January 4, 2007 (LBO) – It appears that the government of Sri Lanka is getting back into the airline business that it exited in 1998. According to the official news release (http://www.news.lk/index.php?option=com_content&task=view&id=1351&Itemid=44), the objective is to ensure low-cost travel for migrant workers and tourists.
For example, India's biggest low-cost airline, Air Deccan reported a net loss of INR 3.40 billion for the 15 months ending June 2006, on turnover that increased 322 per cent to INR 13.52 billion. Air Deccan claimed that it will be profitable by 2008-2009.
There is little dispute that low-cost transportation for migrant workers is a good thing. There is not enough debate about how to achieve this objective.
Airline?
The airline business is seen by some as a simple business. The cost of moving an aircraft from Point A to Point B is not difficult to calculate. It does not vary significantly whether the plane is full of passengers or not.
One need not actually buy aircraft to operate an airline. Leasing is a widely used option. In the 1970s, Alfred Kahn, the renowned economist who headed the Civil Aeronautics Board at the time and was responsible for deregulating the airline industry, believed that the airline industry satisfied the conditions of low barriers to entry and exit.
All you needed to do was lease an aircraft, get permission to take off and land from two airports and you were in business. Of course, getting those permissions may not be easy and passengers may want access to a network rather than just a route pair.
The network elements is what causes airlines like Deccan to invest heavily in the start-up stage, and not try to run the entire business on one or two planes, as the Government of Sri Lanka seems to be planning.
 The logo of Sri Lanka's upcoming state-run budget carrier, Mihin Air. The government is initially setting aside 500 million rupees to float a fully owned airline to service the Middle East labour market. Financial backing is also due from state-run agencies like the Foreign Employment Bureau, the Employees Trust Fund, who will also take an equity stake in the venture, the government said last month. |
The key to success in the airline business is filling the plane. If the plane is full of paying passengers on most flights, the airline makes money; if it is not, it loses. So small things like travel advisories or big things like 9/11 can have dramatic effects on the profit and loss statements of airlines.
So the issue is how good will the Government be in running an airline profitably? Can it keep costs down, and fill the plane with passengers?
The answer does not require a lot of research. Government has run airlines in Sri Lanka in the past: Air Ceylon and Air Lanka. In both cases, it did a dismal job. Air Ceylon was pretty much at the point of collapse when, instead of letting it die, the Jayawardene administration created a new airline, Air Lanka.
Air Lanka earned the sobriquet of UL, Usually Late, because it was operating without enough aircraft for its routes and the aircraft that it had were aged and unreliable. When it tried to buy new aircraft in the early 1990s, all hell broke loose, with allegations being made about kick-backs and corruption.
From the historical evidence it is clear that government will fail at operating an airline. Profitability will be even more of a challenge in the highly competitive low-cost segment of the market.
So, why would government enter this high-risk business? It appears that one reason is easy availability of capital. The airline will be financed by the money forcibly extracted from migrant workers and from the Employees Trust Fund.
In other countries, funds such as these can only be invested in low-risk activities. But in Sri Lanka, it appears that the government is going out of its way to risk the funds that it holds in trust for local and foreign-employed workers.
Airport?
It is well known that the natural advantage Sri Lanka has is geographical location. Colombo is closer to most South Indian airports, than they are to Mumbai or even Chennai, the region's other international airports.
If the government wishes to lower the costs of flying for our migrant workers and tourists, what it should do is to reduce the costs of using the single international airport that we have and attract more airlines to come to Colombo.
Lower costs and less redtape will bring new airlines in. New airlines will drive prices down. They will also generate revenues for the government owned airport.
Again, there is not need to speculate on this outcome. The entry of Jet and Sahara to the Colombo-India routes in 2004 resulted in lower prices and greater availability of seats.
Under Indian government policy, an airline has to have operated for a number of years before it is allowed to fly international routes, excluding airlines like Deccan from this market. One quick solution is to allow a low-cost airline from India to register as an airline in Sri Lanka.
Then they can haul traffic from Indian cities to Colombo and take them out on the international flights authorized by the Sri Lankan civil aviation authorities. With an established market in India, the passenger volumes will be high, justifying larger aircraft which result in lower costs.
This will make Colombo a hub, not only for SriLankan as it is now but also for the new airline. Prices will decline and frequencies will increase.
There is much that the government can do to improve the airport, such as building a second runway to reduce the disruptions of runway repairs that have to start soon, building an alternative airport to reduce the fuel that has to be carried by planes coming to Colombo, and ending the various exclusivities that have been given to SriLankan that keep the prices of ancillary services up.
It can also begin to create an independent regulatory regime for the airport, as India is beginning to do. Not having a government-owned airline will make it easier to establish a good regulatory regime, in contrast to India, which is still hanging on to Air India and Indian Airlines.
If these actions are too complex, there still is one thing the government can do to improve the lot of migrant workers. Reduce the compulsory "levies" extracted from them. If the government extracts less money from them, they will surely be able to better afford the airline tickets.
There is no reason for the government to take their money and invest it in high-risk ventures. That this money is available is in itself evidence that too much money is being taken by the Bureau of Foreign Employment.
