By Rajeewa Jayaweera –

Rajeewa Jayaweera

Following its exit from Rome in May 2016, the national carrier SriLankan Airlines after much vacillation recently announced its decision to exit from Frankfurt and Paris commencing next winter season. London, for reasons best known to decision makers will continue. The reasons attributed to the decision to discontinue flights are supposedly route losses and stiff competition. It is no secret all European routes have been incurring losses during last 37 years. Stiff competition is an understatement. Due to unplanned ad hoc granting of traffic rights by GoSL to foreign carriers, SriLankan Airlines, from around 2005 have been overwhelmed by Middle Eastern carriers in its European markets. The Sub-Committee on Economic Affairs, Prime Minister, Chairman and the Board of Directors, collectively or individually need to be complimented for making this bold decision, even at this late stage for whatever reasons.

Had flights been discontinued in May 2016 rather than November 2016, it would have saved the airline millions of dollars. Months of May, June and September are traditional low revenue months for European routes whereas December, January, February and March enjoy substantially higher revenue. During the Emergency General Meeting held on 16 June 2015, the Chairman did announce a Recovery Plan submitted to GoSL for approval. It is reliably understood the initial plan submitted recommended discontinuation of European routes excluding London. Severn months later, during the Special Shareholders meeting held on January 19, 2016 the Chairman informed shareholders the proposal to discontinue Rome, Paris and Frankfurt routes was still pending GoSL approval.

Stake holders in the leisure industry, notably travel agents and hoteliers have expressed their displeasure over the decision to exit from Paris and Frankfurt. It is their contention the national carrier should continue to operate loss making routes. They still believe in the archaic ‘national carrier’ concept which belongs to a bygone era. Commercially driven modern airlines operate commercially viable routes and short haul routes which feed and contribute to profitability of long haul routes. Promotion of tourism is the responsibility of tourism authorities. Inept tourism promotion authorities are not a justification for carriers, national or otherwise to continue operating routes resulting in the loss of millions of dollars year after year.

The main competitors of SriLankan Airlines in Europe are Middle Eastern carriers with large route networks, several gateways in each European country and multiple frequencies a day. SriLankan Airlines operations out of European stations with its limited network, single gateway in each European country and 3 -4 frequencies per week other than to London, is excessively dependant on its primary destination Colombo and a handful of other destinations such as Maldives, a few South Indian destinations and Bangkok. In most instances, it is necessary to offer these destinations at air fares lower than those to Colombo in order to remain competitive.

Charts given herein, derived from Market Intelligence Data Tapes (MIDT) provides current status on market share. MIDT is a software program which collates segments of reservations of airlines from individual cities / countries to other cities / countries or what is known as City Pairs. They do not include figures of budget carriers and web sales through airlines booking engines. Data is updated periodically and finally after completion of each month. Most carriers, including SriLankan Airlines utilize this analytical tool for gathering of historical data and planning purposes. These figures are not absolute but sufficient for planning and evaluation purposes. Data has been condensed into three categories i.e. Sri Lankan Airlines; Emirates, Qatar Airways, Etihad, Oman Air, Kuwait Airways and Saudia as Middle Eastern Carriers and all other carriers as Other Airlines.

Chart 1 – Market Share in Europe

This Chart is an indication of market share in 2014/15 and 2015/16 of carriers operating from France, Germany, Italy and UK to Sri Lanka. Whereas SriLankan Airlines enjoyed market share in excess of 50% from all these countries till around 2005, it has progressively lost market share to competitors over the last ten years. Current market share of SriLankan Airlines in French, German and Italian markets to Sri Lanka amount to an abysmal 27.8%, 21.9% and 25.4% respectively. In UK, it amounts to 36.7%. The Middle Eastern carriers enjoy a combined market share in excess of 50% in each of the four countries, highest being 72% in Germany.

