Restructuring SriLankan Airlines can help reduce our economic woes

Originally appeared on The Morning

By Anuka Ratnayake

There is much discussion on the precarious financial situation of the island’s National Carrier SriLankan Airlines. A month ago, Minister of Ports, Shipping, and Aviation Nimal Siripala de Silva revealed that “The only way to rescue the National Carrier is via urgent restructuring” [1].
The airline has racked up significant losses while its debt obligations have increased significantly with the depreciation of the currency. Getting rid of the airline will allow the Government to focus on its limited resources to strengthen social security nets and improve social infrastructure.
The argument regarding the airline has been muddied by emotion, for it is ultimately the people who pay for it and who have the right to ask if this is the best use of taxpayers’ money.
SriLankan Airlines’ Annual Report for 2020/’21 (latest available annual report) provides that the SriLankan Airlines Group recorded a loss of Rs. 49.7 billion. However, the Ministry of Finance in its latest Annual Report records that the loss (before tax) of SriLankan Airlines for the year 2021/’22 is Rs. 170.8 billion [2]. The accumulated loss amounts to Rs. 542.5 billion as at 31 March 2022. The National Carrier lost Rs. 248.4 billion in the first four months of 2022 due to the volatility in exchange rates [3].
The airline is in debt to the Bank of Ceylon and the People’s Bank to the tune of $ 380 million in 2022, while another $ 80 million loan has been obtained from the Bank of Ceylon by mortgaging shares of SriLankan Catering. The banks have extended support to the airline on the basis of letters of comfort issued by the Ministry of Finance.

Further, the airline has a debt payable on an international bond on a Government guarantee of $ 175 million. The guarantees extended by the Government to banks and bondholders represent additional potential losses of public funds. The group owes an arrears amount of $ 325 million to State-Owned Enterprises (SOEs) such as the Ceylon Petroleum Corporation (CPC), the Airport and Aviation Services (Sri Lanka) (AASL), and the Civil Aviation Authority of Sri Lanka (CAASL) [4].
The group’s current liabilities exceeded its current assets by Rs. 214.6 billion by 31 March 2021 and the total equity of the company as at reporting date has declined to a negative Rs. 281.5 billion.
The Auditor General’s report has continuously warned the company that “a material uncertainty exists that may cast significant doubt on the group’s ability to continue as a going concern” [5]. The Auditor General has relied on the Cabinet approval dated 7 February 2022 and the letter issued by the Secretary to the Treasury on 24 February 2022 confirming the support of the Government to the company to continue its operations as a “going concern”. In simpler terms, the SriLankan Airlines Group is technically insolvent and it continues to operate using taxpayer money.
The airline last reported a profit in 2008, under the management of Emirates. It has failed to report a profit in any year since then. The airline industry is known to be a high-risk, low profitability business.

Future losses and lessons learnt from India

The International Monetary Fund (IMF) has now reached a Staff-Level Agreement (SLA) with Sri Lanka to assist its economic recovery process. It was agreed that the IMF would provide an Extended Fund Facility (EFF) of $ 2.9 billion on a 48-month arrangement.
The total debt of SriLankan Airlines (just over $ 1 billion) is nearly one-third of the EFF. Sustaining further losses is an impossible task since the Government can no longer fund the airline. Covering future losses of the airline through tax increases is unacceptable given the dire economic conditions faced by the public.
Sri Lanka needs air connectivity, but this is best provided by privatising air services and not by operating an airline. A good example is the Air India privatisation which took place in the past year. The Indian National Carrier was sold to the Tata Group for the relatively small sum of INR 180 billion [6]. Prior to the sale of the airline, it was losing $ 3 million a day on average, which totaled to over $ 1 billion per year [7].
The rising aviation fuel prices and airport usage charges were not sustainable after the pandemic restricted air travel. Further, competition from low-cost carriers and the poor financial performance of the airline made things worse. Air India’s poor client orientation, lack of punctuality, obsolete productivity practises, and poor revenue generation techniques were among the reasons for its incompetency [8].
The impact of the Air India privatisation was discussed at a panel at the ReformNow Conference hosted by the Advocata Institute. The panellists stressed how the Tata Group had already begun the process of value addition through efficient customer care services, improving fleet productivity, and focusing on budget flights for the domestic market.

