The Business of National Pride: How Flag Carriers Navigate the Skies

November 21, 2024
The Business of National Pride How Flag Carriers Navigate the Skies

By Catherine Cheng

In the complex world of aviation, national airlines, often referred to as flag carriers, play a unique role. These airlines are typically owned or supported by their respective governments and are tasked with not just turning a profit, but also serving as ambassadors to their home countries. This dual mandate creates both opportunities and challenges which we will explore by examining the business models of National Airlines and taking a closer look at SriLankan Airlines and other flag carriers around the world.

The Home Country Business Model

National Airlines generally operate under a business model that is heavily influenced by their home country’s interests. This model typically includes several key elements:

  1. National Identity: Flag carriers are often extensions of their country’s brand. Their livery, in-flight experience and overall service is designed to highlight the best of what their nation has to offer.
  2. Economic Catalyst: These airlines are slated to boost tourism, facilitate trade, and connect their country to the global economy prioritizing routes that benefit national economic interests, even if they are not always profitable.
  3. Government Support: Many flag carriers receive financial backing or preferential treatment from their governments. This can include subsidies, monopoly rights on certain routes, or favorable regulations.
  4. Employment and Skill Development: National airlines are often major employers in their home countries serving as training grounds for aviation professionals.
  5. Strategic Asset: These airlines could be on call to serve Government needs in times of national emergencies or to facilitate diplomatic missions.

While this model has its advantages, it also presents challenges. The pressure to serve national interests can sometimes conflict with the need for profitability, leading to inefficiencies and financial struggles for some flag carriers.

SriLankan Airlines: A Case Study

SriLankan Airlines, the flag carrier of Sri Lanka, provides an interesting example of how national airlines operate and evolve. Founded in 1979 as Air Lanka, it was rebranded as SriLankan Airlines in 1998 following a partial acquisition by Emirates.

Contribution to Sri Lanka’s Economy:

  1. Tourism Boost: In 2022, Sri Lanka recorded over 719,978 tourist arrivals to the country’s generating approximately $1.1 billion in revenue. The airline facilitates approx. 55% of total tourist arrivals, making it a crucial player in the tourism sector.
  2. GDP Contribution: The air transport sector, including SriLankan Airlines, directly contributes around $446 million to GDP. When spending by foreign tourists arriving to the country is factored in, the total contribution to GDP rises to approx. $7.9 billion, representing 8.9% of the country’s GDP.
  3. Job Creation: The airline supports approximately 703,000 jobs in Sri Lanka, including 19,000 direct jobs in the air transport sector, 9,000 jobs from local suppliers, and 669,000 jobs supported by spending from foreign tourists.
  4. Cargo Operations: SriLankan Airlines has expanded its cargo operations significantly, achieving $146 million in cargo revenue in the financial year 2020/21, which accounted for 60% of total air transportation revenue.
  5. Ground Handling and Catering: The airline also provides comprehensive ground handling services and catering, contributing to overall revenue streams while supporting local suppliers.

Government Support

The government of Sri Lanka fully controls SriLankan Airlines and has provided significant support, including government guarantees and bonds to facilitate borrowing in international debt markets. The government is also taking over approx. LKR 100 billion (approximately **$332.6 million**) of the airline’s debt as part of a restructuring plan aimed at privatization. This support underscores the strategic importance of the airline to the nation’s economy and connectivity.

Dr. Kenneth De Zilwa, a prominent business cycle and development economist in Sri Lanka, offers insight into the airline’s significance and potential future direction:

“SriLankan Airlines is more than just a commercial entity; it’s a vital artery for our nation’s economic lifeblood. While the airline faces challenges, its role in connecting our island to the world, supporting tourism, and facilitating trade cannot be overstated. Moving forward, a public-private partnership (PPP) model, similar to the successful LankaPay model in our financial sector, could be the key to balancing national interests with commercial viability. This approach could inject private sector efficiency while maintaining the airline’s strategic importance to Sri Lanka.”

Challenges and Adaptations

Like many national carriers, SriLankan Airlines has faced its share of challenges:

  1. Financial Struggles: The airline has experienced financial difficulties, partly due to the high costs associated with maintaining a full-service carrier model in a competitive market.
  2. Political Interference: As a state-owned enterprise, the airline has sometimes been subject to political decisions that may not align with commercial interests.
  3. Market Competition: Increased competition from Gulf carriers and low-cost airlines has put pressure on SriLankan Airlines’ market share and profitability.
  4. External Shocks: Events like the 2019 Easter bombings in Sri Lanka and the global COVID-19 pandemic have severely affected the airline’s operations and finances.

