SriLankan Airlines raises global profile and expands oneworld presence in South Asia

SriLankan and Qatar gives oneworld a one-two punch in South Asia

SriLankan Airlines formally entered oneworld on 1-May-2014, completing the accession process in 23 months. oneworld initially accepted SriLankan as a member-elect in Jun-2012.

See related report: SriLankan Airlines to join oneworld, furthering its revival, and access to India for oneworld

SriLankan's strong network in South Asia, particularly India, attracted oneworld. Four months after announcing SriLankan as a new member-elect, in Oct-2012, oneworld also approved Qatar Airways as a new member. Qatar, which was able to complete the accession process in only one year and formally join in late Oct-2013, has an even larger operation in South Asia. While having both Qatar and SriLankan as members results in some overlap, it is manageable and the duo combined give oneworld a strong presence in the region.

SriLankan currently serves 11 destinations in South Asia, including seven in India, two in Sri Lanka, one in Pakistan and one in the Maldives. Only two of these destinations, Tiruchirappalli in southern India and Mattala in Sri Lanka, are new for oneworld. But SriLankan gives oneworld more scale in the region and a new swathe of connections, supplementing the connections to South Asia now provided by Qatar.

Qatar currently serves 12 destinations in India (six of which are also served by SriLankan). Qatar also has nine destinations in other parts of South Asia (three of which are also served by SriLankan), including five in Pakistan and one each in Bangladesh, the Maldives, Nepal and Sri Lanka.

SriLankan combined with Qatar gives oneworld a leading presence in India (for now)

In India, Qatar is the second largest foreign carrier while SriLankan is the eighth largest, based on current seat capacity. Three other oneworld members - British Airways, Malaysia Airlines and Cathay Pacific - are also among the top 15 foreign carriers (and the top 20 in India's overall international market when also including Indian carriers).

India top 20 international carriers ranked by weekly seat capacity: 5- May-2014 to 11-May-2014

Rank	Airline		Total Seats
1	9W	Jet Airways	136,978
2	AI	Air India	130,748
3	EK	Emirates*	104,090
4	IX	Air India Express	44,793
5	QR	Qatar Airways*	43,286
6	G9	Air Arabia*	36,408
7	SQ	Singapore Airlines*	35,962
8	WY	Oman Air*	30,134
9	SV	Saudia*	29,136
10	6E	IndiGo	28,440
11	EY	Etihad Airways*	28,436
12	UL	SriLankan Airlines*	27,609
13	TG	Thai Airways*	25,994
14	LH	Lufthansa*	25,278
15	MH	Malaysia Airlines*	24,966
16	BA	British Airways*	23,452
17	AK	AirAsia*	20,160
18	SG	SpiceJet	19,020
19	CX	Cathay Pacific*	18,830
20	GF	Gulf Air*	16,735

Note: *foreign carriers
Source: CAPA - Centre for Aviation & OAG

With SriLankan oneworld has increased its share of capacity in the Indian international market from 12% to about 14.4%. Prior to Qatar's entry in late Oct-2013 oneworld only had an 8% share, according to CAPA and OAG data.

India international capacity share (% of seats) by alliance: 5-May-2014 to 11-May-2014

Source: CAPA - Centre for Aviation & OAG

While a 14% to 15% share does not seem significant in the global context, given that oneworld's global share of international capacity is about 16%, it is significant in the Indian context because all of India's carriers are currently unaligned.

Six of the top 15 foreign carriers serving India are also unaligned, including market leader Emirates. Of the nine aligned carriers among the top 20 in India's international market, a leading five are now oneworld members while three are in Star and only one is in SkyTeam.

Star will overtake oneworld in India after Air India joins

Air India in late 2013 recommenced the process of joining Star and could finally enter the alliance as early as Jul-2014. This will result in Star overtaking oneworld as the largest carrier in the Indian international market as Star will double its share of seat capacity to about 25% compared to 14.4% for oneworld and only just over 6% for SkyTeam.

