Taking Off Again

In 1997, Emirates bought into Air Lanka and named Peter Hill as CEO. As Hill explains, re-named SriLankan, the airline has turned Colombo into a hub for India and it is now generating record profits.

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By  Neil Denslow Published  January 3, 2005

|~|peter hill_m.jpg|~|Peter Hill, CEO of SriLankan Airlines|~|Six years ago, Sri Lanka’s national carrier, Air Lanka was a financial basket case with an aging feet and a poor reputation. However, re-branded as SriLankan Airlines, the business has been transformed into a profitable airline with some of the highest service levels in Asia. Against the backdrop of the troubled global aviation market, and political instability in Sri Lanka, the turnaround is a major achievement for the airline’s staff, and also for Emirates. The Dubai carrier bought 43.6% of the airline from the government six years ago, and it also took on the management of the Sri Lankan carrier under a 10 year contract. Emirates bought into the Sri Lankan carrier for one simple reason: India. Like all other airlines, the Dubai carrier only had limited rights for flights into the country, but it represented a massive potential market. Buying into SriLankan allowed Emirates to gain more rights into India and gave it the opportunity to develop a hub for operations in the subcontinent. “At the time of the buying into the business, Emirates had a lot of access problems into the Subcontinent. Sri Lanka did as well, but we had a bigger platform to start from,” explains Peter Hill, SriLankan’s CEO. Using this greater access, the Indian subcontinent has been central to SriLankan’s business plan since EK took control. To better serve this market, Air Lanka’s aging Lockheed Tristars were replaced with an-all A330/40 fleet and the network was re-drawn with India in mind. Loss-making routes were cut from the timetable, and the carrier instead focused on developing Colombo into a hub for India and the wider region. “We basically re-built and revised the network to focus on Colombo, not just as our home base, but also as a hub for South Asia,” explains Hill. “That was what the whole business plan was built around.” The success of the plan is clear to see. The 2003/04 annual results showed group net profits of US $54 million, up 76% on the year before, and the airline unit itself also reported its first profits in 25 years. This is alongside an expansion of the fleet, which is likely to continue this year, as well as a 25% growth in the size of the network. This growth followed a new aviation pact between Sri Lanka and India, which enables SriLankan to serve seven metropolitan cities in India and 15 others centres with unlimited traffic rights. The carrier is already taking advantage of this by flying over 70 flights a week into India, and it plans to operate 100 weekly services to 14 or 15 destination within the next year and a half. “We have gained huge access rights into India over the last 18 months, and we have taken full advantage of them,” says Hill. “And we have a lot of opportunities there [in India] still.” The current healthy state of SriLankan contrasts sharply with some of the lows in the recent history of both the airline and the country — not least, July 2001, when a Tamil Tiger attack on Colombo’s airport resulted in the destruction of half the carrier’s fleet. Alongside other dips in the aviation industry, like 9/11, SARS and last year’s fuel price surge, the carrier’s turnaround over the last six years is even more remarkable. “It’s been a roller-coaster, but the industry is like that,” says Hill. “However, we have had some bigger dips than most and we have had some challenges that few other airline managers have had to face.” In its turnaround, SriLankan has benefited from its ties with Emirates, as it has been able to draw on the expertise of its part-owner and gain economies of scale. Emirates’ involvement in the day-to-day running of the airline is fairly limited. Hill, himself, was seconded from EK to run the carrier — after being called out of semi-retirement — as was Nigel O’Shea, who has headed SriLankan’s IT operations since the takeover. A third Emirates employee, Neeraj Kumar, also spent six years in Sri Lanka overseeing the airline’s finance, but this is the limit of Emirates’ involvement in day-to-day operations. Instead, the airline board, which comprises four representatives from the Sri Lankan government and three from Emirates, approves the annual plan and then leaves it up to the management in Colombo to implement it. “We are very much autonomous,” says Hill. “In terms of Emirates’ day-to-day involvement, there are only two people here… and we get on with running the business under the plan for the year. The Emirates directors do not really get involved unless we want them to.”||**|||~||~||~|However, SriLankan has clearly benefited from Emirates’ experience. Hill played a leading role in establishing EK, and SriLankan draws many lessons from the Dubai airline both in terms of service and operations. “We do look at the standards and the product [Emirates] has onboard,” says Hill. “When we bought the A330s, for instance, the configuration of the amenities onboard, the inflight entertainment and the seats, all replicated what Emirates had... However, we then put a Sri Lankan makeover onto all of that,” he adds. “Emirates’ culture is very multi-national, but we go away from that and make [our airline] very uniquely Sri Lankan.” In the background, SriLankan has also benefited from replicating Emirates’ IT set-up, which has greatly improved the efficiency of operations. After a transition period, these systems are now all run in Colombo, although there is strong integration between the two airlines’ different platforms. “We work together closely on the marketing platform and on a commercial basis, so it is important to have all of those systems talking to one another,” notes Hill. SriLankan has also gained from Emirates’ marketing finesse, which guided its re-branding, as well as from EK’s reputation, which SriLankan is able to leverage on in its own marketing campaigns. “We are able to promote ourselves as a partner of Emirates, which has given us a lot of credibility and marketing opportunities that this carrier never had before,” comments Hill. Joint purchasing projects have also allowed both Emirates and SriLankan to get better rates from suppliers at outstations. The two have also worked together on aircraft purchases, which has helped cut the price paid by both carriers. “When we bought the A330s, it was an extension of the Emirates order, so we got a price based on an order they had in excess of 25 aircraft,” says Hill. “We, who were purchasing six planes, could not