Financial Times

Sri Lanka boasts about its strategic location and the ability to be the Gateway to South Asia, however, some experts in the aviation industry are blind to the need in developing Sri Lanka's ancillary aviation services which may thwart the long term growth of the sector. This would have adverse consequences on tourism, air-cargo and thereby the entire economy.

Around the world the aviation industry is considered to be a complex and turbulent industry because of macro issues and developments; low cost innovative services such as no frills-airlines, new ticketing channels such as the BSP (Billing and Settlement Plan; a universal system of ticketing) system and increasing operating costs mainly due to spiraling oil prices. Micro level challenges faced by Sri Lanka include lack of enthusiasm in development of domestic aviation infrastructure and massive development projects of airports and ancillary services in the region, especially India. Thus the issue is whether Sri Lanka is ready to meet the emerging challenges in the long-run or have we bowed out already.

International airlines have withdrawn from Sri Lanka due to its expensive ground handling and in-flight catering. This has (no doubt) contributed negatively towards Sri Lanka's ambition to be a hub airport to South Asia and a gateway between the East and West.

The decision to liberalize the domestic aviation services and approving more players to fly international should be hailed. However, results are yet to be seen. After one year of the liberalization, still new players are not fully operational; they attribute lack of infrastructure development and high costs associated with ancillary aviation services as reasons for their inability to proceed. These services such as ground handling and in-flight catering are absolute essentials for operations.

This is not a hindrance confronted by only the new domestic players but also the international airlines, which have been calling Colombo for some time at a hefty cost to the nation.

Many international airlines such as Czech Airlines, Gulf Air, Aeroflot, Cyprus Air, Oman Air, Lufthansa Cargo and many other international airlines have withdrawn from Sri Lanka due to its expensive ground handling and in-flight catering.

Nearly 44% percent of SriLankan Airlines is held by Dubai-based Emirates Airlines with a management contract (expected to expire in 2008) that includes exclusive rights to ground handling and catering at the only international airport of Sri Lanka with the Airports Authority of Sri Lanka (AASL). Due to investment and operational constraints AASL is unable to provide these services creating an effective monopoly in favour of SriLankan Airlines. Furthermore, these monopoly rights have prevented any competition for these ancillary services and artificially created high prices have prevailed, leaving no option to airlines calling Bandaranaike International Airport (BIA).

The contract of selling a portion of SriLankan Airlines to a competing foreign airline was the first and only agreement in the world where a national airline was sold to a foreign airline with exclusive rights for ground handling at the national airline's hub-airport. The authorities should not bring themselves to a situation where they may be compelled to extend the effects of this unfavourable position.

Airline ground handling operations include checking in/out passengers with baggage and cargo operations. High costs in ground handling mean high operating costs and low returns to airline operators. Ultimately passengers (tourists also) and shippers/consignees (of air-cargo) are levied additional costs. Other airports in the region; for example, Singapore's Changi International Airport and India's Bangalore International Airport have a minimum of two ground handlers whilst Hong Kong has as many as eight (including airlines having the right to do their ground handling) which is encouraging efficiency and reducing unnecessary costs through competition and attracting more flights.

For short-haul flights, airlines opt to carry meals for the return as well due to the high cost associated with catering at BIA. Due to the same reason, meals for transit passengers are also sourced from alternative locations resulting in a loss of foreign revenue to the nation.

A senior executive of an airline , which obtained a licence to fly international, has said that his organization can provide ground handling at 1/7th of what SriLankan is charging for the same services if not for the monopolistic agreement. He also noted that Sri Lanka's ground handling rates are nearly three times those of Dubai, which is a much more infrastructure-rich and active airport.

Despite the high price the service levels received by international airlines are substandard and this is evident by the fact that airlines place their own crew in supervising operations.

Airline Catering (also known as in-flight catering), which is a very specialized service requires hygienically produced meals to be provided and served to crew and passengers on-board. Meals may vary as per class/category of the passenger, region and distance and is a critical component of standard international airlines (not no-frills airlines).

Again Colombo airport doesn’t offer any alternatives to airlines other than SriLankan Airlines' catering arm; Sri Lankan Catering (pvt) Ltd as an in-flight meal supplier. This situation results in higher airfare for Sri Lankans and tourists. If regional airports are analyzed it is evident in most airports that there are many caterers. For instance recently Indian airports; Delhi and Bangalore liberalized its inflight catering making way for two players, whilst in Singapore (2) and in Hong Kong (3) players are operating.

Authorities should be commended for not extending the monopoly enjoyed by SriLankan for five years which ended on 2003/4 on international routes and allowing new players to enter the market. However, mere granting of licenses would not enable the entrants to operate whilst SriLankan restricts them through providing high-priced essential services such as ground handling and airline catering over which they have a monopoly. It's a known fact that SriLankan’s ancillary services are used to ward-off competitors and/or infant companies by charging high rates for services.

How prudent is it to allow SriLankan to compete with international airlines and at the same time provide these essential services to them? Due to increasing unfair costs, airlines strategize to keep their costs down by having their own engineering unit (a part of ground handling) and dual sector catering (storing meals for the return trip) etc.

The authorities should take immediate action to discontinue the detrimental contracts in 2008 and seize the opportunity to invite private Sri Lankan companies to participate in managing the provision of ancillary services at the BIA and propel the industry to greater heights. This would ensure long-term growth for tourism and travel and make the ambition of being an International Gateway and a Hub for South Asia a reality.