Liberalising air links

By Ravi Ratnasabapathy

According to news reports, Sri Lanka’s President Maithripala Sirisena has asked Qatar to partner with the island’s troubled national carrier SriLankan Airlines. The President’s move is to be commended: the airline has racked up billions in losses, getting rid of it will allow the Government to focus its limited resources on priorities such as health and education.

The argument about the airline has been muddied by emotion, the people; for it is ultimately the people who pay for this; must ask if this is the best use of taxpayers’ money.

The annual report for 2016/17 reports that the Srilankan Airlines Group recorded a loss of LKR 28bn (2016 – LKR 12bn) with an accumulated loss of LKR 170bn (2016 – LKR 141bn) as at March 31, 2017. The Company’s current liabilities exceeded its current assets by LKR 99Bn (2016 – LKR 73Bn) and the total equity of the Company as at Reporting date has declined to a negative LKR 116, Bn (2016 – negative LKR 88 Bn).

The Group is technically insolvent and the Auditor General has warned that “a material uncertainty exists that may cast significant doubt on the Group’s ability to continue as a going concern”. The Auditor General has relied, inter alia, on two letters of support: a letter issued by the Secretary to the Treasury on December 23, 2016 and Cabinet approval on July 18, 2017 as notified by letter dated July 26, 2017 confirming the support of the Government of Sri Lanka (GOSL) to the Company to continue its operations as a ‘Going Concern’. In a layman’s terms, unless the Treasury (read taxpayers) is willing to underwrite the activities of the airline it will go bust.

The airline is in debt to the Bank of Ceylon and People’s Bank to a total of Rs.49 bn as at March 31, 2017. The banks have extended support to the airline on the basis of letters of comfort issued from the Ministry of Finance. Further, the airline owes Rs.26.5 bn to international bondholders which are secured on the basis of a Government Guarantee of USD 175 mn. The guarantees extended by the Government to banks and bondholders represent additional potential losses of public funds.

The airline last reported a profit only in 2008, when under the management of Emirates. It has failed to report a profit in any year since then. The airline industry is a high risk, low profitability business. A study by Oliver Wojahn for IATA published in 2012 shows that the overall airline industry has failed to cover its cost of capital in all years except six, since 1981. The study covered 69 public listed airlines worldwide, covering roughly 70% of the airline industry.

Future losses

Sri Lanka has obtained a loan from the IMF a loan US$1.5 billion (the second since 2009, the previous administration borrowed US$2.6 bn) to attempt to put public finances in order. It is sobering to note that the accumulated losses of the airline (just over a US$1 billion) are 65% of the IMF loan. Sustaining further losses is suicidal and tax increases to fund these and future losses represent an unacceptable burden the public.

Sri Lanka does need air connectivity but this is best provided by liberalising air services, not by running an airline. A good example is an extensive liberalisation with India which took place in 2003. Prior to deregulation, only the national carriers of the country were allowed fly, the number of flights was restricted, the pricing was regulated and the destinations controlled.

The liberalisations were in the areas of pricing, competition, capacity and new routes. Market forces were allowed to determine prices as opposed to being set by the two governments. A report by Raveen Ekanayake of the Institute of Policy Studies in January 2016 notes that:

“The benefits of liberalization are clear… passenger traffic between the two countries more than doubled in the immediate wake of liberalization in 2003 and has since increased. The bulk of the new traffic being generated is a result of the relaxation of capacity constraints on metropolitan destinations.

The improvement in air connectivity has facilitated the movement of people to forge trade, investment, and cultural linkages between the two countries. The tourism industry in Sri Lanka, in particular, has been a major beneficiary….. During the early 2000s, India in terms of volume was the 3rd top source of tourist arrivals to Sri Lanka after the United Kingdom and Germany. By 2004, India had jumped to the second place and by 2005, India became the top source of tourists to Sri Lanka, surpassing the United Kingdom by as much as 20% in terms of tourist numbers. Since then India stands as the top source of tourist arrivals to the island.”

This is not an isolated experience, it is confirmed by numerous studies including one by IATA which showed that traffic growth subsequent to liberalisation typically averaged between 12% and 35%, directly benefiting economies by increasing GDP, employment, tourism, and exports. According to the IATA report, the creation of the Single European Aviation Market in 1993 led to average annual growth doubling between 1995-2004 compared to growth in the years 1990-1994. The US-UK agreement lead to an almost 29% increase in traffic.

Aviation hub

Singapore’s liberal aviation policy has been a key factor in the growth of Singapore’s Changi International Airport, where air transport contributed nearly S$20 billion of value-added to the Singapore economy or about 6% of the Singapore GDP in 2011.

A national carrier is a source of pride but it is not a priority for cash-strapped Government. The airline should be disposed, or even closed and a liberal air services policy 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.