Note: This article is based on Today's article on the price war between ground handlers published 3rd July and can be found here.
Ground handlers are companies contracted by airlines to service their airplanes between flights, which includes cleaning, refueling, as well as cargo and luggage handling. Today reports that the two largest companies in the ground handling market at Changi Airport are engaging in a ferocious price war, driving prices down almost 30% over a 3 year time period. Of the two companies, SATS commands 80% 0f the market share with the smaller dnata taking the remainder, making the market an oligopoly. Here are 3 thoughts of the ongoing competition:
Photo credit: URA
1. Airlines are Benefitting (and perhaps consumers)
Airlines are benefitting from lowered prices and better service quality as the duopoly competes for greater market share. The drastic fall in prices of servicing a Boeing 737-800 and the Airbus A320 represents a classic case of a price war, where excessive price cutting is used to pressure rivals in a bid to gain greater market share and possibly force out competitors. Airlines are taking advantage of this by negotiating harder for better contracts with SATS and dnata, and a lot of switching is observed between the two providers as airlines attempt to get best deals for themselves.
This naturally reduces their cost of production which could translate into higher profits and perhaps lower the costs of air travel for consumers if airlines pass this cost savings on. In a competitive market for air travel, the fall in cost of production should lead to a rise in supply which will increase consumer surplus and consumer utility.
2. Product Differentiation (Non-price competition) is still Relevant
While airlines are switching between service providers to obtain the best deal, price is not the only determinant considered. For example, Etihad airways have engaged dnata for passenger check-in, baggage handling and aircraft ramp handling while retaining SATS' services for cargo handling and catering. This could be explained by what SATS claim to be a result of their regional network advantage, "with food solutions and gateway services catering to more than 50 cities across 12 countries". Clearly, the disparity in market share can account for the way airlines view the different companies and how price alone is an insufficient factor for companies to acquire more customers and grow market share. The resilience of SATS market share is also a testimony of the importance of reducing substitutability in light of price competition to encourage customer loyalty towards a firm for its specialty in certain services.
3. Barriers to Entry - Aggressive Tactics, Small Market Size & Large IEOS
Two globally established services providers have attempted to break the duopoly over the last decade with both failing and exiting the market within 4 years of operations. This could be explained by Singapore's small market size, where there is only sufficient demand in the ground handling market to support a small number of such firms. Swissport, which exited in 2009, explained its inability to "secure the critical mass needed to sustain operations in Singapore" which resulted in a reported $50m loss. This means that demand could have been so low, such that total revenue is unable to cover total cost in the long run, thus resulting in the firm's exit. This could also be explained by a possible internal economies of scale in the market for ground handling, meaning only a few firms could reap sufficient internal economies of scale (IEOS) in order to be profitable in such a small market. Hence when the new firms entered the market, the inability to operate at a large enough scale resulted in extremely high average costs rendering them unprofitable. What probably exacerbated the situation are aggressive tactics adopted by the incumbents to deter potential entrants by making it more difficult for them to make a profit by lowering the equilibrium price in the market.
Conclusion
This is a classic case of an oligopoly's actions determining the desirability of the market structure. It is evident that this example of an oligopoly has created both winners and losers. On one hand, airlines and consumers can benefit from the lowered prices, better service and greater product differentiation between the two baggage handlers. However the aggressive actions of the incumbents have resulted in the exit of two firms and probably deterred many more. There is no guarantee that such competitive behaviour would continue in the long run. If SATS and dnata turn collusive, airlines and consumers could lose out as they contrive to raise prices, restrict output and have less incentive to improve quality and differentiate their service. Naturally, this is the responsibility of the Competition Commission of Singapore (CCS) to ensure this does not occur to safeguard the interests of airlines and consumers.