Merger Reflects Woes of Airline Food Industry

By JAMES F. PELTZ

May 20, 1999 12 AM PT

The airline “fare” wars are heating up.

Passengers aren’t the only ones frustrated by the airlines’ penchant for saving money by serving skimpier meals on many flights. It’s also tough on the leading caterers of airline food, and that’s a big reason why two of them announced Wednesday that they’re merging.

SAirGroup, the parent of Swissair, said it is buying Dobbs International Services Inc., the second-largest U.S. airline food caterer, from Viad Corp. of Phoenix for $780 million.

SAirGroup already owns Gate Gourmet, a leading overseas provider of airplane food, and the addition of Dobbs will give it immediate access to the U.S. market and thus an even broader global reach.

The new company, with annual revenue of about $2 billion, thus would be able to spread its costs over a broader base of business and wrestle better terms from its suppliers of food and condiments--two big advantages when trying to prosper in the face of food cutbacks by the airlines.

Indeed, it’s a step that’s already been taken by their main rival and the airline food leader, LSG Sky Chefs Inc., which was formed by an alliance between German airline Lufthansa and longtime caterer Sky Chefs Inc. of Arlington, Texas, in 1993.

And there’s another factor behind the mergers: The airlines themselves have been forming global alliances, putting pressure on the caterers to have worldwide breadth if they want the airlines’ business.

“We can go to our customers and assure them that the service we provide in Pittsburgh is going to be the same consistency and quality with what they would find in South Africa,” said Bill Slay, a spokesman for LSG Sky Chefs. He declined to comment on the SAirGroup-Dobbs merger.

But it’s the airlines’ curbs on food spending that present the biggest hurdle to above-average growth for the $8-billion worldwide airline-food-catering industry.

Between 1994 and 1997, food spending by U.S. carriers dipped 2%, to $2.4 billion annually, even though airline passenger traffic soared in that period, the trade publication Air Transport World reported recently, citing Transportation Department statistics.

The “fare” cuts were an outgrowth of the airlines’ deep recession in the early 1990s, when the U.S. industry alone lost $13 billion.

Also, the airlines’ heavy use of “hub” airports has made full meals less mandatory on U.S. flights. A cross-country trip today is often actually two flights--with a stop at the airline’s hub--of less than two or three hours each. So “meals” on each leg of the trip often amount to snacks.

Some airlines are again trying to use food as a way to make their service more appealing, and they’ve tried to maintain high food standards for their business and first-class travelers, whose fares have shot up in recent years.

In the first nine months of last year, there was a 5% increase in food spending among the 10 biggest airlines, Air Transport World said. The average spent per passenger: $4.55.

But it’s unclear if the upward trend will last, and Viad isn’t waiting to see. It’s selling Memphis, Tenn.-based Dobbs to redeploy the proceeds into its core, faster-growing businesses of money orders and wired-funds-processing services, and convention, event and travel services, Viad Chairman Robert Bohannon told analysts Wednesday.

“We have not been very effective in raising our operating [profit] margins” at Dobbs, and revenue growth “has not been robust,” he said.

Not that Dobbs--which assembles more than 140 million airline meals a year--has been languishing. Its profit last year climbed 11%, to $37 million, on an 11% gain in revenue, to $892 million. But Dobbs’ earnings, which accounted for 35% of Viad’s overall profit two years ago, now contribute 25%, “and the trend line was clearly down,” said Jack Modzelewski, Viad’s chief financial officer.

“Dobbs is a premier company in its industry, and from a profitability standpoint, its margins were second to none,” said analyst Timothy Dwyer of investment firm A.G. Edwards & Sons in St. Louis. “But from Viad’s standpoint, Dobbs just didn’t fit the growth profiles it was looking for.”

Viad was created in 1996 when Dial Corp. spun off its familiar soap, food and personal-care lines into a new entity that kept the Dial name. Viad was left with Dobbs and its other service lines.

But analysts have been urging Viad to shed the slower-growing Dobbs for some time, even though Viad’s stock has been a standout performer. Since late 1996, the shares have soared more than 80%, outpacing the bellwether Standard & Poor’s 500 index.

On Wednesday, they jumped $2.31 to close at $31 on the New York Stock Exchange.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Dobbs at a Glance

History

1934: James Dobbs and Horace Hull open a sandwich shop in Memphis, Tenn., and begin selling box lunches for Memphis airport flights.

1947: Dobbs reaches 2.5 million meals served annually for 16 airlines at 23 airports.

1968: Company is bought by Squibb Corp.

1980: Retailer Carson Pirie Scott & Co. buys Dobbs and gives its airline food unit the name Dobbs International Services.

1987: Dobbs International is bought by Greyhound Corp., and four years later Greyhound changes the name to Dial Corp.

1996: Dial spins off its consumer-products lines into a “new” Dial, and Dobbs and other remaining services segments stay with newly named Viad Corp.

1999: Viad agrees to sell Dobbs to SAirGroup, parent of Swissair.

Facts