Aviation hub

Singapore’s aviation policy has been a key factor in the growth of Singapore’s Changi International Airport, where air transport contributed to nearly $ 20 billion of value added to the Singapore economy or about 6% of the Singapore GDP in 2011.
There is much public support for restructuring SriLankan Airlines due to its heavy burden on State coffers and thereby the taxpayers. However, rather than selling the airline alone, bundling the sale of the airline with the other business units such as SriLankan Catering and SriLankan Airlines Ground Handling would be attractive to investors. At the same time, the airport too can be included and marketed as an aviation package with a similar potential to the Changi International Airport.
A national carrier is a source of pride, but it is not a priority for a cash-strapped Government. The airline should be disposed of or even closed, and a liberal air services policy should be adopted instead.
This could boost growth and truly turn Sri Lanka into an aviation hub, freeing taxpayers’ money to be used for health, education, and other priorities.

References
1. https://www.ft.lk/top-story/Answering-aviation-Aragalaya/26-739243
2. https://www.treasury.gov.lk/api/file/a7a35d1a-556f-49b2-81e0-20294eb5a519
3. https://www.treasury.gov.lk/api/file/bc1e8eaf-91eb-4cb3-94e0-35d81f65a949
4. https://www.ft.lk/top-story/Answering-aviation-Aragalaya/26-739243
5. https://www.srilankan.com/pdf/annual-report/SriLankan_Airlines_Annual_Report_2020-21_English.pdf
6. https://www.indiatoday.in/business/story/explained-air-india-handover-government-to-tata-group-changes-1904217-2022-01-25
7. https://www.advocata.org/commentary-archives/2021/10/11/air-india-sold-privatise-srilankan-now
8. https://www.bbc.com/news/world-asia-india-60150531

Anuka Ratnayake is a Research Assistant at the Advocata Institute. She can be contacted at anuka.advocata@gmail.com. The Advocata Institute is an Independent Public Policy Think Tank. The opinions expressed are the authors’ own views. They may not necessarily reflect the views of the Advocata Institute.

Air India sold; privatise SriLankan now

Originally appeared on the Daily FT

By Prof. Rohan Samarajiva

Privatisation should not take into account the nationality of the purchaser, but that a foreign acquisition would, on balance, yield a more sustainable solution

Air India, which was losing $ 3 million a day on average (over $ 1 billion per year) has been sold for what amounts to loose change for a conglomerate the size of Tata Sons: $ 400 million plus the assumption of $ 2 billion out of the massive debts in excess of $ 8 billion accumulated by the state-owned carrier over the years.

But this is a good deal for the people of India. It is one that we in Sri Lanka should study and emulate.

Air India, founded by the Tatas in 1932, was expropriated by the state a few years after independence. It, and Indian Airlines which was merged with it a few years back, had the backing of the state, unlimited financing, and monopoly rights in both the domestic and international segments. Yet, service was awful, and profits were rare. 

As the market was opened to competition, first in the domestic segment and then in the international, the two state-owned airlines failed to meet the challenge. Even today, Air India is smaller than IndiGo, an airline which commenced operations in 2005.

The greatest benefit to the public is the avoidance of subsidising the airline. The government will still have to deal with the remaining debts of the company but at least the liabilities will not keep growing. And if the Tatas manage to turn it around, the government will receive tax revenues.

100% sale

It took the Modi government four years to get to this point in the sale. But in fact, various Indian governments have been trying to do something about this bleeding sore for much longer. Earlier attempts failed because the government was trying to keep an ownership stake and the ability to interfere in management. 

In 1998, the Kumaratunge government sold only 40% of the money-losing and inefficient Air Lanka for $ 70 million. It bundled the sale with a 10-year management contract to Emirates. But given the crudity of how the letter and spirit of the management contract was violated by the government in a fit of pique, it was unlikely that any new investor/manager would trust the government of Sri Lanka to keep its word.

Back in the 1990s or even in the following decade, state-owned airlines were seen as having value. But over time, the environment has changed, and they are beginning to look less like marquee investments and more like collections of landing slots and aircraft. With the present transaction, more attention is being paid to Air India’s Heathrow landing slots than the value of its brand or the prestige of being a flag carrier. The airline business is a regulated activity vulnerable to state interference and coercion. Even having 100% ownership is not going to protect an airline with the major presence in a national market from the caprice of a head of state annoyed that his entourage did not all get seats in business class. But it is better than having thieves foisted on the airline as managers. The thievery engaged in by SriLankan management is now in the public record, thanks to the Airbus investigation. 

For how much?

