Flag bearers of India’s neighbors are dangerously close to crisis – can they be rescued?
Delays in aircraft and engine deliveries are giving airline CEOs around the world sleepless nights as they try to cope with a rapid rebound in air travel demand after two years of the Covid-19 pandemic. 19.
But they are the least of Richard Nuttall’s worries. The seven-month-old CEO of Sri Lankan Airlines has far bigger issues to grapple with: where will the airline get fuel to fly its planes; whether there is sufficient cash to handle its operations over the next few weeks; and above all, with an economically crippled government unable to support it and hoping to privatize it, how soon will the airline have a new owner?
“We recovered from Covid-19 very quickly. The airline made a profit of $12 million in the last four months (to March 2022).”
“Right now it’s tight. We manage cash flow month to month,” Nuttall told ET in a recent interview.
An Oxford graduate and holder of a Sloan Masters, Nuttall has 30 years of experience in various airlines around the world. He was appointed interim CEO of Sri Lanka in January and confirmed in April.
It’s struggling to get SriLankan Airlines flying even as its owner struggles to keep the country running. The Sri Lankan government last funded its airline in March 2021, according to Nuttall.
The carrier now survives on cash flow from its operations, even as air travel continues to be hit by the country’s deep economic turmoil and instances of violent protests by citizens. About 85% of the carrier’s revenue comes from sales outside Sri Lanka, which gives it the foreign currency to buy spare parts and fuel, Nuttall said.
About 2,500 kilometers away in Karachi, Amir Hayat has similar worries. The acting head of state-owned Pakistan International Airlines (PIA) is trying to convince its debtors and suppliers to defer payments and the government to restructure its debt. Air Vice Marshal Hayat was named interim CEO in April, after his predecessor Arshad Malik completed his term and left. Hayat was an adviser to Malik.
“We posted operating profits in the last quarter of the previous year and the first two quarters of this year.”
PIA has 31 planes, three of which are grounded, two stuck with a lessor; and faces a global ban on flights to the West.
The Pakistani government has said it is not yet considering privatizing it, although the airline has been criticized for poor management and faces competition from smaller but profitable private competitors such as Airblue.
Air India, a government airline in much worse health than its neighbors, nevertheless fared better. The Tata Group, which bought it from the Indian government for Rs 18,000 crore ($2.4 billion), is now trying to revive it by increasing operational efficiency, cutting costs and buying new planes.
Interestingly, Sri Lanka, which is in the worst situation among the three airlines, was recently doing better than both. And this despite an economic crisis in the country which began in 2019. “We recovered very quickly from Covid-19.
We broke even in the six months between October 2021 and March 2022. We made a small net profit of $0.61 million, compared to a loss of $147 million a year earlier. In fact, we made $12 million in the last four months (through March 22),” Nuttall said.
Sri Lanka’s outstanding debt is approximately $855 million. For comparison, Air India’s outstanding debt as of August 2021 was Rs 60,562 crore ($7.6 billion) mostly on sovereign guarantees to fund its losses. By 2021, Sri Lanka had accumulated losses of around LKR 36,600 crore (over $1 billion). PIA’s cumulative losses and liabilities in 2021 were PKR 50,000 crore ($2.4 billion).
The carriers recorded losses of LKR 5,000 crore ($137 million) and PKR 5,000 crore ($241 million), respectively, for 2021. In comparison, Air India’s cumulative losses in March 2021 were 83 916 crore rupees ($10.4 billion).
Nuttall said revenues started to decline from May. In June, Sri Lankan Prime Minister Ranil Wickremesinghe said the economy had collapsed. “Our country has no dollars,” Nuttall said. “That means it’s very difficult for us to buy fuel overseas or borrow money.”
Revenues are used in operations. “Due to the situation in the country, it has not been possible to obtain external financing for the airline since the beginning of 2021. This has led to restructuring with creditors and reductions in staff salaries to overcome the challenges of Covid,” Nuttall said, admitting the company was often behind in paying wages and repaying debt.
The airline recently announced that it was using a 30-day grace period to pay interest on its $175 million 7% 2024 bonds. Sri Lanka was majority-owned by Gulf carrier Emirates between 1998 and 2008.
Then the government bought the shares, and now owns 99% of the airline. The carrier has recorded annual net losses since 2008-09.
Emirates CEO Tim Clark recently said the airline “has done its job” of turning Sri Lanka into profits. He said the airline could turn around but for the “pickle” the country has found itself in. He did not say whether Emirates would invest in the airline again.
Nuttall said finding a buyer wouldn’t be difficult. “The airline has shown that it can be profitable. There are a lot of debts. But if you can find a way to restructure the debt, which usually happens when you privatize, then chances are we have something here that is attractive to multiple parties,” he said.
Sri Lanka has 24 planes – 12 narrow-body planes and 12 wide-body planes – three of which are grounded. Nuttall said all would be well deployed as travel demand increases in the summer.
The PIA problem is different. He cannot exploit the opportunities arising from the fact that the world wants to travel. For the past year and a half, aviation authorities in the United States, United Kingdom and Europe have banned flights from Pakistan to these regions. The European Aviation Safety Agency (EASA) banned it after a PIA flight PK8303 crashed in Karachi two years ago. Earlier this year, the International Civil Aviation Organization completed an audit of the Civil Aviation Authority of Pakistan. But the bans have not yet been lifted. An EASA audit, scheduled for early this year, has been delayed and is now due in a month and a half, PIA’s head of marketing and communications Abdullah H. Khan told ET. PIA operates charters to the UK and regular flights to Canada where it faces no bans.
In the country, the Pakistani rupee has weakened and foreign exchange reserves are at historically low levels. “Recovery is a challenge. PIA engages all stakeholders, including lessors and client service providers, to ensure financial obligations are met. Although it will be very difficult as the budgetary situation of the airlines is not idealistic – we are still in the recovery phase, while the liabilities are all in normal times,” Hayat said.
Khan said the airline has been posting continuous losses since 2004. “The government is not funding these losses. They are funded by advance note sales, sovereign guarantees and asset-backed loans. Losses appear on our balance sheet and, together with liabilities, have climbed to a cumulative PKR 500 billion ($2.4 billion). Our assets are worth PKR 110 billion ($530 million), which means the airline’s equity value is almost negative at PKR 400 billion ($1.9 billion). We asked the government to restructure our debt and our contributions.
Like Sri Lanka, PIA is also on the road to recovery. Hayat and Khan said the airline posted operating profits in the last quarter of the previous year and the first two quarters of this year.
PIA is operating at just 55% of its pre-Covid capacity of 550 flights per week, Khan said. Hayat is pinning her hopes on the ongoing Haj trip to support the claim. It plans to operate 75% of pre-Covid flights by the end of the year.
Hayat also said he expects the government to announce incentives for the aviation sector in the next budget. PIA has already added two narrow-body aircraft to its fleet this year and will add two more this month.
Sri Lanka and Pakistan are turning to the International Monetary Fund for help. Sri Lanka has secured lines of credit from India. Both airlines are waiting for fuel prices to cool, demand to increase and their governments to rebalance their debts.
“It’s a precarious situation. We achieved this for 15 months. It’s gotten a little more complicated over the last two months, but we’re coming into the summer season which should help us come back,” Nuttall said.
But public anger over the economic crisis shows no signs of abating. On Saturday, protesters stormed the residence of Lankan President Gotabaya Rajapaksa, forcing him to flee.
On how long he gave the airline to survive before it got a new owner, Nuttall signed off with a quintessentially British expression. “How long is a string? It depends on the price of fuel. It depends on the situation in the country. It’s an impossible question to answer.