Choices: Airline or airport?

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.

A cursory examination of the profit-and-loss reports of the world’s airlines will show that the airline business is quite volatile, with the low-cost segment being more volatile and risky.

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.

Money?

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.