The best way to help people is to allow them to keep their money and use it as they please. The worst way is to extract their money and waste it on high-risk ventures in their name.
Air Ceylon was a disaster at one stage one of its planes were impounded at London Heathrow airport for not paying the fuel bill and the poor passangers were hanging around at the airport for days.
Air Lanka was no better and was never run by a professional business manager with people being off loaded at extra cost to the airline and you know what happened to it.Now the whole thing is run by emirates.
Don't anyone learn by the mistakes. Unless of course the govt wants to employ their unemployable henchman using public money.
The best option is to get a private capital to be the base run by people who have previous sucessful track record of running an airline to contribute 60% to 70% of capital (not borrowed from the state banks) and the govt to contribute the balance.
That way the govt get the benefit of both worlds.
This type of venture should only be backed up only after carrying out a due diligence test as to its viability by a totally independent International Management consultancy.
if sri lankan government gonna go ahead with Mihin Lanka they should first analyze the current market.
because by starting a government enterprise at this very moment will put the government in to more trouble since airline industry is one of the riskiest industries in the world.
government without no proper business thinking endanger its fiscal situation further in to trouble.
this will be a toatl failure if this airline is going to run like the railway department.
profits should be there to keep the business going. otherwise how will this airline survive in this volatile market.
other competitors in the world tend to come up with innovations everyday then how on earth this airline competes with them.
I think there should be vigorous debate about what is expected of government enterprises; in many cases, I would expect such an analysis to make the case for radical reform including privatization.
That is why loss making ones have been privatised or closed all over the world.
But essential services may be given at a loss, like health, education, social services, etc.
Airline is not an essential service though it makes sense to run SLTB at a loss as it gives a service to the very poor.
Most loss making government enterprises are overstaffed. That is why they are loosing.
Government should let private sector develop and create jobs. Over the past few years, government has been enlarging the public sector at an enormus cost.
Just look at the employment of over 40,000 graduates. How many of them have been employed in productive positions.
And how many of them have gained skills necessary to be productive.
As several readers have emphasized, the key issue is not profit and loss, but the endangering of SLBEF, EPF and ETF funds in a high-risk venture.
It is bad enough that these funds are being eroded by negative real interest rates (EPF and ETF) and mismanagement and possible corruption (the court cases involving those who ran SLBEF under Minister Samarasinghe during 2001-04 are still not all concluded, I think).
If Rajapaksa Consolidated invests its own capital in a high-risk venture it should be of no concern to anyone other than the shareholders.
Thats the key.
People are FORCED to pay EPF/ETF into a fund that gives a highly negative real interest rate.
If only EPF rates were tied to AWPLR or 6 Month Gross t-Bill. Then it wont be so cheap for the government to use those monies to run hair-brained schemed.
The majority of the people paying this don't understand what it is used for or how it works.
They just think they'll get a lump sum when they retire, without understanding that its only a FRACTION of what they can get if they were allowed to invest that money in different instruments such as FDs, securities and commercial paper.
EPF still pays single digit interest while the inflation rate is almost double and commercial banks are offering 13-14% on 6 month deposits.
Its another form of taxation on the poor.
The government doesn't run anything profitably. And this is not like any other dormant govt. organization - as the writer points out, when airlines try to cut costs and run at a loss, the safety of it suffers.
Look at the state of the bus and train services. They're both appalling.
There's no point boasting about 7-8% quarterly growth when slum dwellers huts are cleaner than train compartments and those locomotives go as slow as bullock carts.
So many big projects = nice paydays for the ministers controlling the relavent ministries.
And serveral ministerial "secreataries" are kith-n-kin to these ministers and they can be found living it up with black label and grey goose vodka and colombo's nightspots.
Thanks EPF for subsidizing our officials day to day expensies.
And this is not the first time that he has raided the ETF coffers either. When he was labour minister he bid for the Salt Corporation on the CSE. The Salt Corporation is now a loss-making business, wholly ownedf by the ETF and stuffed with Mahinda Maama's cronies.
What a wonderful thing to do with the pension money of millions of employees. Governance? Ethics? Principles?
Bah! Who wants these alien foriegn concepts in dear old Lanka.
Let the Chintanaya rule for a 1000 years. The voted have got what they wanted, now let them get stuffed.
The least, the MR govt claiming to be the one for the people, by the people and of the people.
My understanding, correct me if wrong, is that migrant workers airfare is paid by the employer.
And employees will have to pay if they make additional trips, which is rare in anycase.
Then why start a budget air in their name and with the extracted money from them.
According to a local news paper, the govet owned loss making entities recorded a total loss of some R30.b in the year of 2005 alone.
The accumulated losses of CEB runs into R60b. In spite of all losses, the govt is still creating such monsters to gobble up public money. It is a shame, we dont learn.
Reuters report '' the proliferation of budget airlines across asia has made air travel affordable for millions, but this week's aircraft disaster in Indonesia has underlined the challenge for governments to ensure safety standards are met'.
In the recent case it has been said the the airline had been cutting corners with safety measures and that might have caused the airline to crash.
I may be wrong and hope I am wrong. But a budget ariline in SL will lead to more problems than solutions.
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