KEY DETERMINANTS PERTAINING TO THE DROP IN MARKET SHARE OF SRILANKAN AIRLINES by P

KEY DETERMINANTS PERTAINING TO THE DROP IN MARKET SHARE OF SRILANKAN AIRLINES
by
P. N. Kumanayake
0000015478
An Integrated Research Project submitted to the Sri Lanka Institute of Marketing in partial fulfillment of the requirements for the Postgraduate Diploma in Marketing
Supervisor: Mr. Anuradha Edirisinghe
Sri Lanka Institute of Marketing
Postgraduate Diploma in Marketing (PGDIP)
SLIM Business School – Colombo
June, 2018

Research Proposal Evaluation – IRP
Marking Scheme
Student Name P.N. Kumanayake
Registration Number 0000015478
Criteria Allocated Marks Awarded Marks
1 The background of the problem 10 2 The significance/rationale of the exploration of the problem 10 3 The objective/s of the report 15 4 Brief Literature Review 10 5 Methodology of perspective 15 5.1Conceptual framework 5.2Operationalisation 10 6 The approach to data collection 10 7 Delimitations of the study 5 8 The Time Plan 5 9 References(Harvard Reference System) 5 10 Adherence to stipulated format 5 Total 100 Special Remarks:
Signature of Examiner Table of Content
1. Background of the Problem1
2. Significance/Rational5
3. Objectives6
3.1 Primary Objective6
3.2 Secondary Objective6
4. Literature Review6
5. Methodology8
5.1 Conceptual Framework8
5.2 Operationalization Table9
6. Data Collection Analysis10
7. Delimitations11
8. Time Plan12
9. References13
List of Figures
Figure 1: Conceptual Framework8
Figure 2: Time Plan12
List of Tables
Table 1: Market Share of Top Ten Passenger Carriers1
Table 2: Passenger Movement2
Table 3: SriLankan Airlines – Net Profit (Loss) Figures3
Table 4: SriLankan Airlines – Market Share Percentages3
Table 5: Operationalization Table9
1. Background of the Problem
The history of civil aviation in Sri Lanka had its humble beginnings way back in the 1930’s where the first airdrome was constructed in Ratmalana. Being one of the British colonies as well as with the outbreak of the Second World War, runways were developed and expanded. The inaugural international flight of Air Ceylon took place in 1947. It was then realized that the development of the aviation industry within Sri Lanka was to play a key role in terms of developing the country’s economy. Aviation sector is central when it comes to Sri Lanka’s tourism strategy.
Air Ceylon was wound up completely, and in its place Air Lanka came into operation in September 1979, under the patronage of then President, J. R. Jayewardene, in association with Singapore Airlines which was a profit making airline.

Presently, as stated in the Ministry of Finance, Annual Report (2016), Airport Aviation Services (Sri Lanka) Limited – (AASL), which has been empowered by the Civil Aviation Act of 2010, acts as the statutory service provider in terms of developing and maintaining all aerodromes in Sri Lanka as well as the management of all domestic airports including the three largest being Bandaranaike International Airport (BIA), Matthala Rajapaksa International Airport (MRIA) and Rathmalana Airport (RMA).
At present, 32 international airlines operate in Sri Lanka. Thus, the market share within the aviation idustry of Sri Lanka, is being shared among various airlines such as Air India, Cathay Pacific, Emirates, Fly Dubai. Indigo Airlines, Jet Airways, Malindo Air, SpiceJet, Thai Airways, Turkish Airlines, Air Asia Berhad, China Eastern, Gulf Air and so on. Hence, the level of competition faced by SriLankan Airlines is very apparent, when it comes to capturing the market share. The market share percentages of the top ten passenger carriers in 2015 are depicted in Table 1.