Even when Emirates was remitting dividends to Treasury, the airline itself was not profitable (though it was not haemorrhaging money like after Emirates departed); the real money makers were catering and ground handling, which were monopolies. The considerable pressures that will be exerted to bundle these activities along with the airline to show a less cringeworthy sale price should be resisted. 

Once we get rid of the money-guzzling airline, action should be taken to provide the best possible services to all airlines without discrimination through optimal use of the tools of competition: competition for the market and competition in the market.

The Government can save face by manipulating the debt component of the sale, as has been demonstrated in India. Because the government of India is absorbing more of the debt than the stated sale price of $ 2.4 billion or the actual cash component of $ 400 million, an uncharitable observer could even claim that the Modi government is giving away an airline for nothing. But that disregards how much is saved by not having the white elephant in government hands: more than $ 1 billion a year.

With SriLankan, the avoided losses to Treasury would be Rs. 99 million a day, the average per day loss incurred by the airline in 2018, 2019 and 2020. The less abnormal years of 2018 and 2019 were included lest it be said that no general claims could be made from losses in a pandemic year. Rs. 99 million ($ 0.5 million a day) is quite a bit lower than Air India’s $ 3 million a day benchmark. But it must be remembered that most things in India are around 50 times the size of Sri Lanka, whereas the daily loss is only six times. 

But still, not losing Rs. 36 billion per year ($ 180 million) a year would be nice. That’s close to one fourth of what the Government spent on pensions in 2020. In times like this, every billion matters.

But it should be Sri Lankan

Once I was on a TV talk show with JVP leader, making headway with the argument that the taxes paid on potatoes and milk powder by a housewife in Siyambalanduwa should not be spent on subsidising SriLankan Airlines. He conceded that such subsidies were wrong and that the government appeared incapable of running an airline. But he said, why do we have to sell it to foreigners? Why cannot some good Sri Lankan capitalists take it over and run it professionally? 

So shocked was I by this ceding of ground that I was unable to properly respond, which I will do now. My first response would have been to say that from a Marxian perspective the nationality of the capitalist makes no difference. Exploitation is no less objectionable because the capitalist carries the same passport as the exploited. But then, perhaps Marxism is no longer relevant, this being three decades after the fall of the Berlin Wall and all that. 

As a consumer why would I care about anything other than the price-quality bundle offered by the airlines offering service to the destinations I wished to travel to? If one of the airlines happened to be a lossmaker like Air India or SriLankan, subsidised by other people’s tax dollars, that would be even better for me as a consumer. 

But then, it could be argued that this was a form of predatory pricing, whereby even efficient airlines were driven to rack and ruin because they have to match the artificially low prices of the state-subsidised carriers. As a consumer I would not care, but perhaps as a policy maker I may. The remedy for this would be some form of inter-state agreement not to offer subsidies, as there exists in the European Union.

But this would be a digression, because the whole point of privatising to a foreign or domestic investor would be to get away from subsidising the flying rich. If the investor believed he would not be bailed out, he would run the business in a responsible manner, offering reasonable prices and withdrawing from ruinous competition where such popped up. The only danger would be the state (or the Cardinal through the state) exerting pressure not to withdraw from unprofitable routes, something SriLankan is very familiar with.

Who would be able to better resist such pressures, a domestic or a foreign investor? The answer being the latter, I would conclude that privatisation should not take into account the nationality of the purchaser, but that a foreign acquisition would, on balance, yield a more sustainable solution.

Rohan Samarajiva is founding Chair of LIRNEasia, an ICT policy and regulation think tank active across emerging Asia and the Pacific. He was CEO from 2004 to 2012. He is also an advisor to the Advocata Institute.

SriLankan Airlines and the Case for Privatisation

Originally appeared on Sunday Times

By Aneetha Warusavitarana

The government’s policy document ‘Vision 2025: A Country Enriched’ positions Sri Lanka as a knowledge based, highly competitive, social market economy; and much of the content of the document is in line with increasing competition, productivity and efficiency.

The state of SriLankan Airlines, however, is in the antithesis of efficiency and productivity. The airline has been raking in losses for years now, and on Monday the 7th of January, the president appointed a committee to once again work on its restructuring. The new committee will assess the previous reports and restructuring plans and have now completed their recommendations.

It is evident that state ownership of this airline is not working, so what are the solutions?

