With the current traffic, the airline is in a perfect position to feed it to Australia, China, Japan, Singapore, depending on where the connecting traffic is. That is where the big opportunity lies
The commercial opportunity is huge. The risk is more about the country, politics and the currency
There is huge potential for the national carrier given India’s booming economy
Growing is a real challenge due to lack of aircraft, engines and spare parts
Chief Executive Officer of SriLankan Airlines, Richard Nuttall, in an interview with Daily Mirror, discussed the way forward and the current challenges of the national carrier in the midst of efforts by the government to restructure it.
Excerpts of the interview:
Q SriLankan Airlines is the most cash-strapped government institution at the moment. You suffered losses amounting to US $ 525 million.
We sometimes do our accounts. What sometimes people do is they look at the exchange loss. So for instance we had US $ 1 billion debt. When the currency devalued, 180 billion in LKR suddenly became 360 billion in LKR.
If you start looking at the LKR results, you say we’ve lost, because it’s doubled. But actually the US dollar component is just the same. It is still a billion US dollars.
If you look at our accounts in US dollars, for 2022 /2023, we broke even. We made US $ 4 million.
Q You have an idea about the performance of the current financial year. What is your assessment?
You are correct. We have a huge amount of debt that we have to restructure. The reality is that the airline has lost money over many years. It had to pay interest on that.
We then had COVID when every airline in the world lost money. You’re paying for aircraft and engines that are sitting on the ground. The biggest problem for Sri Lankan Airlines is the cash situation. It is a fact that we have a lot of debt. The real big problem is that we can’t borrow. So we have to do everything with our own cash flow. This industry is a very low margin industry.
We have to pay for past debt. If we have a bad year and can’t borrow money, we don’t exist.
We have to pay off our debts. We are breaking even. But breaking even isn’t enough, because we’re still having to pay. We have to pay Rolls-Royce for contract issues that go back to 2015.
Q We have to pay a lot of money to restore LEAP engines, engines on the 320 neo fleet that came off the aircraft in 2021.
What it means is that we don’t need to just break even. We need to earn 50-60 million more than breaking even to pay everybody.
If you’re going to pay off all of this debt, you need to grow. That is now very difficult in the world today. If you went back two or three years as we were coming out of COVID, the world had a lot of spare aircraft. You could get aircraft very cheap. We were going to take advantage of that. Then the country had its issues and went into the bond default. When you go into a bond default, nobody is going to give you an aircraft until they can see what’s happening. We’ve come out of the other side of the bond default and things are being restructured.
What we’ve discovered after COVID is that there aren’t enough aircraft in the world. What happened during COVID was that engineers and technicians left the industry. The manufacturers stopped manufacturing because you couldn’t put people together in COVID. Nobody was building planes, engines and spare parts. Some people who know how to do that left the industry. And at the same time, nobody was being trained to replace them because nobody was trained during COVID.
You can’t learn to work on an aircraft engine by doing it on a computer. You have to stand by the engine with other people, or a little bit of both. The issue has been made worse by the fact that the new generation engines have had a lot of problems.
Around 2014, 2015, new generation engines came out. You had the Pratt & Whitney engine and the CFM engine that they were going to put on the 320neos and the 737 MAX aircraft.
What they all promised was that they would reduce fuel burn by 15 percent. That is good for the environment and the airlines because fuel is your biggest cost. It’s 40 percent.
All of these engines are failing.
So our problem is not just that we can’t grow. We actually have a problem keeping our existing fleet in the air because we can’t get engines. And when we have an aircraft that has a problem, we can’t get spares because they don’t exist.
This is not just a Sri Lankan problem. If you look in India, you’ll find over 100 aircraft grounded because they don’t have engines.
We have three or four. What it means is that if you want to grow, it’s very difficult. Everybody is looking for aircraft. We have one 320 aircraft that’s leased. Its lease finishes in maybe 15 months’ time.
The people who own that aircraft, which is 14 years old, have already been approached by four different, very large airlines.
One of them is a big Gulf carrier. Two of them are airlines that would never ever before go for a used aircraft. This aircraft is probably the most used aircraft in the world.