Table 1: Market Share of Top Ten Passenger Carriers
SriLankan Airlines UL 51.70%
Emirates EK 9.97%
Qatar Airways QR 6.14%
Mihin Lanka MJ 5.49%
Fly Dubai FZ 2.45%
Jet Airways 9W 2.33%
Air Arabia G9 1.97%
Etihad Airways EY 1.88%
Singapore Airlines SQ 1.78%
Cathay Pacific CX 1.77%
Source: Civil Aviation Authority, Annual Report 2015
The SriLankan Airline operates a route network of 105 cities in 47 countries, where its main hub is located at Bandaranaike International Airport in Colombo. In 1998, the company, then known as Air Lanka, had entered into a strategic partnership with the Emirates Group. But in 2008, all affiliations between the two airlines ended. With the government taking over the administration of the airline, the company has been continuously making significant losses, alongside a drop in market share and overall sales figures as well.

Mihin Lanka (Pvt) Limited – (MLL) was amalgamated with SriLankan Airline’s business operations along with all of its route networks in 2016 due to the continuous financial burden created by it. SriLankan Airlines re-scheduled and upgraded all routes to full service operations from the budget flight operations, as indicated in the Central Bank Annual Report (2016). The current passenger movement figures and the traffic load summary of SriLankan Airlines are indicated in Table 2.

Table 2: Passenger Movement (From Apr 1st – Mar 31st)
2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Traffic Load 2,872,689 3,490,933 4,300,418 4,221,032 4,394,319 4,381,370 4,508,377
Source: Ministry of Finance, Sri Lanka Annual Report, 2017
Most of the operating losses of SriLankan Airlines were said to be from high costs related to aircraft maintenance and lease. Currently, the government is seeking for a strategic partner so as to remove the government burden of maintaining a massive loss making airline.
The net profit or loss figures of SriLankan Airlines, as per their financial statements in Rs Million, before and after the privatization are depicted in Table 3.

Table 3: SriLankan Airlines – Net Profit (Loss) Figures
2005 2007 2009 2011 2013 2015 2017
Net Profit (Loss) 479.87 568.04 -9,305.94 -381.61 -26,089.00 -16,494.66 -28,929.99
Source: Parliament Research Division – 2017 Nov
SriLankan Airlines, which is the flag carrier airline of Sri Lanka, has been reportedly making losses during the past years. The magnitude of the amount of loss being accrued by the company can be clearly identified by scrutinizing the figures mentioned in Table 3.
The drop in the market share percentages of the airline, for the past five years is illustrated in Table 4.

Table 4: SriLankan Airlines – Market Share Percentages
Year Market Share Percentage
2013 58.9%
2014 54.1%
2015 51.7%
2016 47.1%
2017 46.0%
Source: Ministry of Finance, Sri Lanka – Annual Report 2017
This is a very dynamic topic which is being discussed extensively is the present day, even within political forums. For the Sri Lankan government, maintaining the national airline under this much of debt is a major encumbrance. SriLankan Airlines has last made a profit in the financial year of 2008, and since then it has been unprofitable with the termination of the strategic alliance with Emirates. The company’s Compound Annual Growth Rate (CAGR) was calculated considering its operating expenditure as an investment, for the past few years since the termination of the partnership with the Emirates Group up until the present year. Thus, the CAGR amounted to a rate of 5.97%, which is the mean annual growth rate of the company’s investment. Thus, it is clear that the rate of return on the copany’s investments is also quite low. The continuous drop in the market share and the loss making situation of the national airline carrier of the country may have many negative consequences on the nation as a whole.

Thus, the research problem of the study is this continuous decline of the market share figures of the airline, since the termination of the strategic alliance with the Emirates group in 2008.

2. Significance/ Rational
This study would be significant in terms of both theoretical as well as practical perspectives. Also, the significance of the research is threefold, namely for a reader of the study, the researcher himself or herself as well as for the company under consideration.

A reader of this research article would be in a position to gain a thorough understanding on the operations of the national airline carrier of the country, key elements pertaining to the drop in its market share and profitability. A person going through the study would also be able to gain an in-depth understanding of the factors affecting the profitability and market share of any given company operating within the aviation industry.

The researcher too would be able to gain a meticulous insight on the overall aviation industry, on the flag airline carrier of the country and its downfall, major factors that are to be focused on when uplifting it, major advantages gained when partnering the enterprise by forging a strategic alliance with another company and so on. The researcher would gain sufficient knowledge so as to make acceptable and practical suggestions or recommendations so as to turn the company over a new leaf.

