Curtains for SriLankan Airlines?

Emirates CEO, Tim Clark, yesterday announced that the

Dubai-based airline will not renew its management contract with SriLankan Airlines

after 1-Apr-08.

There was no immediate statement of whether a vital codeshare between the two carriers will be maintained, but Emirates is already reportedly becoming an attractive employment option for skilled staff from its partner, further reducing the likely efficacy of SriLankan.

Where terrorists, tsunami, SARS, civil war and difficult market conditions failed to destroy the nearly 40 year-old airline, it may be that politics and market change may soon succeed. The cancellation follows a public spat, where the SriLankan government last month withdrew the work permit of Peter Hill, Emirates secondee and CEO of the Colombo-based carrier.

Meanwhile, Emirates will try to sell some or all of its 43% holding. It acquired 40% for USD70 million at the same time as the agreement entered into force in 1998 and later added another 3%. CEO Tim Clark suggests a selling price of USD150 million, but there may not be many buyers.

In the past, Sri Lanka benefited from India's restrictive international aviation policy. Thanks to its relative opennness towards the small island neighbour, Colombo became India's major sixth freedom gateway hub.

Adding the effective partnership of Emirates (and some excellent work on the ground by Peter Hill, especially in recovering from the destruction of most of the SriLankan fleet by terrorists), SriLankan was able to exploit this position very effectively. But things have changed.

India is now allowing its own private airlines to fly internationally and is rapidly opening up access generally. Point to point services are being established every day. As a result, Sri Lanka's strong sixth freedom base is progressively being eroded; opportunities for its flag carrier to exploit India's market are accordingly evaporating.

With this combination of negative currents, the timing could hardly be worse for SriLankan’s future. But there is more, for termination of SriLankan’s 10-year agreement with Emirates will mean a lot more than a simple change of management.

The SriLankan government will now take over operational control of the flag carrier, but long-term support for it – of which the government owns 51% - looks likely to be less than wholehearted.

Last year, a new government owned airline, Mihin Air, was established, strongly promoted by the national President (who reportedly takes a close personal interest in day to day operations), and quickly began operating head-to-head with Emirates-SriLankan on key routes like Dubai. This provocative move could now be seen as part of the preparations – or provocations – for termination of the Emirates management agreement. An untidy process is now probable, while the transition is navigated.

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