Bigger contribution to economy anticipated:

SriLankan to fly towards profits

By Shirajiv Sirimane

SriLankan Airlines will soon fly towards profits as the airline has identified its gray areas which are already being addressed. Though it has being criticised and its image tarnished as a loss-making entity, if one analyses its objective, one could clearly see that the national carrier of any country does not necessarily have to bringing roaring profits.

The critics have forgotten and overlooked the service a national carrier provides to a country and have also not taken in to account the other major loss-making airlines in the world.

American Airlines has suffered a record USD 1,926 million loss while Air France had suffered a USD 1,553 million loss. British Airways too has suffered a USD 1,151 million loss while Air India (USD 949 million) and Alitalia (USD 370 million) too were among the key loss-making airlines.

Despite this situation, the aviation industry is a major player in the world economy as over 3.5 percent of the global GDP relies on aviation.

If the aviation sector was a country, it would be the 19th largest in the world

Airlines today are a highly competitive business and to attract more passengers, prices are compromised. Due to this, throughout the world aviation has become an industry where returns are comparatively minimal.

The high cost of fuel is a killer for any airline and for SriLankan too, this is a major issue as 46 percent of its expenses are on fuel! Aircraft leases comprise 12 percent of its expenditure while staff and training expenditure is 12 percent.

This clearly shows that the airline is investing on training to be in line with other airlines and to enhance quality.

SriLankan Airlines crew

Some models of SriLankan Airlines aircraft Pic: Saliya Rupasinghe

Some of the students who were treated to an experience of a lifetime at the Mattala Airport inauguration

Despite these overheads, the airline had made a significant contribution to the national economy. It had contributed USD 1.3 billion a year to the Sri Lankan economy. This is a contribution of 2.2 percent to the GDP.

Foreign party

In the recent past, in a bid to provide a better service, the airline was leased to a foreign party amid huge controversy and when this lease was cancelled and the ownership taken back under the Government, the airline was in a bad state.

The foreign party that ran it had not re-investd a red cent and had used the maximum resources of the airline to take profits. Its routes were used by the leased airline to its benefit and the ‘product’ was left to ‘rust’, which had made the turning around of SriLankan a tall order.

There was no capital infusion into the airline since 1993 until 2012, and the business was sustained through sale and lease-back of assets, and one-off gains. However, after re-branding and other timely measures, the subsidiaries of SriLankan are now making profits. In 2011, the Government approved a USD 500 million investment spread over five years, starting in 2012.

The airline has also formulated a five-year business plan which is progressing smoothly and is on target.

By not investing in new aircraft, the previous management had put the airline under tremendous financial pressure. Some of the aircraft that were handed back were nearly 20 years old and had to be replaced.

These ageing airlines were also gulping more fuel and were becoming a major financial burden to the airline.

They are now being replaced with modern and brand new A330-300s in 2014 and A350s in 2014.

The introduction of these aircraft, while giving a major boost to the fuel bill, would also be more economical as they could carry more passengers and fly further. Jet fuel prices have increased 261 percent within the last decade. This would help the airline to have more flights using these aircraft as well and increase the number of destinations.

Financing projects

SriLankan has to borrow money from outside sources to finance these projects and one of the main points the critics have overlooked is the interest rates.

One could see that a key to the success of the few profit-making airlines is the low ratio of interest they receive when they borrow to reinvest. “Some times, this is around one percent and ours start from around six percent,” said CEO of SriLankan Kapila Chandrasena.

“With the dawn of peace, we expanded the airline to stimulate tourist arrivals into Sri Lanka - since this was our responsibility as the national carrier. Under this program, some destinations were maintained even amidst a difficult operating environment to support the rebuilding of tourism.”

“The investment of USD 500 million from the Government will see, not only the airline growing, but also increasing its contribution to the economy - whilst continuing to play an active role in facilitating the tourism and trade growth of Sri Lanka.”

What SriLankan has done so far….(These were achieved despite not receiving any cash investment)

*Phased introduction of an upgraded Business Class product, to increase the Business Class load factor

*Business Class passenger numbers increased 44 percent from 2011/12 to 2012/13

*Improving the revenue management function by introducing new systems, fare-class re-alignment and adopting industry best practices

*Passenger yield increased four percent from 2011/12 to 2012/13

*Investing in better data and tools, to understand the market developments and to forecast accurately

*Launch of new value added revenue streams, such as Upgrad, to increase ancillary revenue

*Re-fleeting the narrow-body fleet with younger, more fuel-efficient aircraft

*Introduction of the latest Amadeus Altea Passenger Service System. SriLankan is the first airline in the region to adopt this industry leading technology platform.

*Membership in the oneworld global alliance planned for early 2014

*Introduction of iPad-based EFBs to improve productivity and achieve weight, and fuel savings

*Operating margin improved to -24 percent in 2012/13, from -30 percent in 2011/12