As for the company itself, it would be in a position to identify appropriate and feasible solutions as to convert itself from a loss making company, to a profit making one. The company too would gain an insight into some of the pressing issues causing it to lose its market share among other competing airlines.

The theoretical implications of the study would be the identification of the major factors impacting upon the decline in the market share of the airline company. At the end of the study, the most prominent determinant influencing on the market share would be identified. As a result of that, the company would be in a position to take necessary measures and actions, to rectify errors and then to enhance the corporate market share as well as its profits. A strategic partner could be selected based on the most pressing issues identified via the study, in collaboration with the government, so as to convert the company from a loss making one into a profit making, promising enterprise.

The underlying basis for the continuation of any given corporation is profit making and the capturing of market share, which goes hand in hand. As stated by Robert et al (1975: 97-106), there is a direct implication of market share on profitability and return on investment (ROI). Therefore, the decline in market share of SriLankan Airlines is a significant and sizable problem to be studied, and is also directly related to the marketing field.
3. Objectives
3.1. Primary Objective
The primary objective of this research study is to identify the main factors influencing upon the decline in the market share of SriLankan Airlines.
3.2. Secondary Objectives
In addition to the primary objective of the study which is stated above, the researcher also identified the following secondary objectives.

Measures or solutions to be taken by the company so as to convert it from a loss making entity into a profit making one.

To identify the unprofitable routes in which the company is currently operating in.

4 Literature Review
With the end of the civil war in Sri Lanka, Nagahawatta (2016) has stated that both the aviation industry as well as the tourism industry has faced a lot of opportunities, challenges and issues. Various sorts of inefficiencies as well as bureaucracies have become a part and parcel of SriLankan Airlines.
According to Eugene et al (1994), research findings have indicated that there is a very high correlation between customer satisfaction and market share as well as on profitability. In the same research, it is indicated that customer satisfaction has an overall positive effect on economic returns. Likewise, customer expectations and experiences would lead to the creation of customer satisfaction, which in turn would play a key role in enhancing the market share. The findings of this study also depicts that by improving the customer satisfaction, the economic gains would be realized in the long run.

Eckard (1987) has stated that product differentiation increases the stability in market share; while advertising has mixed implications in sustaining and expanding a product’s market share. Ferrier (1999) has expressed that various competitive actions carried out by market leaders and challengers have major impacts on the erosion of the market share of the company under consideration. The same scholarly article has defined the total competitive activity as the accumulation of the number of new competitive moves carried out by a firm in a given year. Thus, the researcher also intends to assess the degree of competition posed within the airline industry, especially when it comes to price based competition with regard to budget airlines, which would have direct implications on the market share of SriLankan Airlines.

Airline passengers’ decision to remain with the same airline or to switch to the use of other airlines is said to be dependent upon the experience they have had in terms of flight delays, according to Suzuki (1999). Thus, it could be said that there is a positive correlation between on-time performance and airline market share. The variable of on-time performance has been defined by Suzuki (1999) as the overall percentage of flights arriving with 15 minutes of scheduled arrival time.

According to David et al (2006), the firm value of an airline is said to be positively related to hedging in terms of fuel prices and requirements. Hence, there is a positive correlation between hedging and the firm value.

There is a significant negative impact on market share of the companies operating in the airline industry, when it comes to layoffs and employee relationships, Even though it may lead to short term cost savings, based on the research findings of Gittell (2005).
Liu ; Yang (2009) had explored the impacts of competing loyalty programs on expanding the market share, where the findings and conclusions on the impact of such programs are unclear. Thus, the researcher intends to explore and statistically test this particular variable in light of loyalty programs carried out by SriLankan Airlines, such as Fly Smiles.

5. Methodology
5.1. Conceptual Framework
Upon reviewing the literature, the researcher selected the below mentioned four independent variables so as to test the deviation of the dependent variable which is the market share of SriLankan Airlines.

