brand logo

The national airline: A financial catastrophe in the making!

03 Aug 2022

By the Pathfinder Foundation Delusion appears to be a national affliction in Sri Lanka. When confronted with stark realities, the State consistently refuses to take proactive measures to avert dire consequences. It refers to national liabilities, like the national airline, as national assets.  Despite regular doses of life-saving intravenous injections in the form of hard cash by the Treasury, bleeding of State-owned enterprises (SOEs) continues. The senior management, employees, and trade unions of SriLankan Airlines (designated UL), the national carrier, which has been in deep red for nearly a decade and a half, collectively fail to appreciate that the general public cannot continue to pay for its existence. Recently, a local daily newspaper revealed that the national airline made Rs. 71.8 billion in profit for the first four months of 2022 and suffered a loss of Rs. 320.3 billion, including a one-time exchange loss of Rs. 145 billion, during the same period. It added: “As at the end of April 2022, UL had Rs. 618.7 billion worth of liabilities, including a sovereign guaranteed $ 175 million international bond.”  The irony is that according to the former Minister of Aviation Nimal Siripala de Silva, SriLankan Airlines had posted a Rs. 171 billion ($ 476 million) loss in the financial year ending March 2021, while the accumulated losses had reached Rs. 542 billion ($ 1.5 billion). The total liabilities of the airline were estimated at Rs. 618 billion ($ 1.7 billion). Amid the country’s economic woes, Sri Lanka defaulted on its loan obligations to international lenders in May. With that, SriLankan Airlines too followed suit, which might result in legal action against SriLankan Airlines by aircraft leasing companies, as was Sri Lanka's recent experience with Aeroflot, the Russian national airline. However, on 26 July, the airline reported that it had serviced the interest relating to the $ 175 million Treasury-guaranteed bond due in 2024. The predicament of SriLankan Airlines is not entirely new. The national airline has been gasping for breath since its takeover from Emirates in 2008, and all attempts made to divest the airline five years ago ended without a positive result. Considering the loss-making behemoth was an asset, the Government attempted to identify an investor who would take over the airline while reserving its right to retain 51% shares in the venture. Several international firms sniffed around, but understandably failed to take a bite. SriLankan Airlines can continue its wayward behaviour as long as the Treasury coughs up millions in foreign currency, as it has been doing over the years. However, this time around, the Treasury itself is in deep trouble, and will not be able to come to the rescue of the national airline again. That means the operations of SriLankan Airlines will grind to a halt soon, which might happen within a few months, if not in years. The national airline will soon go the way of the dodo unless the Finance Ministry, the airline’s senior management, and the trade unions recognise the dire situation and decide to take proactive action to avoid a financial catastrophe, which Sri Lanka cannot afford.  The danger is not only that SriLankan Airlines would fail, but all operations at the Bandaranaike International Airport (BIA) along with it, as ground handling facilities provided to all other airlines are part and parcel of SriLankan Airlines’ operations. With ground handling services coming to a standstill and the computer systems leased by the national airline ceasing to operate, the airport will not be able to service even other airlines that still fly to Sri Lanka. Since SriLankan Catering is an independent entity, it may survive the crash. Still, it will not be able to function due to foreign airlines deciding against flying into the country due to a lack of airport facilities and aviation fuel. That will put the last nail in the coffin of the already ailing tourism industry, which brought in as much as $ 4.3 billion as recently as 2018. SriLankan Airlines is not the only airline that has faced similar financial predicaments. Air India, which operated a fleet of over 153 owned and leased aircraft, was also in the red for many years. The Indian Government tried various stratagems to sell off the airline. All those attempts failed, and eventually, it settled all debts amounting to Indian rupees (INR) 610 billion, and sold the airline to the Tata Group for nearly $ 2.4 billion. It was sweet revenge for Tata, as it was initially their airline that the Government took over in 1953 and eventually returned to them in early 2022, unable to shoulder the mounting burden of losses. In that sense, SriLankan Airlines is an orphan with no home to return to! Clearly, the Sri Lankan Government cannot follow the Indian example, as it does not have the resources to settle Srilankan Airlines’ debts before trying to divest the airline. All it could try to do in the current circumstances is to avoid an uncontrolled nosedive, which would isolate Sri Lanka with a non-functioning international airport, even for a short period. However, all is not lost, and the Government could still take decisive steps to address the situation. However, it has limited time to succeed.  First, it should arrange an urgent study to assess how many weeks or months the national airline could operate with the current finances. By doing so, the Government will not repeat its mistake of delaying an intervention by the International Monetary Fund (IMF) to save the national economy. The second measure is, while that study is being carried out, it should put together a team consisting of representatives of the national airline, the Finance Ministry, and the Attorney General’s Department to unbundle ground-handling operations from SriLankan Airlines and make it an independent entity, like SriLankan Catering. The third measure is to decide how to dissect the national airline so that interested parties could take over operations of its revenue-generating routes. It is abundantly clear that Sri Lanka will not be able to repeat the performance of India by settling its national airline’s debt, which is said to be in the region of $ 1.7 billion. The newly elected President is fully aware of the ground situation. The question is, will he be allowed to take crucial but unpopular hard decisions in the interest of the national economy? An economic tsunami affecting the island’s tourism potential is at close range. Already, foreign airlines are curtailing their flights to Sri Lanka due to the non-availability of fuel, and SriLankan Airlines is forced to seek the precious commodity outside the country. Should the Government wait until the inevitable calamity occurs, or prepare in advance to manage the looming disaster? It is time to take hard decisions. (The Pathfinder Foundation is an independent, non-partisan research and advocacy think-tank whose primary focus is on policy research and action-oriented policy reform)


More News..