27-Feb-2013 7:00 AM

SriLankan Airlines focuses expansion on North Asia as it prepares to join oneworld

Analysis

SriLankan Airlines is planning to focus expansion on existing and new markets in Asia ahead of the carrier's ascension into the oneworld alliance. SriLankan is now on course to formally become oneworld's smallest member in Nov-2013.

The government-owned carrier is currently focused heavily on South Asia, which accounts for 41% of its international seat capacity. SriLankan's network in South Asia, particularly India and the Maldives, is its main draw to oneworld. But North Asia is SriLankan's target growth market, with more capacity to greater China and the likely launch of flights to South Korea. SriLankan's North Asia expansion could be boosted by a relationship with Cathay Pacific, which is sponsoring SriLankan's membership into oneworld.

Summary

SriLankan Airlines is planning to focus expansion on existing and new markets in Asia ahead of the carrier’s ascension into the oneworld alliance.
SriLankan’s network in South Asia, particularly India and the Maldives, is its main draw to oneworld.
North Asia is SriLankan’s target growth market, with more capacity to greater China and the likely launch of flights to South Korea.
SriLankan is considering adding non-stop flights to Hong Kong and launching services to Seoul via Hong Kong.
SriLankan is looking to establish a partnership with Cathay Pacific, which is sponsoring SriLankan’s membership into oneworld.
SriLankan is the largest international carrier to and from the Maldives, with its five daily flights on the Colombo-Male route providing 14,000 weekly return seats and accounting for about 20% of total international capacity at Male.

SriLankan's North Asian network currently includes the three largest cities in mainland China - Beijing, Guangzhou, Shanghai - as well as Hong Kong and Tokyo Narita. Only Tokyo is served non-stop from SriLankan's Colombo hub while the other four cities are all served via Bangkok.

Northeast Asia currently accounts for 7% of the carrier's seats, compared to 41% to South Asia, 22% to Southeast Asia (includes the first leg of flights to greater China), 19% to the Middle East and 12% to Europe. But SriLankan CEO Kapila Chandrasena says "the Far East is where our growth is".

SriLankan international capacity (weekly seats) by region: 25-Feb-2013 to 03-Mar-2013

SriLankan looks to launch service to Seoul via Hong Kong

Mr Chandrasena told CAPA at the Malaysia Airlines (MAS) oneworld joining ceremony in Kuala Lumpur on 31-Jan-2013 that the carrier is looking at adding non-stop flights to Hong Kong and launching services to Seoul via Hong Kong. Both would be significant developments as Hong Kong is not currently linked to Colombo on a non-stop basis and there are currently no direct flights between South Korea and Sri Lanka. Korean Air (KAL), however, is planning to launch on 09-Mar-2013 three weekly A330 flights from Seoul to Colombo with continuing service to Male in the Maldives, opening up a market SriLankan is also keen to tap.

Sri Lanka and South Korea forged an expanded bilateral agreement in Feb-2013 which granted KAL traffic rights for Seoul-Colombo-Male while SriLankan was granted traffic rights for Seoul-Hong Kong-Colombo. Seoul-Hong Kong is a huge market with eight carriers currently providing about 30,000 weekly one-way seats, according to Innovata data. SriLankan's ability to carry local passengers between Seoul and Hong Kong could make the route viable as Korea-Sri Lanka itself is a small albeit promising market. There were only about 8,000 South Korean tourist arrivals in Sri Lanka in 2012 while there were about 24,000 South Korean tourist arrivals in the Maldives, according to tourism ministry data from both countries.

SriLankan currently serves the Hong Kong-Colombo market with three weekly flights via Bangkok using A330s and A340s. Cathay Pacific serves the market daily using 777s, with four weekly flights via Singapore and three weekly flights via Bangkok.

SriLankan-Cathay codeshare would be logical

SriLankan currently does not codeshare with Cathay Pacific, but the two carriers plan to consider codesharing after SriLankan formally enters oneworld. SriLankan and Cathay could potentially cooperate on the Hong Kong-Colombo route as well as markets beyond Hong Kong and Colombo.

A partnership between Cathay Pacific and SriLankan would make sense as it would help Cathay access the Maldives, which Cathay does not currently service but has emerged as an important and profitable market for some of its biggest competitors including Singapore Airlines (SIA). For SriLankan, a partnership with Cathay and Cathay regional subsidiary Dragonair could help it access offline markets beyond Hong Kong in North Asia, particularly secondary cities in China as SriLankan only serves primary Chinese cities, and on the west coast North America.

A Cathay-SriLankan partnership would also be logical as Cathay is now mentoring SriLankan on the oneworld membership process, helping the smaller carrier with meeting IT and other requirements. SriLankan recently began the process of transitioning to an IT system from Amadeus which will support its ascension into oneworld.