Everybody who has an aircraft will ask, “Shall we put this aircraft into Sri Lanka, where you have an airline with a lot of debt and a country where, 18 months ago, you couldn’t get your dollars out of the country? Or do I give it to a big European carrier or a Gulf carrier? So we have this perfect storm that makes it very difficult to get aircraft now.
It is a problem for everybody with aircrafts to keep them flying because of the engine difficulties and the spare parts issues. So at a time when we need to grow to pay off our debts, we’re actually struggling to keep our full fleet flying.
Q In this context, we have set a target to restructure the airline by June. How challenging is it to achieve this target under the current circumstances?
So I think there are two aspects. Part of our problem is the same as everybody, which means that it’s quite hard getting access to aircraft and growing. And part of our problem is the fact that we have no cash, which means that when people have aircraft, we are the last people to get them.
We have the commercial opportunity if you can get aircraft. We are in Sri Lanka, right next to India with all of the growth in India.
The commercial opportunity is huge. The risk is more about the country, politics and the currency.
Again, if you want to invest in a company, you’re going to be a little bit worried about it. If I make money, can I take my dollars out of the country? So the economic situation here is part of the risk. But the commercial opportunity is very good.
Q Can you explain a bit more about commercial opportunities?
At the moment, India has maybe half an aircraft per million population. China has three aircraft per million population. The United States has 30 aircraft per million population. Even in Sri Lanka, we have one aircraft per million of population. You have to remember India is 65 times bigger than here in population.
India is also growing very fast. So for a long time, India didn’t grow, but China was growing. Now it’s a bit the other way around. The rule in this business is that if GDP grows by X, air travel will grow by three times. So if India’s GDP is growing at 5% or 6% that says the demand for air travel will grow at 15% to 18%. If you go to India now, we talk about that half aircraft. Most of it is being used for domestic travels.
They’re hoping it will double in the next six years. In India, they don’t really have enough aircraft, even with these huge orders. In India you’ve got Mumbai and Delhi. These are the two big hubs.
Then you’ve got all of these cities there. If you’re in Cochin, and you want to go to Australia, there are no direct flights from Cochin. So if you want to go from Cochin to the Middle East or Europe, you go on a Gulf carrier. We used to carry that traffic. But now with the Gulf carriers, it doesn’t work. But if you want to go to Australia, you can either fly three hours this way and then three hours later if you’re flying over Sri Lanka, or you do a hop and you go to Australia. With all of this growth and all of these cities, we fly to nine and ten cities in India.
With that traffic, we’re in a perfect position to feed it to Australia, China, Japan, Singapore, depending on where the connecting traffic is.
That is where the big opportunity is. What happens is the more flights you have, the more traffic we’ll get to Sri Lanka. So if you look at India at the moment, the number one country for tourism to Sri Lanka is India. It varies by month/year.
Number two is the UK. Russia, sometimes in the winter, but also the UK. The UK is maybe 10% less. The UK has a population of 50 million people, 11 hours flying time away. India has 1.4 billion, an hour away or up to three hours away.
So the demand from India that should be coming here shouldn’t be 12,000. It should be 120,000. But you need to have enough flights. So you add flights that can bring Indians here, Indians to Australia, to New Zealand, to wherever with those connections. You have a really strong opportunity to build a hub here.
Q For you to increase the traffic to Colombo, in that sense, the facilities at our airport should also be expanded. What is your view about the facilities at the airport?
The airport is already at capacity at the peak periods. So you need a bit more discipline and spreading capacity. But for us, we want all the flights to arrive at the same time, and we want them all to leave at the same time, because then you have the connections. So, yes, the airport needs to be bigger. So it needs the second terminal.
But in the meantime, AASL (Airport and Aviation Services Ltd) is working creatively to find solutions. They’re looking to put some more check-in counters. They’ve identified another area in the current terminal where they can put some more check-in counters. We’re also putting kiosks where people can check in themselves and drop their baggage. So there are ways, and also using technology, people will start using facial recognition and scanners. So there’s a way that even with the current airport, we can expand the capacity by maybe by 50 percent. But then in time, they’ll need the new terminal. But if we work together, we can manage it a little bit.
