Margin-hunting airlines may shed catering units

Lufthansa, Air France-KLM and Finnair are all reported to be looking at sales of their food units,...

Lufthansa, Air France-KLM and Finnair are all reported to be looking at sales of their food units, with broader catering companies and private equity the most likely buyers. (Shutterstock)

Maria Sheahan and Philipp Halstrick, Reuters

, Last Updated: 4:23 PM ET

A plastic tray, a hard bread roll and cellophane-wrapped cutlery: airline food can be a joyless culinary experience for economy class flyers, and some carriers may now be about to shed their catering units to focus on the hunt for higher margins.

Steady cashflow produced by the catering operations is likely to attract buyers should the sales go ahead, and airlines may also hope that the food suppliers will produce inflight meals more cheaply if they are in independent hands.

Lufthansa, Air France-KLM and Finnair are all reported to be looking at sales of their food units, with broader catering companies and private equity the most likely buyers.

The largest, Lufthansa’s LSG Sky Chefs, could go on sale in September or October, according to an investment banker familiar with the airline’s thinking.

“Private equity already talked to Lufthansa about the deal,” he said, adding that banks had not yet been instructed to arrange a sale and no deal was expected before the end of 2012.

LSG Sky Chefs made 2.3 billion euros in revenues last year and operating profit of 85 million but is trying to boost the margin with cost cuts and other restructuring moves.

Analysts value the group, which controls more than a quarter of the inflight catering market and serves airlines such as Australia’s Qantas and United Airlines of the United States, at about 700 million euros.

German newspaper Financial Times Deutschland reported that Lufthansa could sell around half of LSG Sky Chefs by next year in a first step. Lufthansa has said the unit is not core but makes a valuable contribution to the group.

Servair could also be on the block as its parent Air France tries to cut costs and boost profit. Paris broker Oddo Securities values the company at 278 million euros based on rivals’ multiples. A company spokeswoman declined to comment.

Not all airline food comes in a plastic wrapper, at least in the business and first class cabins. The French group served 10 tons of lobster and 40 tons of foie gras last year, making 797 million euros in turnover.

Servair’s profits are not split out but Air France made 25 million euros from catering, almost all of it from the unit.

Finnair’s catering business, with 80 million euros of revenue, is up for sale and was due to be bought by LSG Sky Chefs earlier this year. But Lufthansa’s board pulled out to concentrate on cutting costs and non-essential investment.

STEADY CASH FLOW

The catering companies would offer a buyer a steady inflow of cash, especially as they have been cutting their dependence on air travel by expanding into school and hospital food.

In the air, though, times have been tough as several airlines have slashed free food on short-haul flights or followed the low-cost model of selling branded food on board.

On long-haul flights, food remains important but companies are struggling to keep costs down, particularly as travellers request specific meals such as kosher or halal.

As well as private equity, possible buyers include Emirates Airline’s food unit Dnata, French catering company Sodexo and SATS, the airline support group spun off by Singapore Airlines in 2009, an LSG Sky Chefs source said.

He also said U.S. food service company Aramark Corp , which supplies schools and prisons - and fed the 33 Chilean miners trapped underground in 2010, could be another possible buyer.

“Catering is not as cyclical as the airline business and it is likely that a financial investor could do more on the cost side than a flag carrier because its reputation would not be at stake,” Silvia Quandt analyst Stefan Kick said.

Private equity groups, which typically like unloved but cash flow rich units of major companies, are likely to sniff around any sales although inflight catering has burned them before.

Texas Pacific Group bought Gate Gourmet, now the world’s No.2 airline catering firm, from bankrupt carrier SwissAir in 2002 for 1.1 billion Swiss francs, hoping for a recovery in air travel after the attacks on the United States of Sept. 11, 2001.

It ended up restructuring the business and selling it on. The new company Gategroup was listed in 2009 and although shares have since risen by a third since then, it still has a market value of only 686 million francs.

Gategroup, which serves Virgin Atlantic, made 2.7 billion francs of revenues and 115 million of operating profit.

BUILDING SCALE

With margins already squeezed by fewer food services on short-haul flights, the best way for airline catering companies to boost profits is to build scale to buy food more cheaply.

The rest of the business - filling trolleys with meals, loading them on to aircraft and removing waste after the flight - can cost more than the food itself. Caterers are also under pressure to lighten trolleys to slice down fuel costs.

“The logistics element is largely a commodity service, the same everywhere. And its cost is largely labour, which varies from one country to another,” said Peter Jones, professor at the School of Hospitality and Tourism Management at the University of Surrey. “Profit has to be driven out of the food element, and that’s tough to do in today’s climate and with food prices rising.”

Several catering companies have already gone for scale and LSG Sky Chefs and Gategroup now control about half the market.

Emirates’ Dnata bought Alpha Flight Group from Autogrill in 2010, Gate Gourmet doubled in size in 1999 by buying U.S. based Dobbs International Services and LSG bought Sky Chefs from American Airlines in 2001.

While the cost battle rages at the low end, airlines are also competing on quality for business class, returning to the early days of flight when lavish meals were used to lure wealthy ship and train travellers into the air.

Lufthansa’s Junkers G 31 aircraft was so focused on food it was called the “Flying Dining Car” in 1928.

These days, airlines have hired Michelin-star chefs and offer fine wines to business class customers to retain the customers who make airlines the most money per seat.

Lufthansa offers meals designed by Germany’s Mario Kotaska, English chef Heston Blumenthal is involved in a special Olympics menu at British Airways, and China Airlines introduced a menu by Tokyo-based Albert Tse.

Abu Dhabi-based Etihad Airways won the World Airline Award for best First Class catering last year thanks to its offering of flexible dining times and an a la carte menu featuring items such as organic fruit, prawns, brioche pudding and lamb fillets.


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