SriLankan Airlines develops a hub at Mattala. Two international airports may be one too many

This is the fourth and final instalment in a series of analysis reports on the Sri Lankan market. The first report analysed how SriLankan Airlines' market position and outlook is potentially improved by its ascension into the oneworld alliance. The second instalment looked at the flag carrier's turnaround plan, including its fleet modernisation initiative. The third report analysed the market position and outlook of Sri Lanka's second carrier, Mihin Lanka.

• SriLankan Airlines raises global profile and expands oneworld presence in South Asia
• SriLankan Airlines turnaround hinges on fleet renewal, yield improvements and oneworld
• Mihin Lanka adds business class, re-fleets. Sri Lanka hardly needs two government-owned airlines

This report examines the strategy being employed by both carriers for Mattala Rajapaksa International, located in Sri Lanka's southern district of Hambantota. The airport is named after Sri Lankan president Mahinda Rajapaksa, who is from a village in the Hambantota district. Hambantota is also a small city located about 200km from Colombo and about 15km from the town of Mattala where the airport is situated.

Mattala Airport is operating well below its design capacity

Mattala Rajapaksa International opened in Mar-2013 and features a 12,000m² terminal building with two gates and 12 check-in counters. Its one runway is 3,500m, long enough to accommodate A380s although the largest aircraft in the Sri Lankan market are A330/A340s (which SriLankan currently operates on some of its Mattala flights).

A second phase envisions adding 34 check-in counters and 28 gates by the end of 2015, which would raise capacity to about 5 million passengers per annum. This is clearly an overly ambitious plan as the airport is currently handling less than 50 weekly movements and is operating well below its initial design capacity of 1 million passengers and 6,000 movements per annum.

SriLankan Airlines is the market leader at Mattala, accounting for 28 of the current 36 weekly scheduled movements. Mihin Lanka currently accounts for only two weekly movements while Abu Dhabi-based Rotana Jet accounts for the remaining six movements.

The current figures however are slightly misleading as flydubai has temporarily suspended service to Mattala. The Dubai-based LCC plans to resume flights to Mattala on 1-Jun-2014 with six weekly frequencies, boosting total weekly movements at Mattala to 48. Based on schedules for early-Jun-2014, flydubai accounts for about a 16% share of total seat capacity at Mattala, making it the second largest carrier after SriLankan, which will have about a 71% share.

Mattala capacity share (% of seats) by carrier: 2-Jun-2014 to 8-Jun-2014

Source: CAPA - Centre for Aviation & OAG

SriLankan makes several early network adjustments at Mattala

SriLankan initially linked Mattala with Colombo, Bangkok, Male and Riyadh. But Riyadh was dropped in Jun-2013 and Bangkok was discontinued in Dec-2013, according to OAG data. The southern Indian cities of Tiruchirappalli and Chennai were added in Dec-2013 but Tiruchirappalli was dropped in Mar-2014. Beijing and Shanghai were added at the end of Mar-2014 and Jeddah was launched in Apr-2014.

The latest iteration of SriLankan's rather complex schedule for Mattala includes two weekly flights to Beijing, two weekly flights to Shanghai, one weekly flight to Jeddah, four weekly flights from Male and two weekly flights from Chennai. All five international routes are only served non-stop in one direction as part of triangle routings that include a stop in Colombo.

SriLankan also operates three weekly A320 return frequencies between Colombo and Mattala. This turn around service supplements the 11 one-way domestic sectors which are available as part of the international routes, providing a rather odd schedule of eight weekly flights from Colombo to Mattala and nine weekly flights from Mattala to Colombo.

Mattala to Colombo capacity by carrier (one-way seats per week): 4-Mar-2013 to 9-Nov-2014

Source: CAPA - Centre for Aviation & OAG

Domestic services for SriLankan are a highly unprofitable proposition

The resulting hodgepodge of flights (with varying timings depending on the day of the week) for Colombo-Mattala and Mattala-Colombo is hardly ideal for trying to develop a local domestic market. Not surprisingly SriLankan has struggled in this market, with the turnaround flight in recent months carrying an average of only about 20 revenue passengers per sector. SriLankan points out demand has been improving as in the start-up phase in 2013 the turnaround flight was typically carrying less than five passengers. But the reality is the Colombo-Mattala market is too small to be viable, particularly with jets.

