19 November, 2018

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PAREXIT & FRAEXIT By SriLankan Airlines

By Rajeewa Jayaweera

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 EuropeSRiLankan Airlines 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 LankaSriLankan Airlines 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 ResultsSriLankan Airlines 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.

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Latest comments

  • 2
    3

    Sri Lankan incurs a monthly loss of Rs 1 billion and the expected loss for 2016/17 is around Rs 15 billion and congratulations to the board and management on a fine

    To be fair by the current board they have made some important decisions:

    1 amalgamate MIHIN
    2 sell A 350 aircraft without taking delivery
    3 carve out ground handling and separate it
    4 stop flying to Paris and Frankfurt
    5 seeking a JV partner
    6 not accepting board fees
    7 publicly acknowledging that the airline is bankrupt
    8 freeze on recruitment unless critical

    However they have made some blunders as well

    1 recruitment of some unsuitable very senior staff
    2 delay in restructuring the airline
    3 considering bombardier aircraft as possible replacement
    4 not taking action against previous board members and senior staff for malpractices
    5 not reducing staff to sustainable levels such as 150 per aircraft from current 250
    6 not renegotiating pilot salaries and allowances downwards from Rs 2 million per month and stewardesses salaries from Rs 500,000 per month.

    Unfortunately Yahapalanaya Govt is slow to get things done.

    May be another increase in VAT may be required to pay for the losses!!!

  • 3
    1

    Mr.Jayaweera,

    why are you wasting your valuable time in writing about SriLankan.There is nothing new about this White Elephant that the tax payers of this country do not know about by now.Every successive Governments since Independence and their politically motivated appointees to the Board/Senior Management are equally responsible for the current situation which seem to have reached a point of no return.

    Do not expect anything constructive or meaningful to happen under the current Board or the band of so called Chief Officers whose intentions may be to enjoy the benefits till it last.Should we talk about the rest of managerial quality when Pilots are more concerned about the Lounge facility rather than how they could contribute otherwise for a possible revival of the Airline instead.

    The Death of this institution is certain either naturally or under tragic circumstances. Either way only when it happens the Tax Payers of this country can finally have a sigh of relief

  • 0
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    Shevan

    The purpose of this piece is not to criticize the airline but to defend it’s decision which is being condemned in some quarters.

    • 2
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      Mr.Jayaweera,

      Let us hope those who are the decision makers will have the wisdom and courage to have a hard look at London operations as well since the performance figures do not speak well.Maintaining a route for “prestige” is a luxury this country can hardly afford under the present circumstances

  • 5
    0

    To make Sri Lankan airlines successful, our selfish leaders and their hangers on should stop using the national airline like their own personal limousine. It is time we had strict rules that NO politician can take his entire family and village anywhere until they have paid for their seats. The Rajapaksas were like leeches who abused their powers and used entire planes to cart their well fed catchers all around the world, throwing out patrons who paid for their seats, and they made sure their big behinds sat in business class, not even economy.
    If our politicians keep doing this, the national carrier will have to be shut down, but they do not care about that.
    Do we have any politician who is genuinely interested in serving this country, or are all out for themselves at the cost of this country suffering?

  • 2
    0

    If we are to pull out of routes because they have become highly competitive and therefore unprofitable,what happens if and when the same happens to the other routes as well?
    Reminds me of a solution Freddie Silva suggested some time back.Cut the wings off and put them on Pettah -Moratuwa route!!

  • 0
    1

    It is my understanding that the Colombo – London service has to be operated under an agreement between Sri Lanka and the UK.

    SriLankan cannot just drop this route even if they wanted to.

    • 1
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      UK Citizen,

      We can stop the London services any time but we will lose the slots given to Sri Lankan and difficult to get it back whenever we want, again from civil aviation authys. in UK. Suggest Sri Lankan airlines retain London as a gate way to Colombo,SEA and Far East and connect the passengers from rest of Europe and Americas at London. We may be able to fill the aircraft on a daily basis if the timings are good. London is a competitive market and experienced sales staff should be positioned if we were to compete with rich airlines like
      Emirates, Qatar airways, Etihad airlines on the route to Colombo.

