Case for radically restructuring SriLankan Airlines
Introduction
Disruption and innovation are closely interlinked phenomena that are at this critical juncture in time when the established world order is becoming increasingly under strain and unpredictable. It is therefore essential that Sri Lanka’s leaders start applying creative disruption as a means to radically reform and modernise the country’s economy.
Against this backdrop the Pathfinder Foundation will be presenting a series of articles entitled “Economic Disruptors” and hope that policy-makers will seriously take these into consideration in their policy formulation process.
Background
SriLankan Airlines began as Air Lanka in September 1979. During its 40-year history, the entity has been unprofitable in 24 of the years – the losses made during this period far exceed the profits earned in 16 years.
Being a small-scale operator, with very little premium revenue, the prospects of a full-service airline becoming profitable in Sri Lanka are low. The losses of SriLankan for FY 2019/20 can be estimated to exceed US$200 million – with the impact from the Easter attacks. – The continued operation of the airline will require significant funding from the Treasury.
The few national carriers that are still government owned – such as Air India, Biman Bangladesh and Pakistan International Airlines as well as Etihad and Qatar Airways – incur sizeable losses each year. The likes of Air New Zealand and Finnair (where the government holds a stake but are run as private companies) continue to make small profits. The fully privatised national airlines (such as British Airways and Lufthansa) remain highly profitable.
In the current situation, if no funding is made available, it is highly likely that SriLankan will have to cease operations. This paper looks at possible transition solutions that will minimise the impact to the national economy whilst safeguarding the availability of international air links.
Transition of operations
Safeguard of existing profit centres
Despite losses being made at a group level, SriLankan has several profitable business units. Further, the continued availability of these services will be essential for operations at Colombo and Mattala airports. Therefore, it is proposed that a government owned limited liability vehicle be created to house the following profitable businesses; Ground HandlingEngineering MRO (Line & Base maintenance)In-flight CateringAviation CollegeAircraft Security Services
These profitable businesses could then be developed, without the current hindrances those units face for expansion due to the parent’s financial issues.
Safeguarding air links
The government shall call for proposals from internationally renowned airlines to set up a local operation in Sri Lanka. The licensing of the selected operator shall be subject to the condition that they continue to operate on a set of guaranteed routes to secure the vital air-links, which may include the following routes out of Colombo; Chennai/ Delhi/ Mumbai/ Male.
Given the market nature of Sri Lanka, it is likely that a Low Cost Carrier (LCC) may provide the best benefits to the economy as they will be able to serve thin margin routes due to their low cost base. The short-haul routes currently being operated by SriLankan would then be dropped.
The transition of operation shall be carried out in three stages to safeguard a non-interrupted access to international points:
Stage 1: Call for proposals and setting up of new airline
Stage 2: Transfer of short-haul operations
Stage 3: Continuation/ transition of long-haul operations
In Stage 3, SriLankan would be only operating the long-haul routes out of Sri Lanka with a wide-bodied aircraft fleet.
Liabilities
Cessation of operations by SriLankan could prompt several liabilities. Key among these would be the $175 million sovereign guaranteed bond issued by the airline, staff liabilities and any aircraft lease or maintenance commitments made by the airline.
Of these, the $175 million bond was originally due for maturity in 2019 and then re-issued with interest being serviced. The government may need to transfer this bond to a dormant vehicle under the Treasury and service the interest. The other debt liabilities of the airline are owed to state banks and the Ceylon Petroleum Corporation, which are within the control of the government.
The staff liabilities may require $4 to 5 million if large numbers of employees are laid-off prior to ceasing operations. Any new operator based in Sri Lanka will require pilots and flight attendants to be hired locally, so job losses will be minimal and this figure is likely to be less.
The aircraft lessors would typically end the contract and repossess the aircraft in an airline bankruptcy without raising any further claims. Same principle generally applies to maintenance contracts.
Thus it is highly unlikely that there would be any claims against the state from these liabilities. However, it may be advisable to either transition these aircraft to the new operator or co-operate with lessors and quickly process de-registration and re-exportation of the aircraft.
Conclusion
A cessation (or reduction) of operations by SriLankan would relieve the state of a major financial burden. With the right framework and commitments, a replacement airline(s) could provide un-interrupted connectivity and employment.
Further, the use of an internationally recognised airline to set up an operation would ensure a quicker ramp-up of operations without sacrificing on safety requirements – which may be the case should a local private airline with limited funding attempt to fill the space.
(Comments are welcome at: pm@pathfinderfoundation.org)