Mr Chandrasena is confident SriLankan can meet all the requirements and be able to formally join oneworld in Nov-2013. But Cathay is less optimistic given the amount of work required on the IT side. Delays in the alliance joining process are typical and often carriers need significantly more than the typical minimum period of 18 months. As oneworld accepted SriLankan as a new member in Jun-2012, an ascension in Nov-2013 as currently scheduled would mark a relatively quick 17-month joining process.

Hong Kong-Colombo is a challenging market given lack of local passengers

Establishing a non-stop link between Hong Kong and Colombo is important ahead of SriLankan's entry into oneworld as it will result in better connections for the alliance's passengers. But local demand is limited between Hong Kong and Sri Lanka, making it difficult to sustain non-stop flights from both carriers even when taking into account oneworld synergies.

Cathay CEO John Slosar told CAPA that Cathay for now has no plans to eliminate the Bangkok or Singapore stop in the carrier's Colombo flights. He points to the fact that Sri Lanka is not included in Hong Kong's visa on arrival programme, which limits inbound traffic from Sri Lanka to Hong Kong. Hong Kong and China also remain very small sources for Sri Lanka's fast-growing tourism industry.

While the oneworld tie-up should bring more connecting passengers to the Hong Kong-Colombo route, the local traffic is simply not there to justify at this point a daily non-stop. Three weekly non-stop flights from Sri Lanka could potentially be supported as SriLankan will be able to allocate a portion of its seats to the South Korean market.

Cathay, if it also entered the Hong Kong-Colombo non-stop market, would need to rely almost entirely on connecting flights to Male in the Maldives, either by extending its own Colombo flight to Male or accessing the five daily flights SriLankan now operates to Male. But if nearly all its passengers on a potential Colombo non-stop are heading to the Maldives, Cathay would be better off simply flying to Male direct and retaining its current Colombo service via Bangkok and Singapore, where it is able to pick up passengers and access the larger Thailand-Sri Lanka and Singapore-Sri Lanka markets. A direct flight to Male, which Cathay has been considering, would also allow it to offer a more competitive one-stop product between the Maldives and several points in mainland China in competition with SIA, which relies heavily on connections to China to support its two daily flights to Male.

Colombo has limited links to other oneworld hubs

Colombo is currently now connected to only five other oneworld hubs: Amman (served by Royal Jordanian), Kuala Lumpur (served by SriLankan and Malaysia Airlines), London Heathrow (served by SriLankan), Moscow (served by SriLankan) and Tokyo Narita (served by SriLankan). Colombo is also served by Qatar Airways from Doha, which will become a oneworld hub once Qatar Airways formally joins the alliance in 2014.

SriLankan already codeshares with Royal Jordanian and MAS and is planning to implement a codeshare with Moscow-based S7 Airlines. Codeshares with British Airways and Japan Airlines would be logical and could potentially lead to both carriers operating alongside SriLankan on the Colombo to London and Tokyo routes. A codeshare with Qatar Airways is also possible although potentially more controversial as Qatar Airways now competes with SriLankan in the Sri Lanka-Europe market.

Europe is the main source of tourist arrivals for Sri Lanka, accounting for 44% of the one million tourism arrivals reported by the Sri Lanka Tourism Development Authority in 2012. Qatar Airways is the second largest foreign carrier in Sri Lanka after Emirates, which has maintained a large presence at Colombo since ending its partnership and management involvement in SriLankan in 2008. (Two years later, in 2010, the Sri Lankan government bought back Emirates' 44% stake in the carrier.)

Emirates currently operates four daily 777 flights to Colombo, including two from Dubai and one each from Singapore and Male, while Qatar operates three daily flights on the Doha-Colombo route with A320 family aircraft. Of the 20 foreign carriers currently serving Colombo, which is currently the only airport in Sri Lanka with international service (a second international airport is expected to open in southeast Sri Lanka in Mar-2013), only Emirates and Qatar operate more than two daily flights.

Colombo capacity share by carrier (% of seats): 25-Feb-2013 to 03-Mar-2013

SriLankan and partner MAS look to add capacity on Colombo-Kuala Lumpur route

The MAS codeshare includes flights on the Colombo-Kuala Lumpur market as well as regional destinations in Asia and some flights to Australia and the US. Mr Chandrasena says SriLankan is now looking at adding capacity to Kuala Lumpur to fill some of the void left by Malaysian low-cost carrier AirAsia, which is dropping its daily service to Colombo on 26-Feb-2013. More capacity on Kuala Lumpur-Colombo is also more sustainable as SriLankan joins oneworld's newest member, MAS, in the alliance.

