that form larger entities. The industry composes of airline catering divisions, specialist in-flight caterers and a range of suppliers providing food, beverages and catering equipments. The situation renders most airlines in the world not to have their own flight kitchens.
Instead, they search for local in-flight catering companies and have contracts with them to provide in-flight meal based on their specific criteria. Figure 2. Market Share of Global In-Flight Catering Companies (Est. ) Source: “Inflight Catering – Student Fact Sheet. ” 2001. IFCA. Retrieved February 24, 2005 from <http://www. ifcanet. com/teams/education/student. asp> In general, these local catering companies support and consolidate with the two largest in-flight catering companies: LSG Sky Chef and Gate Gourmet. The two companies now hold over half of the worldwide in-flight catering market share.
Below the level are regional catering companies like Alpha Flight Services that have strong position in UK and Europe with future steps to be the third largest catering companies behind LSG Sky Chef and Gate Gournet. The regional companies account for 25% of the market share while the rest is the combination of local companies in all countries worldwide. The above pie chart better describes the composition of market share in worldwide in-flight catering industry. In addition, for regional and local catering companies, it includes some airlines, which still have their own catering companies and thus their flight kitchens.
This special case still exists in the Asia/Pacific region. Usually, airlines, which have their own catering companies, also provide requests from third party airline carriers as well as their own airline needs. 3. 6 Analysis of Getting into UK In-flight Catering Market As explained in the beginning of the paper, we employ the marketing mix to help understanding what is needed in in-flight catering market, by how much we charge, whom to serve and many more to consider. 3. 6. 1 Marketing Mix of In-Flight Catering Industry a) Product and Promotion It is all the same, a business has products to offer.
In catering business, caterer should determine the type of food and its harmony with the type of event, time of event, number of people to be served, available equipment, number of food preparers and servers and the amount of money to be spent. According to Lastovica, Roberts, and Brochetti, caterer should provide a menu that includes a variety of foods that are acceptable to the customer and the occasion (1999). Under such circumstances, caterer will plan to include nutritious foods from each of the food groups, including meat, poultry, fish, dried beans, eggs and nuts; bread, cereal, rice and pasta; vegetables; fruits; milk and cheese.
In addition, as a caterer, one does not have to invent and make all foods by himself. Just like a supermarket or a bakery, they have special menu that they make by themselves like pancakes, black forests, and brownies; while their suppliers or partners provide other menus. Remember, world largest fast food chain restaurant, McDonalds, known for their unique burgers not the Cola or orange juice. However, Lastovica, Roberts, and Brochetti, suggest that if we decide to make all foods, consider our skills, equipment and time as you plan menus (1999).
In addition, it is important to prepare a quality product of standard consistency. Develop a quality standard for each item. Use high-tech equipment designed to produce a consistent product. As a promotion, the food product may come in fancy color and design to increase its attractiveness. Therefore, caterer should have enough skills to contrast in texture and flavor. In addition, caterer should develop an information packet that includes sample menus and prices, and list of previous customers that might increase the caterer’s capability and class.
This is imperative to enter today’s situation in in-flight catering industry where the discounted airlines, which provide low airfares to passengers, tend to provide less meal or snack only during the flight at no charge and offer additional meals at various costs. Some carriers like Southwest Airlines turn out not to offer free meal in the cabin. Isidore says that in the wake of Sept. 11, many airlines are forced to cut the amount spent on free meal service per passenger by about 10 percent to an average of $4. 29. This is because they experience decreasing number of passengers since they fear of another terrorist attacks.
The main reason of such changing is to cut costs of delivering free meal in the cabin. Under such circumstances, in-flight catering companies should create and provide a low cost meal or snack as well to enter in-flight catering market. Another in-flight catering service that becomes trends nowadays is one that sells meal during the flight or sells it at the gate for special price. Under such circumstances, in-flight catering companies should also think about kinds of meal to be sold at the gate or in the cabin. This is imperative since the two methods pose a big difference in the delivery.
Meal that sold at the gate is less risky that one sold in the cabin. This is because meal that sold at the gate can be put in the refrigerator or oven for next flight in case that it is not sold out. On the contrary, meal that sold in the cabin will lose attractiveness since it is easy to get cold in case that it is not sold out. Therefore, any in-flight catering companies should define which meal is free meal service, which meal is sold at the cabin and the gate. b) Place and Pricing To operate a profitable catering business, we need to decide by how much we price our meal.