Chart 2 – Market Share in Sri Lanka

This Chart is an indication of market share of carriers operating from Sri Lank to France, Germany, Italy and UK 2014/15 and 2015/16. The Sri Lankan market is very small in size and extremely price sensitive. The national carrier’s market share to the four European destinations did not exceed 30% to any of the four European countries in 2015/16. Low contribution from the base (home) station Colombo add further pressure on the European stations for higher contributions.

Chart 3 – Route Results

Revenue of four European routes in 2015/16 has declined by 20% in comparison to 2014/15 despite a 43% reduction in fuel costs for flights operated. The national carrier’s management has attributed the decrease due to increased competition and strengthening of the US Dollar. It must be noted, losses incurred in Paris and Rome routes in 2015/16 despite a substantial reduction in fuel expenses exceed losses in 2014/15.

A strong argument used by some critics is the negative impact of the loss of non-stop flights between Colombo and destinations in Europe. That is a misnomer as it applies only when travelling to/from Paris, Frankfurt, Rome and London to/from Colombo. Non availability of daily flights in the national carrier’s flight schedule except to London negates this advantage to a great extent. Further, it makes no difference to a passenger travelling from Nice, Munich, Berlin, Hamburg, Milan, Manchester, Birmingham, Glasgow or any other European city whether they change their flights in Paris, Frankfurt, Rome and London when travelling with SriLankan Airlines or in Dubai, Doha, Abu Dhabi, Muscat, Kuwait, Riyadh or elsewhere when travelling with other airlines.
The national carrier’s market share has declined in 2015/16 in comparison to 2014/15. In the context of market share, SriLankan Airlines has been simply overwhelmed by Middle Eastern carriers both in the four European countries and in Sri Lanka. Considering the high market share enjoyed by Middle Eastern carriers, there is no reason for these carriers not to fill the void created by the national carrier’s exit from Rome, Paris and Frankfurt.

The London route has been retained possibly for prestige reasons. The substantial reduction in route losses in the London route in 2015/16 in comparison to 2014/15 is chiefly attributed to a 50% reduction in fuel costs. According to IATA Jet Fuel index, Aviation Fuel cost around USD 80 per barrel in April 2015 and dropped below USD 40 by December 2016. However, cost in July 2016 is around USD 60 per barrel. It would be prudent to reconsider operations to London unless the route becomes profitable in 2016/17 which would be a first in 37 years.

Those opposing ROMEXIT, PAREXIT and FRAEXIT by SriLankan Airlines need to take cognizance of the factors described herein rather than oppose the move based on self- interest.

After 18 months in office, the airline’s main shareholder GoSL and Board of Directors has made no headway in finding a solution for the loss making national carrier other than the announcement for Request for Proposals to convert the airline into a public private enterprise and its plans to handover the lucrative Ground Services function to Airport & Aviation Services Ltd. The last two of the old Airbus A330-200 aircraft currently in the fleet are due to be retired by end of this year. Three new Airbus A350 aircraft are due for delivery between September and December this year. Meanwhile training of staff in A350 aircraft have been suspended indicating the new aircraft will not be inducted into the fleet. However, it is understood no lease agreements have been signed to lease out the unwanted three Airbus A350 aircraft. The fourth aircraft has been cancelled upon payment of a penalty of USD 17.5 million. The lack of direction and a coherent plan is chiefly due to the laid back attitude and lack of a sense of urgency by those responsible for the airline since January 2015. The 100 Day Program which went beyond is no excuse for doing nothing. One of these worthies was spotted at the Farnborough Air Show last week possibly taking a closer look at Bombardier aircraft.

In view of GoSL’s reluctance to close down the airline, it need be prepared for any eventuality especially in case a suitable investor is not found. A substantial volume of traffic is developing between BRIC member countries China and India and the African continent. Sri Lanka is geographically better located than Middle Eastern countries to cater to such a market. Scope does exist for good air connections. It would be a new market worth close study.

Meanwhile, it is hoped the carrier has prepared a ‘survival plan’ to continue operations beyond the deadline given by the Finance Minister and a solution is found for the tottering and listless airline.