SriLankan Airlines Strategic Restructuring

SriLankan Airlines is a loss-making and strategically significant national carrier. The core air-transportation business has 52 routes, of which 14 routes have been profitable and 38 routes are non-profitable, compared to the subsidiary ground handling, catering and engineering business based in Sri Lanka, which is a highly profitable monopoly (Daily FT, 2025).

Even though the Group has contributed significantly to tourism (an estimated 25 percent of total tourist arrivals) and its operating profit before finance costs and exchange effects is recovering, the Group incurred a net loss of LKR 2.7 billion in 2024/25, mainly attributed to a very high net finance cost of LKR 31.6 billion and a highly leveraged balance sheet (EconomyNext, 2025).

Interest-bearing debt is now approximately LKR 177 billion, with lease liabilities of around LKR 109 billion, plus significant historical liabilities from terminated aircraft contracts and unpaid invoices. The airline has required frequent cash injections into the Treasury (LKR 106 billion in FY24 and an extra LKR 20 billion in January 2025) to remain operational.

In light of IMF-imposed restructuring and repeated failures of earlier turnaround efforts, this report proposes a narrowed-focus strategy:

• Fly only the routes with a history of profitability, focused on wide-body flights (approximately 10–14 routes).
• Stop all non-profitable and narrow-body flights (India specifically).
• Revise the business model to concentrate on long-haul, wide-body, cargo-driven operations.
• Sell a minority stake in the profitable SBUs via partial listing or equity sale to fund deleveraging and restructuring.

The five-year financial model in USD indicates that while Year 1 is a loss-making year due to one-off lease termination and redundancy expenses, the restructured network achieves positive free cash flow momentum and route-level margins of 8–10% from Year 2, with Group-level net profit improving steadily over time.

It is recommended to the Board that the airline be restructured immediately around an all-wide-body, profitable-route network, backed by a well-timed programme of SBU monetisation and debt restructuring — rather than full privatisation or closure at this stage.

Revenue, Profitability and Traffic

During FY 2024/25, SriLankan Airlines realized total Group revenue of about LKR 296–334 billion and an operating profit (excluding exchange gains/losses) of about LKR 30.7 billion. Nevertheless, the Group experienced a net loss of LKR 2.7 billion after deducting finance expenses and exchange effects (srilankan, 2025).

Operationally, the airline achieved 14.7 billion ASKs of passenger capacity with an almost 79% passenger load factor, and a total load factor (including cargo) of nearly 70% — lower than the breakeven load factor of 76.2%. This means the network is functioning below economic breakeven on average, although passengers are willing to take the flights.

Fleet and Network

As of 31 March 2025, the airline had a fleet of 21–22 aircraft, including 9 wide-body and 12–13 narrow-body aircraft. The route network comprises 52 routes, of which only 14 are profitable and 38 are loss-making. All 15 Indian routes are unprofitable, and five of them do not even cover direct operating costs (DOC).

Wide-body routes — especially to London, Melbourne, Sydney, Singapore, Dubai and Male — are usually profitable compared to narrow-body operations, and most domestic-adjacent routes, especially India, are usually value killers (srilankan, 2025b).

Subsidiaries and SBUs

The Group's subsidiaries in ground handling, catering and engineering contribute approximately 10 percent of total revenue but generate about USD 57.7 million combined profit with very high margins (ground handling 56%, catering 89%, engineering c.5%). These SBUs operate as local monopolies within Bandaranaike International Airport, which underpins their profitability.

Debt, Lease Liabilities and Treasury Support

Interest-bearing debt is approximately LKR 177 billion, including a USD 175 million bond guaranteed by the sovereign. Lease liabilities are close to LKR 109 billion, with an estimated monthly lease cost of USD 10.7 million. The airline also carries significant historical liabilities to suppliers, especially Rolls-Royce, with LKR 12.6 billion and USD 179 million paid in penalties, interest, and unpaid invoices in FY24 (srilankan, 2025b).

The airline is heavily dependent on the Government of Sri Lanka for cash injections: LKR 106 billion in FY24 and LKR 20 billion in January 2025 — indicating severe liquidity distress.

