BMI's Executive Summary

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Core Forecasts

Tourist arrivals for 2007 showed a decline, in line with BMI 's own expectations. Some 494,008 tourists arrived in Sri Lanka over the year, a drop of 11.7% year on year (y-o-y). The country 's deteriorating civil situation was the main reason behind the fall in tourist numbers, with a state of civil war between the military and the Tamil Tigers persisting in the country 's north east. Although this part of the country is not a main tourist destination, negative tourist advisories from foreign governments have deterred visitors from coming to the island.

May was the worst month for tourism, with visitor numbers down by over 40% y-o-y. In fact, only three months of the year (January, November and December) saw an annual increase in visitor numbers. December 's monthly arrival figures were especially strong, showing a 55.8% annual increase, to 61,116 visitors. Looking at international tourism revenue figures, these too showed a decline, of 6.1% y-o-y, to US$385mn.

Moving forward, we believe that the island nation will continue to struggle to attract tourists from Western destinations, given the civil conflict in the north east of the island. However, this shortfall could be offset by an increase in visitors from India and the Middle East region. Overall, we believe an average annual growth rate of 1.5% in tourist arrivals over our forecast period to 2012 may be possible, if the ongoing promotional efforts to attract visitors from the Middle East region, Russia and India come to fruition. However, we still feel that 2008 and 2009 will remain difficult years for the local tourism industry, given the ongoing state of war in the north and east of the country. As such, we predict only very slight growth in tourist arrivals and revenues figures over the next two years.

Sri Lankan Airlines To Return To State Control

Sri Lanka 's flagship airline, Sri Lankan Airlines, is to return to state control at the end of March 2008, following Emirates ' decision not to renew its 10-year management contract. At present, Emirates is to keep its 43.6% stake in the airline, but speculation is now rife that the Dubai-based airline will seek to divest this to another regional player.

BMI believes that the return of Sri Lankan Airlines to state control will be a negative for the airline, which had benefited greatly from Emirates ' management. It is to be hoped that the airline can find a new partner to help it through the years ahead.

Civil War Risk Real

We caution that there is a real danger that Sri Lanka's conflict with the rebel Liberation Tigers of Tamil Eelam (LTTE, Tamil Tigers) will descend into full-scale civil war. BMI expects an escalation of violence from both sides following the official end of the ceasefire agreement, and with the government starting to push for a decisive military solution, a violent backlash by the Tigers is on the cards.

The government's withdrawal in January from the Ceasefire Agreement (CFA) with the Tamil Tigers has set the stage for a marked intensification of fighting during 2008. There will not be a huge upsurge in casualties in the immediate term, as violence had already been increasing before the demise of the CFA. However, over the course of our forecast period, the formal end of the truce, which had been in place since 2002, could result in unrestrained fighting. The government is likely to ignore international calls for restraint and push for military advances in the northern Tamil homeland, which will test the Tigers ' patience and could provoke retaliation in the form of bombings across the country, including in Colombo. Although Tamil activity is currently limited to the north and east of the country, which is not a tourist destination, any spread of violence into the south and west of the country would have devastating consequences for the tourism industry.

Chapter 1 - New This Quarter

Core Forecasts

Accommodation Sector

A return to civil war

Sri Lanka Tourism Industry SWOT

Chapter 2 - Market Overview

Tourism Outlook

Table: Sri Lanka Tourist Arrivals 2005-06

Rising tensions

Table: Sri Lanka - Historical Data & Forecasts, Tourism Industry

Table: Sri Lanka - Historical Data and Forecast, Tourism Industry

Chapter 3 - Macroeconomic Forecast

Table: GDP And Population

Chapter 4 - H5N1 Virus (Update): Transmission Among Humans?

Travel

Commercial Airlines

Special Focus: Rising Jet Fuel Costs

Table - Oil Price Forecasts

Chapter 5 - Hospitality

Hotels

Table: Sri Lanka - Accommodation Sector Forecast

Table: Major Hotels By City/Resort – As Of July 2006

Chapter 6 - Company Monitor

Profiles

Sri Lankan Airlines

Keells Hotels

Chapter 7 - BMI Forecast Modelling

How We Generate Our Industry Forecasts

Tourism Industry

Sources

Competitive Landscape for Asia Tourism Reports: Sample of Companies Ranked

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Comparative cross-border analysis assessing business and regulatory factors to rank Asia’s most competitive tourism markets. Indicators used include Political Risk, Business Environment Risk, Forecast International Tourism Receipts, Visitor Arrival Growth, Investment Environment and Shock Factors (taking account of any special factors such as terrorism, natural disasters and disease). Company SWOTs for leading resort, hotel, airline, travel and tourism operators in each market, including competitive intelligence on overall geographic presence, competitive positioning and relationships with international operators; % share of operator markets; % share of international arrivals and departures; % share of busiest domestic routes; main products and services; panregional expansion, merger and acquisition strategies.

Network of Asain Tourism Sources

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BMI's Asian Tourism Reports are based on an extensive network of multilateral organisations, government departments, tourism industry associations, chambers of commerce and company reports. Information sources include: