The National Airline: A financial catastrophe in the making!

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 the state-owned enterprises continues.  The senior management of the national Airline, which has been in deep red for nearly a decade and a half, its employees and trade unions collectively fail to appreciate that the general public cannot continue to pay for its existence.

Recently, a local daily revealed that the national Airline made Rs. 71.8 billion 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 bn worth liabilities, including a sovereign guaranteed US$ 175mn international bond.” The irony is that according to the former Minister of Aviation, Nimal Siripala de Silva, SriLankan Airlines had posted Rs. 171 billion (USD 476 million loss in the financial year ending March 2021, while the accumulated losses had reached Rs. 542 billion (USD 1.5 billion).  The total liabilities of the Airline were estimated at Rs. 618 billion (USD1.7 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 Airline.  However, on July 26, the airline reported that it had serviced the interest relating to USD175 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 the 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 per cent shares of 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 used to do over the years.  However, this time around, Treasury itself is in deep trouble and will not be able to come to the rescue of the national airline yet again.  That means operations of SriLankan Airlines will grind to a halt soon, which might happen within a few months, not in years.

The national airline will soon be gone as the dodo unless the Finance Ministry, the 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 that not only SriLankan Airlines would fail but also all operations at the BIA, 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 on the coffin of the already ailing tourism industry, which brought as much as 4.3 billion US dollars as recent 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 INR 61,000 crore and sold the Airline to the Tata Group for nearly US$ 2.4 billion.  It was sweet revenge for Tatas, as it was their Airline, which 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 Airline’s 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 current finances.  By doing so, the government will not repeat its mistake of delaying an intervention by the IMF to save the national economy.

The second measure is, while that study is being carried out, it should put a team consisting of representatives of the national Airline, the Finance Ministry and the AG’s Department to unbundle ground-handling operations from SriLankan Airlines and make it an independent entity like SriLankan Catering Services.

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 airlines’ debt, which is said to be in the region of USD1.7 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.

This is a PATHFINDER ALERT of the Pathfinder Foundation. Readers’ comments are welcome at www.pathfinderfoundation.org