Mattala Airport: Vital for Sri Lanka’s transport strategy

Friday, 3 January 2014 00:00 -     - {{hitsCtrl.values.hits}}

By Dinesh Ranasinghe FCMA, CFA Mattala Rajapaksa International Airport (MRIA) is a US$ 200 million mega-investment project that has been operational from March this year. Since then it has been at the centre of media attention and controversy. The main criticism is that it is merely a political move and that there is no viable business case. However, there are a few fundamental aspects that need to be evaluated before jumping to any conclusion. Justification of the need for a second airport in the south Although many debate the need for a second international airport in a small country like Sri Lanka, there are many potential benefits. One of the main benefits is the ability to offer airlines and passengers a choice between Bandaranaike International Airport (BIA) and MRIA. This breaks the natural monopoly of the already crowded BIA and its ancillary services, such as ground handling and catering. Furthermore, it is mandatory that airlines carry extra fuel to enable them to reach an alternative airport in the case of emergency. Previously, southern Indian airports and Male were the options for emergency landing – now the alternative can be MRIA. This means carrying less fuel or more cargo at a lower cost and/or more fuel-efficient flights. "MRIA cannot thrive solely by feeding on traffic gained from BIA or Sri Lanka. As a new airport in a new region, more needs to be done beyond simply marketing the airport. MRIA should engage in route development with a view to attracting international traffic and airlines, for instance making it a destination for low-cost carriers and/or tourists from Europe" Having to rely solely on one international airport is an economic burden, especially in the event of natural or manmade calamities. This was evident when BIA was shut down during the terrorist attack of 2001 and passengers were stranded with no alternative. BIA is not geared to accommodate the next generation of flights such as A380s. This reduces the chance of Sri Lanka being an aviation hub of the region.  Thus, there is a need for the creation of the next generation of airport facilities to cater to the newest flights and enable the fulfilment of aspirations to be a regional transportation hub. A second airport is a must and the ideal location is the south to complement the Hambantota Port and enable air-sea intermodal connectivity, which is vital to emerge as a regional transport and logistics hub. The strengths of the local tourism industry, export processing zones and other infrastructure, such as hotels, road networks, etc. in the vicinity further strengthen the geographic choice – southern Sri Lanka. It should be mentioned that the proponents of expanding BIA are blind to the fact that expanding the airport would require a similar investment and increase crowding in the already congested business district. It would also possibly interfere with day-to-day operations at BIA, resulting in disrupted services for passengers and airlines. Considering these factors, it does indeed seem sensible to develop a second airport in the south of country. Industry and market framework The airport business is complex. It sells aeronautical services (i.e. the provision of runways, taxiways, aprons and terminals) to airlines. In turn, airlines sell seats to passengers and cargo space to shippers. The airport business has three distinct characteristics. First, it is geographically fixed, meaning it will be served by the population and business in that geographic region. Clearly the relocation of the business is not possible. However, this does not mean distant passengers cannot be attracted via other means (e.g. price promotions, new routes, etc.). Second, running an airport is a fixed cost business. The operational expenses are quite low compared to the fixed costs (e.g. runway, terminal and equipment expenses), which have a low correlation with the passenger throughput. Third, it is a complex two-sided business: airports engage in a commercial relationship with the airlines and a retail relationship with the passengers. Thus, revenues increase in proportion to the numbers of passengers and flights. This is the most critical aspect of an airport business plan. The airport has to attract flights to attract passengers and passengers to attract flights: a paradox. The core marketing strategy should revolve around whether the airport services all market segments or specific market segment(s). When BIA was the only airport in the country, it was able to disregard market segments and operate as a monopoly – airlines and passengers had no other choice. However, with MRIA operational, both airports should seek to define and target their respective markets. As mentioned, the market is two faceted, comprising airlines and passengers. A clear definition of the target market in terms of airlines, passengers and cargo is critical, for instance, whether it comprises long haul or short haul flights, low cost airlines, time sensitive cargo, perishable cargo, business or leisure travellers, etc. Understanding