Running up that Hill

SriLankan Airlines is finally in profit, but as CEO Peter Hill tells Rhys Jones, the battle is not over.

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By  Rhys Jones Published  May 22, 2005

Running up that Hill|~|PETER-HILL-200.jpg|~||~|FOR A MAN whose lifeblood is aviation, Peter Hill seems to really hate the airline business at the moment. Hill, who has been CEO of SriLankan Airlines for the past six years, appears thoroughly disillusioned with the state of the industry — and with good reason. “The whole sector suffered really badly last year, but this year is going to be even worse,” he gloomily predicts. With the combined effects of terrorism fears, the repercussions of last year’s tsunami, the flurry of low-cost alternatives to traditional carriers and rising fuel costs, the airline industry isn’t exactly a fun place to be right now. “I came back from the States last night and the carriers over there are publishing huge losses in the first quarter and we’ve only just started the year,” he says. At last month’s Asian Airports World 2005 conference, International Air Transport Association (IATA) bosses said the global aviation industry must undergo major reforms as high oil prices look set to plunge airlines into a fifth straight year of multi-billion-dollar losses. “High oil prices have had a huge impact on the sector and I would go as far as to say that the industry is reeling from the prospects of high fuel prices,” Hill bemoans. The SriLankan Airlines Group, which comprises the airline, ground handling and catering arms of the company, published record profits of some US$58 million in 2003-2004. This was the first time in 25 years in which the airline had got into the black. However, things appear to be heading in a totally different direction this year. “We were looking forward to continued profits along those lines for the next couple of years because nothing much had changed at that stage, but then fuel prices started going up,” explains Hill regretfully. “We should know the exact figures for last year in around a month or so, but it’s not been a great year for us because coupled with high oil prices we had three months after the tsunami to deal with. So we lost a huge amount of money as a result of that,” he adds. The IATA, which groups 275 airlines, representing 94% of global air traffic, claims its members could collectively lose US$5.5 billion this year, primarily due to escalating fuel expenses. Total losses in the airline industry reached US$4.8 billion in 2004 as its fuel bill rose from US$44 billion a year earlier to US$63 billion. Aviation fuel costs are 36% higher than a year ago and 5.4% up on the last quarter. “We made a profit when fuel was US$0.94 a gallon in March 2004, but over the past year fuel prices have averaged US$1.32 a gallon,” explains Hill. “The airline virtually disappeared because of this and there will be a substantial loss for the airline this year, but the group might just struggle through,” he adds. For 2005, the average cost of oil is expected to be around the US$1.50 a gallon mark. The surge in oil prices, which dragged the airline near the red by the end of the period, is set to raise fuel bills by more than one-third. SriLankan forecasted fuel prices of around US$1.53 or US$1.54 for the current financial year. However, prices floated around the US$1.76 mark throughout April, making Hill sceptical about the chances of SriLankan breaking even next year, let alone ending the year in the black. “One cent a gallon on the price of fuel over the year is worth US$1.1 million on our bottom line and our forecast went up from US$1.32 to US$1.54 this year,” says Hill. “Making a profit out of the airline business at the moment is hugely difficult,” he adds. As well as the other negative factors, rising fuel costs have taken a heavy toll on SriLankan’s attempts to restructure and expand. The airline’s fleet currently comprises five A340s, 4 A330s and 5 A320s and two freighters and two air taxis. “We had plans to increase the fleet this year but as well as escalating oil prices, the effects of the tsunami and the downturn in visitor arrivals means that all those expansion plans are on hold for at least a year,” comments Hill. “We were looking at bringing in a couple of single-aisle A320 150-seaters for the regional services and at least one more wide-body for expanding the long-haul services, but as I say this is all on hold at the moment. The tsunami cost us tens of millions of dollars in revenue, so have we got the cash to go out and look at increasing our fleet? The answer is that at the moment it would be rather foolish to embark upon such an idea,” he added. Last December’s tsunami, which swept nearly 40,000 people to their deaths and left another half a million homeless was Sri Lanka’s worst natural disaster in memory. The country was looking at another record year in terms of visitor numbers, while SriLankan Airlines was looking at consistently filling its planes before the tragedy rocked the country and the world. “Most of the hotels and resorts were full and we were looking at seat factors of 80% plus. Within two weeks of the tsunami seat factors had plummeted to less than 50%, all the tour operators cancelled their allotments in the hotels and visitor arrivals basically dried up,” he says dejectedly. “It was very, very bad and I reckon