Privatise SriLankan to save it

 

Thursday, 21 October 2021

India is perhaps the most important market for SriLankan, not only because of the many Indian tourists coming to Sri Lanka and our people going there, but also because of the many Indian passengers transiting through Colombo to the Middle East and Southeast Asia. It is not an international hub, but as one of my MBA students, Ajith Wickramarachchi, established, it is a secondary regional hub. 

In 2017 and 2018, the Civil Aviation Authority reported 15.8% transit as a share of the total of arriving and departing passengers. In 2019, the year of the Easter Bombing, both arrivals and departures dipped, but not transit, giving a percentage of 17.5. The proportion of transit passengers has never been as high as in the true international hub, but it has consistently been higher than in Indian airports, including Mumbai and Delhi.

Colombo’s congested and obsolete airport is not set up to capture the full value of transit passengers, unlike the spiffed-up Indian airports, but transit is good for SriLankan. As with all airlines based in small countries, it can fill aircraft only by carrying passengers from other countries. 

Since the aviation market liberalisation started in 2003, SriLankan is not limited in the number of flights it can operate into and out of India. It is in fact the largest international carrier serving India, and this is not just tourists and pilgrims. Many of the passengers that fill the India flights do not leave the Colombo airport: they get on another flight out of Colombo to Western Asian or Southeast Asian destinations or vice versa. Even the viability of the Australian flights was dependent on the passengers to/from India SriLankan could attract. 

By itself, geographical location is never a guarantee of hub success, but it helps. In relation to major cities in South India, Colombo is advantageously located compared to Mumbai, India’s major international gateway, as shown in Table 1.

This locational advantage can be used by any airline operating out of Colombo, not just SriLankan. The fact that SriLankan has been operating direct flights to these cities for decades and because its service quality (including onboard alcohol) was superior to that of its Indian competitors, especially Air India and Indian Airlines, was one reason SriLankan succeeded in drawing a lot of transit traffic to Colombo.

What does the Tata acquisition mean? 

Tata operated two airlines prior to the acquisition. It holds 51% of Vistara, a full-service airline. The balance is held by Singapore Airlines. It operates out of Delhi and serves nine countries in addition to domestic destinations. Tata owns 83.67% of Air Asia India, a budget airline serving domestic destinations since 2014. Bengaluru is its hub. 

With the acquisition, Tata gains access to 4,400 domestic slots and 1,800 international slots. It is unlikely that it will maintain the status quo, even though it cannot retrench staff for one year. 

The most dangerous scenario for SriLankan is if Tata chooses to use the newly acquired aircraft and slots to supplement the international operations of the full-service airline, and to ramp up the domestic and international operations of the budget carrier. 

The reason many Indian passengers flew SriLankan was not its strength but the weakness of the competitors. If Tata succeeds in converting the current aircraft and slots of Air India to an efficient low-cost airline, SriLankan will cease to be an attractive alternative for the large numbers of cost-conscious Indian passengers. Bengaluru, a modern airport built-in 2009, is ranked 68th in the world by SkyTrax. It already serving as a hub for Air Asia India’s domestic network. If Tata decides to operate flights to West and South East Asia out of Bengaluru life will difficult for SriLankan. 

In the same way that Jet Airways sought to haul passengers from Colombo to its international hubs in Chennai and Delhi, Tata is likely to want to connect passengers originating or terminating in Sri Lanka to its hub airports in Bengaluru, Mumbai and Delhi. Given the limited open skies agreement that is in place, Tata faces no limits of flights into Sri Lanka.

That would mean that SriLankan’s non-transit business will also be threatened. Many of us uncomplainingly transfer to long-haul flights from airports in the Gulf, Singapore or Bangkok. It may not be long before the modern and highly ranked Mumbai, Delhi and Bengaluru airports will join that list.

What can be done?

The success of SriLankan has thus far depended less on its innovativeness and efficiency than on the weaknesses of its competitors. For some time, it appeared that Jet was beginning to offer decent competition, but they went down. The Air India, Air Asia India and Vistara combination has the potential to emerge as a formidable competitor that will not only take back the India-originated traffic but will also eat into Sri Lankan origin/destination business. 

Given the volatility of the airline business only the foolhardy will predict success for Tata. But given its strategic alliances with Singapore Airlines and Air Asia, one would be equally foolish to discount the possibility. The low price paid for slots and aircraft, and the deep pockets of one of India’s largest conglomerates, suggests that whatever is coming will be well capitalised. 

What should be the attributes of the champion of Colombo as a regional or secondary hub? First, it should be well-capitalised. Second, it should be well-managed. Third, it should be lean. The technically bankrupt SriLankan Airlines has none of these. Air India was in a similar state, but with the new owner, it has the potential. If the Government wants to save Colombo’s position as a secondary hub and have a chance to make it an international hub, it should move quickly to privatise SriLankan.

If not, our only hope will continue to be someone else’s incompetence.