Air India is the second largest carrier in India's international market, just ahead of Emirates but behind Jet Airways, which has previously looked at alliances but is unlikely to make a move in the near-term given its recent partnership and equity tie-up with unaligned Etihad. As India's LCCs have also so far rejected overtures from the global alliances, with domestic market leader IndiGo particularly targeted, Star will likely be positioned as India's largest alliance for the foreseeable future.

However, having Air India as a member comes with potential challenges. While the flag carrier has demonstrated significant improvement over the last couple of years it continues to struggle financially and is still not considered to have a top tier international product.

See related report: Air India finally to enter the Star Alliance. Lufthansa now looks to escalate Gulf carrier rhetoric

oneworld and Star to be neck and neck in South Asia's international market

In the broader South Asian international market, Star and oneworld will have roughly equal shares once Air India enters Star.

SriLankan's entrance boosted oneworld's share of the South Asian international market by about 6ppts from 12% to 18%. The earlier entrance of Qatar provided a 5ppts boost, from an initial base of only 7%. (While SriLankan is based in South Asia, Qatar has almost as much capacity to and from South Asia as SriLankan's entire network.)

Star currently has about an 11% share of seat capacity in the international South Asian market while SkyTeam has only about 7%. The addition of Air India will give Star about an 18.5% share, according to CAPA and OAG data.

South Asia international capacity share (% of seats) by alliance: 5-May-2014 to 11-May-2014

Source: CAPA - Centre for Aviation & OAG

When including domestic capacity, Star will have a clear advantage as the Indian domestic market accounts for about half of total capacity in South Asia. Star's share of system-wide capacity in South Asia will grow from about 5% to over 17%. oneworld's share of system-wide capacity in South Asia is currently about 8% while SkyTeam's share is only 3%.

oneworld members will be able to access several secondary Indian destinations via Doha and Colombo. But while Qatar and SriLankan serve a combined 13 destinations in India, Air India has over 60 destinations in India, providing a much wider network for Star members in one of the most important emerging markets.

Colombo and Doha also lack connectivity with other oneworld members. While more oneworld carriers could be swayed to launch services to Colombo and Doha now that they are hubs for the alliance, only three of oneworld's 13 other members currently serve Colombo (British Airways, Cathay Pacific and Malaysia Airlines) and only two serve Doha (British Airways and Royal Jordanian). In comparison, India is served by six of the other 13 oneworld members (British Airways, Cathay Pacific, Finnair, Japan Airlines, Malaysia Airlines and Royal Jordanian).

Colombo is oneworld's smallest hub airport

The reality is SriLankan is a small carrier and Sri Lanka is a small market. SriLankan is the second smallest of the alliance's 15 members (excludes oneworld affiliates) and is only slightly ahead of Royal Jordanian in terms of current seat capacity and passenger traffic figures from 2013.

In terms of fleet, SriLankan is the new baby of oneworld with only 21 aircraft compared to 30 aircraft for Royal Jordanian, according to the CAPA Fleet Database. (SriLankan however has more widebody aircraft than Royal Jordanian and Russia's S7 Airlines.)

Of oneworld's 15 primary hub airports (excludes secondary hubs and affiliate member hubs) Colombo Bandaranayake International Airport is the smallest in terms of total weekly seat capacity. Amman Queen Alia International Airport is slightly larger, with about 186,000 weekly seats (includes all carriers) compared to about 181,000 weekly seats for Colombo, according to CAPA and OAG data. Santiago International in Chile is the next smallest oneworld hub airport but is about double the size of Amman and Colombo.

Santiago however is slightly smaller than Amman and Colombo when only including international capacity as slightly over half of Santiago's total capacity is domestic. Amman and Colombo both have very limited domestic operations. SriLankan has just one domestic route, Colombo to Mattala, which is served with nine weekly frequencies most of which are operated in combination with an international sector.

