By Rajeewa Jayaweera –

Rajeewa Jayaweera

The writer wrote some weeks ago urging the government and national carrier to consider withdrawing from its European routes. The main purpose of my essay was to high light the contradiction in government policy of pouring millions of dollars into a national carrier on the one hand and following an ‘open skies’ aviation policy since 2001 resulting in the massive injection of capacity by Middle Eastern carriers on the other hand thus undermining the government’s own investment. From some of the comments observed, I felt that further expansion on the subject would help better understand the current situation.

The national carrier is unable to compete with carriers from the Middle East on its European routes. Even large carriers such as US carriers, British Airways, Lufthansa, Air France to name a few are being gradually eased out of some of their traditional markets. Agence France-Presse (AFP) recently carried the following news item. It was also published in one of the local leading dailies.

Quote;

Three top US airlines groups called on the US government and urged changes to the bilateral commercial aviation agreements between the United States of America and Qatar and the United Arab Emirates.

According to the groups, $42 billion was given to UAE and Qatar based airlines, including Qatar Airways, Etihad Airways, and Emirates to push US carriers out of this lucrative market, and make competing impossible.

The US carriers together with workers’ groups issued a 55 page report detailing how “unfair” subsidies given to Gulf rivals Qatar Airways, Etihad Airways and Emirates have allowed them to wrest market share from the US industry.

Airlines from the United States are escalating their rhetoric against Emirates, Etihad Airways and Qatar Airways, even suggesting the near unprecedented action of rescinding open skies agreements, which the US has with the UAE and Qatar. The refrain is loud and echoes much of the European airline resistance – but US airlines cannot seem to agree on their target.

United CEO Jeff Smisek at one time said Gulf airlines are not subsidised, but then said they are “heavily subsidised”. American Airlines CEO Doug Parker said they are “perhaps” subsidised. Delta CEO Richard Anderson bemoans the role of state-owned airlines despite having many national carriers (Saudia, China Eastern etc.) as partners in SkyTeam.

“The multi-billion dollar subsidies… have allowed Qatar Airways, Etihad Airways and Emirates to rapidly expand their fleets and international routes, distorting the commercial marketplace to the severe detriment of US employment, the US economy and the US airline industry,” the US group said.

American Airlines, Delta Airlines and United Airlines along with US pilot and airline labour groups said the three Gulf fliers have benefitted unfairly from huge interest-free loans, subsidized airport charges, government protection on fuel losses, and below-market labour costs that are considered unfair subsidies under the World Trade Organization.

The report said that, with the backing of state support, the Gulf airlines are targeting more international traffic to the United States on the back of the US “Open Skies” aviation agreements with Qatar and UAE.

It noted their huge share of orders for wide body aircraft, representing about one-quarter of the entire global fleet of wide body aircraft.

“Because the Gulf carriers are adding this new capacity at rates that substantially exceed global GDP growth — which drives growth in demand for air transport services — the only way to accomplish this feat is to continue taking passengers from other countries’ carriers,” they said.

They called on the US government to open new talks over the air agreements to address what they said are violations of those pacts, and pressed for changes.

“The Open Skies agreements conferred enormous benefits on Qatar and the UAE by opening the most lucrative market in the world to their airlines,” the group accused.

If Qatar and UAE refuse to address the problems, they recommended the US should move to terminate the agreements and negotiate new deals based on “principles of comity and reciprocity,” the US group said.

Unquote

United Airlines, Delta Airlines and American Airlines are all private US carriers funded by shareholders. However, they receive government bailout packages when in financial difficulty. As readers can observe, they are feeling threatened due to unfair competition by Emirates, Qatar Airways and Etihad and are suggesting the unprecedented step of renegotiating or abrogating air services agreements. Some countries have recently begun declining further traffic rights to UAE and Qatar. The Indian government recently turned down a request from UAE for further traffic rights. Emirates already operate 186 and Air Arabia 113 weekly flights between Dubai and India. China has informed both Emirates and Qatar Airways of the need to operate flights to remote cities for every additional flight to cities having high demand.

The situation in Sri Lanka is much more critical. Sri Lanka’s national carrier is a small airline with a daily flight only to London in the west. As I explained in my previous article, 20 flights from four gateways (London, Frankfurt, Paris and Rome) in three European countries and UK is not in a position to compete with the three giants operating 438 flights from fourteen gateways (5 in UK, 4 in Germany, 2 in France and 3 in Italy) besides four other medium sized carriers. For example, there is no earthly reason for a German living in Munich to travel to Frankfurt by train or car during four days of the week for the pleasure of flying our national carrier when they have a choice of five daily flights offered by EK, QR and EY from Munich to Sri Lanka via their respective hubs. The advantage of a “non-stop “ flight does not exist for passengers living in cities other than Frankfurt due to transport involved in reaching Frankfurt to fly the national carrier.

