Operations overhaul should lead to higher profits for SriLankan Airlines

National carrier SriLankan Airlines (SLA) has struggled in recent years as a result of rising operating costs, allegations of corporate mismanagement and lobbying by local vested interests. The new administration of President Maithripala Sirisena is hoping to address these issues with a comprehensive restructuring of the company’s portfolio, which could return the airline to profitability over the medium term.

Recent Decline

SLA’s recent troubles began in 2008, when UAE-based Emirates Airlines declined to renew its management contract with SLA. The Sri Lankan government bought Emirates’ 44% stake in 2010, leading to full state control of the national carrier. Technical problems and flight delays in the years after created significant challenges, and the company has reported years of successive losses.

In 2011 the company reported a net loss of LKR381.6m ($2.7m). SLA’s net income has simultaneously decreased dramatically each year since, with the company reporting losses of LKR19.8bn ($142.6m) in 2012, LKR26.1bn ($187.9m) in 2013, LKR32.4bn ($233.2m) in 2014 and LKR128bn ($921.6m) in 2015. Part of these losses has been attributed to the unprofitability and insufficient traffic at Mattala Rajapaksa International Airport (MRIA), which opened in 2013. SLA halted all flights to MRIA in January 2015, according to the Official Government News Portal of Sri Lanka. However, the airline is also still significantly burdened by a set of contingent liabilities entered into during the administration of former President Mahinda Rajapaksa. Under an aircraft purchase agreement with France’s Airbus in 2009, the previous government contracted 10 aircraft for delivery between 2014 and 2021, with more than $1bn in capital commitments pledged in the near to medium term. Ajith Dias, chairman of SLA, described the 2009 purchase as unwarranted. He told OBG, “Our requirement for aircraft with long-haul capacity was not very big, given that our longest flight time is 11 hours to London. Moreover, we could manage the operations with the available aircraft.” The airline remains in negotiations with Airbus to minimise future damage, which could potentially require the selling off of assets as payments become due.

Restructuring

The 2015 election brought extensive restructuring, and the former president’s brother-in-law, Nishantha Wickramasinghe, resigned as chairman of SLA in early 2015. New management has promised a shift in operations, as part of an ongoing investigation into corruption in a national effort to improve transparency in transport projects. A major push has centred on flight network rationalisation, namely, extending its regional footprint, scaling back long-haul flights and creating more efficiencies with Sri Lanka’s low-cost carrier, Mihin Lanka, which is also owned by the government. “There will be a sharper focus on India and China, with increasingly frequent flights, and, in India’s case, smaller planes,” Dias told OBG. “At the same time, we will be moving away from less profitable European routes.”

While in early 2016 SLA announced plans to do away with its Rome route by mid-year, as well as other less profitable European routes, such as Paris and Frankfurt, in February 2016 the airline reconsidered and opted to retain flights to London, Paris and Frankfurt, with a fifth weekly flight to be added to the Frankfurt route in July 2016. However, the Rome route is still to be phased out in May 2016. In January 2016 SLA also expanded its China offering and began three weekly non-stop flights to the city of Guangzhou.

Privatisation

Separately, the national carrier also looks set to take advantage of economic reforms in late 2015 that opened the door for SLA’s subsidiaries to list on the Colombo Stock Exchange. In December 2015 the government announced it would list 30-49% of its wholly owned catering subsidiary, Sri Lankan Catering, as well as the airline’s ground handling unit, which should improve efficiency and service quality.