July 16, 2019
Mihin Lanka: Key Strategy for Success
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In the last two decades, despite momentary setbacks due to rising fuel prices, terrorist attacks and outbreaks of disease (e.g. SARS), the air travel industry globally has boomed. During this time, amid controversy, the Government of Sri Lanka launched Mihin Lanka (in 2007), which involved the investment of billions of rupees and has accumulated monumental losses year on year. Under these circumstances, it is reasonable that ordinary citizens and policymakers interrogate the investment and operational feasibility of the airline.
Requirements for a low-cost airline
Decades ago air travel was limited and affordable only for an affluent few. However, increased competition, reduced operational costs, and growth in people’s discretionary income, especially for the middle class, has made air travel more affordable. In the case of Sri Lanka, people have opened up to the idea of overseas leisure trips – especially to short-haul destinations – as a substitute to limited local destinations. Globally, the shift by passengers from full-service airlines to low-cost airlines is evidence of the growth in the industry and potential demand. Thus, to make use of this untapped and growing niche market, the introduction of a dedicated low-cost airline in Sri Lanka is indeed sensible.
The business model of a low-cost airline
Low-cost airlines (also known as no-frills or budget airlines) operate on a different model compared to traditional airlines, such as SriLankan Airlines, Emirates, etc. They offer low fares to stimulate frequent and discretionary travel. To make them a profitable venture, compensating for the decreased revenue due to the low fares, fewer services are offered in relation to food, check-in baggage allowance, entertainment, seat reservations, etc. These ancillary services are available at an extra cost on top of the basic fare. Essentially, the services are unbundled and charged for separately depending on the customer’s requirements.
Understanding the passengers
The passengers in the low-cost airline market, as the name suggests, are price sensitive. They are, however, less time-sensitive compared to business travelers. Research suggests that an ordinary leisure traveler is at least twice as price-sensitive and less than half as time-sensitive as a business traveler. These passengers generally make point-to-point (direct with no transits) short-haul flights requiring minimum on-board services.
Another important aspect is that the markets are more transparent, thanks to the Internet, meaning that passengers can quickly compare flights and change destination, travel dates, airline, or airport, etc. if needed and the travel agents’ role is weakened.
Mihin Lanka – Present situation
Apart from identifying itself as a low-cost airline in its promotional material, Mihin Lanka does not show the key attributes of such an airline.
Attributes such as offering complimentary on-board meals and introducing a special meal for children is unheard of in low-cost offerings. Entertainment and an extravagant baggage allowance of up to 40kg are also the attributes of a traditional airline rather than a low-cost model. Furthermore, when the fares are analyzed, most are consistently similar to those of SriLankan Airlines and it is thus unclear what aspect of Mihin Lanka is ‘low-cost’.
Mihin Lanka code-sharing (different airlines sharing seats on the same flight) with SriLankan Airlines does not make business sense, as they supposedly operate in two separate market segments and would be expected to provide two distinct services.
Thus, Mihin Lanka is a full-service airline in all but name. Sri Lanka does not need another state-funded traditional airline. The current model fails to meet the fundamental market requirements as outlined earlier in this article.
Re-engineering Mihin Lanka’s strategy
With intense competition and SriLankan Airlines not enjoying great success, there is no point in Mihin Lanka operating as another full-service airline and following the same path. If Mihin Lanka is to be a profitable venture, it needs to define and execute a business model following a low-cost strategy and cascade it down to operational efficiency by implementing the following measures:
- Equipment – The airline should operate fuel-efficient flights to hedge against rising fuel prices and remain competitive. Generally, Airbus 320 and Boeing 737 flights should be deployed as they are extremely fuel-efficient and low in maintenance and staff costs, resulting in low costs per passenger. The flights should be configured to maximize the use of seating space and offer minimum optional features (e.g. entertainment) as this reduces the costs of acquisition/lease and maintenance, which also results in fuel efficiency due to reduced weight.
- Flights/routes – The focus should be on short-haul destinations with a maximum one-way flight time of four hours and minimum numbers of on-board staff.
- Pricing – This is critical as the target market is price sensitive.
Prices should be low and should induce passengers to switch from using full-service flights to shift and stimulate demand. Mihin Lanka should offer a simpler online fare system, charging for one-way tickets, baggage, etc.
The pricing policy should incorporate, for example, lower fares for early booking, high fares for weekend travelers, and increases in fares as flights fill up. This will encourage advance bookings, enabling the airline to engage in promotions in a timely manner.
Hub – The hub should be moved from BIA exclusively to MRIA (Mattala airport). BIA’s aviation charges are some of the highest in the region, whereas a generous long-term contract at a concession could be negotiated with MRIA.
Service restructuring – There should be no extravagant passenger
benefits. Customers should be offered the standard low-cost airline package:
Passengers pay for checked-in luggage; there is a free allowance of 7kg for hand luggage; there is no on-board entertainment and no complimentary meals (only paid meals onboard); seat reservations are abolished (i.e. first-come, first-served basis) and priority boarding (again charged for) is promoted so that passengers can choose the seats they prefer.
- Partnership/code-sharing with SriLankan Airlines – This agreement should be suspended as it is between two distinct services.
- Management – The management team should be independent of SriLankan Airlines. A dedicated management team with no conflict of interest or political interference is required: a tall order.
- Marketing and promotion – A national and international marketing campaign is needed, especially incorporating e-marketing. Packaged holiday deals, including accommodation and return flights at low prices, should be offered to stimulate demand during off-peak times.
- Customer services – The airline should exploit and promote the Internet where possible, for example in making bookings and changes, rather than using call centers and local offices. Generally, low-cost airlines charge a premium for the use of call centers and offices.
This is not an exhaustive list, but these measures would be a step in the right direction.
At the moment, the Sri Lankan skies are stacked with traditional airlines and if a fitting business model is embraced and implemented, no doubt Mihin Lanka can spread its wings to be a profitable venture, benefiting the public by enabling affordable travel, promoting local industries (tourism, transport, etc.) and thereby also benefiting the country.
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