Determining the costs of catering is the most important part of covering expenses and earning profits. Lastovica, Roberts, and Brochetti in Starting a Successful Catering Business suggest that caterers must price their services using different methods. The pricing formula that covers both costs and provides a profit is as follows: Materials + Overhead + Labor + Profit = Price In this equation, materials cover the costs of the food or beverage items and any shipping and handling costs incurred to acquire these materials.
In addition, overhead costs are the variable and fixed expenses that must be covered to stay in business. Variable costs are those expenses that fluctuate including vehicle expenses, rental expenses, utility bills and supplies while fixed costs include the purchase of equipment, service ware, marketing and advertising, and insurance. After overhead costs are determined, the total overhead costs are divided among the total number of catering jobs expected (Lastovica et al). As noted above that we can make our own food or purchase convenience foods from our suppliers and partners.
In this manner, we can compare the cost between the two options in compliance with the taste after considering skills and equipments we have. Then evaluate for cost savings and quality consistency. Labors costs include the costs of food preparation and service, vacation time, retirement and other benefits such as health or life insurance. To determine labor costs per hour, consider the following components: 1. Skill and reputation 2. Wages paid by employers for similar skills and 3. Place where caterer conduct their business.
Other pricing factors include image, inflation, supply and demand, and competition. The last item in the formula is the profit that added to our total costs. In this scheme, caterers need to determine the percentage of profit added to each menu item or type of event. We can consider three pricing options as follows: 1. Charge products exactly the same as competitors do 2. Charge products more than competitors do or 3. Charge products less than competitors offer Whichever pricing scheme we take, it is important to cover all incurred costs if we want to stay in the catering business.
Business never grows if we keep maintaining losing profits and we never stay in the business if we keep maintaining high profits that make our product away from the competitors’ price for exactly the same product and quality. Above all, to be successful in the catering business, any caterers should produce delicious food that is safe and wholesome. Any mistakes in providing food services including toxic foods will destroy your reputation and business. So keep food service safe. Concerning the issue, anyone who want to enter in-flight catering market in UK should comply with UK Food Safety Legislation.
The new version of the legislation will be in effect in 2006 so ensure that catering products we want to offer in UK have complied with the newest legislation. 3. 6. 2 Porter’s Five Forces Analysis of In-Flight Catering Industry At the heart of this analysis is the industry analyzing model known as Porter’s five forces model which details the threat of new entrants, power of buyers, power of suppliers, rivalry among existing competitors, and the threat of substitute products for wine industry that satisfies following diagram: Figure 3. Porter’s Diagram of Five Forces a) Degree of Rivalry
Rivalry in UK and global In-Flight Catering market is fierce since current condition the market only has two major players that has operated globally. In this report, we will discuss three major in-flight catering companies: LSG Sky Chef, Gate Gourmet, and Alpha Flight Services. 1) LSG Sky Chef Currently, LSG Sky Chefs becomes the world’s largest provider of in-flight services including catering and procurement to equipment management. The number of airlines has risen into 270 airlines as of 2003 (“World’s Biggest”). The strong global presence in in-flight catering market has put the company to gain over 30% market share.
The competitive advantages of LSG Lufthansa Service Holding AG are their worldwide operation, reaching more than 200 catering facilities in 48 countries. In 2003 alone, the company showed significant improvement by reaching ? 2. 7 billion in which ? 1. 86 billion are from airline catering business (“Facts & Figures”). In order to strengthen its global presence and to boost LSG Sky Chefs production capacity, the company has agreed to buy the UK assets of airline catering operator Abela at London-Gatwick, London-Heathrow and London-Stansted airports (“Abela”).
This acquisition is important for LSG Sky Chefs to put a deeper presence in UK In-Flight Catering market. By acquiring Abela, now LSG Sky Chefs has existed in several UK airports like Heathrow, Gatwick Birmingham, Manchester and East Midlands. 2) Gate Gourmet Gate Gourmet is one of biggest in-flight catering company with customers are mostly biggest airlines carriers like British Airways, American Airlines and Cathay Pacific. In 2002 alone, the company turnover recorded CHF 2. 8 billion. Currently, Gate Gourmet produces over 195 million meals per year and has 115 flight kitchens worldwide (“Facts & Figures 2004”).