have hoped to have got that price without the Emirates connection. They in turn benefited, as the add-on order helped as they continued to expand their fleet.” Emirates has also benefited from its investment in SriLankan more directly, as the airline has reaped dividends from its shareholdings in four of the last six years. “We are also recognised as a well-run airline, with good cash reserves and a much better financial statement [than six years ago]. So, if the decision was ever to be taken by Emirates to sell the business, it would be worth a huge amount more than it was,” adds Hill. The two airlines are also an important source of traffic for each other, with both being the biggest source of interline traffic for the other carrier. This has been achieved through codesharing on all flights and complete inter-changeability of tickets between the two carriers. This co-operation is likely to become even more important, as SriLankan faces up to increasing competition in its major markets. The Indian government has begun to open the country’s skies and a number of carriers are scrambling to launch services to and from the country. Private Indian operators have also been able to launch international services to Sri Lanka, muscling in on what was a two-horse race between SriLankan and Indian Airlines. Hill, however, is relaxed about the threat posed by such competition and instead focuses on the opportunities liberalisation has created. “We are not negative about the development of more carriers in India,” he comments. “We see that as drawing more attention to the opportunities for travel in India, and it’s a huge market, which is hardly being tapped at all at the moment,” he adds.||**|||~||~||~|The opportunities are shown on the Chennai-Colombo route, where Jet Airways and Air Saraha launched daily services in competition with the Indian and Sri Lankan flag carriers in March 2004. The new entrants have impacted on yields, but SriLankan has not seen much drop in traffic numbers. “Saraha and Jet have increased more on point-to-point travel, and we have picked up more on the long-haul through Colombo as a hub,” explains Hill. “Our experience has been positive rather than negative.” Further competition on routes into Sri Lanka is likely to come over the next 12-18 months, as Indian low cost carriers, such as Kingfisher Airlines and Air Deccan, grow and launch international services. These carriers are likely to create further pressure on yields, and SriLankan is already preparing for the competition. However, Hill believes the start-ups may not be able to achieve the same price differences seen in Europe and the US. “We are trying to drive down all of our costs, so that we remain competitive regardless of what happens,” he says. “However, there are not large numbers of secondary airports in the region, so many of the savings low-cost carriers benefit from in Europe are not necessarily available in this region. That is going to impact on the cost [low cost carriers] are going to have to absorb, and there are not many savings to be gained from lower labour costs either,” he notes. Alongside the expansion of its network in India, SriLankan is also planning to tackle a number of new international destinations in support of its development of Colombo as a hub. The start of a thrice-weekly service to Beijing via Bangkok, which was postponed last year by high fuel costs, is expected to go ahead in April, and more flights into Europe are also planned. London will be raised from 12 flights a week to 14, and more capacity into Germany and France is also on the horizon. A thrice-weekly service to Osaka, complimenting SriLankan’s existing three flights to Tokyo, could also start over the next 12 months, and the airline is also eyeing a resumption of flights to Australia. Such services would allow the airline to enter profitable long-haul markets, such as Europe to Australia. Colombo is also well-situated to act as a hub for these routes, as it is much more centrally located between Europe and the South Pacific, as well as between Africa and the Far East, than either Singapore or Dubai. “We have recognised that Sri Lanka in its proximity in Southeast Asia is very much aligned with India; that’s our strength. But, if you look at the globe, Colombo is a good alternative stopover point for long-haul travel… Looking long term, I think the secondary focus of the hub in Colombo will be the North/South East/West axis,” says Hill. This goal would seem to conflict with Emirates’ global ambitions, but SriLankan aims to offer a smaller, complimentary service rather than competition. “We can already offer the joint inter-changeability of our tickets, so passengers could go one way over Dubai and then come back an alternative way via Colombo… These are the ideas that we have,” Hill explains. To support its expansion, the airline is also set to add to its fleet, which currently comprises five A320s, four A330-200s and five A340-300s. “The plan will see probably two A320s joining the fleet on a lease basis, and maybe a widebody,” says Hill. “If we decide to start up Australia... then there may also be one or two more widebodies, probably A340s.” SriLankan is also interested in taking on its first freighter, probably an A300 or A310, which could fly to China and India, as well as feeding into EK’s hub in Dubai. “We could be seriously looking at [a freighter] again in the next few months,” says Hill. “It all really depends on what happens to fuel. If it continues to nudge downwards that would make that possibility more of a reality.” The airline is also set to expand its domestic amphibian air taxi operation, with the addition of more floatplanes. The carrier launched this service using an eight-seater Cessna 208 Caravan floatplane and it has slashed journey times for travel on the island. For instance, going from Colombo to the East coast takes six hours by car, but it can be done in the air in just 45 minutes. The on-demand service has therefore opened up huge swaths of the country to tourism. “A lot of small boutique hotels are coming up [in Sri Lanka], which are generally fairly close to a reservoir or large river,” notes Hill. “We can now set down with our floatplanes there, and suddenly these places are on the map.” To support this demand, the airline has already added a 15-seat de Havilland Canada Turbo Otter, with another due this month, and it is also planning to increase its service offerings. The list of destinations is likely to increase from 10 to 15-20, while there are also plans to take on more aircraft, as well as launching scheduled services. “Within five years, you might see 10-20 aircraft doing this kind of work,” says Hill.||**||

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