SriLankan Airlines: Nosedive or take-off?
View(s):For many months now, the talk of the town, at least in Colombo, has been SriLankan Airlines and its future. Eran Wickramaratne, Deputy Minister of Public Enterprise Development, told parliament recently that losses total Rs 1.7 billion now compared to a Rs. 4.4 billion profit in 2008. Stung by the cancellation of the management contract, a senior Emirates official told reporters in Dubai in February 2016 that Emirates has decided it won’t get involved again in managing another airline following its ‘bad’ experience with SriLankan. Emirates however cannot take a holier-than-thou attitude as one of its decisions to use a single reservations platform (its own) for both airlines instead of the national carrier running its own, was widely criticised as a suspicious measure to take away passenger loads, etc.
This was one of the points raised in a Business Times Poll this week where questions were asked on the future of the ailing airline and from where (on earth) could a cash-strapped government revive it. Among the recommendations in the poll is that while many respondents are firmly of the belief that management must be in private hands (that should be a standard followed by all state-owned business enterprises because the Sri Lankan state has proved that it cannot run a business, efficiently with profit), they were equally firm that ownership should be retained fully or a large majority stake with the government. This is easier said than done, as the 16-month old government had discovered even in its profound (past) view that transparency, accountability and good governance will be the core of the new regime.
Transparency is only in the air, good governance only on platforms. Accountability? Give us more time, has been the response, for example, with the Ministry of Finance leading the way! Debt is mounting, the public still dished out the faults and failures of the previous regime ad nauseam. People are more interested in how these issues will be taken care of, the whole purpose in ‘changing of the guard’. The results of the BT poll clearly reveal that the public has given up on state management of public enterprises; that the buck must stop (here and now); and that state officials must be charged for misuse and abuse of power and taking bribes. That is yet to happen. The recommendation that Sri Lankan should find a private manager of the airline while retaining a majority stake, should also be taken seriously.
Another interesting suggestion is for the authorities to invite potential investors from the tourism industry viz John Keells Holdings (JKH), Aitken Spence and Jetwing among others. However the authorities must also tread with care here given the experience of the past where serious questions of impropriety were raised in the privatisation deal involving JKH and Lanka Marine Services, resulting in a court rescinding that contract. The ‘debt-to-recovery’ challenges of the national carrier come at a time when there is rapid change in the global air transportation industry. Closer home, the goalposts are constantly changing. Tourists to Sri Lanka account for a sizable percentage of the over 7 million passengers using the Colombo International Airport and these source markets are changing to India and China being the focus compared to Germany and the UK being the prime source markets in the 1970-1990s.
Similarly West Asian carriers – Emirates, Qatar and Etihad – are the ones calling the shots regionally compared to Singapore Airlines or British Airways many years ago. Another strong carrier is Turkish Airlines which however could face difficulties due to growing unrest at home.
Having exited from an Emirates contract, the government is now considering a management/investment contract with Qatar as reported in today’s Business Times. Barring Emirates and piles of debt, SriLankan Airlines is still an attractive proposition for any regional carrier given its exposure to large chunks of passenger loads from India and China, the country’s biggest source markets. That plus SriLankan Airlines being the biggest carrier into the Maldives, where China is the largest source market, makes a lot of economic and financial sense to a regional player.
China and India are the biggest providers of global passenger traffic. In February 2016, Etihad Airways increased its stake to 49 per cent in India’s private-run airline Jet Airways with an eye on the massive passenger loads. Etihad in raising its stake from 22 per cent in 2013 to the highest permitted amount for a foreign airline in India, also buys into Jet’s debts (one of the reasons why founder Naresh Goyal sold more shares to Etihad) which as at December 2015 was reportedly (Indian) Rs. 119,201 million. Jet Airways, together with Etihad Airways, now has the largest market share in Indian international traffic. While Jet’s business is mostly in India (55 local destinations and 22 international), Etihad flies to a number of destinations in more than 55 countries. The enhanced stake in Jet provides an edge to Etihad in the sizable Indian travel market, against other West Asian carriers.
When Emirates exited from Sri Lankan Airlines, this is what the powers-that-be said said: Treasury Secretary P.B. Jayasundera – “SriLankan Airlines is managed mainly by Sri Lankans and with the change of the Emirates agreement there would not be any change immediately. The government has the capacity to manage the entity.” SriLankan Airlines Chairman Harry Jayewardena said: “The Government of Sri Lanka has decided that it will take the total control of the National Carrier’s Management from this date and will continue to manage the national carrier for the best interest of the public and the country at large.” The Sri Lankan Tourism Promotion Bureau said: “There is a high degree of competence at the various levels of management of SriLankan Airlines that Emirates has helped develop under its management.” Eight years later, the airline is operating at a Rs. 1.7 billion loss with mismanagement being the main feature and, these numbers kept away from public exposure and anger.
Today the airline is also considering scrapping Frankfurt and Paris sectors, a move that the tourism industry is totally opposed to in the context of a revival of the business from the West due to various other destinations that Europeans travel to being affected either by terrorism or internal strife. What is missing in the decision-making so far is a due diligence, proper audit and even a forensic audit to assess the state of the airline and ways of moving forward. One cannot expect the new management to do that particularly amidst reports that the new CEO is getting twice the wage that the earlier CEO was getting. It needs an independent auditor cum fire-fighter. While forensic accounting is normally considered in tax audits, it’s also used to provide a comprehensive perspective of a company’s finances. Thus, as the debate hot’s up with what-did-we-do and what-should-be-done views, an urgent (externally-done) audit of the airline and due diligence is recommended before entering into any contracts with other airline operators or making any other decision based on the current balance sheet position.