Read excerpts of CounterPoint’s exclusive interview with former CEO of SriLankan Airlines, Suren Ratwatte, as he weighs in where Sri Lanka’s national carrier is headed.
Q. What kind of restructuring should UL adopt and what kind of strategy should UL implement if it wants to survive in future?
A. As long as SriLankan Airlines (SLA) exists as an entity, under the Companies Act it is liable for its debts. Some of these (adding up to almost USD 455 million in dollar denominated debt and LKR 27.6 billion in local borrowings) are sovereign-guaranteed by the GOSL. This includes a US$ bond, but most of the Treasury-backed debt would be in LKR. The total bank debt at the start of the financial year (April) was around USD 600 million.
The National Audit Office carried out an audit, which pointed out that the airline experienced a net loss of Rs 47,197.86 million during the year ended March 31 2020, with an accumulated loss of Rs. 326,341.48 million.As of 31 March, the company’s current liabilities exceeded its current assets by Rs. 211,645.13 million and total liabilities exceeded its total assets by Rs. 273,369.08 million. (source – Sunday Times)
With the advent of COVID the airline’s performance has worsened. It appears that in the first six months of this financial year (April – September 2020) the airline has lost in excess of Rs. 21,800 million. The expected loss for the entire FY is forecast to be in the region of Rs. 50 billion assuming the airport re-opens in January. If the borders continue to be closed the loss will be even greater.
According to Section 220 of the Companies Act of 2007, “Serious Loss of Capital” the company’s directors are required to disclose such a financial position and present a plan for reversing it.
Hence, one could argue that SLA is now in contravention of the spirit of the act. The company is probably circumventing the act via a ‘letter of comfort’ from the Treasury to the company auditor. This letter of comfort then requires the treasury to honour all the airline’s debt.
The airline could add around LKR 50 billion of losses annually as long as the COVID-19 situation continues.
It is worth noting that the aircraft leases, both arrears and contractual payments going forward, are NOT under a Treasury guarantee.
There is no conceivable restructuring that will allow the airline to pay back these debts. The existing debt plus interest is far greater than any revenue forecast for many years hence. At its peak, ‘air transport’ revenues approached USD 950 million annually, but the company still didn’t make a profit. In the last six months it appears that revenues of under USD 100 million were achieved, and there would be losses from other businesses such as Ground Handling & Catering that used to be profitable.
Essentially, restructuring is a fantasy. If all the debt plus the lease arrears are written off and a major capital contribution was made – perhaps; but as we have seen that is well over USD one billion, a lot of it in foreign currency. The country is facing a debt crisis already and desperately needs to invest in infrastructure and services.
Q. SLA was making a profit under Emirates, would it be a better option to give the management to another company?
A. It’s too late now. All airlines have excess capacity at the moment and will be that way for many years to come. Why would they want to take over the management of a company that is burdened with debt, overstaffed, and has militant unions? It’s just not worth the effort.
Q. Singapore Airlines was the only airline in Asia that was making a profit; how are they making a profit, and can SLA adopt such a strategy?
A. Singapore Airlines Group (SIA) has been very well managed from the outset. They have three airlines in the group, SIA, Silk Air and Scoot, catering to different market segments. But even they have lost a fortune and were bailed out by Temasek Holdings, the Singapore Government’s wealth fund, to the tune of SGD 8.8 billion (USD 6.2 billion). Yet, 70% of that money has already been burned-up just to stay in business.
The Government of Singapore however, can afford this cost as SIA has been profitable for 48 years until COVID and is very important to the nation’s economy.
Q. SLA does not have long routes; will adding long routes and removing the non-profit short routes help us?
A. Actually, SLA does have several ‘long’ routes. Just no ‘ultra-long-haul’ (ULR) routes such as to New York, Los Angeles, etc.
Don’t confuse ‘point to point’ traffic (also called Origin and Destination – O&D) between cities such as London and Colombo, with ‘network’ traffic. There is some limited O&D traffic between Colombo and cities like London, Tokyo, Beijing, Shanghai and Melbourne.
Flying these routes is possible, but they will lose money – though not too much. It may be possible to eventually get Frankfurt and maybe some other European routes back too. But even the O&D traffic will take a while to recover, and is unlikely to be commercially feasible — only if GOSL wants these routes and will accept losing money on them.