Q Despite the commercial potential, Sri Lankan airlines are burdened with a huge debt burden at the moment. Will these private sector investors pour in money for such a venture?
You know, so this is being managed by the state-owned enterprise restructuring unit. It’s not actually being managed by the airline. But you are correct. I think that’s why part of the IMF process was for the state institutions to restructure their balance sheets and then privatise.
If you don’t restructure the balance sheet, nobody will buy with too much debt. Equally, if you don’t restructure the balance sheet, the danger is nobody will buy. Then, the IMF doesn’t want the government to put any more money into the airlines.
If the airline is not sustainable, the government is going to have a choice of either putting money in or losing the airline. There are two problems with that. There are some routes where people will fly.
But many routes only work because of the connecting traffic. So, for instance, our flights to Australia only work because we have connecting traffic from India. So if we don’t exist, you will not have direct flights to Australia. Maybe some of those Indian routes won’t be there if there’s no connecting traffic. So that reason is there all the time.
You need somebody here who’s based here as a hub if you want to have the same number of flights. The other issue is that there are not enough aircraft in the world at the moment. So for anybody who wants to come and set up a new airline or anybody who wants to expand, the chances are that they’re going to have to wait three, four or five years to get aircraft. So the danger is if something happens to us tomorrow, there’s going to be a whole lot of capacity in the country that nobody is going to fly.
Q As an expert in the industry and also as the CEO of Sri Lankan Airlines, what kind of proposals have you put forward to this re-structuring unit headed by Mr. Suresh Shah?
Well, so we have sat down with Suresh Shah and we have given them the background and our thoughts about the industry and why it’s important and how connectivity works and all of these things. But what we also told them to do, or what we also suggested they do, was that they were using IFC (International Financial Corporation) to manage the transaction. But airlines are a very specialised business. What we suggested and what they also did was that the IFC worked with some aviation specialists so that they could work with the government on the valuation and could help market the airline.
If we were privately owned, obviously, we would do it ourselves. But even if we did it ourselves, we would use somebody to assist us. When SOERU calls us, we provide as much data as we can.
However, we painted the picture for them at the start, but now they’re running with it.
Q Are the countries such as India and China showing any strategic interest in acquiring the airline?
This is what I understand alternatively. We are not part of the SOERU, although we do know people who are there. We understand that they had a Zoom call – a call for people to ask questions when they first of all put out the document for Expressions of Interest. We understand that seven or eight people participated in that call, and none of them were airlines – some international, some domestic.
We also understand that some of those people asked for time to see if they could get together to form consortiums. So, they extended the deadline until February.
Maybe nobody will know who is interested until they open up the EOI.
Q In Sri Lanka, SriLankan Airlines is identified with national pride as in any other country. How valid is this concept of the national carrier in the current global context?
It is actually very valid. I think it depends a little bit where you are. If you’re in Europe, where essentially in Europe you have open skies, you have airlines from one country that have hubs in another.
So, you know, you have carriers like WizzAir and Ryanair that have hubs all over Europe. So it’s not quite as important there.
But if you are an island or if you’re somewhere that’s like an island because you have zones around you without good transport or where there may be conflict, then your airline is quite important because you rely on it for connectivity, you rely on it to connect passengers, you rely on it for freight.
And what happens is that foreign airlines will only fly according to economic conditions, whereas your national airline will also try to support you when you need it. If you look at COVID, if you go back to 2022 when the country had its problems, the foreign airlines were all pulling out and reducing flights because they couldn’t repatriate their dollars. So at that time, the national airline was very, very important. Because, again, without us, a lot of people wouldn’t have been able to connect, whether for business, whether for tourism, or whether to go overseas or even to work. You know, even if you’re a diaspora and you want to go to work in Australia or Europe or the Gulf or Korea or wherever, you need to be able to get there. During COVID, we played a key role in transporting goods and medicine.
When things are difficult, that’s when you need a national carrier. When everything is booming and everybody has lots of aircraft, maybe it’s not quite so important.
As a country, Sri Lanka had a few issues over time. So having a national carrier that makes sure you have those connections is very important.