    • 1
      0

      well,I do not know of any agreement other than the Bi-lateral Air services Agreement between Sri Lanka and UK that would govern the operation of flights.Do not believe such agreement prohibits any carrier terminating operations based on commercial considerations.

  • 1
    0

    As per Rajeewa’s judgement,the Mathematical calculation will be like below –

    PAREXIT + FRAEXIT = ULEXIT

  • 0
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    NAK
    Thai, Cathay and Malaysian operate daily flights to/from Colombo. Singapore Airlines operate 10 flights a week to/from Colombo. It adds up to 31 flights a week. SriLankan Airlines operate a slightly higher number of flights to the Far East (excluding China). That is competition.

    Emirates (5 flts daily), Qatar and Etihad (3 flts daily), Oman Air 11 flts per week, Kuwait 6 fts per week, Saudia 5 flts per week. It adds up to 99 flights per week. Over 90% such flights have convenient connections to Europe from their respective hubs within 1 – 3 hours. SriLankan Airlines operated 18 flights a week to Europe till March 2016. That is not competition. It is a massacre.

    UK Citizen
    There is no such agreement between UK and Sri Lanka. You might recollect, British Airways has withdrawn flights from Colombo three times since 1980s.

    • 1
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      Rajeewa,

      This, I presume is due to open sky policy introduced
      by successive govts. and the National Carrier got pushed out. Its a
      crime that other airlines grab so much of passengers in Colombo,while the govt. is satisfied that they earn some money on handling foreign airlines at CAK. and not bothered about improving on bilateral agreements to get a fair share of the passenger traffic, arriving and
      departing CAK.

      This is similar to the problem the Sri Lankan fisher folk are facing.
      The Indian fishing boats illegally enter Sri Lankan waters and grab
      most of the fish, leaving nothing for the Sri Lankan fishermen, while
      the govt. pays no attention to the losses suffered by our local fisher folk.

  • 0
    0

    As per the schedule you have provided, the “Load Factor” on European Sector has come down from 2014/15 to 2015/16. However, an average of 70% has been maintained. Now the question is : What was an is the “Earning” factor? Obviously a loss is shown in the same chart you have produced. That being the case has any of those “TOP MANAGEMENT” personnel taken any measures to arrest that situation? Presently there are “Big Brains” injected to the administration at even Rs. 3 million a month salary PLUS other perks to address this issue. What have they done? Is to abandon those routes? Is that what is expected? To me 70% “Load Factor” is a “spring board” to build on. An “Expert” (if these highly paid are Experts) has to “Evolve” a system and “Reinvent” an strategy to (1) maintain the 70% at high earning levels and (2) increase the Load Factor to at least 75 to 80% of the capacity and bring up the earnings. To do that a “Fine Tuned” Marketing Strategy and “Better Managed” cost savings have to be done. Shouldn’t these “EXPERTS” embark on a “PROJECT” like that instead of taking the “EASY WAY” of abandoning the available market opportunities? Have they been recruited at high cost to take that “Easy Way”? You are a Marketing man. What do you think of the “Responsibility” of an “Industry Expert” is?

  • 0
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    Lanka Watch
    In my view, it is up to the government to decide what best suits the country and economy i.e. Open Sky or an airline. What they did not realise is the need to decide on one or the other and not both. Inherent weaknesses of Sri Lankan system does not enable it to have both. Sri Lanka has no bargaining power when negotiating air services agreements. Added to that, we field incompetent officials without any negotiating skills in our delegations. Foreign delegations run circles around them. I have personally witnessed this in India and France.

    Douglas
    In my subjective opinion, we are beyond the help of ‘Industry Experts’. There is so much they too can do. 18 weekly flights to 4 European gateways against 99 weekly flights to 14 European gateways as I said is a massacre.

    Due to lack of space, I did not elaborate in the article. cRPK and RASK of all four European stations in 2015/16 was lower than those in 2014/15. Even though Load Factor was 74.3%, Cabin Factor was 87.3% which means flights were spilling traffic and had little room to further increase.

