VZCZCXRO0142
RR RUEHLMC
DE RUEHLM #0584/01 1020418
ZNR UUUUU ZZH
R 120418Z APR 06
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 3095
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 2941
RUEHNE/AMEMBASSY NEW DELHI 9490
RUEHKA/AMEMBASSY DHAKA 9087
RUEHIL/AMEMBASSY ISLAMABAD 5976
RUEHKT/AMEMBASSY KATHMANDU 4012
RUEHGP/AMEMBASSY SINGAPORE 5632
RUEHBK/AMEMBASSY BANGKOK 2942
RUEHKP/AMCONSUL KARACHI 2004
RUEHCG/AMCONSUL CHENNAI 6525
RUEHLMC/MILLENNIUM CHALLENGE CORP
RUEANHA/FAA NATIONAL HQ WASHDC

UNCLAS SECTION 01 OF 02 COLOMBO 000584 
 
SIPDIS 
 
STATE FOR EB/MTA/MST AND SA/INS; MCC FOR D.NASSIRY AND 
E.BURKE 
SINGAPORE FOR FAA 
BANGKOK FOR TSA/SHARON WALLOOPILLAI 
USDOC FOR EROL YESIN 
 
SIPDIS 
 
E.O 12958: N/A 
TAGS: ECON EAIR CE
SUBJECT:  CIVIL AIR IN SRI LANKA  3 NEW CARRIERS 
 
REF:  COLOMBO 559 
 
¶1.  Summary:  The Government of Sri Lanka (GSL) is taking 
some steps to liberalize civil aviation.  The GSL has 
issued provisional licenses to three new airlines 
registered in Sri Lanka to operate international air 
services, although initially they will be restricted to Sri 
Lanka-India routes.  Until now, the national carrier, Sri 
Lankan Airlines (SLA), was the only domestic carrier 
operating international flights.  The new airlines hope to 
operate feeder services via Colombo.  Their preparations to 
start operations with leased aircraft will see marked 
change in Sri Lankas airline industry.  End Summary. 
 
THREE LICENSES ISSUED 
--------------------- 
 
¶2.  In December 2005, the Civil Aviation Authority (CAA) 
issued three provisional licenses to operate international 
civil aviation services.  The companies were required to 
have a minimum of 51% local ownership in order to be 
eligible for the licenses.  EconOff met with the chief 
executive officers of Sri Lankan Airlines (SLA) and the 
three new airlines:  Expo Air, Holiday Air and Deccan 
Aviation, to discuss the changes in the civil aviation 
sector.  All three new companies come with substantial 
aviation experience.  Expo Air is part of an established 
Sri Lankan company already into international air cargo 
services and domestic air services.  The other two are 
joint ventures with foreign companies:  Air Asia of 
Malaysia has a substantial stake in Holiday Air and Deccan 
Airways of India has a substantial stake in Deccan Aviation 
of Sri Lanka.  These companies plan to utilize the 
financial status and other resources of their partners. 
All three airlines plan to lease aircraft. 
 
FIRST ROUTES TO SECONDARY INDIAN CITIES 
--------------------------------------- 
 
¶3.  Initially, the three companies have been granted rights 
to fly to India.  But since all slots into the largest 
Indian cities except for Calcutta are already taken up by 
SLA, initially the three airlines will fly to secondary 
South Indian cities.  They hope that with the expansion of 
bilateral air services agreements, more large cities in 
India will open to them. 
 
PRICING STRATEGIES 
------------------ 
 
¶4.  According to Mr. A. Thowfeek, CEO of Expo and Mr. Suren 
Mirchandani, Director of Deccan Aviation, the two airlines 
plan to cater to expatriate Indians working in the Middle 
East, flying them from various South Indian cities to 
Colombo, which has connections to onward destinations in 
the Middle East.  Although planning to offer no-frills 
services, Expo and Deccan do not plan to compete with SLA 
or other carriers based on price. (COMMENT:  Flying out of 
India from airports SLA does not serve may be a 
sufficiently distinguishing factor for success. End 
Comment.) 
 
¶5.  In contrast, Holiday Air plans to distinguish itself as 
a low-price carrier.  Holiday Air plans to offer tickets as 
cheap as $10 and will utilize an internet-based 
reservations system.  According to Mr. A. Ruzaik, CEO of 
Holiday Air, the airlines target market is anyone looking 
for a cheap deal.  All three airlines plan to expand 
services to other destinations after the limited license 
period is over. 
 
PRESERVING AN IMPECCABLE SAFETY RECORD OR GIVING SLA 
TIME? 
--------------------------------------------- ------------ 
 
 
COLOMBO 00000584  002 OF 002 
 
 
¶6.  The new operators complain that licensing conditions 
are not very conducive to business.  Initially CAA will 
will 
issue provisional licenses to fly to India for six months 
on a trial basis.  CAA argues that the new airlines need to 
ensure that Sri Lanka maintains its safety record in civil 
aviation.  Sri Lankas national carrier, SLA, has a good 
flying record with no major accidents. 
 
¶7.  Even after more international routes beyond India are 
opened to the new carriers, India may remain the most 
lucrative sector for the airlines operating from Sri Lanka. 
Peter Hill, CEO of SLA (currently the fourth largest 
foreign carrier serving India), told EconOff that for 
domestic carriers the jewel in the crown is India.  To 
help the civil aviation market grow, Sri Lanka-based 
airlines could bring the Indian diaspora back and forth 
between India and the Middle East and elsewhere via Sri 
Lanka. 
 
¶8.  The new carriers complain that although licenses are 
being granted, SLAs hold on Sri Lankas Bandaranaike 
International Airport and its ground services (including 
baggage handling and catering) enable SLA to keep an iron 
iron 
grip on the civil aviation market.  (Comment:  This could 
give SLA further undue advantage should licenses be granted 
for competing routes, since SLA could charge itself less 
for ground services while undercutting the competition 
should a price war ever erupt.  End Comment.) 
 
 
 
COMMERCIAL OPPORTUNITIES FOR US BUSINESS 
---------------------------------------- 
 
¶9.  The operators plan to buy/lease aircraft, most likely 
short haul aircraft.  Growth of the civil aviation market 
also presents significant business opportunity for US 
suppliers of civil aviation ancillary machinery and 
equipment. 
 
THE NEXT STEPS BEFORE OPERATION 
------------------------------- 
 
¶10.  Holiday and Expo Air have submitted detailed plans to 
CAA already.  Deccan plans to confirm its interest in the 
licenses after a company review in early April.  The 
airlines now need to provide route feasibility and CAA will 
do market feasibility studies before approving the proposed 
routes. 
 
Comment 
------- 
 
¶11.  The GSLs gradual liberalization of civil aviation 
could boost many sectors of Sri Lankas economy (tourism, 
transport, etc.) as well as provide significant commercial 
opportunities for US suppliers of civil aviation ancillary 
machinery and equipment as well as short-run aircraft 
leases or sales.  It remains to be seen whether a 
sufficient market can be created for four Sri Lankan 
carriers (up from only one) flying internationally.  The 
newcomers strategies depend in large part on whether they 
can exploit demand by Indian expatriates and migrant 
workers traveling to the Middle East, and to what extent 
they can capitalize on South Asias growing regional 
tourist market.  At least until Indias overburdened 
primary airports expand their facilities faster than 
Indias demand for air travel increases, Sri Lanka may 
become another hub for Indian travelers. 
 
LUNSTEAD 
STEAD