In response to these challenges, SriLankan Airlines has been working on several strategies:

  1. Route Optimization: The airline has been adjusting its route network to focus on more profitable destinations and frequencies.
  2. Fleet Modernization: Efforts are being made to update the fleet with more fuel-efficient aircraft to reduce operational costs.
  3. Service Enhancement: The airline continues to invest in improving its service quality to differentiate itself in a competitive market.
  4. Partnerships: Codeshare agreements and alliances with other airlines have been pursued to expand the network and increase passenger numbers.
  5. Restructuring: There have been ongoing discussions about potential privatization or restructuring to improve the airline’s financial health.

Government Support for National Carriers: Global Examples

SriLankan Airlines is not alone in receiving government support. Many national carriers around the world benefit from various forms of government backing. Here are some notable examples:

  1. Lufthansa (Germany): Received a €9 billion bailout in 2020, which included a government equity stake. This support was crucial during the pandemic but has since been repaid.
  2. Air France-KLM (France and Netherlands): Secured €10.4 billion in aid, comprising loans and guarantees, to stabilize operations amidst the COVID-19 challenges.
  3. Qatar Airways (Qatar): Likely received substantial government support, similar to other Gulf carriers, to navigate challenges posed by the pandemic, although specific figures have not disclosed.
  4. Emirates (United Arab Emirates): Received AED 7.3 billion (approximately $2 billion) from the Dubai government in 2020 to help the airline survive the COVID-19 pandemic. In the 2021-22 fiscal year, Emirates received an additional AED 3.5 billion (approximately $954 million) capital injection from the Dubai government.

PwC Research Findings

According to a recent report by PwC titled “Airlines Still Need Stimulus” published on May 30, 2024, the aviation industry continues to face significant challenges. The report emphasizes that national airlines are still seeking government support to improve operational efficiency and cope post-pandemic with rising costs. It highlights that “the operational pressure caused by currency fluctuations, particularly the depreciation of local currencies against the US dollar, significantly impacts aircraft operational costs, including fuel prices and maintenance expenses.”

The above examples illustrate the significant financial backing that various national carriers have received from their governments, highlighting the importance of such support in maintaining operations and addressing the challenges faced during the COVID-19 pandemic.

The Global Context

The experiences of SriLankan Airlines and other national carriers highlight the complex challenges facing national carriers globally. While government support can be crucial for maintaining operations and serving national interests, it also raises questions about fair competition and market efficiency.

The justification for such support usually centers on the strategic importance of maintaining a national airline for economic development, tourism, and national prestige. However, critics argue that these subsidies can lead to market distortions and inefficiencies.

The future of national airlines are likely to find a balance between serving national interests and maintaining commercial viability and may involve the following:

  1. Partial Privatization: Some governments are opting to sell their stake in the national carriers to bring in private sector expertise and capital.
  2. Strategic Partnerships: Alliances and joint ventures with other airlines can help national carriers expand their reach and improve efficiency.
  3. Government Support with Strings Attached: Some countries are providing support to their flag carriers, but with conditions for improved efficiency and profitability.
  4. Focus on Comparative Advantages: Successful national carriers are often those that leverage their country’s unique strengths, whether it is its geographic position, tourism appeal, or service culture.
  5. Public-Private Partnerships (PPP): As suggested by Dr. De Zilwa, PPP models such as the LankaPay system in Sri Lanka’s financial sector could offer a way to balance national interests with commercial efficiency in the airline industry.

Conclusion

National airlines like SriLankan Airlines continue to play a vital role in their home countries’ economies and national identities. However, the challenging aviation landscape requires these carriers to evolve their strategies continuously. The most successful will be those that can balance national interests with commercial realities, leveraging government support while also embracing market-driven efficiencies.

As the global aviation industry continues to evolve particularly in the wake of disruptions such as the COVID-19 Pandemic, the role of government support for national carriers remains a contentious issue. Balancing the desire to maintain a flag carrier with the principles of fair competition and fiscal responsibility will likely remain a challenge for many nations in the years to come.

The story of SriLankan Airlines and its peers around the world will continue to be one of national pride, economic necessity, and the relentless pursuit of sustainability in the ever-changing skies of global aviation. Those that succeed will continue to serve as vital links for their nations to the global economy, while those that fail to adapt may find themselves relegated to the pages of aviation history. The potential adoption of innovative models like public-private partnerships could offer a new path forward, blending the best of both worlds to ensure the continued relevance and success of national carriers in an increasingly competitive global market.