Brighter Or Darker Skies Over SriLankan Airlines?

Brighter Or Darker Skies Over SriLankan Airlines?

logoA media release in October 2016 by SriLankan Airlines stated among other things, “The airline’s Group Loss stood at LKR 9.03 billion, which represents a 45% improvement for the 2015/16 financial year compared to the previous year” (2014/15). The annual report confirmed a Group Loss of LKR 9.5 billion, excluding a penalty charge of LKR 2.5 billion, paid for cancellation of one A350-800.
The media release by the national carrier published by The Island last week titled “Brighter skies over SriLankan Airlines financial position” states, “Contrary to inaccurate reports in the press, the management of SriLankan Airlines would like to point out that since the Unity government was formed, the airline’s losses have been dramatically reduced.” It further reported a ‘draft’ (unaudited) loss of LKR 13.4 billion during 2016/17 excluding LKR 14.3 billion, paid for cancellation of several A350-800 aircraft.
To describe a LKR 3.9 billion or 41% increase in year on year Group Losses, despite the discontinuation of traditionally loss-making routes of Frankfurt, Paris and Rome as a “dramatic reduction of losses since the unity government was formed” is to be mendacious.  
 
The present management regularly camouflage its abysmal performance with announcements of ‘Company Losses’ and ‘Group Losses’. This directorate or any other directorate cannot be expected to make good, nearly four decades of monumental losses and mismanagement.
However, the present directorate and management can and should be held accountable for their inability to achieve an Operating Profit (surplus) in its core business operations. An Operating Profit / Loss has no relevance to servicing previous loans and payments for future aircraft deliveries / cancellations. Unlike Sri Lankan Rupee figures, US Dollar figures has no bearing on the depreciation of Sri Lankan Rupee.
Core business activity of an airlines consist of ‘Passenger & Cargo Transportation, carriage of Mail & Excess Baggage, ad hoc flights (charters) and Frequent Flyer net accruals. Revenue derived thereof is referred as Traffic Revenue. Operating Profit (surplus) is the positive variance between Traffic Revenue and Operating Expenditure, expenditure related to generating Traffic Revenue. Ancillary activities such as Ground Handling, Engineering Services, Duty Free Sales, Catering, Training Centre etc.  do not belong to core business activity.   
2016/17 Performance 
Traffic Revenue has reportedly dropped by 6.1% to USD 790 million in 2016/17 from USD 842 million in 2015/16. Passenger Revenue is down by 6.5% to USD 685 million from USD 725 million and Cargo Revenue down by 7% to USD 80 from USD 87 million.
The Operating Deficit in 2016/17 amounts to USD 110 million compared to USD 87 million in 2015/16, an increase by 26%.
Key contributory factors have been a 2% reduction in revenue passenger kilometers (RPKs) in 2016/17 from previous year (RPK is calculated by multiplying the number of revenue-paying passengers on board a flight by the distance traveled), a 3% reduction in Passenger Yields and 11% reduction in Cargo Yields from previous year. It has negated a 3% increase in number of passengers carried from previous year.    
One of the reasons attributed to the “weakening of the balance sheet” in the media release was the non- recovery of “drop in ticket prices” as a result of “fuel price reduction in 2015”. Nevertheless, a reliable source stated “average fuel price paid by the airline in US cents per gallon in 2016/17 was 3% less than average price paid in 2015/16”.
Drop in ticket prices need be addressed with innovative and dynamic sales, pricing and marketing strategies, by the commercial division, besides stringent controlling of costs by all concerned, top down.
Drop in ticket prices is a universal phenomenon and not limited to the Sri Lankan market and SriLankan Airlines. Qatar Airways CEO announced last week, a 20% growth in profits of USD 541 million and a 22% growth in passengers carried on year on year basis.
Identity Crisis
The national carrier is undergoing an identity crisis. It is unable to decide if it is a long haul / legacy carrier, regional carrier, intra-regional carrier or a budget carrier. According to the carrier’s website, it currently operates 23 aircraft comprising of 13 wide-bodied and 11 narrow-bodied aircraft to 41 destinations including Melbourne due to commence on October 29. Most carriers, after careful study of new routes demand in existing routes, acquire aircraft for route expansion. SriLankan Airlines introduces new destinations and increase frequency to existing destinations due to an excess of aircraft. 

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