Sri Lanka's domestic market is mostly served by small air taxi operators, some of which are partnered with SriLankan. (SriLankan ceased its own air taxi operation in late 2013.)

SriLankan currently accounts for about 54% of international seat capacity at Colombo as well as in the overall Sri Lankan international market (includes the second international airport at Mattala), according to CAPA and OAG data. With SriLankan's ascension, oneworld has boosted its share of international seat capacity in Sri Lanka to about 65%.

Sri Lanka international capacity share (% of seats) by alliance: 5-May-2014 to 11-May-2014

Source: CAPA - Centre for Aviation & OAG

Before SriLankan joined on 1-May-2014, oneworld already had a leading 11% share as SkyTeam accounts for less than 5% of seat capacity in the Sri Lankan international market while Star accounts for less than 3%.

But prior to Qatar joining, oneworld had only a 6% share as Qatar is the second largest foreign carrier in Sri Lanka. Emirates, which had a 44% stake and management role in SriLankan until 2010, is the largest foreign carrier with about a 6% share of capacity.

While a small market, Sri Lanka does have some value to oneworld

Sri Lanka is currently served by 20 foreign passenger carriers. Only seven foreign carriers operate more than seven weekly frequencies, with six of the carriers hailing from the Middle East or India - Air Arabia, Emirates, Etihad, Jet Airways, Qatar and SpiceJet. The only East Asian carrier with more than seven weekly frequencies to Sri Lanka is Malaysia Airlines (MAS), but Cathay Pacific and Singapore Airlines have more capacity as their seven weekly frequencies are operated with widebody aircraft while the 10 weekly frequencies from MAS are operated with 737-800s.

Overall foreign carriers account for 40% of Sri Lanka's international market. In addition to Sri Lankan's approximately 54% share, Sri Lanka's second carrier Mihin Lanka accounts for about 6%.

SriLankan and Mihin Lanka are both entirely owned by the Sri Lankan government and are close partners, with SriLankan codesharing on most Mihin Lanka-operated routes. But Mihin Lankan operates under a hybrid budget model and has no intention of also joining oneworld as a member or affiliate. Mihin Lanka's strategy and outlook will be analysed in a later instalment in this series of reports on the Sri Lankan market.

Sri Lanka international capacity share by carrier: 5-May-2014 to 11-May-2014

Rank	Airline		Total Seats
1	UL	SriLankan Airlines	98,233
2	EK	Emirates*	10,276
3	MJ	Mihin Lanka	10,140
4	QR	Qatar Airways*	9,250
5	CX	Cathay Pacific*	5,572
6	SQ	Singapore Airlines*	3,990
7	EY	Etihad Airways*	3,808
8	9W	Jet Airways*	3,796
9	G9	Air Arabia*	3,608
10	KE	Korean Air*	3,360
11	MH	Malaysia Airlines*	3,280
12	WY	Oman Air*	3,072
13	SV	Saudia*	2,850
14	KU	Kuwait Airways*	2,682
15	FZ	flydubai*	2,646
16	D7	AirAsia X*	2,639
17	WE	Thai Smile*	2,436
18	SG	SpiceJet*	2,184
19	AI	Air India*	2,064
20	MU	China Eastern Airlines*	1,740
21	BA	British Airways*	1,506
22	RG	Rotana Jet*	720

Note: *foreign carriers
Source: CAPA - Centre for Aviation & OAG

Sri Lanka is a relatively small aviation market and is clearly in the shadow of nearby India, which is over 10 times the size and is about five times larger in terms of international capacity. Sri Lanka is the 15th largest international market in Asia-Pacific, just ahead of Bangladesh and just behind Pakistan.

Of the 14 larger markets in Asia-Pacific only two, Pakistan and the Philippines, do not have any local carriers which are current or pending global alliance members. But only one of the smaller markets, New Zealand, has an alliance member.

