SriLankan Airlines’ Six Million Dollar Man

By Sanjana Fernando

In May this year the CEO of SriLankan Airlines took a controversial decision to arbitrarily terminate the supplier contract with MilleniumIT, incurring a loss to the airline and the tax payer of over $ 6 million (just under a Rs. 1 billion), according to sources.

The termination seems to have been done without an impact analysis to ascertain the financial, legal and commercial implications. Just like the cancellation fees paid for the A350s, there was absolutely nothing to show for the $ 6 million paid out.

Currently over 80% of ticket sales are via agents, including agencies belonging to some Board Directors of the airline. Some agents enjoy commission of up to 50%, according to sources.

The Customer Relationship Management (CRM) system, which was being developed by the world-renowned Sri Lankan-based IT company, could not only have helped increase ticket sales by around 5% but could have also decreased cost of sales paid as commission to agents by as much as 20%, resulting in an incremental EBITDA of around Rs. 10 billion per year, which may have been enough to show a positive operating profit.

A CRM system is a sophisticated piece of IT system which collects and organises details of customers to help deliver a streamlined customer service but also acts as a powerful marketing platform for repeat customers.

Nearly all successful airlines in the world have advanced CRM and revenue management systems. In today’s competitive environment, operating an airline without even a basic CRM system will have a significant impact on customer satisfaction, retention and financial leakage.

On a different note; while I am delighted to receive a response from the Management on my previous article titled ‘Lost two years,’ I was disappointed to see that the excuses given were not quantified.

The Management has used a graph which shows the correlation between oil prices and passenger fares, to highlight the impact to passenger revenue in times of low fuel prices.

However page 104 of the latest Annual Report shows that although the airline was benefiting from low fuel prices they did not pass it onto the passengers. In fact the prices have increased gradually over the last five years.

The Revenue per Available Seat Kilometre (RASK), a key metric in global airline analysis which shows the revenue paid by a passenger to travel a kilometre, has in fact increased from Rs. 7.6 in 2013 to Rs. 8.4 in 2017.

Then the Management goes on to talk about adjusting the numbers to reflect yearly price increases in supplier contracts, unaware that these prices increase with inflation “every” year, and not just in 2017.

The argument around impact due to currency volatility has some merit. Page 23 of the Annual Report mentions an impact of $ 21.6 million. For simplicity I will assume a bigger number and adjust the Rs. 14 billion loss shown by Rs. 4 billion and bring down the loss to Rs. 10 billion.

The last point about a net loss of $ 30 million due to “daytime” airport closure seems made up. Although easily measurable the management has not put the effort to do a simple analysis to quantify more precisely the financial impact due to the closure. But for simplicity let’s assume that the number is correct and adjust the Rs. 10 billion by another Rs. 4.5 billion. This still leaves a massive Rs. 5.5 billion loss.

(The writer is a former Investment Banker from London, with aviation sector experience).

Click to read Sanjana Fernando's original article: The “lost two years” of SriLankan Airlines 

Read the response to this article by SirLankan Airlines Management: Management of SriLankan Airlines responds to “Lost Two Years” opinion article