May 8, 2017 7:15 pm JST

SriLankan's search for new partner getting desperate

Senior ministers tasked with finding replacement after TPG withdraws bid

MUNZA MUSHTAQ, Contributing writer

COLOMBO -- Sri Lankan officials are getting increasingly desperate to find a private-sector partner to share the burden of rehabilitating flag carrier SriLankan Airlines.

The airline, which for a decade was managed and part-owned by Emirates, saw its expenses and debt level soar after the respected Gulf carrier pulled out its team in 2008 amid tensions with then President Mahinda Rajapaksa and his family.

Prime Minister Ranil Wickremesinghe kicked off the search for a new partner for SriLankan last year, culminating in the selection of TPG Capital, the U.S. private equity group which has a record of guiding airline turnarounds, ahead of seven other bidders.

On May 5, however, SriLankan Chairman Ajith Dias announced to staff that TPG had ended talks to buy a 49% stake after completing its due diligence on the airline and concluding potential returns were less attractive than other investment options.

The airline has been losing money since 2009 and in its annual report for the year ended March 2016, it reported current liabilities of 100.26 billion rupees, double its total assets.

According to a preliminary results announcement on May 4, the carrier lost 6.49 billion Sri Lankan rupees ($42.5 million) in the year ended March 31, excluding finance and one-off charges. The loss was aggravated by the depreciation of the rupee against the dollar because of the airline's heavy dollar-denominated expenses and by flight cancellations necessitated by the daytime closure between January and March of the runway at Colombo's international airport for resurfacing work.

Officials told the Nikkei Asian Review that following TPG's retreat, Wickremesinghe appointed Minister of Public Enterprise Development Kabir Hashim, Minister of Development Strategies and International Trade Malik Samarawickrama and Minister of Special Assignments Sarath Amunugama to talk to Emirates, Qatar Airways and Air Asia in hopes of convincing one of them to be SriLankan's partner.

The move bypasses two bidders which had originally been shortlisted by the government alongside TPG but which lacked its track record in international operations and airline turnarounds. Peace Air, a defunct private local airline which has announced plans to restart operations, had bid with support from Lufthansa Consulting, an arm of the German airline. Trans Maldivian Airways, an air-taxi service operating in the nearby archipelago, had bid with reported backing from Singaporean air services company SATS. Peace Air last month announced plans to file legal challenges to its exclusion from the due diligence process.

Family business

An official inquiry following the change in Sri Lanka's government in 2015 found that gross mismanagement and corruption had ruined SriLankan's finances. The investigation panel said Nishantha Wickramasinghe, chairman of SriLankan between 2010 and 2015 and a brother-in-law of Rajapaksa, was paid 500,000 rupees a month despite having no relevant qualifications.

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

The inquiry called for a criminal investigation into alleged fraud in the award of a duty-free contract in which Rajapaksa's cousin Udayanga Weeratunga was allegedly involved. Weeratunga fled the country 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 aircraft leasing company AerCap Holdings as penalty for cancelling a contract for four Airbus A350 aircraft. Deputy Minister of Public Enterprise Development Eran Wickramaratne told the Nikkei Asian Review that the airline did not require such long-range aircraft since the majority of its flights are shorter-range.

Chairman Dias, who was appointed in 2015, said in October that he had inherited "quite a mess" and that "unnecessary aircraft" would be returned to lessors to cut operating losses. SriLankan, which has a fleet of 24 aircraft, has suspended loss-making flights to Paris and Frankfurt and is focusing on more lucrative routes in Asia and the Middle East. It is adding three routes into India in the coming months, which will give it the largest number of Indian destinations of any foreign airline.

Emirates bought 40% of the airline, then known as Air Lanka, for $70 million in 1998. It later increased its stake to 43% but eventually sold its shares for $53 million to the government after Rajapaksa ordered the revocation of the visa of Peter Hill, then the airline's chief executive, when he refused to accommodate a political delegation on an international flight. SriLankan's workforce, which stood at 5,113 in 2008, had floated up to 6,987 by 2015 because of political appointments.

Political interference

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

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 are worried about the possible impact of the airline's privatization. He alleged that the airline's board and senior executives continue 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 told the Nikkei Asian Review in early April that the government had no plans to fully privatize the carrier. "What we are looking at is the commercialization of the airline, which will be based on a partnership or a joint venture," he said.

Whether the government can find any partner both willing and able to work with its criteria and bear the risk of further political intervention remains an open question.

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