Turbulence on Ground

Posted: October 2, 2009 in Uncategorized

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By Joseph Thavaraja

SriLankan Airlines is the national flag carrier of Sri Lanka, a full service airline, and is one of Asia’s leading airlines. It has won the Best Airline Turnaround of the Year 2004  from Centre for Asia Pacific Aviation and also the Best Airline in South Asia (3 consecutive times) from Travel Trade Gazette. As of April 2009, the airline has a route network serving 28 destinations (51 through codeshare) in 15 countries (28 countries through codeshare). SriLankan’s fleet comprises of 13 Airbuses and two AN12 freighters. SriLankan Cargo, (two dedicated freighters) through its AN12s operates to 50 destinations in 28 countries in Europe, the Indian Sub-continent, Middle East, Far East and South East Asia.

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Skytrax Research, the leading research advisors to the world airline and air transport industry, and the largest aviation research agency in the world, has given Sri Lankan a 3 Star rating. Skytrax’ 3 Star ranking is defined as “3 Star rating – awarded to airlines delivering a fair Quality performance, but with greater levels of inconsistency.”

Nevertheless, according to recent reports, revenue has dropped only by 7% (Rs. 5.8 Bn) during the year compared to last year, but Net Profit after Tax has dropped by 302%. Obviously the revenue drop due to global down turn would not be the main contributing factor. Cost of operation has increased by 12% making cost to revenue ratio 94% to 113%.

What led to this state of affairs in a service provider that was the pride of Sri Lanka? More importantly, what are the environment variables that affect its competitiveness?

An initial scan shows that its main competitors and Mihin Air as the reason-Aggressive promotion and competition from Emirates and Qatar Airways (main competitors) on SriLankan routes. These two airlines jointly took about 30% passengers to SL for the period Jan-June 2009. Then, the well known MihinAir factor-the public sector airline’s dependency on SriLankan ‘has continuously eaten into’ the national flag carrier’s profits.

Nevertheless, a closer look shows a host of other environmental factors that are at play. (This however, is not to vindicate Mihin Air burdens or Emirates & Qatar challenges on Sri Lankan).

Diving deeper

According to international airline industry sources, it’s the Asian Airline industry that is ‘affected most’ due to the global downturn. Andrew Herdman, Director General of the Association of Asia Pacific Airlines (APA), says that airlines in Asia Pacific have been the most adversely affected by the global economic downturn when compared to airlines in America and Europe. He points out that the segments of the airline industry most adversely affected are premium travel, long-haul services and cargo. He adds that these are the very same bits of the business that Asian carriers rely on for most of their profits. A key contributor is the domestic tourism industry. SL Tourism development authority’s statistics show that, of the 183021 scheduled carrier total in tourist arrivals for Jan-June 2009 to SL, no less than 62987 were shuttled in by SriLankan –the airline, unaided, is responsible for 34%  of the arrivals according to Sri Lanka Tourism Development Authority. This is one third of the passenger totals. Nevertheless, a closer inspection shows that SriLankan’s total passenger transport declined—a fall of 25% in SriLankan in comparison to the same period in 2008. The negative implications are further complicated by the fact that SriLankan also has been performing a key responsibility of Sri Lanka Tourist Promotion Authority by spending its own valuable earnings for tourism promotion to Sri Lanka- For instance, SriLankan in 2005-07 period invested more than Rs. 350 million in advertising campaigns to promote Sri Lanka as a tourist destination and ‘You can see the world in Sri Lanka,’ a Rs. 10.2 million month-long series of media and Internet advertisements that will run through January.

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This is also is a time when PATA forecasts a gloomy picture of long term tourist arrival forecast to SL in its Tourism Forecasts 2008-2010; with Sri Lanka being the only country in South Asia with a negative tourist growth of -3.12% in the overall average annual growth rate percent (AAGR)-2006-10. The crisis is even further compounded by tourism/hotel industry’s general attitudes towards SriLankan. “SriLankan Airlines would have to play a bigger role to promote tourism.”They are the National Carrier and they cannot only look at profits. And it is high time they review their high airfares to many destinations” declared a Veteran hotelier in November 2008.

Another reason is the ticket price gambit. Not being daunted by the regional air fare war, SriLankan removed its Fuel Surcharge on fares throughout almost its entire route network with effect from 1st January, “in order to pass on the benefits of reduced fuel prices to passengers.” With effect from 1st January, the Airline has completely removed its Fuel Surcharge on all tickets to short-haul and medium-haul destinations. Also the Fuel Surcharge on fares between Colombo and ‘just five long-haul destinations – London, Paris, Frankfurt, Rome, Tokyo – has also been greatly reduced to a flat rate surcharge of EUR 25 bringing up another cost write-off. In addition, the effects from the dent made to the profits in 2007/08 FY due to high cost of aviation fuel leading to an operational loss of Rs. 588 million for SriLankan, had clearly extended to this year as well.

Then, the (in)famous marriage with Emirates. SriLankan lost 5.8 billion rupees after the government’s termination of the management agreement with Emirates clearly hitting its bottom-line.

The crowding sky is the next factor. As mentioned earlier, Emirates and Qatar Airways pose a direct competitive challenge. A closer inspection, however, shows that other less known players being ‘busy’ -specifically, operations of Jet Air.

Jet Air has won various international awards lately and becoming known for its innovative services, and now it has clearly grabbed Sri Lankan passengers (especially in the Colombo-Indian sectors). The new entrant, Air Asia, with its clever low cost approach will impact SriLankan’s bottomline further with its aggressive pricing towards East Asian destinations.

