With the country embroiled in a financial meltdown of unprecedented
proportions, on Wednesday, July 20, 2022, Parliament confirmed Ranil
Wickremesinghe as the nation’s eighth Executive President by a clear margin.
One of the many challenges facing the new President is the future of the state-
owned national carrier, SriLankan Airlines. A perennially loss-making state-
owned enterprise (SOE), the airline is surpassed only by the Ceylon Electricity
Board (CEB) and Ceylon Petroleum Corporation (CPC) as a drain on the nation’s
balance sheet. Reference here.
A short history
The nation dipped its collective toes into the airline business when Air Ceylon
(AE) was founded in 1947. Chronically underfunded, AE lurched along for three
decades with several foreign airlines as ‘partners’, successively, until, by 1978,
it was left with only two aircraft and a handful of routes. A new long-haul
airline was to be established, named Air Lanka (UL), to service the tourist trade
and the growing labour market in the Gulf. Poor old Air Ceylon succumbed to
the inevitable when one of its two remaining aircraft was destroyed by a bomb
in September 1978.
Despite starting off with a flourish, Air Lanka became dogged by controversy
soon afterwards. Questionable aircraft purchases fuelled a rapid expansion
that was stymied by the damage the country’s tourist trade incurred with the
growing Tamil separatism-motivated insurgency, which escalated with the
terrible ‘Black July’ race riots of 1983.
In 1998 Emirates Airlines of Dubai bought a stake in UL, signed a ten-year
management contract, and embarked on an expansion program. The same
year the Lankan carrier was re-branded as SriLankan Airlines while acquiring six
brand-new Airbus A330-200s and an additional A340-300. These plans too hit a
speedbump with the attack on the Katunayake airport in July 2001, which
destroyed four airliners and damaged another two. The management team
chose not to replace the destroyed aircraft but downsized the airline
significantly, enabling UL to stay in business. Crucially, no state funds were
called for, with the insurance payout and the sale of some assets proving
sufficient to keep the airline flying for the remainder of the ten-year ‘strategic
partnership’.
Back to the arms of the state
Emirates did not renew the ‘partnership’ when it expired in 2008, and the
Government of Sri Lanka (GOSL) purchased the 43.6% share owned by the
Dubai-based airline in 2010. From then on, UL went back to losing money after
a period of relatively prudent fiscal management. A hugely controversial
purchase of multiple Airbus aircraft in 2013 became even more tainted with
the manufacturer admitting in court that it had paid many millions in
‘commissions’ to the spouse of a senior executive of the airline.
The airline’s accumulated losses since its inception are in the region of Sri
Lankan Rupees (LKR) 542 billion, or about USD 1.5 billion. In addition, the
company has a debt burden of around USD 850 million plus unpaid aircraft
lease costs, which have not been officially disclosed but are estimated to be
more than USD 120 million.
According to media reports, the country’s newly appointed President, Ranil
Wickremesinghe, recently stated that his administration would oversee the
airline's privatisation.
Can SriLankan be privatised?
Airlines the world over have had a few torrid years with COVID-19 all but
stopping the tourist trade. With the pandemic receding, there has been a rapid
recovery, and some companies are approaching a return to profitability.
The airline business is notoriously seasonal, with the summer peak
(July/August) and Christmas being some of the more reliably lucrative periods.
Remaining profitable at other times of the year, known in the industry as the
‘shoulder period’, is the challenging part of the business.
As recently as March this year, UL’s senior management claimed that the
airline had ‘turned the corner’ and announced plans to ‘go it alone’ without
GOSL support. However, later reports indicate first-quarter losses for 2022 far
in excess of previous years’ figures.
In view of the latest fiscal reports and the continuing lack of fuel in Colombo,
the company’s base, it does not appear that there will be many suitors for the
airline itself, and a full-year profit looks unlikely.
However, the UL Group, which includes SriLankan Catering, has some
potential. Catering and Ground Handling are monopoly licenses held by the
national carrier. Ground Handling functions are an integral part of the airline
but spinning them off into a separate entity (like SL Catering which has its
balance sheet) is not a complicated exercise. In addition, the airline’s hangar-
based Maintenance and Repair Organization (MRO) and its considerable
airport security arms are viable businesses too. The sale of these entities would
help repay some portion of UL’s debt, wholly guaranteed by GOSL.
This would leave the core ‘air transport’ on its own. But with a greater portion
of the debt removed by the sale of subsidiaries and the new-found optimism
about the core business, the company could conceivably prosper. Perhaps the
airline’s Board of Directors, political appointees to a man with no personal
investment in the airline but with some considerable blue-chip business
expertise between them, could re-capitalize the airline and run it profitably?
After all, they have publicly stated that this is possible, and it would
undoubtedly be a huge relief to Lankan taxpayers who have been funding this
aeronautical dinosaur for 75 years.