F59690447040igure 1: Conceptual Framework
5.2. Operationaliation
Table 5 depicts the indicators that the researcher identified by reviewing previous literary articles, that describes each and every variable under consideration within the present study. These indicators would be used later on when developing the questionnaire, in the data collection stage. The table also illustrates a rough draft as to what sort of questions and the exact number of questions that the researcher intends to use, to as to gauge the necessary information with regard to the selected variables.

Table 5: The Operationalization Table
Variables Indicators Measurements Questions
Customer Satisfaction Customer retention
Brand attributes
Customer recommendations
Customer complaints Five point Likert Scale Five questions per variable
On-time Performance Punctuality
Advertised performance VS actual performance Five point Likert Scale Five questions per variable
Loyalty Programs Perceptions towards loyalty programs
Number of offers redeemed Five point Likert Scale Five questions per variable
Competition Use of other competing airlines
Responsiveness to competitive actions Five point Likert Scale Five questions per variable
Market Share Service quality
Brand loyalty
Usage frequency Five point Likert Scale Five questions per variable

6. Data Collection Analysis
The total population and the sampling frame of the research study include all the airline passengers within Sri Lanka. Upon substituting figures to the given formula of calculating the actual sample size, the researcher arrived at a figure of 480 respondents comprising of the actual sample. However, under the given circumstances, the researcher decided on collecting a sample of only 100 airline passengers from within Sri Lanka, which would be derived from the population of interest. The non probability sampling technique of Convenience Sampling would be administered. The total population would be divided into multiple significant strata based on the purpose of travelling. That is, data would be collected from various segments of airline passengers including business travelers, passengers flying for leisure, transit passengers, foreign travelers etc.

Self-administered survey questionnaires would be used in order to collect necessary data on airline preferences, and thereby to gauge the market share of SriLankan Airlines. In addition to that, secondary data sources too would be used.

According to the definitions of Saunders (2009), the research is to be an empirical, quantitative study; since credible data would be collected from people using data collection techniques, numerical data would be statistically analyzed and also since statistical data would be gathered using questionnaires. The research philosophy would be more lenient towards positivism since it would be a structured, organized explanation of the social phenomena. The research study is not going to be an action research, since the researcher would not be a part of the research.

The data collection time horizon would be cross-sectional, given that the data would not be gathered over an extended period of time. As a deductive and an descriptive study, the researcher intends to study and to find out new insights to the problem of the drop in market share of SriLankan Airlines, as well as to assess the phenomena by asking questions so as to prove whether the explanations of the business issue is true or false. Data would be gathered from a comparatively large population, using standardized questions.

As for the data analysis approach, Multiple Regression method would be used along with the usage of the Statistical Package for the Social Sciences (SPSS) software, since the impact of multiple independent variables would be assessed against a single dependent variable.

7 Delimitations
Mainly, the relationship between the selected four independent variables is being ignored. For example, there would be a direct correlation between the independent variable of customer satisfaction, on-time performance and the provision of loyalty programs; where customer satisfaction would heighten in the absence of flight delays as well as in the face of properly coordinated loyalty programs being carried out.

Same applies to the other independent variable of competition, where the degree of the intensity of competition would vary based on the other independent variables such as on-time flight arrivals and departures, carrying out loyalty programs and so on.

Moreover, there would be certain other operational as well as practical issues related to the research. The researcher intends to limit the sample size to only 100 respondents out of the total population of interest, along with the inability to meet the actual sample size of 480 respondents, mainly due to time limitations. The data collection is also going to be more or less cross-sectional, due to the same reason.

The researcher has decided to evaluate the impact of only four independent variables, where in reality, there could be more pressing issues directly impacting upon the market share of the selected company. Another delimitation identified was the fact that the focus of the study, mainly in terms of data collection, would only be on the airline passengers within Sri Lanka. Thus, the generalization of the findings would be to some extent questionable.
Based on previous literature, the definitions of certain variables are also rather arbitrary. For example, the on-time performance has been defined by Suzuki (2000) as the arrival of an aircraft to the destination airport within 15 minutes of the schedules arrival time. But, as mentioned in this scholarly article itself, this may not represent the true definition of “on-time arrival”. At the same time, the decision taken by airline passengers to switch or not to switch between airline services may not be based on factors related to airline delays, but purely based on such other reason which is being ignored here.