the behavioural patterns of passengers and airlines is pivotal. Passengers’ choices are primarily determined by a few major factors. Servicing routes/destinations are critical; fares, cost to access the airport and choice of airline are also important. Hence, it is necessary to define and identify the precise requirements of passengers. For instance, a time-constrained business traveller will choose BIA, whereas a leisure traveller will be more likely to opt for MRIA. Similarly, airlines will respond to a new airport in different ways – a main determinant will be passenger demand and traffic rights. After establishing these factors, fares, airline and airport cost structures come into play in assessing commercial viability. Present MRIA approach The core marketing strategy of MRIA is unclear – whether it is pursuing a differentiation strategy and targeting niche markets or a cost leadership strategy by offering low-cost services to airlines and passengers. If it is pursuing the latter, then it is in head-on competition with BIA as they are targeting the same market. In this case, MRIA has adopted unfocused tactical strategies, such as offering a substantial discount for airlines on ground handling charges and various exemptions from customs duty, exchange control and import-export regulations. It has also been suggested that SriLankan Airlines has been induced to use MRIA due to political pressure rather than free market forces. In the case of direct competition, such strategies are clearly not sustainable and would result in cannibalising market share from BIA, leading to an overall decrease in profitability of airports and state airlines increasing the burden on the government. It should be noted that the southern region of Sri Lanka is an underprivileged region compared to the western region of the country and the airport cannot afford to target passengers only from the operational catchment area.  It should devise mechanisms to draw in passengers from other parts of the country. There is speculation in the media about making MRIA a maintenance, repair and overhaul (MRO) centre, mainly to reduce any losses sustained. This is a commendable proposal as it would open up the possibility of becoming a world-class aviation hub. Also, it could attract Indian airlines, generally serviced in Singapore, Malaysia and/or Dubai, as it is requirement to carry out servicing and maintenance checks twice a year. Making MRIA a success The utmost priority should be to define the core strategy and target market and channel resources to win market share within that segment. Once this foundation is laid, MRIA should deploy more focused tactical strategies to attract airlines and passengers, not only locally but internationally. An international focus is necessary to avoid a shift in traffic from BIA to MRIA. Employing a specialised marketing agency and investing in an international marketing campaign – including the promotion of Sri Lankan tourism – are essential measures. MRIA cannot thrive solely by feeding on traffic gained from BIA or Sri Lanka. As a new airport in a new region, more needs to be done beyond simply marketing the airport. MRIA should engage in route development with a view to attracting international traffic and airlines, for instance making it a destination for low-cost carriers and/or tourists from Europe. The recent fiasco of a flight being delayed due to the interruption of fuel bowsers from Colombo raises a few concerns regarding the airport facilities and infrastructure and the message it conveys. However, in the present situation (with the lack of built-in fuel linkages and other unreported shortcomings) low-cost carriers would be a feasible market in the short term as they demand the minimum facilities and services. Critics of MRIA should note that airlines are generally not flexible in terms of their routes in the short term due to contractual relationships with airports and governments. Thus, more time should be allowed for airlines and passengers to adjust to the presence of the new alternative. Airlines should be invited to use the airport by providing start-up and route concessions, revenue guarantees and/or guaranteed load factors and by undertaking marketing initiatives on behalf of the airline. In addition, passengers should be given incentives to use the airport by continuing the current concessions and improving services (parking, airport lounges) and concessions (concessions to use the Southern Expressway, lower taxes, etc.). Promoting MRIA cannot be done in isolation from the private sector. Partnership with the private sector in the region is critical. This is because success of the airport depends, at least in part, on supplementary infrastructure and services in the region, such as road and transport links (e.g. shuttle and taxi services), warehousing, hotels and accommodation, etc. All this is easier said than done. The development of Sri Lanka as a regional transportation hub should be the result of a sensibly assembled and well-executed model that effectively reaps the geographic advantages of the location. Such an ambition cannot be achieved by BIA alone.