Published Nov 22, 2011 by Competition Commission
ALPHA/LSG MERGER INQUIRY
Summary of hearing held with DHL on 22 November 2011
The inflight catering industry
1. DHL said that, taken as a whole, its business handled a wide range of logistics and
other functions across UK business including Global Freight, Express small
packages and supply chain work. Some of the divisions dealing with these areas had
considerable experience of the requirements of working with the aviation industry, for
example at airports.
2. DHL had set up a small division in March 2010 within the supply chain side of the
business to address airline business solutions. Its aim had been to enter the supply
market for ‘above the wing’ services to airlines by offering primarily ‘logistics’-based
services. DHL did not consider that this business could be summed up as the provision of in-flight catering: locating the division within the supply chain side reflected
DHL’s view that food provision was less central to the business than logistics
elements, which incurred the majority of the costs associated with in-flight catering.
3. To date, the division’s business was relatively limited in scope. In the UK, DHL had
the BA contract for all short-haul flights at Heathrow, but no contracts with any other
UK airlines; it also had a small operation for Ryanair in the Republic of Ireland. More
recently, DHL had won a major contract in South Asia starting in December [hidden text]. Its
aim was to create a significant sized global business in above-the-wing services.
Current and past in-flight catering arrangements
4. The contract with BA involved serving 210 flights a day [hidden text]. It was handled from a
dedicated site at Colnbrook near Heathrow with a facility which DHL called a ‘flight
assembly centre’. DHL bought in food components together with the many other
products needed for short-haul flights including snacks, beverages, bar stock and
‘dry’ goods, eg headphones. All these components were delivered to Colnbrook from
different locations and assembled through a highly automated process for uplifting to
5. The contract with BA was a long-term [hidden text] deal [hidden text].
6. [hidden text]
7. The background to DHL’s successful bid to BA stemmed from BA’s 2007 invitation to
31 possible suppliers, including at the time DHL’s freight business, to provide innovative proposals on how they could handle the full range of BA’s ‘above-the-wing’ operations. DHL, through its new division focusing on above-the-wing services, had made
an offering to cover all BA’s UK needs, ie from both Heathrow and Gatwick for both
short and long haul. BA had come down to a short-list of four including DHL, and had
looked at permutations of suppliers for their various needs.
8. DHL had chosen to work with Northern Foods as a partner in its bid because it had a
long association with the company and knew it to be a reliable food producer with
sound safety standards, reliable on delivery, and with a good understanding of the
role needed. Northern Foods provided all the food needed for short haul, either pro-2
viding the food itself or where necessary choosing suppliers to do so. For business
class and Club Europe, food was provided by Do & Co.
9. DHL understood from BA that it had won the short-haul contract, replacing Gate
Gourmet, because of its innovation, transparency, account management process,
and also because BA wanted to increase the number of suppliers to its business.
This was the only change of supplier BA had decided on—the other BA business
remained with, respectively, Alpha (at Gatwick) and Gate Gourmet (for all its longhaul business from Heathrow).
10. [hidden text]
11. [hidden text]
12. [hidden text]
13. In terms of entering the market outside London, DHL felt that the minimum number of
long-haul flights that would allow a new entrant an adequate return was some five to
ten long-haul flights a day, and there were few if any such regional long-haul operations. On short haul, DHL gave the example of its business in the Republic of
Ireland where it had an existing airside facility, and relied on servicing 22 flights a day
on a simple ‘pick, pack and dispatch’ basis. It noted that legacy caterers had advantages in bidding at regional UK airports because tenders often allowed limited lead
times: where legacy caterers had existing assets, either property or vehicles, this
gave them an advantage, and a new entrant might need to gain business from a
number of users to make entry at one airport worthwhile.
14. [hidden text]
The proposed merger
15. DHL considered that the proposed joint venture would make it harder for new businesses to enter the market. Alpha and LSG could be expected to seek to charge
higher prices in the regions; and in the Heathrow area they would be able to reduce
their costs, eg by rationalizing vehicles and leases, and would thereby be in a
stronger position and able to reduce the likelihood of new entrants gaining a critical
‘multi-user’ level of business. The vehicles and leases released by Alpha/LSG could
be expected to be unsuitable ones for entrants to make good use of, eg because
vehicles would be too old given that UK airports placed limits on the age of vehicles
operating on the airfield.