Horizontal Food Supply Chains Must Go Sovereign, Vertical

Horizontal Food Supply Chains Must Go Sovereign, Vertical

June 1, 2020

SATS CEO Alex Hungate chats with CNBC Managing Asia Christine Tan on utilising SATS aviation kitchens to feed migrant workers in Singapore and how disruptions to supply chains during the pandemic underlines the need for a reconfiguration away from broad horizontal supply chains to more vertical, sovereign supply chains.

Christine Tan (CT): You had worked for Reuters, HSBC and now leading SATS here in Singapore. In your 25 years of global leadership, how would you describe the disruption you’re seeing caused by the pandemic?

Alex Hungate (AH): Well, Christine, it’s hard to imagine such a disruptive event for our industry. 80 percent of our revenue comes from the aviation industry, and that’s the industry which is probably in the crosshairs of this pandemic. We’ve been redeploying people at a rate that we’ve never done in the history of SATS.

Something like 10,000 people across the group have been redeployed into different activities. Many of which are about surviving, but many of which are about the future of the company as well.

CT: We know that SATS is very closely tied to the aviation sector, how does it feel to suddenly see the bulk of your revenue streams suddenly getting wiped out?

AH: We have scenarios which modelled pandemics, believe it or not, but we always referred back to events like SARS or H1N1 or MERS which were primarily regional impact events. But this is the first time that we’ve had to deal with a pandemic that is truly global in its impact. Something like 95 percent of the aviation business has just disappeared over the last two months. So, that’s a scale of impact that no risk scenario ever anticipated.

CT: In terms of impact, because like all businesses, SATS obviously is being hurt by the pandemic. How did you do in the first three months of the year? How damaging was the picture?

AH: We were lucky because we have extensive operations in China. We had an early insight into what could happen in the rest of Asia. So, we moved quickly. We were able to procure personal protection equipment for our frontline passenger handling staff. We had staff who were going in and out of Wuhan on some of the evacuation flights and they were properly equipped. We had millions of masks in our hands from our sourcing networks across the world, so we were able to protect them. We were able to quickly implement some of the techniques we used during SARS and the other pandemics that we sought to protect the public as well, and that kept the services to our customers going.

We understand also that we’ve got important duties like keeping the supply chain going through the key airport hubs that we operate. So, air cargo became a very, very important factor for most everybody in daily life to make sure the shelves were stocked. We brought in millions of eggs through the air cargo operations. Our own food operations have been purchasing thousands of tons of meat and protein to make sure the shelves are still full as well.

CT: The things that you’re doing in terms of impact on earnings, what’s the damage like? Because I know your financial year ends in March 31st. What does your current financial fiscal year look like?

AH: There has been a significant impact. We’ve been trying to communicate with our shareholders as proactively as we could. We issued a profit warning which indicated that the profit in the fourth quarter, notwithstanding the relatively strong first three quarters, but the profit in the fourth quarter was already going to be impacted significantly. Still profitable, but significantly down. Something like 70 percent down from what we saw at the same quarter last year. We also gave some forward guidance for the first quarter – indicating that we might well make a loss of between SGD 50 and 70 million in the first quarter. So, for us, that’s the quarter starting first of April.

CT: Do you think you can be profitable for the current fiscal year?

AH: Well, it depends on the duration of the pandemic, clearly. We believe that from 1st of April onwards, we’re getting the full brunt of that reduction in aviation volumes. So, something like 95 percent reduction in the full month in April and then we’ll continue with that kind of scale of impact through the rest of the first quarter.

The second quarter – the quarter starting 1 st of July – is too difficult for anybody, I think, to forecast. When you listen to some of the airlines, and honestly, we’re very close contact with our customers, they’re talking about maybe one or two years before things return to the volumes that they were preCOVID crisis. So, it’s a question of the different scenarios and making sure we’re prepared for the worst, but of course, hoping for the best in terms of the upturn.

CT: The Singapore government has doled out SGD 112 million dollars in terms of relief package for the aviation sector plus two fiscal packages. Can you give us an indication of how much government aid you’re getting to help cushion some of that impact?

AH: For the first case, they’re supporting the retention of jobs. So, we’ve responded to that very much by ring-fencing those roles and we’ve been able to save a lot of roles that we would not have been able
to save without that government support. That allows us to retain a strong capability that when things start to rebound, meaning we can retain our reputation for quality and operational excellence because of all that experience of those people.

The second part of the structure is very interesting as well. It’s about developing capabilities for the future. And so, they have emphasized through WSG and SSG – Place-and-Train, and then classroom and online training in order to build new capabilities, and that’s something which we’ve try to respond to very proactively. In fact, we were the first company in aviation to act as the Pilot Centre for training excellence.

SATS Academy has been training 3,800 SATS employees to do jobs which are different than the jobs they do today. The building is not empty actually. We managed to persuade Changi Airport to let us use some of the gate boarding rooms as classrooms because we need some of the training to be in person, but we need very large social distancing and we want air-conditioned rooms. There are scores of empty air-conditioned gate-hold rooms where we can train our colleagues. Even on the apron, we’ve got people doing classes on how to drive some of the ground service equipment – so the skyloaders and the high lifts that you see. Normally, operationally, Changi is so busy that we can’t train as many people as we’re training today. So, we can have more people who can multi-skill and use different types of vehicles so that as things rebound, we can start to be much more flexible.

CT: So, you’re talking about redeployment of your employees, does this somehow help you save their jobs?

AH: Absolutely. At the same time aviation has taken a hit, we have other parts of our business which have been growing quite fast. So, fortunately, over the last couple of years, we’ve been starting to diversify into non-aviation catering. So, we do catering for defence, hospitals, schools, and all kinds of different walks of life. And then, in places like China, India and Singapore, we’ve also been expanding our business catering to central kitchens for restaurants.

Those capabilities have allowed us to pivot and redirect our capacity, our catering capacity to serve sectors of the community that are getting their food in different ways. So, the good thing about food or being in the food business is that eventually everybody has to eat. So, although they’re not eating in restaurants, they’re ordering more through home delivery. Our sales into retail have increased.

Our sales through some of the home delivery outlets have increased as well. And our food trading business has increased quite dramatically because we’ve been engaged in securing food supplies across the network and then supplying others as well. So, that part of the business has become very busy. We’ve had to retrain and deploy people into the non-aviation food part.

In our aviation kitchens, which have relatively little demand to meet for aviation business, we’ve been actually assembling meals for other emergency services like healthcare, et cetera, and those people, of course, are doing heroic job. We feel very proud that we’ve been able to feed them during this time and to make sure that they can focus on what they want to focus on, which is public service and public health.

I think the agility of the people is our key differentiator. When you start every day redeploying thousands of people into roles that they don’t normally go to, it’s a very different level of challenge. We took some of our data analysts out of the operations and we moved them into the task of helping us to create a dashboard for deployment.

Like a lot of companies at the start of the crisis, we created a crisis management task force. But after a week or so of going through the normal processes, we suddenly thought, hang on, this is more like a transformation opportunity. We can really reshape our workforce. We started to think of ourselves more as a manpower services agency than an aviation services agency. So, this dashboard allows us to deploy, monitor and make sure that everybody’s following the right areas of development so that we can emerge stronger as a company, that each of them, each of my colleagues can emerge with stronger capabilities on a personal level as well.

CT: You’ve also bitten the bullet by cutting some of the salaries of your senior management. You yourself have taken a 15 percent pay cut as well. Do you think that’s enough? Do you foresee somewhere along the road you might have to do more?

AH: Well, I think we’re one of the first companies in Singapore to take this move because we had the insights from China. We had a sense of how grave this might become. If more is necessary, we’ll be happy to take the lead again. Right now, I feel like we’ve reduced the cash burn quite considerably.

We’ve raised about a half a billion in new debt issue over the last month and a half. So, that means that we have a quite considerable cash buffer now that will, we think, take us through the expected duration of the pandemic, and perhaps even create a bit of a war chest for us to try to acquire new capabilities as the rebound starts to happen. It is worth noticing though that some parts of Asia are already starting to increase in volume.