Given below are some figures related to Capacity, Market Size and Market Share for an eleven months period 01 April 2014 to 28 February 2015. While not being 100% accurate, the writer can vouch for an accuracy rating of around 90% which should suffice for purpose of ascertaining trends. Figures of UL, EK, QR and EY are given separately while figures of Oman Air, Kuwait Airways, Saudia and Jetair have been combined as ‘Others’. Data has been obtained from a data base named MIDT which is an analytical tool used by airlines for planning and evaluation purposes. Data given are ticketed reservations relevant to Point of Sales (POS) UK, Germany, France and Italy only. UL Capacity has been calculated based on 275 seats per flight in 20 weekly flights for 48 weeks, 10 seats per flight on EK, QR and EY flights in 438 weekly flights for 48 weeks departing from relevant cities with a stopover of less than 4 hours in their respective hubs and 20 seats per flight in 51 weekly flights of Oman Air, Kuwait Airways, Saudia, Turkish Airlines and Jetair flights for 48 weeks departing from relevant cities with a stopover of less than 4 hours in their respective hubs. Majority of traffic consist of Tourists, VFR and business traffic.

• UL’s market share in its primary route i.e. to Colombo notwithstanding “non-stop” flights is below 50% in UK and mid 30%s in Germany, France and Italy.
• EK, QR and EY between themselves enjoy market share of 34% out of UK, 49% out of Germany, 34% out of France, 36% out of Italy and a combined market share of 38% .
• Other carriers enjoy a sizable market share ranging from 18% to 34% in the said countries and a combined market share of 22%.
• Market Share in the four countries is split 40% to UL, 38% to EK, QR and WY and 22% amongst other carriers.
• Excess capacity exists from each of the four countries which will invariably lead to fare wars especially during low and shoulder seasons. Resulting fare wars will compel the national carrier to reduce fares to remain competitive and defend market share.

Some 12- 15 years ago, UL enjoyed market share of over 60% in UK and Europe. Current market share levels indicate a drastic erosion – the main reason being the increase in capacity given by GoSL to foreign carriers. Lack of Route Profitability is also partially attributed to being a small airline with single gateways in each country, small networks and limited frequencies. European POS are overly dependent on sales to Colombo and less than half a dozen other destinations. It does not enable a good Revenue Mix. POS of our competitors with large networks could sell from 75 destinations upwards which gives them greater flexibility in their sales strategies and a far better Revenue Mix. The writer is of the opinion that the national carrier has long passed the point whereby it would have a reasonable chance of competing with Middle Eastern carriers in the European and UK markets. Therefore, the more meaningful course of action would be a planned withdrawal from its European routes.

Of foremost importance are two key questions – a) does the nation need a state funded airline. The government should undertake a careful study and establish the nation’s long term needs and priorities. If the decision is that this country does not need a state funded airline, the matter ends there and all that remains is to wind up operations of the national carrier. b) does the state have the competence to own and the will to professionally manage an airline. Judging by some of the types appointed to the Board of Directors in the past and present, the answer in the writer’s opinion is an emphatic NO.

Should the government decide in favour of a state funded airline, the next decision would be as to what type of airline is required. A Regional airline operating within SAARC region would be a non-starter due to non-existence of sufficient traffic to sustain flights operating from point to point within our region. Our geographical location would prevent passengers from any SAARC nation other than Maldives from flying to any destination via Colombo. That would leave the option of a carrier operating to the Middle East, SAARC region and selected Far Eastern destinations. It may be an ‘all frills carrier; or a ‘no frills’ carrier. Transforming the national carrier from its present status to such a carrier would involve the careful evaluation of the most lucrative routes and future growth potential based on projected traffic growth. Downsizing of the current fleet and redeploying available aircraft time in the identified routes for the new carrier would follow.

In the opinion of the writer, the government must ponder over the role to be played by the government. If the new carrier is to be managed by a Board appointed by the government, it will be a repetition of the two eras 1948 -1978 with Air Ceylon and 1979 – to date with Air Lanka / SriLankan Airlines. It is absolutely essential that government involvement be that of a minority shareholder with no option of a Golden Share. Their investment could be by way of transfer of all remaining assets to the new carrier as done by the British government at the time of privatizing British Airways. The majority holding must essentially be held by private investors both local and foreign who also should have control of the Board of Directors. That should give the new carrier a more than reasonable chance of success.

*The writer worked for SriLanakn Airlines and Qatar Airways for over 20 years