8. Time Plan
Figure 2 illustrates the expected time frame that the researcher intends to achieve, with respect to each and every key task that is to be accomplished, so as to successfully complete the research study within the given time period. The most number of weeks were allocated on the data collection stage.

Figure 2: Time Plan
Week No
Activity April May June July
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
1) Obtaining approval for the Research Proposal 2) Preparing for the Research proposal presentation 3) Preparing the final draft of the Research proposal 4) Developing the questionnaire and data collection 5) Obtaining approval for the final Research Report 6) Submitting the Research Report after making final changes 7) Preparing for the VIVA Defense 8) Final Hardbound submission
9. References
Anderson, E.W., Fornell, C. and Lehmann, D.R., 1994. Customer satisfaction, market share, and profitability: Findings from Sweden. The Journal of marketing, pp.53-66.

Buzzell, R.D., Gale, B.T. and Sultan, R.G., 1975. Market share-a key to profitability. Harvard business review, 53(1), pp.97-106.

Gittell, J.H., Cameron, K., Lim, S. and Rivas, V., 2006. Relationships, layoffs, and organizational resilience: Airline industry responses to September 11. The Journal of Applied Behavioral Science, 42(3), pp.300-329.

Innis, D.E. and La Londe, B.J., 1994. Customer service: the key to customer satisfaction, customer loyalty, and market share. Journal of business Logistics, 15(1), p.1.

Liu, Y. and Yang, R., 2009. Competing loyalty programs: Impact of market saturation, market share, and category expandability. Journal of Marketing, 73(1), pp.93-108.

Suzuki, Y., 2000. The relationship between on-time performance and airline market share: a new approach. Transportation Research Part E: Logistics and Transportation Review, 36(2), pp.139-154.

Tsaur, S.H., Chang, T.Y. and Yen, C.H., 2002. The evaluation of airline service quality by fuzzy MCDM. Tourism management, 23(2), pp.107-115.

Varet, L.A.G., 2003. Competition for market share or for market size: oligopolistic equilibria with varying competitive toughness.

Eckard Jr, E.W., 1987. Advertising, competition, and market share instability. Journal of Business, pp.539-552.

Nagahawatte, L. and O’Connell, J.F., 2016. An analysis of the issues and prospects facing SriLankan Airlines and its embedded partnership with Sri Lankan tourism. Tourism Economics, 22(5), pp.908-927.

d’Aspremont, C., Dos Santos Ferreira, R. and Gérard?Varet, L.A., 2007. Competition for market share or for market size: Oligopolistic equilibria with varying competitive toughness. International Economic Review, 48(3), pp.761-784.

Carter, D.A., Rogers, D.A. and Simkins, B.J., 2006. Does hedging affect firm value? Evidence from the US airline industry. Financial management, 35(1), pp.53-86.

Gittell, J.H., Cameron, K., Lim, S. and Rivas, V., 2006. Relationships, layoffs, and organizational resilience: Airline industry responses to September 11. The Journal of Applied Behavioral Science, 42(3), pp.300-329.

Rust, R.T. and Zahorik, A.J., 1993. Customer satisfaction, customer retention, and market share. Journal of retailing, 69(2), pp.193-215.

Buzzell, R.D., Gale, B.T. and Sultan, R.G., 1975. Market share-a key to profitability. Harvard business review, 53(1), pp.97-106.

Stavins, J., 2001. Price discrimination in the airline market: The effect of market concentration. Review of Economics and Statistics, 83(1), pp.200-202.

Sara, J. and Piyumi, A., 2016. The Study of Organizational Anti-citizenship Behaviors on the Performance of Organizations (Case Study: Sri-Lanka Airlines Company). Journal of Business and Technovation, 4(1), pp.10-22.

Ferrier, W.J., Smith, K.G. and Grimm, C.M., 1999. The role of competitive action in market share erosion and industry dethronement: A study of industry leaders and challengers. Academy of management journal, 42(4), pp.372-388.