Although China was hit very early, we do now start to see some increase in the domestic flights in China, which we are handling in the Beijing airports. We are also starting to see that the restaurants are reopening. So, our kitchens, which are supplying the restaurant chains across China, are starting to generate larger volumes. So, we are seeing that there is strong demand for supply chain and cargo services, which we provide in a lot of the airports around Asia.

In normal times, about 60 percent of cargo goes in the belly-hold of passenger planes. Since those planes are largely not flying anymore, there’s a sudden contraction of the available cargo space to just the 40 percent, which was normally carried by freighters. That’s not enough. So, what the airlines have been doing is they’re converting their flying passenger planes for the sole purpose of flying cargo. So, they are filling the belly-hold, but they’re converting the seating area to be able to carry cargo. So, our people are going through the back-breaking job of lifting cargo through the passenger aisles and then strapping them securely, of course, because there are very important safety procedures to be taken into account – strapping them securely into the seats, so that the yield and the load factor on those passenger planes can approach what it would be on a normal cargo flight.

CT: Did you ever imagine that you and your staff would have to do something like that?

AH: Well, no. I think it’s great to see the creativity and the ingenuity that you can witness during these times. You can just imagine how different it is creating an airline meal than creating a meal that’s going to be consumed within the next couple of hours. They learn something new and they also have that sense of accomplishing change and being comfortable with change, which let’s face it, is
such an important thing in today’s fast-moving environment.

CT: Singapore is fighting hard with the COVID infection in the foreign worker dormitories. As a food catering, you are now providing food to foreign workers in these dormitory lockdowns. Has the transition been easy?

AH: Let me also talk a little bit about the bravery of some of our colleagues, because that food has to reach the migrant workers in the dormitories and some of those dormitories are in the so-called, “red zone”, in other words, they’re in an infection area. We’ve had volunteers saying that, with the right equipment and the right training, they are comfortable to enter into the red zone. Without that kind of bravery, we wouldn’t have been able to deliver the food to the people that need it. So, we’re very proud of that.

I’ve had something like 1000 volunteers going into hospitals and going into other public services as well. I was at Changi General Hospital myself last week for the induction of another group of about 50 volunteers who were going to get trained by the hospital colleagues so that they could act as concierge to welcome guests, take their temperatures and direct them into parts of the hospital. They happen to be nearly all from passenger services, so you can imagine those very similar skills and very similar kind of personality attributes that allow somebody to do a good job checking in passengers at the airport, turn out to be perfect for checking passengers who are also anxious because they’re entering a hospital – calming them down, making sure they know where to go and making sure that they’re safe.

It’s just wonderful to see that kind of volunteering into the community. I think in this environment, it’s so important that we have that kind of DNA in our culture because the opportunities to volunteer are greater now and more needed now than they’ve ever been before.

CT: In terms of food production, I hear you have a very efficient rice production line where you can actually cook up to 600 kilograms of rice an hour. Am I correct?

AH: Well, not only you are correct, but I’ll surprise you by saying that’s not enough, because in normal times that’s more than enough. It’s one of the investments we made up the last couple of years that we thought would take us way into the future. But feeding some of the migrant workers, we realize that the quantity of rice per person per day is much, much higher. Normally, for an average airline meal, you get something like 150 grams of rice per portion. But the migrant workers, their appetite is much, much higher and they will eat something like 450 or half a kilo of rice per meal. So, when you’re doing three meals a day for tens of thousands of migrant workers, that really adds up. So, what we had to do – not only do we have those rice lines running three shifts a day, but we’ve had to actually use some of our other steam ovens to be able to keep up with the demand in parallel with that.

CT: So, whether it’s feeding the healthcare workers or the foreign workers, how is SATS getting compensated for this new role?

AH: Well, we are compensated. Clearly, there are raw material costs and their direct utility costs. The pricing is designed not to make a big profit, it’s just designed to cover our costs because it’s something that we want to do, that our communities need us to do. It’s helpful, of course, because it helps us cover those fixed costs, keep those equipment busy and help keep our people busy as well. I wouldn’t say it’s a big profit maker, but it’s something that we’re very pleased to do.

