Financial Times

SriLankan doubles profit, China flights may be delayed
SriLankan Airlines announced a record profit for FY 2003/04, with the airline operations making a profit for the first time, but the launch of services to China under an aggressive expansion plan could be delayed owing to difficulties in sourcing a wide-bodied aircraft.

Net profit of the national carrier after tax nearly doubled to Rs 4,555 million in the FY ended March 31 2004 while the group, consisting of the airline and its subsidiary SriLankan Catering Services, made a net profit after tax of Rs 5,635 million, up 76 percent.

Total group revenue was up 25 percent to Rs 46,191 million. "We've had an outstanding result at this juncture of the airline industry," SriLankan CEO Peter Hill told a news conference. "All round the world you hear of doom and gloom, with some airlines going bankrupt and others facing difficult times.

"We face the same difficulties. We're not government subsidized - we have not got a cent from the government since 1998, which I'm sure would be good news to tax payers." The airline, in which Emirates has a 43 percent stake and management control, declared a 25 percent dividend, up from 10 percent the year before. It paid Rs 656 million as dividend to the government which is the main shareholder.

Hill said he expects the airline to have another profitable run this year with key indicators on target except for fuel costs, which along with increased flights, has doubled the fuel bill.

Fuel costs had gone up to $1.30 per gallon on average from 90 US cents last year. The airline has 17 aircraft in its fleet and consumes 100 million gallons a year. Hill said the airline plans to acquire two more narrow bodied A-320 for the winter season to increase services to India and the Middle East but that plans to launch services to China this winter could be delayed because of difficulties in sourcing a wide-bodied A-340.

"In the short term our expansion is hampered by lack of aircraft and the withdrawal of wide-bodied aircraft for servicing." SriLankan plans to enter the China market in November, with the launch of thrice-weekly flights between Colombo and Beijing via Bangkok.

It also plans to increase existing services to daily frequencies to as many destinations as possible with the same strategy being adopted on new routes. Hill said SriLankan will acquire two Turbo-Otter amphibious aircraft to complement its existing Cessna Caravan floatplane in its new air taxi service and start scheduled services to airlift visitors from the international airport to resorts around the island.

The number of passengers carried during the year rose 14 percent to 2.06 million while cargo carriage increased by 15 percent to 55,000 tonnes. Chief financial officer S.A. Chandrasekera attributed the results to improved productivity and cost containment through controls and achieving economies of scale.

The airline operation made a profit of Rs 600 million - the first in its 25-year history - compared with a loss of Rs 700 million last year, he said. SriLankan Catering made a net profit of just over Rs 1 billion. The airline's profits have usually come from catering and ground handling services, in which it has a monopoly.

Chandrasekera said the Rs 5.6 billion group net profit was the highest corporate profit in Sri Lanka. "No other company in Sri Lanka has done so." The catering subsidiary made a Rs 1,080 million contribution to group profits.
Revenue from ground handling went up to Rs 2.6 billion from Rs 2.2 billion last year.

"Almost all of that filters down to the bottom line," Chandrasekera said. Asked about the monopoly on ground handling and complaints of high fees, Hill said it wasn't an issue and that the criticism appeared to be exaggerated.

"Fifty percent of the movements at the Bandaranaike International Airport are by SriLankan Airlines. With Emirates that goes up to 70 percent. So who is going to come here to win business from a fairly small number of airlines?"

He also said the airline had not raised ground handling fees for the last six years - since 1998 - while it has had to bear cost increases in almost everything else including wages and fuel.

"Ground handling costs are not a huge part of operating costs. With the ever increasing number of aircraft coming here, the supposedly high ground handling fees do not appear to be a huge deterrent."

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