Sri Lanka’s success as a hub: Location is not enough

Feb 19, 2013 (LBO) – I’ve been seeing the insides of too many airports, one reason for the long gap since the last Choices column. Made me reflect on what makes some airports hubs and others not.

A hub airport is one that has a high proportion of transit passengers (and/or freight). The last time one of my students did an in-depth study, around 20 percent of passengers going through BIA were in transit. Just before it was renationalized, SriLankan claimed that as many as 46 percent of its passengers transited through Colombo, though that percentage appears too high for now.

Sri Lanka used to be a major hub in the 1960s, as evidenced by the story of Lee Kuan Yew transiting to London through Colombo. Then we lost that status and started going to Singapore to get long-haul flights. What this shows is that location is not enough, by itself.

Competition among hubs

One of the world’s largest hub airports, Heathrow, sees itself in competition not only with the other major hub airports in Europe (Amsterdam Schiphol, Frankfurt, Paris Charles de Gaulle and Madrid), but also with emerging hubs in Istanbul and Dubai. This is a correct perception, since it’s now common for Asian and African passengers to bypass Europe altogether and fly to North and South America directly from Gulf airports such as Doha and Dubai.

Colombo has little chance of competing with the region’s mega hubs, such as Bangkok, Dubai and Singapore. But it can easily achieve greater success as a regional hub, connecting South Asian passengers to South Eastern and Western Asia.

Colombo is not at the geographical center of South Asia (New Delhi is), but it is advantageously positioned in relation to the dynamic South Indian states, the Maldives and even populous Indonesia.

For a while it appeared that New Delhi’s new Terminal 3, operated as a public-private partnership and home to a dynamic airline (Jet Airways), would pose a serious threat to Colombo, but it appears that the quality of the transit experience there is deteriorating.

The massive numbers of passengers generated within the catchment area of the New Delhi airport appears to have caused the Indian airport authorities to fumble the ball.

Countries like Singapore and Sri Lanka that do not have the luxury of a massive domestic catchment area cannot afford to; they arecompelled to pay greater attention to transit passengers in order to fill their flights and make best use of their airports.

What a hub needs to succeed

The most important ingredient of success as a hub airport is good connections (to places that passengers want to go to; without too long a wait). The precondition for good connections is lots of flights. How one attracts a lot of flights is by running an efficient airport that can provide excellent ground services (e.g., fueling, catering, baggage services) at competitive prices.

BIA is not the most efficient airport in the region. SriLankan, the home airline, has long enjoyed monopolies in ground services. These monopolies become even more important when the airline is hemorrhaging red ink, as it is now. But they have to be eliminated BIA is to become a successful regional hub.

No one was complaining about Singapore Changi’s efficiency. Yet, they have introduced significant competition in ground services by allowing in DNATA, the Dubai-based airport services operator. Sri Lanka should follow, at least in terms of concessioning out the supply of ground services through well-defined contracts that create incentives for efficient service supply and low prices.

BIA now offers better services to transit passengers, such a transit hotel and more choice in retail, food and drink. These amenities factor in only after the transit passengers have arrived. No one buys an airline ticket on the basis of the shopping in the transit airport. Many successful airports maintain significant margins on the amenities provided to the captive passengers but keep the ground services as low as possible. Making it attractive for airlines to land an aircraft and takeoff again is the foundation of success of a hub.

Mattala’s effects

The question that will naturally arise is the impact of Mattala. A hub is about people coming on one flight and conveniently getting on another. There is not much value in coming to Colombo and departing from Mattala, or vice versa. For example, having all the flights to and from South East Asia coming to Mattala while Colombo serves South Asia and western destinations does not make a lot of sense since that will not make either airport an attractive hub and will actually harm the potential of each.

Another danger is that the airport authorities will try to cross-subsidize Mattala, by offering below-cost ground services there and jacking up the prices in Colombo even further. Another is the mandating of the use of Mattala, irrespective of commercial considerations. This was the case in Ireland a few decades back.

Ireland had built a big airport at one of its westernmost points, Shannon, to serve the aircraft of the time that needed to refuel as quickly as possible after crossing the Atlantic. Then aircraft technology improved as Shannon was no longer needed. But the government mandated all aircraft coming to Dublin (where the people and businesses were) to clear customs and immigration in Shannon. I recall going through the contortions of doing two landings in a tiny little country as recently as in the early 1990s.

Given how expensive landings and takeoffs are, we passengers paid for the generosity of the Irish government to the stakeholders of Shannon. I believe this madness did not continue for too long.

In the case of Shannon, irrational behavior by the government was driven by the need to appease existing stakeholders. Luckily, there are no existing stakeholders in Mattala. Therefore, one hopes that Shannon will not be repeated here.

Freight hub

But there is a good side to the Shannon story. It was one of the birth places of business process outsourcing. Given the limitations of data storage and communication in the late 1980s and 1990s, it made sense to air freight tape containing data across the Atlantic to be worked upon and returned also by air freight. It also attracted a lot of European beachhead offices of American companies, especially those in IT.

That particular story cannot be directly replicated in Mattala. But its essence can. The authorities need to think of a rational economic application now that the airport has been built. An air freight cargo hub seems to make prima facie sense. In terms of aircraft movements, obscure Memphis, Tennessee, and Louisville, Kentucky, are among the busiest in the world, because they serve as hubs for FedEx and UPS respectively.

While the volumes of air freight carried by these companies as well as others such as DHL and TNT are growing rapidly in South Asia, the region still lacks hubs. The closest are situated in the high-cost locations of Bahrain, Dubai and Singapore. It would be quite a coup for the Aviation Ministry to attract the first such hub in South Asia to Mattala.

Rohan Samarajiva heads LirneAsia, a regional think tank. He was also a former telecoms regulator in Sri Lanka. To read previous columns go to LBOs main navigation panel and click on the ‘Choices’ category.