CT: Are you getting any indication of how long you will continue to provide food for healthcare workers and foreign workers?

AH: There are a lot of big capacity being created for contingency. For ourselves, we run the Marina Bay Cruise Centre which you’re aware. There are two ships which are currently berthed there, and we are running the Cruise Centre as a dormitory extension to provide more spacious accommodation for the migrant workers. The facilities at Expo and other places which are set up to accommodate some of the migrant workers who are ill — some of those are full but there’s a lot of new capacity being brought on in an ingenious and agile way.  Nobody really knows how long this will continue. But we feel like there’ll be a natural equilibrium for us, because if production of food for those in quarantine are being ramped down, that must mean that the other parts of the business are beginning to grow. So, we think that’s quite a nice natural risk management balance between those two areas of demand.

CT: Right in the middle of a pandemic, somewhere in the beginning of March, you actually made an announcement you were going to acquire a U.K.-based aviation food solutions company, Monty’s Bakehouse, for £27 million. What do you tell people who were surprised by the timing of the deal?

AH: We’re delighted with the timing of the deal because we think we have a good acquisition at a good price and a good time. What Monty specializes in is sustainable packaging for the airline business. So, we think the clean, green future for aviation will involve also a low-touch economy. So, the ability to use packaging in an ingenious way to minimize contact between flight crew and passengers, but in a sustainable packaged way with hygienic features, will be a big source of success for those caterers that can master it.

CT: Does the pandemic throw out more opportunities for you in terms of acquisitions? What else are you looking at?

AH: Well, we think that there will be a massive change in supply chain. There has been a lot of talk about the dislocation of China’s sphere of influence and America’s sphere of influence even before the pandemic.

I think the disruptions that we saw during the pandemic as supply chains tried to readjust has just underlined that supply chains are going to get reconfigured. We think that a big feature of the reconfiguration will be increased resilience and a move from very broad horizontal supply chains to much more vertical supply chains, in line with the desire of some governments to… in fact, most governments, to develop sovereign supply chains for critical supplies like food and medical supplies.

That resilience and vertical focus will mean that airfreight will continue to play a very important role in supply chains.

We think that doubling down in our unique skills in managing cargo terminal operations in airports is going to be important. The fact that we have had a leadership position in pharmaceutical and cold chain handling with our cool port facilities which are across Asia now is another area that we think will only grow and become more important.

CT: As CEO of SATS in Singapore, any hard lessons learned from dealing with a pandemic?

AH: One of the things that we struggled with at first was the scale of the redeployment of people that we were trying to accommodate.

When the majority of the people come in to work and do a job that’s different than the day they did yesterday, that’s a major challenge. It’s a challenge of leadership. It’s a challenge of information. It’s a challenge of building new capabilities. So, it comes down to culture and it comes down to purpose and trust. What we found during this crisis is that our purpose, which we talk about as being – feeding and connecting Asia, is even more important than it was before the crisis. In a way, we’ve rediscovered the importance of our purpose as an organization, and that has given us the strength to go through this very difficult process that we’ve all had to go through of confronting just the massive amount of change to make this redeployment of thousands of people into new jobs possible. We’ve learned a lot from that.

We learned that we have to use technology to help us, but also comes down to good old-fashioned leadership,clarity and being true to our values. Then, there’s also the need for trust. You know, trust between the company and all of its stakeholders – our people and the unions, for example, so that they trust that we’re going to steer the company through the crisis. We’re going to try our best to protect them and their jobs so that they can continue to support their families.

The quid pro quo is that we need them to be more flexible and to accept that their job tomorrow might not be the same as their job yesterday, and I think that’s working well. It’s working well because we are drawing on a trust bank that has been built up over the years. If you go into a crisis situation and you don’t have that trust bank built up, and you go to make a withdrawal, you’ll find that the check will bounce. But in our case, I think that trust bank is strong and we’re drawing on that. I thank my colleagues for helping us to honour that check.

(Ed. This interview has been edited from the original transcript provided courtesy of CNBC Managing Asia. Featured image courtesy of HRM Asia, Photographer, Tom White.)

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