Asia Sri Lanka

Sri Lanka seeks new flight path for ailing airline

Government looks to private equity to turn around debt-ridden carrier

A SriLankan Airlines jet taxis along the sole runway of Colombo’s Bandaranaike International Airport. (Photo by Tharaka Basnayaka)

By Munza Mustaq

COLOMBO (Nikkei Asian Review) — Hopes are rising for Sri Lanka’s ailing national carrier, SriLankan Airlines, as U.S.-based private equity firm TPG Capital conducts due diligence on the indebted company.

The process is scheduled to be completed by the end of May, after which the Sri Lankan government and TPG Capital will start negotiations on a deal to salvage the airline, which has been losing money since 2009.

 Deputy Minister of Public Enterprise Development Eran Wickramaratne told the Nikkei Asian Review that eight companies had shown interest in partnering with SriLankan following a local and international call for tenders last year, although only three were shortlisted.
Deputy Minister of Public Enterprise Development Eran Wickramaratne

TPG Capital was selected because it possessed the necessary experience in turning around troubled airlines, he said. TPG acquired Continental Airlines in 1993, selling it in 1998 for 10 times its original investment.

If the negotiations succeed, TPG will augment the management team at the airline by bringing in an international team, said Wickramaratne, whose ministry oversees the carrier. TPG declined to comment.

The government has been trying for more than a year to convince an international airline or investment group to buy a stake in SriLankan, manage it and help the government pay off the airline’s debts, which stand at over 140 billion Sri Lankan rupees ($92 million).

Gross mismanagement

An inquiry found that gross mismanagement and corruption had plunged the airline into debt. The investigation panel said Nishantha Wickramasinghe, chairman of SriLankan between 2010 and 2015, was paid 500,000 rupees a month, despite having no relevant qualifications. Wickramasinghe is the brother-in-law of former President Mahinda Rajapaksa, who was in office from November 2005 to January 2015.

The inquiry said the ex-chairman had received luxury sports utility vehicles, in addition to a Mercedes Benz car and a Prado Jeep. The airline had issued more than 700 free tickets for a rugby tournament and night-time motor racing events in Colombo, which were pet projects of Rajapaksa’s sons.

The inquiry also called for a criminal investigation into alleged fraud in the award of a duty-free contract in which Rajapaksa’s first cousin Udayanga Weeratunga was allegedly involved. Weeratunga has fled the country since the change of presidency in 2015, and is the subject of an Interpol arrest warrant. Rajapaksa has denied that his government was beset by widespread corruption.

The coalition government elected in 2015 was compelled to pay $170 million to independent aircraft leasing company AerCap Holdings as a penalty for cancelling four Airbus A350 aircraft, which had been ordered by the Rajapaksa government. Wickramaratne said the company had not required such long-range aircraft because the majority of SriLankan flights were relatively short-range.

Ajith Dias, who was appointed chairman of SriLankan in 2015, said in October that he had inherited “quite a mess,” and that steps were being taken to reduce the carrier’s losses, including returning “unnecessary aircraft” to lessors. SriLankan, which has a fleet of 21 aircraft, has also suspended loss-making flights to Paris and Frankfurt, and is focusing on more lucrative routes in Asia and the Middle East.

The carrier last posted a profit in 2008, when it was managed by Emirates, a Dubai-based airline group. Emirates pulled out in 2010 after Rajapaksa ordered the revocation of a Sri Lankan visa held by Peter Hill, SriLankan’s then chief executive, because he refused to accommodate a political delegation on an overseas trip.

Emirates had bought 40% of the airline, then known as Air Lanka, for $70 million in 1998. Emirates, which had increased its stake to 43%, eventually sold its shares for $53 million to the Sri Lankan government. SriLankan’s workforce, which stood at 5,113 in 2008, increased to 6,987 by 2015, mainly because of political appointments.

The airline reported a net loss of 12.6 billion Sri Lankan rupees for the year ended March 31, 2016, compared with a loss of 16.4 billion Sri Lankan rupees in the previous year.

Political interference

Harsh Vardhan, chairman of Starair Consulting, an aviation consultancy based in New Delhi, said SriLankan was a classic example of how political interference and bad management can destroy an organization that is performing well. “SriLankan was a great success story of public/private partnership which became a victim of the politics of ego,” he said.

For the airline to succeed, leadership at government and airline level should be bold and dynamic, he added. “My own experience of the public sector is that unless the head of state has clear vision and can bring in competent professionals with full freedom to perform, public sector enterprises remain a drag on the national exchequer because they become a conduit to political patronage, nepotism and corruption.”

The airline’s staff are increasingly concerned about job security. According to Vijitha Herath, a member of parliament for the People’s Liberation Front, workers fear privatization of the airline if all other plans fail. Herath also alleged that the airline’s board and senior executives were continuing to enjoy extravagant perks, including free upgrades from economy to business class.

“At a time when SriLankan is suffering from its worst-ever financial crisis, there is no need for such perks to be doled out to the directors and other staff,” he said. “What the airline needs is good management and strong political leadership to manage the board of directors and the staff, but the biggest problem is that there is no strong political leadership.”

Finance Minister Ravi Karunanayake said the government had no plans to privatize the carrier. “But what we are looking at is the commercialization of the airline, which will be based on a partnership or a joint venture,” Karunanayake said.

 

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