Concerns have been raised over the recent statement made by Ports, Shipping, and Aviation Minister Nimal Siripala de Silva regarding the potential risk to the jobs of over 6,000 employees at the National Carrier SriLankan Airlines, should the airline fail to demonstrate progress in its operational and financial units within the next six months.
This statement has gained attention particularly as it coincides with the extension of the deadline for calling bids for the restructuring of SriLankan Airlines by 45 days from 5 March. Aviation industry experts have expressed concerns about whether the Government is contemplating the shutdown of the airline in case it fails to meet the restructuring deadlines.
Losses continue
In the latest SriLankan Airlines Annual Report, the company has revealed a notable operational profit of Rs. 43.4 billion for the 2022/’23 fiscal year, indicating a significant improvement compared to the previous year’s surplus of Rs. 1.7 billion. However, despite this progress, the airline reported a substantial nett loss of Rs. 71.3 billion. This was mainly due to an exchange loss of Rs. 63.1 billion and finance costs totalling Rs. 51.5 billion.
During the reporting period, SriLankan Airlines has experienced growth in both passenger and cargo revenue. Passenger revenue has increased by 276%, largely driven by a 137% rise in passenger numbers. Additionally, cargo and other revenue experienced a respectable 35% increase compared to the previous year.
However, total expenditure surged by 48% compared to the previous fiscal year, primarily due to increased operational activities and the negative impact of the depreciating Sri Lankan Rupee against the US Dollar.
It is further highlighted that the airline sector recorded nett losses of $ 6.9 billion, an improvement compared to the $ 9.7 billion loss projected in the International Air Transport Association’s (IATA) June outlook. This marked progress from the significant losses of $ 42.0 billion and $ 137.7 billion incurred in 2021 and 2020, respectively.
As we chart a steady path to recovery, passenger yields are anticipated to continue growing, with expected profitability reaching $ 4.7 billion in 2023.
Push for restructuring
In such a backdrop, in a bid to safeguard the future of SriLankan Airlines, the Government has announced plans to repay $ 510 million out of a total $ 1.2 billion worth of loans borrowed from various commercial banks and institutions.
This decision comes amidst ongoing concerns regarding the financial viability of the National Carrier.
The repayment initiative is part of a broader restructuring programme set to commence within the next six months. The aim is to reposition SriLankan Airlines with a more attractive financial balance sheet, ensuring its sustainability in the long term.
Meanwhile, the State-Owned Enterprise Restructuring Unit (SOERU) last week revealed in a press release that the Cabinet of Ministers, in a decision dated 4 March, had sanctioned the transfer of several liabilities from SriLankan Airlines to the Government of Sri Lanka.
These liabilities encompass $ 105 million of Treasury-guaranteed debt owed to the Bank of Ceylon, Rs. 12.9 billion of similar debt owed to the same bank, $ 105 million of Treasury-guaranteed debt due to People’s Bank, and Rs. 18.5 billion of similar debt due to the latter.
Consequently, the only significant term borrowing remaining on SriLankan Airlines’ books is a $ 175 million, 7%, five-year international bond issued in 2019, secured by a sovereign guarantee and due for settlement in June. Furthermore, according to the SOERU, the Cabinet has decided that should SriLankan Airlines emerge victorious in its arbitration case against Airbus SE, measures will be taken to transfer the proceeds to the Government.
During a recent discussion, Minister de Silva stressed on the importance of stringent cost-cutting measures and enhanced financial discipline within the airline. He called for a concerted effort between the company’s administration and trade unions to achieve these objectives effectively.
Currently, SriLankan Airlines operates with a fleet of 16 aircraft, catering to both long-distance and short-distance routes. To enhance its operational capacity, the airline has secured lease agreements for three additional aircraft from Belgium and one from FitsAir.
Aircraft shortage
In response to Minister de Silva’s statements, SriLankan Airlines Chairman Ashok Pathirage stressed that the issue was with the aircraft.
“This is a National Carrier and it has existed for quite a long time. The current issue with the airline is the lack of aircraft. We have placed some orders and the process is ongoing. Once the aircraft are available, most of the problems faced by the airline will be solved,” he told The Sunday Morning.
Meanwhile, SriLankan Airlines Nidahas Sevaka Sangamaya President Janaka Wijayapathirathna also stressed that the issue with the airline was the lack of aircraft.
“Earlier we had 26 aircraft, but now it has dropped to 17. We are managing the entire business with 17 aircraft. If this continues, there will be no future for the airline. This requires the immediate attention of all responsible authorities,” he said.
Previously, SriLankan Airlines published a schedule for operation, but encountered a shortage of the required minimum number of aircraft to fulfil it. This shortage stemmed from the absence of arrangements to purchase or lease aircraft following the cancellation of the Airbus deal.
According to Wijayapathirathna, the issue was not about the type of aircraft but rather the quantity. He emphasised on the need to procure new aircraft at appropriate prices to address this shortfall. However, attempts by the current CEO to rectify the situation were halted by the Committee on Public Enterprises (COPE).
Wijayapathirathna stated that the Government should have made the decisions and executed the purchasing process effectively, rather than obstructing it.
Fleet management
SriLankan Airlines operates an all-Airbus fleet consisting of 24 modern aircraft, including 12 A330s for long-haul flights and 12 A320/A321s for medium-haul flights. The fleet includes various configurations, such as A320-232s with 12 business class and 138 economy class seats, A321-231s with 16 business class and 153 economy class seats, and A330-243s with different seat capacities.
In terms of fleet expansion, SriLankan Airlines received several new aircraft between 2011 and 2018. Notably, in 2011/’12, SriLankan added four Airbus A320s, two Airbus A330s, and one Airbus A340 under operating lease agreements, with a Government-approved equity investment of $ 500 million.
Subsequent years saw additional acquisitions, including A320s in 2012/’13 and A330-300s in 2014 and 2015 as part of fleet refurbishment programmes. The induction of A320neo aircraft in 2017 marked the introduction of new engine options, expanding SriLankan’s fleet capabilities.
However, since the delivery of the A321neo aircraft in 2018, there have been no new additions to the fleet. This suggests a period of stagnation in fleet expansion for the airline.
The Government, through a Cabinet decision dated 28 November 2022, approved a fleet replacement exercise for up to 10 aircraft, utilising replacement aircraft, lease extensions of existing aircraft, or a combination of both. As part of this initiative, the company has initiated a procurement process to acquire necessary aircraft on lease and is currently finalising lease arrangements for two narrow-body aircraft while also extending the lease period for three existing narrow-body aircraft. Additionally, ongoing procurement efforts are underway for the lease of wide-body aircraft.
Moreover, the Government, via a Cabinet approval on 5 June 2023 and a letter issued by the Secretary to the Treasury on 21 September 2023, has confirmed continued financial support to the company to ensure operations as a going concern until the completion of the proposed restructuring process.
Management anticipates that the operational environment’s significant improvement and implemented measures, including debt restructuring, will enhance the company’s liquidity position in the future. Given these circumstances, the Board of Directors considers the preparation and presentation of the financial statements as a going concern to be appropriate.