Then, Pakistan! SriLankan harvested new passenger-loads when Pakistan International Airlines’ (PIA) flights to Colombo were suspended on January 1, 2002, after India refused to allow Pakistani aircraft to fly over its territory. Thus, Sri Lankan was more or less the sole direct operator to Pakistan-till now. Air Blue, the Karachi based private airline is now planning to resume its flights to Colombo (commencement date pending) and this will become the next headache for SriLankan’s bottom-line.

Last but not least, the ‘Mihin Air’ factor which has been highly reported in the local press- This behemoth already ate Rs 3 billion of public money, was then grounded due to (no less than) lack of planes and now it is being ‘placed under’ SriLankan -so that SriLankan bears costs of MihinAir without any significant revenue contributions in return.

Turning Around SriLankan

The SWOT analysis in Table-I shows an approximation of SriLankan’s current strategic status. This is by no means an in-depth SWOT analysis. Yet, it reveals some clear underlying factors at work that brought to where SriLankan is today. The following 15 strategies proposed for turnaround of SriLankan are derived both from the SWOT as well as ‘SriLankan’s own recent’ history. Thus, the suggestions should be differentiated from a ‘quick fixes’ approach.

PROPOSED STRATEGIES

THE SRILANKAN AIRLINES SWOT

Strengths Weaknesses
1. National Flag Carrier

 

2. One of Asia’s leading airlines

3. Won the Best Airline Turnaround of the Year 2004 from Centre for Asia Pacific Aviation and also the Best Airline in South Asia (3 consecutive times) from Travel Trade Gazette

4. Biggest Sri Lanka based airline

5. Earned Skytrax’ 3 Star ranking

6. Online e-ticketing strength

7. Has its own cargo carriers

8. Segmented seating

9. 9. State backing

10. Code-sharing arrangements with other established carriers

11. In partnership with Convention Bureau to develop Indian MICE market Discounted ticket programme ‘Hot Seats’ (through www.srilankan.aero)[7]

1. No domestic flights

 

2. Mostly dependent on a single supplier –Airbus Industrie SAS

3. Burdened with non-operating Mihin Air and its costs

4. Subject to political interference in its operations, flight schedules and management

5. Revenue has dropped by 7% (Rs. 5.8 Bn) during the year

6. Net Profit after Tax has dropped by 302%.

7. Cost of operations has increased by 12% making cost to revenue ratio 94% to 113%

8. No longer shares the Brand name of Emirates Air (no co-branding outlook anymore)

9. Takes on the burden of tourism promotion for Sri Lanka at heavy expenses but corresponding increase in travelers are not satisfactory

10. Current liabilities were higher than current assets by 8.1 billion rupees.

Opportunities Threats
1.New Domestic destinations , especially of Jaffna

 

2.New international routes

3. Post war era Sri Lankans settled abroad increasingly travelling / returning to SL

4. Development of Sri Lanka’s tourism in the post war era

1.Unexpected aviation fuel price hikes

 

2.General loss of demand for air travel due to global recession

3.Entry of low cost/budget carriers: Air Asia and planned entry of Air Blue (Pakistan)
4.Competing online ticket reservation systems by other carriers
5.Possible new government regulations that make operations costlier

6.Possible new international / destination countries’ takeoff/landing regulations that make

operations costlier

  1. Increasing airline security costs
  2. Possible increased political interferences
  3. Potential bankruptcy
  4. Operators with domestic licenses (Expo Aviation, Lion Air, Holiday Air, and Serendib Airlines)can expand to regional routes eating into SriLankan’s routes

2.Proposed strategic options to increase load factors and regain profitability:

  1. Re-focus on hubs based approach—Return to India focus: which has 100 flights a week to India, the country has become an important market to promote traffic to the Middle-East. The airline also actively promotes India as a tourist destination across its network in Europe and South East Asia; Similarly create a Dubai Hub and Singapore Hub and lure passengers.
  2. Sell Travel coupons (Experts say the full-service carriers have ensured 5-6 per cent of their average sales through these coupons. This, they add, will partly make up for the slowdown in demand that is expected due to the fare hike.)
  3. Build long term relationships with international stakeholders:
    1. With various destination tourism boards, and market segments
  4. Agressively promote Weekend Packages, especially to/from India
  5. Expand to non-metro cities abroad but avoid flying directly by code-sharing with domestic airlines for those non metro cities (in the destination countries).
  6. Continuously change food menus according to preferences of new destinations
  7. Commence Domestic flights especially to Jaffna, Trincomalee
  8. Divest Mihin Air-Unless it begins to contribute profits to SriLankan.
  9. Strengthen the sales force: Add/appoint increasing numbers of general sales agents in destination countries.
  10. Stop direct financing of Sri Lanka tourism promotions which is the role of the government/Tourism Ministry.
  11. Overcome political interference in operations by appointing monitoring/coordinating officers to oversee smooth operations
  12. Reformulate marketing and promotions function as an SBU. Encourage this SBU to form strategic alliances with related services such as destination country rent-a-car and ‘airport to home/hotel transfer’ shuttle providers.
  13. Access alternative suppliers-The airline appears to be virtually tied to Airbus SAS for its supply of aircraft. Sri Lankan should also explore other manufacturers-Boeing, Embraer (Brazilian) and Bombardier (Canadian) for low cost planes that can be effectively utilized for regional destinations.
  14. Use Sri Lanka’s flag carrier designation to airline’s advantage
  15. Differentiate from main competitors such as SIA by focusing on the hallmark character of Sri Lankan people’s “hospitality” by showing it not only in in-cabin services but in all steps—from the time passengers arrive at the terminal, boarding, disembarkation and airport-out transfers till final arrival of the hotel.

(Writer’s Email is  josephonline@gmail.com)

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