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SriLankan Airlines: Restructure to be airworthy

19 Jun 2022

  • Parliamentary consultative committee on SriLankan soon
  • Govt. to discuss restructuring of SriLankan with IMF
  • COPE seeks Govt. report on stance and expectation of carrier
  • Urges President, PM and Cabinet to take clear decision about restructuring
  • Rapid changes to management, policy and corruption led to downfall: ALPGSL
  • Options limited for restructuring SriLankan: Fernando
By Asiri Fernando SriLankan Airlines, the once-cherished National Carrier, has been in a financial tailspin over the last decade and is once again under the spotlight with calls for restructuring the loss-making State-Owned Enterprise (SOE) mounting.   While Sri Lanka may have finally come around to gather enough political will to address the issue due to the current economic crisis, the State may be limited in terms of the options it has to effectively restructure the National Carrier. Prime Minister Ranil Wickremesinghe last month highlighted the need for the airline to be restructured, while the International Monetary Fund (IMF) has signalled the need for Sri Lanka to address the issue. Wickremesinghe during his last tenure as Prime Minister (2015-2019) had plans to privatise the loss-making, debt-laden airline. However, the Ranil-Sirisena Government failed to move forward with the plan.   Since SriLankan Airlines ended its 10-year management contract with the Dubai-based Emirates Airlines in 2008, the National Carrier has had a number of management changes, mostly due to political appointments and, along with some ill-advised policies, began to descend, making massive losses. When SriLankan Airlines ended its contract with Emirates, it had recorded a profit of Rs. 4.4 billion in 2008. According to the think tank Advocata Institute, the National Carrier had accumulated losses amounting to more than Rs. 372 billion since 2008 (approximately $ 1 billion). SriLankan also made a loss of Rs. 44 billion in 2019, Rs. 47 billion in 2020, and Rs. 45 billion in 2021. Maintaining thrust Responding to a query, the Office of the Prime Minister told The Sunday Morning that the Government would discuss the restructuring of the National Carrier with the IMF in the coming months. The PM’s Office would not give further details on the planned discussions with the IMF. According to Minister of Ports, Shipping and Aviation Nimal Siripala de Silva, the Ministry will summon a consultative committee in Parliament to discuss the status of the National Carrier and its restructuring. He added that the best outcome would be if another airline could purchase the National Carrier. “I had a meeting with the Board of the SriLankan Airlines today (17). We have to start the restructuring process. I viewed a presentation made by the Board about the airline’s debt, the fleet, and other issues. Following more consultation, I would like to inform the Cabinet of Ministers and the Parliament about its status. I want to summon a consultative committee on aviation in Parliament and explain the true position of SriLankan and why it needs restructuring,” Minister de Silva told The Sunday Morning, adding that he planned to have the committee established within three weeks. When asked about how the Government planned to restructure the airline and if there were foreign parties who had expressed interest in the airline, Minister de Silva said that all options would be evaluated, adding that the Government was keen to see a local private consortium being part of solution. “There are so many people and businesses that have a lot of money in Sri Lanka. We would be delighted if a Sri Lankan consortium could become part of the solution. There are the TATAs (TATA Group) and Birlas (Aditya Birla Group) in Sri Lanka too. If they come together as a consortium and if they can purchase SriLankan Airlines, in my view, that would be a good outcome. However, it has to be a viable proposal. Just because someone has done a business, they may not be suitable to run an airline. Sri Lankan entrepreneurs with a viable plan would be welcomed. Of course, another reputed airline purchasing SriLankan Airlines would be the best option for the country,” the Minister explained. SriLankan Airlines has also been under the scrutiny of the Committee on Public Enterprises (COPE), which has summoned the airline’s Board to answer its questions several times. There has been a daily loss of Rs. 84 million per day (2021), while the airline has received over $ 240 million in capital investments over the last few years.  COPE Chairman Prof. Charitha Herath argued that a business plan presented to COPE by the Board of the airline may no longer be viable due to the economic crisis. “Things are changing day by day, we don’t think that business plan will be feasible now. The country’s economic situation has completely changed. We have requested a clear indication from the Government on what its position is on this matter and what it wants to do about it. This is going to be a very serious issue for our economy. The nation must first be in a good position for there to be a national carrier. The President, PM, and Cabinet should reach a clear decision on restructuring and let us know,” Prof. Herath said, adding that even if Sri Lanka wanted to restructure the airline, its massive debt burden may discourage many international partners or investors. Earlier this month, LIRNEasia Chairman Prof. Rohan Samarajiva told The Sunday Morning that SriLankan Airlines should be completely privatised. He urged the Government to follow the example that the Government of India had set with Air India and the TATA Group, adding that privatisation of the airline would be an indication of the Government’s resolve to undertake reforms for economic recovery. Mismanagement controlled flight into terrain? Controlled flight into terrain is a term used to describe an aircraft’s unintentional collision with terrain while under