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SriLankan Airlines is looking to profitable flying by financial year 2016/17 with the recently concluded fleet modernisation deal with Airbus tipped to 
provide a major boost along with Government support and rebound in tourism.
The national carrier is estimated to have posted a net loss of US$ 190 million in FY13 largely on account of the high-cost fuel bill, whereas core operation wise there has been an improvement.
CEO Kapila Chandrasena told the Daily FT that in FY13 passenger load and revenue had increased by 16% whilst on a net basis, the growth was 9% after factoring the 18% (2.5 million Available Seats Kilometres) expansion in capacity. In FY12, the airline carried 11.2 million passengers whilst the capacity was 14.3 ASK million.
In the FY13, the airline has also managed to maintain a network-wide cabin factor of 82% (up from 79% in FY12) with 60% of the flights securing 100% load factor.
“Despite challenging times, we have managed to deliver on our five-year business plan rolled out from 2010/11 onwards. We foresee strong upturn in our passenger numbers and revenue as the airline aspires to fulfil the Government’s vision of 2.5 million tourist arrivals by 2015 and developing Sri Lanka as an aviation hub in the region,” Chandrasena said. Though the national carrier is saddled with losses, the CEO said in FY13, there have been improvements overall with the operating ratio (operating expenses to revenue) being reduced to a deficit of 25% from 31% in the previous year.
“High cost of fuel remains a key challenge to all airlines, all of which operate within a thin margin of 2% or less return on investment,” he said.
It appears that the airline has taken a conscious decision to forfeit short-term high profitability to position and develop the national carrier to drive tourism and aviation industry into the future on a sustainable basis, given the opportunities in post-war Sri Lanka.
The original business plan approved by the Board, envisaged that SriLankan will get a capital infusion of US$ 500 million over a three-year period starting from FY 2010/11. However, despite its own challenges, the Government has stepped in with support by extending US$ 225 million via an issuance of Bonds in FY12 ($ 125 million) and FY13 ($ 100 million), whilst the airline’s balance sheet has been boosted by US$ 175 million four-year loan arranged (as bridging finance) via a consortium of Middle Eastern banks. Of the latter around US$ 100 million had been used to settle outstandings due to the Ceylon Petroleum Corporation (CPC) and the balance on other dues.
According to Chandrasena, whilst internal and external efforts towards improving airline operations persist, rising fuel bill; estimated to be around $ 400 million per annum, is the biggest challenge for the airline going forward.
The national carrier is also discussing with the Government to improve working capital requirements with possible options being, trading the Bonds issued or using them as security to raise fresh funding at competitive rates, though the latter would mean additional interest burden.
With the hope of capital infusion from the Government as per the Business Plan, SriLankan in FY12 expanded capacity adding six more aircraft (three A320-200m, two A330-200s and one A340-300) bringing the total fleet to 22 comprising seven A320-200s, seven A330-200s and six A430-300s.
Whilst recent expansion has paid off with a net increase in revenue, given the future demand for SriLankan and global air travel as well as the need to improve the yield, a modernisation of the fleet is critical, according to Chandrasena.
Based on findings from industry specialist consulting firm, Seabury Airline Planning Group, SriLankan estimates between now and 2018, two-way air traffic market it currently serves is forecast to grow double digits with some markets such as India and China tipped to deliver 70% growth and Middle Eastern and South East Asian markets growing by nearly 50% on a Compound Annual Growth Rate basis.
In that context a deal with European aircraft maker Airbus has been finalised to procure 10 new airplanes. In a deal worth US$ 1.3 billion, SriLankan is to buy six A330-300s for medium haul flights and four A350-900s for long-haul flights. The arrangement with Airbus will ensure SriLankan Airlines remain as a single-aircraft-brand carrier with the selection of aircraft also based on a better payload. Separately a further three A350s will be sourced from the leasing market as supplies-slots from Airbus weren’t available.
The A330-300s (capable of carrying 300 passengers), will begin replacing the 18 year old fuel guzzling A340-300s between October 2014 and December 2015 whilst the 340-seater A350-900s are expected to join the SriLankan fleet between 2019 and 2023. The leased three A350-900s will come in between 2017 and 2019.
Despite the staggering amount, Chandrasena said modernisation was critical for the future plans of the national carrier, as investment in product upgrading was long due.
Chandrasena said deal with Airbus has a range of additional benefits for the national carrier and the country in terms of maintenance and repair operations, training and tools etc. “The overall arrangement will help realise the Government’s vision of making Sri Lanka an aviation hub more effectively,” the SriLankan CEO added.
He also said that fuel efficiency from the new aircraft make a 5% to 10% positive contribution to the airline’s bottom line inclusive of cost of ownership, going forward. The national carrier is exploring financing options for the new aircraft with most likely arrangement being “sale and lease” which will not have a major impact on the Balance Sheet of the airline.
“Given the recent improvements in the core airline operation along with Balance Sheet support as well as anticipated upturn in tourist arrivals, we are confident that SriLankan Airlines’ direct and indirect contribution to the GDP can be doubled to about over 4% from the current 2.2% using the basis applied by IATA.
For this to be realised faster, Chandrasena emphasised that the entire travel and tourism eco-system including airports, tour and hotel operators, entertainment industry, logistics sector, must work in tandem.