    • 3
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      Taking it further from what Mr.Jayaweera has already said,it seems the days are numbered for SriLankan to continue as a Legacy Carrier.Pitted against Mega Middle Eastern Carriers with Frequency/Gateway advantage what could SriLankan possibly do to survive in Europe with a single Destination already having a high cabin factor with no room to improve. Thinking about feeder traffic to India or Far East is suicidal for then one has to trade in capacity at lower prices(than Colombo) to counter competition.

      For Middle East Carriers Colombo is only one of the destinations in their vast network so they could manipulate price whenever they want to maintain/increase their market share while SriLankan may not enjoy such luxury as for them Colombo is THE Destination and any downward revision of fares will have spiraling effect on their revenues on already loss making route.

      Time is perhaps right for the decision makers to have a serious look on the future of this Airline and if for any reason they deem it necessary to carry on with a Flag Carrier.then remodeling the Airline on Budget operations perhaps could be an option.While there are many such success stories(except MIHIN) that can be emulated,it would also give the Sri Lankans the opportunity of affordable Air travel.

  • 0
    0

    Rajeewa: Thank you. If the Cabin factor was 83%, what happened to the Revenue Factor? Did we run a “Budget Carrier”? What were the costs against revenue? What did the GSAs do? What proportion they got out of the revenue? I remember once the ex CEO Mr. Chandrasena stating that out of 14% profits GSAs got 10% and the airline was left with only 4% to manage every other matter. That is why I am raising this “unseen factor” of GSA operations. It looks that there was a marketing and a pricing problem. Perhaps you could come up with a some insight into these aspects in the future.

    • 2
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      Douglas,

      In simple terms cost of running the Airline far exceeding the Revenues earned has brought SriLankan to this sorry state of affairs.Do not belive this happened overnight but over the last decade or so.More than anything Politicizing of the Airline and the resultant Poor Management lead to this.

      Since you have raised the issue of Marketing/Pricing,yes they certainly would have contributed in a big way to the debacle.It is believed Pricing decisions were more often than not were based on whims and fancies of certain powerful individuals rather than those who were entrusted with the job,making the DEpartment a mere Post Box.While Pricing in any Airline is a vital function at SriLankan it is understood the DEpartment has carried on for so many years without the supervision of an experienced Senior Manager conversant on the subject.

      Those who have been around in the Industry may recollect of times when this particular Department was managed by an Individual who was known for his somewhat heavy Authoritative demeanor which dissuaded even his Superiors in intervening/influencing on his Professional Decisions how unpopular they may have been.He would have been equally disliked by many of his Peers as well as the Trade for the way he conducted his Business without fear or favor

      SriLankan needs more Professionals instead of those who only wants to kowtow their bosses just to keep their positions safe in the Airline

  • 0
    0

    Shevan: Thank you. I agree with you. Marketing, Pricing and Economic Management would have put this airline out of trouble. Let us discuss this in future. I know of one “Top Official” of a reputed airline who failed and erred in building prices in the GDS got kicked out in no time the detection was made. Such airlines who have established “Economic Management” are doing very well in the market and earn awards.

  • 0
    0

    Douglas

    Cabin Factor was 87.3% and not 83%.

    Revenue was a key factor for losses in European sectors in 2015/16. European routes earned 21% less revenue in 2015/16 compared to 2014/15. The Chairman attributed lower revenue to competition and strengthening of USD. That brings us back to my point. UL with 18 weekly flights can not compete with 99 weekly flights of Middle Eastern carriers, not to mention other carriers such as Turkish Airlines, Jetair etc.

    What you say of GSAs has merit in the context of the entire operation. However, my article relates to European routes. UK, Germany and France is on self handling basis. Only Italy and off-line stations are GSA operated. As you are probably aware, GSAs are paid overriding commission based on a percentage of ticket and cargo sales in the territory and not based on route profits. GSA ORC need be compared with the cost airline would incur in the event of self handling operations.

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