control of a pilot. How did SriLankan Airlines manage to plummet from a Rs. 4.4 billion profit-making entity to a Rs. 45 billion loss-making SOE? Responding to a question on why the National Carrier had been making billions of rupees in losses on a yearly basis for over a decade, the Airline Pilots’ Guild of Sri Lanka (ALPGSL) highlighted rapid changes in management and policy, corruption, and uncompetitiveness the airline faces in Sri Lanka (hub) as key reasons for the losses. “Since 2008 the company has seen six chairmen and six CEOs with multiple Board changes. These changes occur during a changeover in government. With each change the corporate governance of the airline also changes. For example, in 2011 the airline was operated under the vision of ‘Mahinda Chinthana – Idiri Dekma,’ which was about prioritising benefit to the national economy over profitability to the airline. That changed again in the period of 2015/’16 with the next Government, where the airline was required to turn profitable with a new restructuring programme implemented. As the Government was short-lived, with the new Board in 2019 this restructuring programme was scrapped and new plans were drawn up to restructure the company. Many changes to the long-term strategy show weakness in the company’s corporate governance, hinder progress, and directly affect the company’s viability,” the ALPGSL told The Sunday Morning. The ALPGSL, Sri Lanka’s leading body representing airline pilots, also underscored the role corruption may have played in the airline’s fall. “The company has been riddled with corruption and during the last few decades it has played a pivotal role in the decline of the company. In the acquisition of Airbus A330s and A350s, SriLankan Airlines stakeholders were bribed by Airbus Industrie to influence the purchase order. Further, these aircrafts were to be leased at a cost higher than industry standards. Whilst the A330 aircraft were delivered to the airline, four A350 aircraft orders were cancelled with a penalty of over Rs. 17,000,000,000 adding up to the losses of the airline. The global airline industry is extremely competitive and runs on very low margins, therefore efficiency is imperative. It goes without saying that corrupt deal-making and short-term unsustainable decisions lead to colossal losses,” the ALPGSL opined. When asked about restructuring, the ALPGSL told The Sunday Morning: “The Airline Pilots’ Guild does not oppose restructuring or privatisation. However, the process should be thoroughly thought out and implementation should not be rushed as past attempts have shown insignificant results and a lack of transparency. In 2017/’18 when Nyras, a British consultation company, was hired to devise a restructuring plan, there was little to no engagement with employees, who are stakeholders with an extensive knowledge of the operative environment. The lack of engagement also increased employee resentment and scepticism towards the process. The restructuring plan was never fully implemented due to various concerns and a homegrown process was sought. The payment for Nyras was in the millions of pounds and a lawsuit against SriLankan Airlines was filed in 2019 by Nyras for the non-payment of consultancy fees.” According to the ALPGSL, the current restructuring plans for SriLankan Airlines, which are being drawn up by the management, have not had adequate consultation with its staff. “The shareholders of the company should have a long-term strategy and a clear vision for the airline. This must not diverge according to the whims and fancies of the ruling political party. As a country dependent on tourism, all related industries should be aligned in one direction, complementing the broader vision of the country. Every aspect of restructuring should be transparent and scrutinised at all levels to minimise corruption and increase accountability. It is also of utmost importance that the strategy that is agreed upon must be protected and facilitated in the long term regardless of changes in government and the Sri Lankan political landscape,” the ALPGSL said, when asked about what kind of restructuring would suit Sri Lanka’s interests best. Turbulence for restructuring According to Advocata Institute Chief Operating Officer Dhananath Fernando, due to the colossal amount of debt the National Carrier holds, there may be a lack of enthusiasm from otherwise potential investors or partners to engage in a restructuring plan similar to the TATA-Air India example or for a Public-Private Partnership (PPP). Fernando opined that the Government may have to absorb some of the debt owed by SriLankan Airlines to facilitate any effective restructuring. However, Fernando stressed that the State must move quickly to restructure the airline to avoid greater debt as Sri Lanka attempts to move towards recovery. “Sometimes there may be interest from a strategic investor, likely from the Indian subcontinent because of the hub assets and connectivity to airports in India like Bangalore. That may be one possibility. But generally, the Government may have to absorb some of the debt and sell it off, which was the case in India,” Fernando opined. Another option is to commission out some of the operations of the airline, like its profitable Catering Division, he said. “Catering is somewhat profitable; you can commission it out to someone who can operate it. Likewise, some of these sectors can be commissioned out,” he said, adding that even if the loss-making SOE was listed in the stock exchange, it may not draw investors due to the unprofitable nature of the airlines operating at present. The urgency to restructure SriLankan Airlines and plug the accumulation of more debt to taxpayers is evident. Sri Lanka may no longer have the luxury of delaying critical reforms as the ongoing energy crisis and the looming food crisis test the collective political will to finally do the right thing in the national interest.   

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