The company has global presence in 31 countries in all five continents and has its own divisions dealing with supply chain management and in-flight operations management (egatematrix). The fun facts about gate Gournet is its historical background in which the company grew from Swissair’s in house catering operations in 1992. Further, in order to strengthen its global operation the company has conducted several acquisitions of other caterers including Aero-Chef, SAS Service Partner, Varig flight kitchens and British Airways flight kitchens (“Innovative Move”).
In UK market, Gate Gourmet continues strengthening its presence by having joint agreement with DO & CO, a world leading premium event caterer, to develop a new premium in flight catering product. The partnership was in effect since October 2003 when DO & CO opens its new gourmet kitchen at London Heathrow (“Innovative Move”). 3) Alpha Flight Services Alpha Flight Services (AFS) if a part of Alpha Airports Group Plc, the largest UK supplier of retailing and catering services for airports and airlines. Currently AFS serves over 50 million meals a year to more than 100 airlines from 75 airports in eight countries.
AFS is the European leader of on-board sales of food, beverages and gifts. During the first semester 2004 alone, AFS sales are increased 12. 4% to ? 133. 8m (2003/4: ? 119. 0m), with UK flight catering sales up 10. 0% to ? 74. 5m (2003/4: ? 67. 7m), International flight catering sales up 3. 6% to ? 17. 4m (2003/4: ? 16. 8m) (“Results for the 6 Months”). Moreover, UK flight catering profit improved 11. 1% due to a 5. 0% increase in meal volumes, reflecting both enhanced aircraft utilization and greater consumer sales by our charter airline customers, combined with a further 7.
5% improvement in productivity. However, its international flight catering profit declined by 61. 1% due to severed condition in Amsterdam and Australian offices. In early December 2004, AFS assigns Christian Salvesen to provide warehouse and distribution services of multi temperature meals and associated airline in-cabin products through an official agreement for 5 years period (“Salvesen Offering”). At initial stage, the agreement exists in AFS’ UK facilities with possible expansion to reach all AFS operation in mainland Europe.
The cooperation with Salvesen is critical since Salvesen has well known supply chain operations in consumer and food sectors. Through partnership with Salvesen, AFS aims to optimize inventories and ensure that goods are available precisely when required. b) New Entrants The threat of new entrants rises as the barrier to entry is reduced in a marketplace. As more firms enter a market, we will see rivalry increase, and profitability will fall (theoretically) to the point where there is no incentive for new firms to enter the industry. One of common barriers to enter an industry is brand loyalty.
Brand loyalty is one element of brand equity that tells us the degree customers buy a specific products or services. In in-flight catering business where the industry has characterized the major players, LSG Sky Chef, Gate Gourmet, and Alpha Flight Services, to rule the industry, it is difficult to enter the market without have agreement with one of them. It means that any local in-flight catering companies that want to expand their market had better to work with one of the three biggest in-flight catering companies before deciding to fight alone.
The reason is clear that the three already have strong brand awareness in customers mind and as the three has become global player, they have already achieve economy of scale where they can offer the price per unit as low as new entrants in the market could not catch up. Another factor that makes new entrants in in-flight catering companies could not compete is the requirement to have kitchen facilities where the airlines customer has the flight route.
To cope with this matter while keeping the cost down, in-flight catering companies could rent kitchen facilities in locations they have not built the facilities yet. However, in the long-term, they should have their own kitchen facilities since renting cost in the long period will be equal to buying new facilities. License is another challenge for new entrants. In order to compete in UK food industry, we should aware that the country also has specific food safety legislation.
If we intend to enter the UK in-flight market in 2006, we must ensure that our services have complied with the new Food Hygiene (England) Regulations 2005 that will come into force on 1 January 2006. Like other food regulation, the Food Hygiene (England) Regulations 2005 also addresses the handling process to ensure the food products are safe to consume. In the Chapter XII of the regulation, the regulator states “food business operators are to ensure that food handlers are supervised and instructed and/or trained in food hygiene matters commensurate with their work activity” (“Changes to UK Food Safety”).
However, if we want to enter the UK in-flight catering market prior to 2006, we do not have to do anything now except simply to ensure we comply with the provisions of The Food Safety Act 1990 and regulations such as The Food Safety (General Food Hygiene) Regulations 1995. Nevertheless, in the event that EU Regulations do become UK law then it will be responsibilities of any owners of food businesses to ensure that they comply with them. c) Products Substitution This is probably the most overlooked, and therefore most damaging, element of strategic decision-making.
