Advocata supports recommendations from experts on restructuring of SriLankan

srilankan-airlines

May 24, 2019 (LBO) – During the ten year period when the management of SriLankan Airlines was under Emirates, the airline enjoyed a decade of profits.

This is in stark contrast to the  period of 2009-2017, when SriLankan Airlines was under state management, and accumulated losses of Rs. 148,707 mn. The restructuring is critical as the airline has negative net worth and is insolvent.

As of 31st March 2018, the airline is in debt to the Bank of Ceylon and People’s Bank for a total of Rs. 57 bn on the basis of letters of comfort issued from the Ministry of Finance. Further the airline owes Rs. 27 bn to international bondholders which are secured on the basis of a government guarantee for USD 175 mn.

The Auditor General reports that ……“Group’s and the Company’s current liabilities exceeded its current assets by Rs.94,205.97 ,million and Rs.100,268.11 million and total liabilities exceeded its total assets by Rs.125,582.89 million and Rs.132,196.34 million respectively. As stated in Note 3, these events and conditions, along with other matters as set forth in Note 3, indicate a material uncertainty that may cast significant doubt on the Group’s ability to continue as a going concern”.

The approach recommended by the committee is one where the management will be separated from the ownership, ensuring independence and accountability. The recommendation to introduce a legal framework and performance monitoring mechanism in particular is commendable, as it will send a positive message to investors, while guaranteeing that management has the freedom to run operations independently, with the board acting as a source of accountability.

Key Points

  • SriLankan Airlines will be the holding company for two subsidiary business units: SriLankan Catering and SriLankan Ground Handling.
  • A 49% stake in each subsidiary will be divested to a strategic partner as the first phase of partial privatisation.
  • Cash inflow from these divestitures will be used to settle a component of outstanding debt in order to create a more favourable balance sheet.
  • The second phase of partial privatisation will be the divestiture of a 49% stake of the holding company SriLankan Airlines to a strategic partner.
  • Management will fall under the purview of the partner, with an independent board established for accountability.
  • Legal framework will ensure that management decisions will be independent from ownership.

Advocata Institute strongly supports these recommendations, the financial and operational restructuring mentioned above should be a priority for the country. However, in the event that the restructuring fails to demonstrate rapid progression towards recovery the government should withdraw all state guarantees that support the borrowings of the airline, thereby preventing further losses from being funded by the treasury.

“Given the dramatic losses incurred by SriLankan Airlines, it is evident that comprehensive restructuring is a matter of urgency. These losses make it abundantly clear that the role of a government does not lie in the management of an airline. The recommendations in the report are promising, and one hopes that immediate implementation will follow” – Dhananath Fernando, Chief Operating Officer Advocata Institute.

Advocata is an independent policy think tank based in Colombo, Sri Lanka. We conduct research, provide commentary and hold events to promote sound policy ideas compatible with a free society in Sri Lanka. Visit advocata.org for more information.