those three months cost us between US$40 million and US$45 million in revenue. The immediate impact after the tsunami was that the industry just died. It literally just died,” Hill solemnly confirms. Despite the December 26 catastrophe, Sri Lanka is slowly starting to pick itself up again. According to Hill, tourism will be essential to help the country rebuild itself. Around 80% of the hotels affected by the disaster are once again operational while most of the island was actually unaffected. “Tourism remains the lifeblood of Sri Lanka, and the area affected is only one small part of the island. Places such as Kandy and the mountain region rely on visitors to sustain their economies and to see a slump in visitor figures would be another blow for the country,” claims Hill. “The region’s travel industry has been affected before, but has shown remarkable resilience thanks to the strength of our product. Experts tell us that we can expect a full recovery within 2005,” he forecasts. Currently in its 25th year of operations, SriLankan Airlines now flies to 47 destinations in 26 countries across Europe, the Middle East and Asia, with 12 points serviced through code-sharing agreements to locations as varied as London, Paris, Riyadh, Singapore, Mumbai, New York, The Maldives and Melbourne. SriLankan Airlines was created in April 1998 when Air Lanka was privatised following the establishment of a strategic partnership with Dubai-based Emirates Airline. The agreement saw Emirates take a 44% shareholding in the company and undertake a 10-year management agreement, during which time SriLankan has been established as southern Asia’s preferred international carrier. “Emirates has a 10-year management contract with us, which we are currently seven years into. I think it has done remarkably well,” states Hill. “Our relationship with Emirates is very stable, very successful and I think it has certainly boosted the image of the airline dramatically. I’d say it was a complete success story and the doubters that we had in 1998 and 1999 have evaporated and you certainly don’t see much criticism in the press about us anymore,” he concludes. With a 49% surge in profits of US$708 million for 2004-2005 and revenues of US$5.2 billion for the year, the Emirates Group has clearly set the standard for its south Asian partner to follow. And it’s not only the company’s financial results that SriLankan is hoping to copy. “We’d love to emulate Emirates’ success. Profits of over US$700 million for the last financial year are just huge, but I’m a realist so we’ll take it one step at a time,” explains Hill. “We have had the ambition to make Colombo a hub like Dubai since 1998. With the introduction of the summer programme it is probably closer now than it has ever been,” he adds. Hill estimates that roughly 50% of the airline’s business has come as a result of the network using Colombo as a connecting point as opposed to a figure of 15% back in 1998. Statistics like this suggest that SriLankan will continue its impressive growth when the price of oil stabilises once again. However, next year could well be just as difficult for the airline to eek out further savings, if oil prices stay high. Another obvious hurdle the SriLankan will have to overcome is the growing presence of low-cost carriers (LCC) flying in and out of south Asia, especially from the Middle East. In spite of this threat, Hill remains confident that the strength of SriLankan’s network will see it through. “The only carrier that currently flies to Colombo as an LCC is Air Arabia and they have progressively increased their services to daily. At the moment, its 150 seats a day, which is a drop in the ocean as far as we’re concerned,” he says. “One of the things we’re doing to compete with that situation is, of course, look at our costs. We operate in a fairly low-cost environment — compared with our competitors Sri Lanka is quite a cheap place to operate from in terms of labour costs. Labour costs are about 10% of our overall costs and that is very small,” he adds. The pressure to lower costs and raise efficiency has never been greater as fares and yields tumble amid the rising oil prices and mounting competition. These factors do not affect government-backed carriers however, and this riles the normally calm and placid Hill. “A threat to commercially run airlines like ourselves, who receive no government funding whatsoever, are those airlines that operate with the support of their respective governments. You only have to look at emerging carriers from the GCC such as Sharjah’s Air Arabia and Abu Dhabi’s Etihad Airways to see good examples of what I’m talking about,” proclaims Hill. “Government-funded airlines are able to grow their networks very rapidly, without any financial constraints and literally buy business to increase their market share by being able to offer market fares below cost,” he adds. Despite unpredictable oil prices and uncertainty within the industry, SriLankan Airlines should come through this turbulent period. Industry experts are impressed that it is at long last in profit, and the future is not as bleak as before. With a strong partner such as Emirates, and a veteran of almost half a century of aviation experience at the helm, the airline looks set to make a smooth landing when conditions settle. ||**||

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