Key Financial Challenges (Top Three)

1. Unsustainable leverage and finance costs – Operating profitability is more than counterbalanced by net finance costs of LKR 31.6 billion in 2024/25, driving the Group to a net loss. This reflects excessive interest-bearing debt, the USD 175m bond, and legacy debts, all restricting cash flow and strategic options.
2. Structurally loss-making route and fleet mix – The network is structurally unprofitable, with 38 of 52 routes making losses and all 15 Indian routes operating at a loss. Narrow-body flights lose money and cannot capture the belly-hold cargo revenue that wide-body aircraft enjoy.
3. Chronic liquidity dependence on the Treasury – Massive and repeated government cash injections to finance working capital and debt service underscore a structural liquidity issue. Banks are averse to lending further, and debt restructuring remains incomplete.

External Factors Affecting Performance

Fuel price volatility – Jet fuel remains the largest operating cost. Recent fuel price drops reduced operating expenditure, partly offsetting other cost pressures, but any rise in global oil prices would increase DOC and the breakeven load factor, especially on marginal routes (Gaudenzi & Bucciol, 2016).

Foreign exchange and currency mismatch – The majority of revenue is earned in foreign currency while a large part of costs (salaries, local services) are in LKR. Meanwhile, a large share of debt and leases is denominated in foreign currency, creating material exchange gains/losses on revaluation that affect reported profitability and cash flow.

Competition and market dynamics – Bandaranaike International Airport is served by more than 30 foreign airlines including Emirates, Qatar Airways, Singapore Airlines, Etihad, Air India, IndiGo and Turkish Airlines. These carriers are regaining post-pandemic capacity, pressuring yields and market share, especially where SriLankan operates older aircraft with higher unit costs (dailymirror, 2025).

Tourism demand – 2024 saw a record 2.1 million tourist arrivals, the highest since 2019, led by India, followed by Russia, the UK, Germany and China. SriLankan Airlines transported 3.7 million passengers, contributing to about 25 percent of all tourist arrivals — a strategic national contribution — though fleet constraints and network inefficiencies limited the airline's ability to fully capitalise on this demand upswing.

Chosen Strategy: Restructure and Downsize to a Lean, Wide-Body-Focused Carrier

Among the available options (sale, pure cost-cutting, SBU monetisation only, or closure), this report recommends a Restructure and Downsize strategy with the following main elements:

• Focus on a selective portfolio of traditionally lucrative wide-body routes (London, Melbourne, Sydney, Singapore, Dubai, Male, Tokyo, Lahore and Guangzhou).
• Exit narrow-body flying, particularly the unprofitable India network.
• Re-orient the business model toward high-yield passenger segments and high-cargo routes, maximising belly cargo revenue on wide-body aircraft.
• Support the restructuring through partial monetisation of SBUs (e.g. 49% of Ground Handling, Catering and Engineering) to raise equity, deleverage, and finance one-off restructuring expenses.

Rationale for the Decision

1. Focus on proven profit pools – Route profitability analysis reveals uneven performance across all 52 routes (14 routes with profit exceeding USD 45.5m; 38 routes with losses totalling USD 72.1m). Focusing capacity on established profitable routes immediately improves the average RASK-CASK spread and minimizes exposure to structurally unprofitable markets.

2. Cargo as a strategic revenue driver – Cargo represents 18–27% of route revenue on a large number of money-making wide-body routes, strongly correlated with route profitability. Narrow-body planes lack this belly-capacity advantage. Transitioning to an all-wide-body model enables the airline to tap into cargo growth and yield stabilisation (Dewulf et al., 2019).

3. Cost and complexity reduction – Exiting the narrow-body business simplifies fleet type, maintenance, crew training and scheduling. The business plan projects savings of about USD 90m annually in lease costs, USD 20m in crew costs, and USD 400m in DOC and route-related costs after exiting loss-making routes and narrow-body flights.

4. Political and social feasibility versus closure – Complete shutdown, although financially conclusive, would trigger very high short-term liabilities (over LKR 500 billion) and significant social and political costs. A controlled downsizing, supported by SBU monetisation and already-underway debt restructuring, is more politically viable while preserving vital national connectivity and tourism provision.

5. Alignment with IMF-mandated restructuring – The IMF has made airline restructuring compulsory, and the government has already begun debt restructuring. A credible, factual strategy that demonstrates a path to financial sustainability strengthens the Government's negotiating position with creditors and multilateral institutions (dailymirror, 2025b).