As there is virtually no business demand for services between Colombo and Mattala, the route relies primarily on tourist traffic. The national parks of southeast Sri Lanka and the unspoiled beaches in the country's isolated eastern region, which is much closer to Mattala than Colombo, have huge tourist potential. But tourist demand for domestic services between Colombo and Mattala is relatively limited and seasonal. Most tourists visiting Sri Lanka stop at many points throughout the island, making an itinerary that starts and ends at Colombo more feasible. The limited number of frequencies on the Colombo-Mattala route also does not allow for quick connections from most international destinations.

As the A320 is the smallest aircraft in the SriLankan fleet the sensible option would be to outsource the Colombo-Mattala service to an air taxi operator, which would be able to justify a higher frequency operation. SriLankan in 2013 ceased operating its own air taxi service, ending an experiment with two de Havilland Twin Otters that lasted less than one year, and currently partners with private air taxi operator Cinnamon Air.

Following the closure of its air taxi operation, SriLankan is no longer keen to be involved at all in the domestic market. In addition to Cinnamon Air the carrier plans to pursue partnerships with other small operators of fixed wing aircraft as well as helicopters.

Sri Lanka is also in the process of building a network of highways that will significantly reduce what is already limited demand for domestic services. A new highway has already opened from Colombo to Matara, a small city in southwest Sri Lanka which is about 85km from Hambantota. An extension of this highway from Matara to Hambantota, which is now under construction, will reduce travel time from Colombo to Hambantota to less than three hours. Travel time between Colombo and Hambantota on the original road (and on the train) takes about six hours.

SriLankan offers international connections at Mattala, starting with Maldives-China

SriLankan has also only seen a very small number of passengers on its international flights at Mattala originating in or heading to the Hambantota district. A majority of passengers deplane or board at Colombo. Of those passengers deplaning at Mattala most are connecting onto other flights.

All four weekly Male-Mattala flights, which are operated with A320s that continue onto Colombo, connect within two hours with either the two Mattala-Beijing or the two Mattala-Shanghai flights, which are operated with A330s and A340s that originate in Colombo.

SriLankan's two weekly Male-Chennai flights, which are operated with a mix of A320s and A340s, and new weekly Mattala-Jeddah A340 flight currently do not connect with any other international routes. But SriLankan is aiming to transition to a schedule that allows Mattala-Jeddah to connect with Mihin Lanka's service from Medan in Indonesia to Mattala.

Mihin Lanka in Apr-2014 added a Mattala stop on one of its two weekly Medan-Colombo services. The new route, which only stops in Mattala in one direction, marked Mihin Lanka's return to the Mattala market after having briefly linked Mattala with Gaya in India in 2013.

While they are separate carriers, Mihin Lanka and SriLankan are both 100% government owned and have an extensive codeshare partnership. Mihin Lanka now codeshares on SriLankan-operated flights to Saudi Arabia, allowing it to sell Saudi Arabia as a destination to passengers originating in Indonesia and going on Haj. Mihin Lanka currently does not carry the SriLankan code on its Medan flights but SriLankan is hoping to expand its codeshare partnership with Mihin Lanka to include Medan and Jakarta.

New Jakarta-Mattala route to support Indonesia-Saudi Arabia connections

Mihin Lanka is expected to add Mattala as a stop on some of its Jakarta-Colombo flights, which currently operates five to seven times per week with A321s. The carrier is also likely to extend the Mattala stop to its second of two Medan-Colombo frequencies while SriLankan is now looking at also expanding its Mattala-Jeddah service to two or three weekly frequencies. SriLankan currently serves Jeddah five times per week while Riyadh is also served five times per week.

SriLankan has been trying to develop local demand for the Mattala-Jeddah market, expecting a good mix of Haj and labour traffic. But as this market will take time to develop most passengers on the Mattala-Jeddah route will originate in Colombo or Indonesia.

So far SriLankan has struggled to develop a local outbound market in Mattala as most passengers from southern Sri Lanka continue to travel to Colombo's Bandaranaike International Airport, located in western Sri Lanka, when departing the country. SriLankan is hoping over time the residents of southern and eastern Sri Lanka will become more familiar with the Mattala option and start using the airport.

In addition to Saudi Arabia, SriLankan sees local demand to potentially support other Middle Eastern services as a large number of Sri Lankan migrant workers in the Middle East are from the southern or eastern part of Sri Lanka. The Sri Lankan labour market has also been the target of the first three foreign carriers to serve Mattala: Air Arabia, flydubai and Rotana Jet. There are over 300,000 Sri Lankans working in the UAE, with a sizeable number coming from the southern and eastern districts.