It is imperative that business owners (us) not only look at what the company’s direct competitors are doing, but what other types of products people could buy instead. The products substitution in in-flight catering market is food that sold in the waiting room or any stores around the airports. This is true since there are no prohibitions of taking food into cabin. Therefore, once we decide to enter in-flight catering market and have airlines, who buy our services, we should ensure that our food (in-flight meal or snack) should completely different from ones offered in the airports.
d) Buyer Power There are some factors affecting buyer power: size of buyer (larger buyers will have more power over suppliers), number of buyers (when there are a small number of buyers, they will tend to have more power over suppliers), and purchase quantity (When a customer purchases a large quantity of a suppliers output, it will exercise more power over the supplier). As discussed in the previous section, currently the airline industry faces fierce competition after the 9/11 attacks, causing phobia of air traveling for fear of being hijacked by terrorists anymore.
In the situation where airlines should cut their airfares to entice passengers to travel with them, in-flight meal becomes one element that airlines will cut the budget to bring the cost down. Under such circumstances, in-flight catering companies should prepare various options of in-flight meal or snack in order to catch up with the airlines budget. Another fact that in-flight catering companies should take into account is the recent trends where airlines are likely to eliminate free in-flight meal option and provide meal only for passengers who want to buy.
In this manner, in-flight catering companies should provide in-flight kitchen or any facilities that enable in-flight meal to get warm for a long time. Another challenge behind the trends to provide meal at a cost in in-flight industry is the inventory. Under such circumstances, there are two factors contributing to the success of delivering in-flight meal. First, the type of meal in which in-flight catering companies should make the meal as warm as passengers want. Second is to provide an exact calculation of by how many meal we should carry into cabin to minimize unsold meal gets obsolete.
e) Supplier Power The power of suppliers plays a significant role in in-flight catering industry since to provide services at any places where airlines have flight route is a huge effort if we do not have local partners and sustainable supply chain that support in-flight catering companies business abroad. The supplier in in-flight catering industry composes of several elements from raw material providers, boxes manufacturers, logistics service providers to human resources that are knowledgeable of conducting in-flight catering business.
Concerning the human resources, currently airline caterers employ over 100,000 people worldwide, and supplier companies have at least the same number again responsible for provisioning the industry (“Student Fact Sheet”). Employment opportunities in in-flight caterers come in several positions. Typically, airlines seek operations and supply chain personnel for their catering divisions with skills in the marketing, logistics, finance, IT and human resources. Each element has job descriptions as following:
• Supply Management: the main task of supply management is to manage reduction in overall production costs and developing value-added supplier alliances. Some in-flight caterer manage their own supply management but other like Alpha Flight Services (AFS) decides to appoint the third party, Christian Salvesen, to handle the supply management. • Operations: the main task of people in operations department is to manage overall hygiene, quality management, food engineering and safety, HACCP implementation, waste handling and other environmental issues.
This department plays significant role since it determine the quality of products. • Marketing: the main task of marketing department is to manage relationships with customers and suppliers, to analyze competitor activity and customer needs, to plan kinds of products and their prices to comply with customers’ budget; to identify what trends will be and prepare products to match the trends. Concerning the human resources, one of school that is ready to provide human resources for in-flight catering business is the School of Management at the University of Surrey in UK.
The school is the place where the world’s first professor of In-flight Catering Research, Professor Peter Jones, develops in-flight catering courses under cooperation with the International Flight Catering Association (IFCA) (“New Look”). Other suppliers that are important to in-flight catering industry are packaging manufacturers. In the UK, one of leader in packaging is Smartboxes, a London-based company that have extensive experience of providing bespoke plastic/cardboard products and packaging for airlines industry. Its customers include Clients include British Airways, Emirates, Saudi Arabian Airlines, Korean Airways.
Changes to UK Food Safety Legislation in 2006. 2005. The Royal Borough of Kensington and Chelsea. Retrieved February 25, 2004 from <http://www. rbkc. gov. uk/EnvironmentalServices/FoodHygieneandStandards/foodlegislationchanges. asp> “Facts & Figures: Essential Information in Brief. ” LSG Sky Chef. 2003. LSG Lufthansa Service Holding AG. Retrieved February 25, 2005 from <http://www. lsg-skychefs. com/search>