Expected Financial Impact

• Year 1 revenue falls by approximately 53% due to exiting unprofitable routes and narrow-body operations; thereafter, revenue rises 5% per year on a smaller, more profitable base.
• DOC is reduced through capacity optimisation with demand, saving approximately USD 400m/year.
• Lease expenses reduce to USD 62m/yr after fleet rationalisation (previously USD 149m/yr).
• Crew and route costs are dramatically reduced as narrow-body crews are retrenched and loss-making stations are closed.

The net profit at Group level remains negative in the early years despite substantial cost reductions, due to high finance costs. However: route profitability improves to 8–10 percentage points, offering a viable core business; and free cash outflows decrease year on year, enhancing debt service capacity — particularly after debt restructuring and SBU monetisation take effect.

Risk Analysis

Political and governance risk – SriLankan Airlines has historically been subject to political interference, discretionary appointments and poor strategic implementation. Unions, employees, and political stakeholders favouring the status quo pose the greatest risk to execution.

Operational and labour risk – Station closures, route cancellations, aircraft returns and layoffs cause operational disruption and labour challenges. Strong pilot unions and guilds could lead to industrial action; an effective yet fair redundancy programme with clear criteria and compensation is essential.

Market and demand risk – Concentrating on fewer routes increases exposure to shocks in those specific markets (e.g. demand drops in the UK, Australia, or the Middle East, or loss of traffic rights), alongside ongoing fuel price and FX volatility.

Financial and restructuring risk – Lease termination costs, debt restructuring assumptions, and SBU valuation assumptions may prove optimistic — for example, sub-optimal market conditions could yield less than the ~USD 150m estimated from SBU listing, compromising deleveraging and extending the time to positive net profit. Mitigation includes conservative financial assumptions, incremental implementation, and sensitivity analysis.

Revenue Projections

The revenue forecast is built on the route/fleet rationalisation scenario: FY24 traffic revenue was USD 920m across the full 52-route network; Year 1 revenue declines to USD 433m (a 53% decrease) following the exit of loss-making routes and narrow-body flying; thereafter, revenue increases 5% annually as capacity and pricing are optimised on profitable routes and the cargo strategy improves.

Within this, passenger revenue is expected to remain dominant (75–80% of total), cargo contributing 18–22% on major wide-body routes, consistent with current profitable route patterns. Ancillary revenue (baggage fees, seat selection, other services) is expected to grow gradually alongside distribution and digital initiatives, though it remains a small percentage. Ground handling, catering and engineering subsidiary revenues are expected to continue, though partial deconsolidation may occur if stakes are disposed of; SBU profits are treated as contributing to cash flow available for debt service and restructuring.

Direct Operating Costs

Direct operating costs (DOC) — fuel, navigation, airport fees, maintenance and route-specific salaries — follow the business plan assumptions: DOC falls from USD 690m in FY24 to USD 298m in Year 1 as capacity is significantly cut, then increases progressively with traffic to USD 362m by Year 5. The DOC margin (DOC/revenue) improves in the restructured years to approximately 69%, compared to 75% in FY24, as long, efficient wide-body flights increase within the operation.

Lease expenses reduce from USD 149m to USD 62m annually through returning or subleasing narrow-body aircraft and renegotiating terms where feasible. Crew costs are reduced substantially as narrow-body pilots and cabin crew are retrenched, with a one-off redundancy cost of about USD 13m in Year 1. Other route costs (station overheads, sales, handling) scale proportionally with the reduced network.

EBITDA, EBIT and Net Profit

To bridge route-level profit and Group-level performance, the model incorporates: head office, IT, global sales and administration overhead at 9–10% of revenue initially, decreasing to 7% by Year 5 as complexity declines; depreciation and amortisation of approximately USD 35–40m per annum, representing owned assets and capitalised heavy maintenance; and net finance costs projected at about USD 100m in FY24, decreasing to USD 75m by Year 5 as debt is restructured and repaid partly through SBU monetisation proceeds and free cash flow.

Under these assumptions, EBITDA remains positive throughout, ranging from approximately USD 8m in Year 1 to approximately USD 50m in Year 5 as revenue and margins recover. Group-level net profit/loss remains negative in the early years due to high interest costs, but losses reduce consistently, providing a plausible path toward breakeven and profitability beyond Year 5, assuming deleveraging continues.

Free Cash Flow and Funding Requirements

Free cash flow is approximated from net profit and depreciation; no substantial growth capex is planned given the downsizing, with maintenance capex largely embedded in DOC. FY24 and Year 1 show high negative free cash flow, driven by one-off lease termination and redundancy expenses. From Year 2 onward, free cash outflows decrease year by year as operating cash improves and finance costs decline.

The plan envisages three main funding sources:

1. Restructuring of the USD 175m bond and state-owned bank loans over a five-year period, as noted in the annual report.
2. SBU monetisation – listing up to 49% of Ground Handling, Catering and Engineering to raise approximately USD 150m, applied to debt repayment, lease buybacks and working capital.
3. Restricted additional Treasury assistance on a tapering schedule, tied to specific performance benchmarks and IMF conditionality.

Strategic Recommendation to the Board

Financially, it is clear that the best available option is to continue operations under a radically restructured and downsized business model, rather than the status quo, aggressive fleet growth, or airline closure. Specifically, the Board is recommended to:

1. Approve an all-wide-body, profitable-route network strategy – dropping all unprofitable and marginal routes, particularly the India network and narrow-body services, and focusing capacity on approximately 10–14 historically profitable wide-body routes (Burns et al., 2023).
2. Implement a sequenced restructuring programme over 18–24 months – following the staged business plan: preliminary modelling, consultation, Board and shareholder approval, establishment of an implementation office, and gradual route and fleet change.
3. Accelerate SBU monetisation and apply proceeds to deleveraging – a 49% listing/sale of equity in the ground handling, catering and engineering SBUs (combined valuation of approximately USD 310m) can legitimately raise around USD 150m for debt and restructuring costs.
4. Complete debt restructuring in alignment with IMF and Government objectives – restructuring current state-bank loans and the USD 175m bond within five years, with suitable haircuts and tenor extensions, leveraging the credible financial plan to secure creditor support.
5. Strengthen governance, risk management and execution discipline – requiring non-politicised leadership, clear accountability, and robust enterprise risk management, as highlighted in the annual report's risk outlook.

Financial Justification

From a financial perspective, the proposed plan offers several advantages:

• Improved operating economics – route-level margins increase to around 8–10% on a lean network, supported by higher cargo shares and more efficient wide-body utilisation.
• Reduced cash burn – DOC, lease and crew cost savings of several hundred million USD per year markedly reduce negative free cash flow and reliance on the Treasury.
• Deleveraging capacity – SBU monetisation and improved operating cash flows create headroom for debt restructuring, gradually reducing the net finance cost burden currently driving net losses.
• Improved debt service capacity – while the plan does not achieve immediate positive net earnings, it materially strengthens the airline's medium-term debt service capacity.

Applying a discounted cash flow analysis to the base case and downside scenarios would likely show that a lean, profitable airline carries a higher net present value than either maintaining the current loss-making structure or the extreme costs of closure and liability settlement.

Board-Style Conclusion (Summary)

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• Daily FT. (2025). SriLankan Airlines: Time to get Govt. out of cockpit | Daily FT. ft.lk. ft.lk
• dailymirror. (2025a, January 24). Rapid growth recorded in passenger, aircraft, cargo movements in 2024: AASL. dailymirror.lk. dailymirror.lk
• dailymirror. (2025b, May). IMF seeks Govt to fast-track restructuring SriLankan Airlines. dailymirror.lk. dailymirror.lk
• Dewulf, W., Meersman, H., & Van De Voorde, E. (2019). The Strategy of Air Cargo Operators: about carpet sellers and cargo stars. In Advances in Airline Economics (pp. 167–199). https://doi.org/10.1108/s2212-160920190000008008
• EconomyNext. (2025, November 26). Sri Lanka records lower tourism revenue after revision in per day spending: CB. economynext.com
• Gaudenzi, B., & Bucciol, A. (2016). Jet fuel price variations and market value: a focus on low-cost and regular airline companies. Journal of Business Economics and Management, 17(6), 977–991. https://doi.org/10.3846/16111699.2016.1209784
• srilankan. (2025a). Annual Reports. srilankan.com. srilankan.com/en_uk/corporate/annual-reports
• srilankan. (2025b). SriLankan Airlines Annual Report 2024/25. srilankan.com. srilankan.com