The shorter routes are where the airline faces the most competition from far more efficient carriers such as Indigo, Spicejet, Fly Dubai, Air Arabia, Air Asia, Malindo, etc. But these also act as ‘feeders’ for the long-haul network, as UL is primarily a network carrier.
So really it is an impossible choice. The network as a whole loses a lot of money. But if it were to be dismantled, then the long-haul O&D routes will also lose, unless they are run as a seasonal charter business.
SLA is essentially a seasonal airline. There are 16-20 weeks a year in which it used to make a profit. Easter, the Hajj, peak summer, Christmas etc. The rest of the year it loses money. The ‘good’ weeks were never profitable enough to offset the ‘bad’ ones, so the annual figures showed a loss.
In fact, the only feasible way to operate would be as a seasonal airline with peak-season flights to selected destinations and some charter work for Hajj, China’s ‘Golden Week’, etc. That is a challenging but possibly successful model to pursue. And it will not be possible until unrestricted international travel resumes, which is at least 2 years away.
Q. The airline industry as we know it no longer exists, so wouldn’t this be a good option to come up with an innovative way to promote UL?
A. Perhaps. The issue is the debt. There is no ‘Chapter 11’ type bankruptcy law that will allow a company to operate while being shielded from creditors. UL has to meet its debt obligations, or it cannot function.
A complete re-invention as a ‘seasonal + charter’ airline, as I said before, is possible, but would be very difficult to achieve successfully. It is an interesting model and possibly worth pursuing, but the debt would have to be written off and all the labour agreements changed to reflect a new way of doing business plus more capital added to make it a viable proposition.
Q. Would SLA have done better if it stayed with Emirates? How would Emirates handle this COVID situation if SLA was under its wing? What kind of decision would it have taken?
A. That’s a hypothetical question. Emirates is also suffering very badly. It needed a huge bailout from the owners to survive. Of the more than 120 Airbus A380s Emirates has, it is operating only about 20. The rest are gathering dust and at a cost of around USD 300 million each, this represents a huge liability to the airline.
There are no real ways to survive this situation unless you have strong domestic demand. Network carriers such as Emirates, Qatar and SIA are struggling. Only Chinese domestic airlines and the LCCs in Europe and North America have reasonable traffic, but even they are losing money. International traffic is dead — and likely to remain that way for a few years at least.
It will take 3 to 5 years before traffic begins to approach 2019 levels, and revenues may not get there for 5 to 7 years. Unless you have cash to survive that long, it may be better to not even try.
Q. Will another company like Emirates take over UL with the current debt, assuming COVID crisis never happened?
A. Not with the current debt and over-staffing. During my tenure we came close to an agreement with an American group that has a lot of airline experience. But the militant unions and lack of political support for change, caused them to walk away.
Q. Would it be better to negotiate our leases and to get older model Airbus aircraft for less monthly lease and interest rates since, as you said, the current fleet of Airbus A330s are not efficient at doing air cargo and passenger transport like the Boeing 747?
A. Most of the leases are for 12-year periods. Many of them began in 2014/15 and some in 2017. So they have many years to run — the first, for the most expensive A330s, will begin to expire in 2026. Until then SriLankan Airlines is contractually liable for them.
Once the pandemic recedes and a vaccine is available, airline traffic will slowly recover. There will be plenty of airlines such as Emirates, Qatar, Singapore, Cathay etc, who will connect Sri Lanka to the world. The strong LCCs (Indigo, Air Arabia, Fly Dubai, Air Asia, Lion Air etc) will also provide regional connectivity.
There will be other privately funded airlines springing up to service the market too. FITS already has an operation running. Two start-ups, Spark Air and Fly Lankan, are advertising their intent. In my opinion, there is no need for the GOSL to waste public money on the airline business. It is far better if private enterprise is allowed to operate airlines based in the country than for the government to spend state funds.
It is a matter of the GOSL having to decide where the priorities lie. Propping up UL for another 3 to 5 years will cost somewhere in the region of USD 3 billion. The choice is up to the government. Will the money be better spent elsewhere, or should the national carrier continue to be subsidized? That’s a political choice.
Read Part I of this series here https://counterpoint.lksrilankan-airlines-continues-to-bleed-money-who-would-care-enough-to-make-it-stop-2/