While Sri Lanka is a relatively small market, oneworld considers Colombo to be among the top 100 business cities - a key criteria in its evaluation of potential new members. oneworld claims to have a 26% share of airline revenues in the top 100 business destinations and says 80% of the alliance's capacity is allocated to these markets.

SriLankan marks end of a huge expansion phase for oneworld

The joining of SriLankan is a milestone for oneworld in that it completes the alliance's biggest expansion phase in its 15 year history - SriLankan is also the alliance's 15th member.

Since Mar-2012, oneworld has added five members with airberlin, Qatar, MAS, TAM and now SriLankan (in chronological order). Several new affiliates have also joined over the last two years, including LAN Colombia, Iberia Express, Austria's Niki and British Airways' Paris-based subsidiary OpenSkies.

US Airways also shifted from Star to oneworld at the end of Mar-2014 and has had the biggest impact on oneworld's global figures, but does not count as one of the 15 members as it is in the process of merging with oneworld founding member American Airlines. Brazil's TAM, which moved from Star to oneworld at the same time as US Airways, is counted as one of the 15 members as it remains a separate carrier from merger partner LAN with both now under the LATAM Airlines Group.

oneworld expects the grouping to now remain at the current 15 member level until at least 2016 as it has no new members in the pipeline and is not currently considering any new applications. "It will be a quiet period for us," promises oneworld CEO Bruce Ashby. But Mr Ashby adds that oneworld is always open to talking to interested carriers that provide high quality service and has a hub at one of the world's top 100 cities for business travel.

oneworld says all the new members (including US Airways) have added about 1,000 aircraft for a total of 3,300; 6,000 daily departures for a total of 14,250; USD40 billion in annual revenues for a total of USD140 billion; 215 million annual passengers for a total of over 500 million; and about 250 destinations for a total of nearly 1,000.

SriLankan's contribution to these new totals is miniscule. The carrier accounts for about 0.8% of oneworld's annual passenger traffic, 0.6% of the alliance's annual revenue stream and 0.6% of the alliance's combined fleet. But what SriLankan receives from oneworld is far more significant as its network of only 32 destinations in 20 countries is virtually expanded to include 130 additional countries.

Joining oneworld is a key component of the carrier's long-term strategy and turnaround plan. SriLankan is banking on oneworld raising its profile and aiding in efforts to benchmark it services to global standards. Alliance membership, along with several other initiatives such as fleet renewal, is also seen as a crucial step in improving the carrier's profitability and long-term viability. The carrier has been highly unprofitable in recent years, with preliminary figures indicating a loss of about USD220 million in the fiscal year ending 31-Mar-2014 with a margin of negative 26%.

SriLankan to start codesharing with S7 and Finnair

SriLankan expects the alliance to generate at least USD25 million in annual incremental revenues as it gains access to an expanded network and attracts more corporate passengers.

The carrier currently only codeshares with two oneworld members, MAS and Royal Jordanian. But SriLankan is implementing a codeshare with S7 on 15-May-2014 and with Finnair on 2-Jun-2014.

The new codeshare with S7 will cover SriLankan's Colombo-Moscow route and domestic connections in Russia, giving the carrier greater access to one of Sri Lanka's fastest growing source markets for inbound tourism. The two carriers will also transfer passengers at Bangkok, providing a service from Colombo to Moscow on days SriLankan does not serve the market non-stop. SriLankan currently serves Moscow with two to three weekly flights, depending on the season, but capacity could be added as it leverages the new domestic connections beyond Moscow.

Finnair will codeshare with SriLankan from Colombo to all four of its European gateways, where connections will be available on Finnair-operated flights to Helsinki. At Helsinki SriLankan will also codeshare with Finnair to other Scandinavian destinations. The Finnair-SriLankan partnership was recently forged while S7 and SriLankan initially forged their partnership in 2013 but implementation was delayed pending regulatory approval.

Codeshares with British Airways and Cathay could follow

SriLankan says it is now in advanced codeshare discussions with several other oneworld members. Cathay Pacific and BA would be the most logical additions as both carriers serve Sri Lanka. Cathay was also SriLankan's sponsor into oneworld.

SriLankan sees BA as providing offline access via London to the US and Canada, which are also important markets as there are large Sri Lankan communities in both countries. SriLankan now serves North America using codeshares with Air Canada and Etihad - relationships it intends to maintain but can be supplemented with links to BA. SriLankan aims to move to Terminal 3 at London Heathrow to maximise connection opportunities with BA and other oneworld carriers.

Cathay and its subsidiary Dragonair, which is a oneworld affiliate, could provide access to secondary cities in China. SriLankan does not currently codeshare with any Chinese carrier beyond its three online points in mainland China, making Hong Kong a potentially attractive hub for secondary cities in China as well as other parts of North Asia and the US west coast. Connection traffic could provide the volumes to justify SriLankan and/or Cathay upgrading their services between Hong Kong and Colombo to non-stop. Cathay currently serves Colombo via Bangkok and Singapore (on alternating days) while SriLankan's Hong Kong service also now stops in Bangkok.

BA's thrice weekly Colombo service, which was launched in Mar-2013, is also now routed via Male in the Maldives but could potentially be upgraded under a BA-SriLankan partnership. SriLankan currently serves London Heathrow nine times per week, according to OAG data. London is already the largest of SriLankan's four Western European gateways. (Paris, Frankfurt and Rome - none of which are oneworld hubs - are served with three to four weekly frequencies.)

While SriLankan is considering adding capacity to existing European destinations, it is not interested in new European gateways (including other European oneworld hubs such as Berlin). Its focus is also primarily on expanding in Asia-Pacific as demand within Asia is growing faster than the more mature European market. More capacity and potentially new services to oneworld hubs in Asia-Pacific would be attractive.

See related report: SriLankan Airlines focuses expansion on North Asia as it prepares to join oneworld

SriLankan eyes codeshare with Qantas to supplement MAS

As part of its increased focus on Asia, SriLankan recently expanded its relationship with longstanding partner MAS to include Australia and Vietnam, two of its biggest offline markets. MAS and SriLankan were already codesharing on their respective Colombo-Kuala Lumpur services.

SriLankan is now seeking to supplement its offline coverage of Australia by adding a codeshare with Qantas. SriLankan aims to work with Qantas via Singapore, giving its passengers a second option for reaching Melbourne, Sydney and Brisbane. (MAS now provides access to SriLankan to these three Australian cities as well as Adelaide and Perth. Qantas no longer serves Adelaide and Perth from Singapore but with SriLankan could provide a two-stop product to these cities and smaller regional destinations throughout Australia.)

SriLankan has been talking to Australian airports and is keen to eventually operate services to Australia. But this is considered a long-term goal and for now it is keen to test out the market with a one-stop product relying on oneworld partners.

SriLankan is not overly ambitious, enabling it to make good use of oneworld

Long-haul network expansion is limited as the SriLankan's business plan envisions renewing rather than growing its fleet. Over the next few years capacity will be added mainly by up-gauging existing flights as A321s take over for A320s, A330-300Es for A340-300s and A350-900s for A330-200s.

SriLankan does not have huge ambitions for growth and its membership in oneworld is about expanding virtually, which is a more sensible strategy given its small size and recent unprofitability. The benefits from joining oneworld could be significant and help the carrier with its turnaround efforts while raising its global profile.

The benefits SriLankan give oneworld are less obvious as the alliance already significantly improved its presence in South Asia with Qatar Airways. Adding SriLankan is a nice supplement in what had been one of oneworld's biggest white spots, but the carrier's small size makes it the least valuable of oneworld's recent string of new members.

Background information

This is the first in a series of analysis reports on the Sri Lankan market. The next instalment, to be published later this week, will analyse in more detail SriLankan's outlook and business plan, including its prospects for growth and improved profitability.