UAE services to Mattala are also part of triangle routings

Air Arabia was the first foreign carrier to serve Mattala, launching two weekly flights from its Sharjah hub when the airport opened in Mar-2013. But the route struggled and was quickly dropped in May-2013. Air Arabia, which initially planned to increase Mattala service to four weekly frequencies from May-2013, continues to serve Colombo with 11 weekly flights.

flydubai entered the Mattala market in May-2013 with three weekly flights. Rotana Jet entered more recently in Apr-2014, also with three weekly flights.

Mattala to UAE capacity by carrier (one-way seats per week): 4-Mar-2013 to 9-Nov-2014

Source: CAPA - Centre for Aviation & OAG

flydubai seems to have had some success on the route and plans to operate six weekly 737-800 flights from 1-Jun-2014. But all of flydubai's Mattala flights have stopped and will continue to stop in Colombo on the outbound leg as part of a Dubai-Colombo-Mattala-Dubai routing. Air Arabia had operated its Mattala service as a non-stop in both directions, which proved to be a mistake as the market on its own was clearly not large enough to support the service.

Rotana Jet is also routing its three weekly A319 flights to Mattala on an Abu Dhabi-Colombo-Mattala-Abu Dhabi triangle routing.

The triangle routings for SriLankan, Mihin Lanka as well as flydubai and Rotana Jet significantly mitigate the risk of operating services to Mattala. Eventually there may be sufficient demand to decouple Mattala and Colombo and operate separate return flights from Mattala. But this is not likely at least in the near to medium term.

Developing the local Mattala market will be challenging given the limited frequencies on the routes offered from Mattala and the tendency of Sri Lankans from all over the island to continue using the country's main airport. The gradual opening of a highway from Hambantota to Colombo, which complements a separate already opened shorter highway from Colombo to Bandaranaike International Airport, further reduces the potential appeal of the new airport at Mattala.

Mattala transit traffic may fill up the seats but detract from Colombo

With the limited local demand, SriLankan and its sister carrier Mihin Lanka have little choice but to focus on the connection market to sustain their Mattala services. Pulling out of Mattala would be unacceptable politically.

SriLankan is committed to developing the market and is looking to add more international destinations from Mattala over the medium term, including potentially Europe. SriLankan has denied reports that Mihin Lanka, which follows a low-cost hybrid model that would in theory be a better fit for the Mattala market given its lack of business traffic, could potentially take over all Mattala operations.

Developing a second hub is far from ideal as SriLankan is a relatively small carrier, operating only 21 aircraft and carrying about 4 million passengers per year. SriLankan has always relied heavily on transit passengers, which currently accounts for slightly over half of its total traffic, but the volumes simply do not justify a two-hub strategy.

The current Mattala schedule, with a focus on Maldives-China and soon Indonesia-Saudi Arabia connections, offers a better alternative than the original schedule which relied too much on a local market that does not exist. But by promoting Mattala connections such as Maldives-China, SriLankan simply takes away from existing connections via Colombo. China-Maldives and Indonesia-Saudi Arabia are good markets for SriLankan but it may be more sensible to focus on building up the volumes in Colombo.

Also as Mattala connections are only available one-way in both the Maldives-China and Indonesia-Saudi Arabia markets, passengers still must connect in Colombo in one direction, creating an imbalance in network flows. SriLankan sees connections via Mattala being more efficient than via Colombo which is becoming congested due to the rapid increase in traffic since the end of the civil war. But the fact that all its Mattala international flights originate or end at Colombo offset any potential efficiency gains.

While SriLankan has plans to establish a second maintenance facility at Mattala, the prospects for basing aircraft (and originating flights) at Mattala are slim given the limited local demand and the fact its crews are generally from Colombo. The decision to duplicate MRO infrastructure in Mattala also seems more political than commercial.

The 2013 opening of the airport at Mattala came with significant fanfare as its construction was an important project for President Rajapaksa, who initially took office in 2006. The airport was again in the spotlight at the end of Apr-2014 as it hosted SriLankan's oneworld joining ceremony.

But the reality is Mattala Rajapaksa International is not needed and is a distraction in SriLankan's efforts to turn itself around. The flag carrier continues to be highly unprofitable and having to meet the political requirement of developing and operating a second hub will make it even harder to meet its targets for financial improvement.