Restructure plan for SriLankan Airlines

By M.H.M. Farook, FCMA (UK), CGMA

Several suggestions are being made in the media about State-Owned Enterprises. Some are of the opinion that most of the SOEs cannot be redeemed, for various reasons. SriLankan Airlines is one of the largest SOEs. The following restructure plan is to turnaround the Sri Lankan Airlines. 

The current financial position of the company is as per the Annual Report 2019/20. 

Equity and interest bearing liabilities

The equity of the company is Rs. 51,617.44 million. The accumulated losses as at 31 March 2020 was Rs. 326,341.48 million. Total equity of the company as at 31 March 2020 is a negative figure of Rs. (273,369.08) million. The non-current interest bearing liabilities as at 31 March 2020 was Rs. 211,737.45 million and interest bearing current liabilities was Rs. 106,723.84 million, totalling to Rs. 318,461.29 million. 

Additional equity 

The performance of SriLankan Airlines for the year ending 31 March 2021 is likely to be the worst since incorporation of the company, in view of the COVID-19 pandemic world over. In that event the company will not be able to meet the lease payments and other liabilities, the Treasury may have to meet these commitments on behalf of the company, for this year and in the future till the airlines world over come to normal. 

Most of these liabilities are either Government Guaranteed or on Letters of Comfort from the Ministry of Finance. It is therefore prudent for the Treasury to take over the liabilities amounting to Rs. 419,050.87 million and get shares issued to the equivalent value.

This will make the total equity a positive figure and the present stake of the Treasury in the company from Rs. 51,617.44 million will significantly improve. This will also improve the working capital. These changes will make the company very stable to face the impact of COVID-19. 

Additional working capital

The current assets as at 31 March 2020 is Rs. 31,176.10 million and current liabilities is Rs. 211,737.45 million, highly inadequate for the smooth working of the company. After the above adjustments are made the current assets will remain at Rs. 31,176.10 million and the current liabilities will substantially reduce to Rs. 29,692.04 million, making the current ratio 1:1 but not adequate for the smooth working of the company. 

Therefore it is necessary to infuse at least Rs. 30,000 million to make the current ratio 2:1. This is the only amount the Government will have to infuse either from its own sources or borrow. It will be cheaper for the Government to borrow than the company borrowing.

Total additional equity 

The total additional equity required is Rs. 449,050.87 million being additional equity to meet interest bearing non-current and current liabilities of Rs. 419,050.87 million and for infusion of working capital of Rs. 30,000 million. This amount together with the opening capital of Rs. 51,617.44 million will increase the stake of Treasury to Rs. 550,668.31 million.

Profitability

The aircraft fuel cost is the highest single expenditure (32% of the total operating expenditure in 2020 and 34% in 2019). The staff cost is 12.41% of the total operating cost for the year 2019/20 and 11.41% for the year 2018/19, which also needs serious review. 

The company should negotiate a reasonable fuel price with the Petroleum Corporation. The Petroleum Corporation is charging a high price because they are a monopoly. If a reasonable price is not forthcoming, the company should look for an alternative supplier either locally or at an alternative airport. 

If the liabilities of the company as stated above are assigned to the Treasury and with the infusion of the working capital, there will be a substantial reduction of the finance cost of Rs. 40,666.87 million (in 2019/2020) and the company will become profitable. 

This will relieve the company of the heavy debt burden and save time and energy of the Board and the senior executives to concentrate on the management. This will be a great motivation and incentive to work on the business plan to turnaround the company. 

Going concern

The Auditor General in his audit report is expressing a doubt about the company continuing to operate as a going concern. All these changes will make the company stable and a going concern. This restructuring will definitely help to list the shares in the CSE.

Benefits to the Government

At least one Government-owned undertaking will be made profitable without any foreign partner and that too the National Carrier. 

The Government is able to sell a percentage of the shares at a profit. 

The sales proceeds can be used to settle the assigned debts without any disbursement from the Treasury. 

It is no more a burden on the Government Budget. 

The stake of the Government in the company is increased from Rs. 51,617.44 million to Rs. 500,668.31 million. 

Private sector funds and expertise to manage the company.

Business plan 

The company should, while these changes are being done, do a deep study of the several business plans available with the company, which may need modifications in view of the present state of the airline industry and world economy. The business plan should be inclusive of the revenue earning units of the company and the subsidiary company. 

If the Petroleum Corporation does not give a fair price for aero fuel, the company should explore the feasibility of starting an aero fuel unit or a subsidiary company in the long term to meet its own need and cater to other airlines also. It is said that because of the price factor most of the airlines calling at the Katunayake Airport do not uplift fuel, which is a national loss.

Listing in the CSE

After these changes are effected SriLankan Airlines should get a valuation of the shares and get the shares listed in the Colombo Stock Exchange. The Treasury can sell a small quantity of shares to see the market response and the prices offered. This will indicate the demand for the shares and from which quarters the demand comes. 

At this stage the company should invite the Sri Lankan private sector, say the top 25 companies, to buy at least 30-40% of the shares. They should also nominate a certain number of directors who will give their expertise to manage SriLankan Airlines. This will be a public-private participation and the debt burden on the Treasury will be greatly reduced.  The expertise of the private sector used for private profit will shared for the public good.