SriLankan currently serves Kuala Lumpur with two daily flights, including 10 weekly A320 frequencies and four weekly frequencies using A330/A340s (these four flights were up-gauged from A320s late last year). MAS has already unveiled plans to increase capacity in the Kuala Lumpur-Colombo market on 31-Mar-2013, when it adds three weekly flights for a total of 10 weekly 737-800 frequencies. Kuala Lumpur is currently the sixth biggest route from Colombo based on seat capacity. London Heathrow and Doha are also among the 10 largest routes from Colombo.

Colombo top 10 routes ranked by capacity (weekly seats): 25-Feb-2013 to 03-Mar-2013

While SriLankan will likely add capacity to Kuala Lumpur, its focus is now more on expanding in Northeast Asia. In addition to the new Colombo-Hong Kong-Seoul route, SriLankan is considering adding capacity on Colombo-Tokyo Narita and to its three destinations in mainland China.

SriLankan unlikely to launch non-stop flights to mainland China in near future

SriLankan currently serves Beijing and Shanghai with five weekly flights via Bangkok while Guangzhou is served with four weekly flights via Bangkok, and Tokyo is served with four weekly non-stop frequencies. Mr Chandrasena says SriLankan eventually would like to offer non-stop flights to its Chinese destinations but for the short to medium term the focus would be "to scale up China" by adding frequencies on the existing routings.

Mr Chandrasena says most of its passengers which board at the carrier's four destinations in greater China currently get off at Bangkok or transit in Colombo for flights to the Maldives. Only about 10% of passengers are heading to Sri Lanka with the remaining 90% split relatively evenly between local passengers that get off in Bangkok and passengers which are heading to holidays in the Maldives.

Sri Lanka's tourism ministry reported less than 26,000 tourist arrivals from China in 2012 (see background information). This represented 58% growth over 2011, showing the potential of the China-Sri Lanka market but does not provide a big enough base to support regular non-stop services.

The Maldives has seen tourist arrivals from China grow steadily in recent years from a base of virtually zero to now accounting for about 25% of the total market. The Maldives Ministry of Tourism reported a 16% increase in tourist arrivals from China in 2012 to almost 230,000. As a result the Maldives now has nine times as many visitors from China as nearby Sri Lanka although the two markets overall are similarly sized with about one million tourist arrivals for each country in 2012.

Approximately only half of the Chinese visitors to the Maldives fly on non-stop flights given there is on average only about 3,000 weekly one-way non-stop seats between the two countries (this figure fluctuates significantly depending on the season). Male in the week commencing 25-Feb-2013 is served by 10 weekly frequencies from Chinese carriers, according to Innovata data. This includes three weekly flights on Hainan Airlines from Beijing, two weekly flights on Sichuan Airlines from Chengdu, two weekly flights on China Southern from Guangzhou and three weekly flights on China Eastern from Kunming via Colombo. Maldives-based carrier MEGA Maldives Airlines also currently operates about 13 weekly flights to China using 767s, including two each to Beijing, Hangzhou and Hong Kong, three to Shanghai and four to Chengdu (MEGA's schedule fluctuates week to week).

SriLankan currently has about 5,000 weekly one-way seats to China including Hong Kong, with approximately 2,500 allocated to the China-Maldives market. This gives SriLankan almost as many Maldives-China passengers as all the Chinese and Maldivian carriers combined. SIA and to a much lesser extent MAS, which serves Male with one daily 737-800 flight, account for most of the remaining portion of the China-Maldives market. SriLankan has a disadvantage in competing against MAS and SIA in the China-Maldives market as SriLankan has a two-stop product with transits required in both Colombo and Bangkok, but Mr Chandrasena claims this has not had an impact on attracting traffic.

SriLankan's strong position in the Maldives is an attraction to oneworld

SriLankan is the largest international carrier to and from the Maldives, with its five daily flights on the Colombo-Male route providing 14,000 weekly return seats and accounting for about 20% of total international capacity at Male. Emirates is only marginally smaller while SIA is the third largest carrier to and from the Maldives with an 11% share of international capacity.

Male capacity share by carrier (% of seats): 25-Feb-2013 to 03-Mar-2013

While it now allocates a large portion of its Maldives seats to China (roughly one-third), SriLankan has historically carried a large number of passengers between the Maldives and Europe and between Maldives and India. But SriLankan has seen its Europe-Maldives traffic decrease over the last several years as Gulf carriers have launched services and steadily increased their capacity to Male. SriLankan previously routed some of its flights between Colombo and Europe via Male, including four weekly flights on a Colombo-Male-London Heathrow routing until 2012.

Most of SriLankan's Maldives passengers now connect onto the carrier's flights within Asia. The carrier's high frequency operation in Male is also attractive to oneworld carriers that serve Colombo or plan to serve Colombo as there would be a quick connection to the Maldives for essentially any flight arriving in Sri Lanka. Mr Chandrasena says SriLankan is now talking to oneworld members about improving their access to the Maldives market.

