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Wednesday, March 29, 2023

Turbulent times ahead for SriLankan Airlines – The Morning

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By Shenal Fernando 

The privatisation of Sri Lanka’s State-Owned Enterprises (SOEs) has always been a highly contested and a very divisive topic as nationalists have dismissed such recommendations as destructive neoliberal propaganda. One of the routinely recommended SOEs for privatisation by proponents of privatisation has been SriLankan Airlines.

In 1998 Dubai’s Emirates Airlines acquired a 43.6% stake in SriLankan Airlines, then known as Air Lanka when it was privatised. Simultaneously, while the Government continued to hold a 51% stake in the airline, Emirates was granted management control under a 10-year management contract. However, in 2007, the visa of Peter Hill, the British Chief Executive Officer (CEO) of SriLankan Airlines at the time, was cancelled by the Government due to the airline’s refusal to allocate seats for then President Mahinda Rajapaksa and his entourage in an overbooked flight from London. As a result, in 2008 Emirates announced that it would not be renewing its management contract with SriLankan Airlines and subsequently sold their 43.6% stake in the airline back to the Government in 2010 for $ 53 million despite valuing the stake at $ 150 million.  

Following the reacquisition of the management and ownership of SriLankan Airlines by the Government, it has failed to earn any profit since 2007 and has been haemorrhaging money, as losses have continuously increased over the past 15 years, reaching a record loss of Rs. 58.1 billion in FY 2020/’21.

Consequently, over the past few years, calls for the privatisation of SriLankan Airlines have increased and on last Monday (16), Prime Minister Ranil Wickremesinghe claimed that it was time to sell the national carrier.

“I further propose to privatise SriLankan Airlines which is incurring extensive losses. The loss for the year 2020-2021 alone amounts to Rs. 45 billion. By 31 March 2021, the total loss was at Rs. 372 billion. Even if we privatise SriLankan Airlines, this is a loss that we must bear. You must be aware that this is a loss that must be borne even by the poor people of this country who have never stepped on an aeroplane,” stated Wickremesinghe.  


Current financial situation


In a recent media release dated 4 May 2022, SriLankan Airlines claimed that the airline had recorded an unaudited Group Operating Profit in US Dollar terms for the January-March Quarter of 2022 through cost restructuring and opportunistic new revenue capture based on new routes‚ and adapting capacity to demand for both passenger and cargo traffic. They further claimed that this was the first profitable quarter (in USD terms) after six years and the first fourth quarter profit (in USD terms) since 2006. However, they also admitted that the debt of the airline which had accumulated over a long period had reached unsustainable levels and that it currently stood at $ 878 million. 

Explaining further, SriLankan Airlines stated: “A majority of this debt is held by the State banks and the Ceylon Petroleum Corporation (CPC). Other significant debt includes Government Guaranteed US Dollar Bonds for $ 175 million reissued in 2019.”

According to data published by the Central Bank of Sri Lanka (CBSL) in its Annual Report for 2021, the public guaranteed debt of SriLankan Airlines has increased to Rs. 60.3 billion in 2021 from Rs. 32.0 in 2018. The CBSL further stated that in FY 2021/’22 the loss recorded by SriLankan Airlines had decreased to Rs. 14.3 billion from Rs. 58.1 billion in FY 2020/’21 and it further stated that the airline’s outstanding credit to the banking sector as of 31 March 2022 was Rs. 91.9 billion. 


Can we sell it?


As calls for the sale of SriLankan Airlines intensify, many have suggested that considering the unsustainable debt accumulated by the airline, there would be no interested parties to buy the airline since there is no value. Considering the massive losses being accumulated daily by the airline, it is arguable that it would be profitable for the Government to absorb part of this accumulated debt as part of the airline’s sale in order to attract buyers, even if the amount absorbed exceeds the sale value of the airline.

However, speaking to The Sunday Morning Business LIRNEasia Founding Chair and Advocata Institute Advisor Prof. Rohan Samarajiva stated that he did not believe the talks that were circulating which indicated there was no value in SriLankan Airlines due its significant accumulation of debt and claimed that the airline still held value for a potential investor. Accordingly, he pointed out that SriLankan Airlines continued to own valuable intangible assets such as Heathrow landing rights and such other assets of that nature which would add value to the enterprise in the eyes of any investor.

He further claimed: “SriLankan catering is quite valuable and the baggage handling and ground handling monopoly that it has been enjoying all these years should be unbundled and sold separately. They shouldn’t be sold with the company.”


Should we sell it?


Speaking to The Sunday Morning Business, Advocata Institute Senior Visiting Fellow Dr. Roshan Perera expressed her doubts regarding the veracity of the claims of the recent profitability of SriLanka Airlines. “When they said that they have recorded profits recently, we didn’t see the accounts, which were not produced. You can make operating profit but once you take into account finance costs, I highly doubt that they have made actual profits,” she said.

