Major restructuring on the cards for SriLankan

Debt-restructuring, downsizing staff and reduction in ground handling charges:

by Chandani Jayatilleke and Isuri Kaviratne

Over the next six months, the debt-ridden national carrier SriLankan Airlines is scheduled to go through a major restructuring process that will, hopefully, pave the way to implement a sustainable business model.

Despite the ambitious plans, the full details of the business model are not yet available. When asked about the proposals for the national airline, Deputy Minister of State Enterprises and Entrepreneurship Eran Wickramaratne said, "It is a difficult question to answer at this stage. The airline is working on its own business model which has more focus on the region; they are also looking for a complementary management partner," he told the Sunday Observer.

Wickaramaratne added that on a purely private and commercial basis, the national carrier would have been shut down. "If it was a private investment, obviously, the owners would have closed it down. But, when it is a national airline there are commercial considerations and there are non-commercial considerations to look at when making a decision about a 'bad company'. All that has to be taken into consideration when making a 'business model' decision about SriLankan," he said.

The Cabinet has made a decision to proceed with restructuring the airline. The timeline for restructuring is an ambitious six months.

"To do that, we are getting restructuring advisory services and will then issue a request for proposals - and when expressions of interest come, we will pursue negotiations with those particular parties," said Minister Wickramaratne,

However, an aviation industry expert said if the decision is taken, based purely on commercial considerations, the airline should be privatised.

The privatisation and restructuring of the airline in 1998 was widely criticised at that time. The government sold a 40% stake to the Dubai-based airline - Emirates. Emirates would also take over the management of the airline. Despite initial criticism the privatisation was deemed a success.

Consultant on Airports and Ports of Strategic Enterprise Management Agency (SEMA), Rohan Masakorala said people opposed restructuring or privatising of SriLankan Airlines based on nationalistic issues.

"They want to keep the ailing airline to boost their egos. Their views are not based on a business case study. Keeping SriLankan is purely an emotional, egoistic and nationalistic decision,"he said.

Masakorala proposed several business models for SriLankan- one is to follow the model of the Ceylon Shipping Corporation - that is to keep the brand and run the airline with the management support of foreign airlines.

The second is to follow the Maldivian example - they do not have a single aircraft; but have become a very successful tourism destination with many airlines using Male as an international airport.

The third is to privatise the airline totally and earn revenue through taxation. Shipping is a capital intensive business; so is the airline industry.

"Sri Lanka with its GDP cannot afford to run a highly capital intensive business such as an airline. It is one of the most competitive industries in the world and even some of the US airlines find it difficult to compete with the modern new aircraft and fleets of the Middle Eastern carriers. Established players such as Singapore Airlines were finding it difficult to compete ," he said.

According to Masakorala, the minimum criterion required to 'save' the airline requires debt-restructuring, downsizing staff, and a reduction in ground handling charges.

The government is exploring the option of a Public Private Partnership (PPP) for SriLankan and has appointed a Special Committee to provide direction on the broader expectations of the government.

"SriLankan Airlines provides an excellent example of the problems that arise from state-owned enterprises," said Ravi Ratnasabapathy of ADVOCATA, a new think-tank in Colombo.

"The previous government inherited a profitable business with the same staff, systems and infrastructure; the principal difference was in the management. The truth is that the airline suffered from gross mismanagement and corruption, some of which has recently been uncovered."

The airline which had been consistently profitable under the management of Emirates last reported a profit in 2008; a bumper Rs. 4.4 billion. Since then the airline has racked up enormous losses. According to the annual accounts ending March 2015, accumulated losses stood at Rs. 123.26 billion.

The airline reported an operating loss of Rs 16 billion in 2015. On Friday the airline said in a statement, 'Without 'one-off' extraordinary payments related to restructuring activities, the Airline's Group Loss stood at Rs. 8.9 billion - a 46% improvement for the financial year ending March 31, 2016 (based on un-audited financials) compared to the previous year.

Over the past decade most state-owned airlines have failed to adapt and are losing money. Countries such as Switzerland and Belgium have operated without flag-carriers for years.

"The country cannot bear the losses incurred by the airline," State Minister for international Trade, Sujeewa Senasinghe said.

The national carrier offered a 'taste of paradise' to citizens of the world once but now its very survival is in doubt.

According to the Dubai media, a senior official at Emirates has confirmed that the airline has decided against future involvement with SriLankan Airlines.

Despite running SriLankan at a profit, the Emirates' relationship with Sri Lanka came under strain, when the previous government revoked the work permit of Emirates appointed, Sri Lankan Airlines CEO Peter Hill. In 2007.

The dispute began when Hill refused to remove 35 passengers from a full London-Colombo flight, to make way for former President Mahinda Rajapaksa and his entourage. The government cancelled the work permit of the CEO of the airline and in March 2008, Emirates did not renew the management contract.

At present, Peter Hill is the Chairman/CEO of ATTG Angola Airlines. When contacted by the Sunday Observer, he refused to comment on the current plight of the national carrier, but admitted he had a satisfying career as the CEO of SriLankan Airlines and said, "I believe we achieved much during that 10-year period, not the least of which was establishing the airline as one of the best airlines in South Asia and turning the business into a profitable one."

After Emirates exited from SriLankan, the then Treasury Secretary P.B. Jayasundera told the media that the government had the capacity to manage the entity, while then SriLankan Airlines Chairman Harry Jayewardena said the Sri Lankan government would manage the national carrier in the best interests of the public and the country. In reality, the decline set in from the moment Emirates Airlines departed.

The accumulated losses at SriLankan now stand at nearly USD three Billion, close to 4-5% of GDP.

[Immediate Measures]

In a statement following the publication of its financial results of 2015/16, on Friday Sri Lankan Airlines said it is looking at addressing certain fundamental problems immediately.

* Re-structuring the fleet and addressing the issue of the A350-900 aircraft which had been ordered by the previous management was a priority. These aircraft are both inappropriate and too expensive for the airline, given the current operating environment and the excessive lease costs.

* The airline hopes to continue with the acquisition of more narrow body aircraft, while delaying or otherwise changing the future wide body aircraft already committed.

* Significant route rationalisation will be implemented but the Airline will take a measured and phased approach towards this rationalisation, to ensure that any decisions would not have a negative impact on the tourism industry.