Restructure plan for SriLankan Airlines
The current financial position of the national carrier airline is as per its Annual Report 2018 where the total equity of the company is a negative figure of Rs. (132,196) million. The non-current interest bearing liabilities and other long term liabilities outstanding according to that report is Rs 69,405 million and interest bearing current liabilities of Rs. 67,630 million, totalling to Rs 137,035 million.
In view of the current financial position of SriLankan Airlines, the Treasury as guarantor is obliged to settle the current outstanding of non-current liabilities amounting to Rs. 69,405 million. Further there is a current outstanding of interest bearing current liabilities of Rs. 67,630. Since the settlement of the non-current liabilities alone will not turn the equity position to positive and the current liabilities of Rs. 67,630 is interest bearing, it is better for the Treasury to accommodate the full amount of Rs. 137,035 million, only then will the total equity turn positive.
The Treasury should treat these loan settlements as contribution to capital and the airline should issue shares to the equivalent amount. Non-current interest bearing loans settled in the past should also be treated as contribution to capital and appropriately accounted and shares issued. This will very significantly improve the stake of the Treasury in the company compared to its present negligible stake. This will further improve the positive total equity.
The suggested restructure shows an improvement of the total equity from a negative Rs. 132,196 to a positive Rs. 4,838 million which is a very satisfactory improvement. When the loan settlements in the past are also capitalised that will further improve the total equity position. There is a significant change also in the working capital.
After all these changes are effected SriLankan Airlines should do a valuation of the shares and get the shares listed in the Colombo bourse and sell a small percentage of the shares. This will indicate the demand for the shares and from which quarters the demand comes. If the demand is good then sell a further quantity and may be able to settle the outstanding loans without any disbursement from the Treasury.
While the above changes are being done the airline should look at the several Business Plans available and implement the most suitable and practicable plan taking other resources into account. This should improve the profitability.
The profitability is not so bad. If the non-recurrent expenses, like, “compensation for cancellation of Aircraft Lease Agreements” are settled, finance costs will considerably reduce. If the excess staff costs and the above industry standard perquisites are adjusted by at least Rs. 250 million per month by negotiation and a fuel price reduction of a billion a month, then the company should turn profitable. The subsidiary and each of the revenue earning units of the company need close examination to improve the profitability.
Aircraft fuel cost is the highest expenditure – 27 per cent of total expenditure in 2018 and 23 per cent in 2017. For an increase of 19 per cent in revenue from 2017 to 2018, the fuel cost has increased by 41 per cent. The company should negotiate a special price with the Petroleum Corporation. I remember reading in the media that 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 (LIOC) or at the alternative airport. They should think of a long time plan to start a revenue earning unit of aero fuel supplier, which can meet the company requirement and supply other airlines too.
There is an enormous amount of trade receivables of Rs. 14,570 million outstanding as at 31.03.2018, which seriously affects the liquidity of the company, while so much is receivable there was incurred interest cost on borrowings, bank overdrafts and overdue supplier balances amounting to Rs. 8,690 million for the year ended 31.03.2018.
Urgent concerted action must be taken to recover these receivables, which will improve liquidity and profitability. There will be no need for bank overdrafts. A strategic partner may not be necessary if the above plan is strictly, professionally implemented by right persons.
(The writer has consultancy experience from 1994 to date both as Local and International consultant. His consultancy experience is mainly state projects funded by international funding agencies like ADB, World Bank and others).