Colombo-Male is currently SriLankan's largest route by capacity. Colombo-Bangkok, driven in part by the large number of passengers originating in greater China and heading to Male, is the carrier's third largest route. Colombo-Chennai is SriLankan's second largest route and one of three Indian routes among the carrier's top 10.

SriLankan top 10 routes ranked by capacity (weekly seats): 25-Feb-2013 to 3-Mar-2013

SriLankan currently serves eight destinations in India and Karachi in Pakistan, giving it 11 in South Asia (including Male and its Colombo hub). The South Asian network was the main draw for oneworld. The alliance currently does not have any member serving three of SriLankan's Indian destinations and did not have any member serving the Maldives until MAS joined. SriLankan will be the first carrier in all of South Asia to join a global alliance.

SriLankan's Asian and Middle Eastern network: as of 25-Feb-2013

Qatar Airways, however, serves all but one of SriLankan's South Asian destinations and has a larger South Asian network, which currently consists of 20 destinations including 12 in India. This significantly diminishes the already relatively limited value that SriLankan brings to the alliance. Qatar Airways had not been approved by oneworld when the alliance voted on SriLankan.

Mihin Lanka will not be part of oneworld

SriLankan budget carrier subsidiary Mihin Lanka also serves six destinations in South Asia (excluding Colombo), four of which are not served by SriLankan. But Mr Chandrasena says for now there are no plans to bring Mihin Lanka network, which also includes three destinations in the Gulf and Jakarta in Indonesia (only one of these destinations is also served by SriLankan), into the oneworld network.

SriLankan codeshares with Mihin Lanka, giving it the ability to offer a seamless product to passengers travelling via Colombo between SriLankan and Mihin Lanka destinations. Mihin Lanka's schedules have been synchronised to optimise connections with SriLankan. Mihin Lanka also has evolved into a hybrid carrier, resulting in a product which is sufficient for full-service passengers. Mihin Lanka's fleet of three A320 family aircraft are operated in single-class configuration but some frills, including checked bags, a light meal and drinks, are provided.

Mihin Lanka is joining SriLankan in transitioning to the Amadeus Altea platform. This gives SriLankan the flexibility to have Mihin Lanka work with other oneworld members in future. But for now the SriLankan government, which owns both carriers, prefers to keep Mihin Lanka independent and outside oneworld.

Mihin Lanka network: as of 25-Feb-2013

Mihin Lanka plans to pursue modest growth, adding approximately one aircraft per year, with a focus on the regional market. The main SriLankan operation will take a hiatus from capacity expansion in 2013 as the carrier waits for the capacity added in 2012 to be absorbed.

Mr Chandrasena says ASKs at SriLankan were up 18% in 2012 with most of the additional capacity allocated to China and India. While capacity will not increase overall in 2013 some markets will see increases, with a focus on Asia, as SriLankan continues to "shift around its network".

SriLankan's outlook is bright as it focuses on Asia and prepares to join oneworld

Over the last year SriLankan has been decreasing capacity to Europe in response to the economic downturn. SriLankan dropped service to Zurich in Mar-2012 and service to Milan in Sep-2012, leaving it with service to only five European gateways - London, Paris, Frankfurt, Rome and Moscow. It currently operates one daily flight to London - with up to 12 weekly frequencies operated during the peak northern hemisphere summer season - four weekly flights to Paris, four to Frankfurt, three to Rome and two to Moscow.

The UK continues to be the second largest source for tourist arrivals in Sri Lanka after India, while France is the third largest market. Tourist arrivals from Western Europe were up 18% in 2012 to 373,000 while tourist arrivals from Eastern Europe were up 44% to 72,000 (see background information). But SriLankan continues to see its share of this market decrease due to expansion from the Gulf carriers.

East Asia, where Sri Lanka tourist arrivals were also up by 38% to 133,000, represents a bigger growth market for SriLankan given the stronger economy in Asia compared to Europe and the less intense competition. Asia also represents the more attractive market for traffic to SriLankan's second home market, the Maldives, given the rapid growth in Maldives tourist arrivals from Asia and the intense competition from Gulf carriers in the Maldives-Europe market.

Sri Lanka's market overall has rebounded from a period of instability, which concluded in 2009 with the end of the civil war. Total tourist arrival figures were up 18% in 2012 and the country's economy grew by almost 7% in 2012, following annual growth of 8% in 2010 and 2011.

SriLankan is well positioned to benefit from the continued growth in Sri Lanka's economy and tourism sector. Meanwhile, membership in oneworld will allow SriLankan to compete more effectively against Gulf carriers to Europe while instantly expanding its global network virtually, allowing the carrier to focus on growth within Asia.

Background information

Sri Lanka tourist arrivals by country of residence: 2012 versus 2011