Back when SriLankan Airlines was still Air Lanka, it was privatised. The government sold a 40% shareholding to Emirates Airlines in 1998, and contracted Emirates to manage the company for ten years with the government of Sri Lanka retaining majority shareholding. In 2008, the government took back complete ownership of the airline, and from then on, the losses began [1].

Source: Sri Lankan Treasury Annual Report (2008, 2018)

Privatisation has worked in the past, and the argument for privatisation of a state-owned airline is strong. To begin with, the aviation industry is an investment heavy industry, which requires expertise and foresight. Beyond procuring airplanes and terminal space, there is a web of domestic and international regulations to navigate, not to mention standards to adhere to. From then on, once you have the planes and are ready to start, the airline needs to be competitive in order to survive. It requires strong management and effective marketing, with a team that can adapt to external shocks in fuel prices, domestic and international politics, and changes in foreign exchange rates. Even if it has the money, a government is ill-equipped for this task, evidenced by the track record of the airline in state hands. During the period of 2009-2017, when the airline was under state management, it has accumulated losses of Rs. 148,707 Mn [2]. Repeated promises of restructuring or turnaround have remained unfulfilled.

While privatisation of SOEs, and specifically the privatisation of state-owned airlines is theoretically sound, appropriate implementation is necessary. The Organization for Economic Co-operation and Development (OECD) has done extensive research on privatisation of state-owned enterprises and has identified some key features that successful privatisations have had in common. Detailed below are some features that are relevant to Sri Lanka [3].

• Strong political commitment to privatisation at the highest level in order to overcome bureaucratic inertia and to resolve inter-institution rivalries in order to move the process forward.

• Clearly identified and prioritised objectives in order to provide the policy with focus and a sense of trade-offs that may be required.

• A transparent process to enhance the integrity of the privatisation process, gain credibility with potential investors and political support from the public.

• An effective communication campaign to explain the policy objectives of privatisation and the means by which they are to be achieved in order to respond to public concerns and to gain support for the policy.

• Allocation of adequate resources in order to meet the demands of the shift to privatization.

Partial privatisation of SriLankan as a more viable solution?

Privatisation does not always have to be full divestiture of the asset; the option of partial privatisation is open. In this scenario, governments sell a minority stake and retain a degree of control, while the enterprise reaps the benefits that accompany privatisation. The process of privatisation will bring with it a much needed infusion of private equity, new management, clearly defined guidelines and a more flexible financial structure. The focus of the airline will shift towards increasing profitability and efficiency, with the aim of increasing shareholder value. Given Sri Lanka’s past success story with the partial privatisation of Air Lanka, it is possible that this solution will be pursued or at least considered.

The pitfall of partial privatisation

Drawing from the experience of privatisation in other countries when governments remain the majority shareholder, the space for political interference continues to exist [4]. This is the biggest potential pitfall, and the SriLankan experience can attest to the damage this can cause. As of now the government is struggling to create interest in the purchase of the airlines, and the fear that the government will once again step in and interfere with the management is the most probable reason behind this.

If the government is considering partial privatisation, steps should be taken to ensure that the government’s interests remain those of a shareholder and not those of a political entity. Given past track records, assurances of non-interference are unlikely to inspire confidence.

In 2015 the Hon. Prime Minister, Ranil Wickremesinghe mentioned that the government was considering the Singaporean Temasek model of a holding company as a solution to the problems of SOEs in Sri Lanka [5]. Establishing a holding company for SOEs would help bolster investor confidence and improve the functioning of the airline. It would professionalize the management and create distance from local politics [6]. It is a shame that even though this idea was brought out in 2015, it was never implemented. The question that remains is whether the government will take this into consideration and take decisive action on this problem four years later.

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[1] Ratnasabapathy, R. (2016). The renationalisation of SriLankan airlines and the follies of state enterprise. In: The State of State Enterprises in Sri Lanka. Colombo: The Advocata Institute.

[2] Ten Year Review: SriLankan Airlines Annual Report 2016/17. Colombo.

[3] Privatising State-Owned Enterprises: An Overview of Policies and Practices in OECD Countries. (2003). Paris: OECD Publishing.

[4] Ibid

[5] Wettasinghe, C. (2015). Temasek model to make public enterprises viable. Daily Mirror. (Online - Accessed 16 Jan. 2019)

[6] Kim, K. (2018). Matchmaking: Establishment of state-owned holding companies in Indonesia. Asia & the Pacific Policy Studies, 5(2), pp.313-330.