Addressing Sri Lanka’s spotty history in privatising SOEs, Dr. Perera pointed out that there was no universal rule that all SOEs must be privatised and that such a decision must be made considering the nature of the enterprise and its industry. Pointing to SriLankan Airlines,she stated that considering the inherent nature of the aviation industry which is highly competitive, there was no need for a State-owned airline.

“You have to know which SOEs should be privatised. There may be some that require more competition and there may be some that can be broken up by unbundling such as the Ceylon Electricity Board. There is no one size fits all process under which all SOEs must be privatised. But in the case of SriLankan Airlines there is no reason for it to be held by the State. We have seen that every time the Government has run the airline, they have run it to the ground. The period when it was under another party was when it was profitable and the Government didn’t have to cover any losses,” she explained. 

Dr. Perera further noted that considering the combativeness of the aviation industry, a national airline was not a necessity and pointed to the Maldives and India as examples of countries without a national carrier. She further dismissed the common argument that Sri Lanka’s tourism required a national carrier and stated that this was not the case as tourist demand would be met regardless of the existence of a national carrier.

“I know that the argument has been made that during Covid-19, we needed a national airline. But we actually don’t – we can always charter an aircraft if we need a special consignment to be delivered. You don’t have to run a full airline for that,” she asserted. 

Considering the recent decision by the Government of India to divest Air India to TATA, why did Sri Lanka need its own national carrier when even India no longer had one, she questioned. 

“An airline needs scale. Can we compete with Emirates or Qatar Airways which possess huge fleets of aircrafts? In comparison SriLankan Airlines has only around 24 aircrafts. The important factor in an airline is connectivity. What can we do with 24 aircrafts? We do not have the money to invest more capital to buy more aircrafts. So, it doesn’t make any sense for the Government to run the airline,” she opined.   

Similar sentiments were expressed by Prof. Samarajiva, who stated that despite recent claims of profitability there was no reason to retain SriLankan Airlines – an SOE that was perpetually losing money. He stated that Sri Lanka would gain greatly by getting rid of the airline, since such a move would communicate to the world that we were serious about setting our affairs in order. Therefore, he proposed that Sri Lanka pursue this path in a transparent manner.

Prof. Samarajiva further stated that the current management of the SriLankan Airlines had done a good job in reducing operating costs and increasing revenue, pointing out that this would be beneficial in privatising SriLankan Airlines, as the value of the organisation had increased due to the current management taking steps to put affairs in order.  

Referring to the recent revelations in the Airbus bribery scandal, he stated that allegations of corruption in SriLankan Airlines were no longer mere allegations and were documented and proved in the UK courts. Therefore, he stated that such a corrupt organisation should not continue to be a burden on the taxpayer.

“I have been saying since 2007 that the people of this country who don’t even go near an airport shouldn’t be paying for these losses, and this was reiterated in the recent speech by the Prime Minister,” he stated.  


How should we sell it?


Dr. Perera pointed out that SriLankan Airlines consisted of three main business units – the airline, ground handling, and catering. She explained that the latter two units – ground handling and catering – were profitable or could be made profitable. Therefore, it was the airline that was loss-making. Hence, she questioned why the Sri Lankan Government should continue to operate the airline.       

She further claimed that even the ground handling and catering business units must be unbundled and divested and pointed to the Public-Private Partnership (PPP) model followed by India in operating its airports as a good example for Sri Lanka to follow.

“The PPP model introduced by India to operate its airports has been very successful. If you have been there recently you would have been amazed by how efficiently those airports are run.”  

Prof. Samarajiva pointed out that SriLankan Catering and SriLankan Airport and Ground Services, which enjoy an uncontested monopoly in the industry, had always been the profit-making business units of the organisation even during the Emirates management.

Therefore, he was also of the opinion that these two business units must be sold separately. However, he pointed out that efforts must be taken to dismantle the monopolies enjoyed by these business units to ensure healthy competition in order to provide the best possible service for all airlines arriving in the country.

Commenting particularly on the SriLankan Airport and Ground Services business unit, he stated that such inefficient monopolies were stifling competition in the local aviation sector.

“They are charging excessive amounts. The former Director General of Civil Aviation in a report about 10 years ago showed that the SriLankan ground handling fees at Katunayake were higher than any other comparable airport in the world. He was reprimanded for this admission and I think he had to essentially go away as a result of various interest groups putting pressure on him,” Prof. Samarajiva stated. 

Therefore, he questioned how Sri Lanka could be made an attractive tourist and investment destination when we continued to pander to inefficient monopolies such as the SriLankan Airport and Ground Services. Instead, he pointed out how Singapore had allowed for ground handling competition at its airport.

“Even Singapore allows for ground handling competition. Both Dnata and their own company are competing. They have different concessionary agreements for ground handling services in Singapore and the airlines can choose which one they deal with,” Prof. Samarajiva explained.   

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