Unprofitable Sri Lankan Airlines looks to cut costs with revitalized Airbus fleet

Loss-making national carrier Sri Lankan Airlines has signed a provisional deal with Airbus worth $1.3 billion to buy six A330-300 and four A350-900 aircraft between 2014 and 2023 to replace ageing aircraft, the state-run firm’s CEO told Reuters.

The airline, seeking to modernise its fleet to cut fuel costs, will opt for Rolls-Royce Plc engines and use a lease-back arrangement to conserve cash, Chief Executive Officer Kapila Chandrasena said in an interview.

“The total cost altogether is going to be around $1.3 billion. But deliveries are progressively from 2014 to 2023 on a staggered basis,” he said. The carrier signed a memorandum of understanding on the purchase with Airbus last Friday, he said.

Sri Lankan Airlines now operates with a 22-aircraft fleet including seven A320-200s, seven A330-300s, six A340-300s and two Twin Otters.

Chandrasena said the national carrier needs to replace all six A340-300s with A330-300 aircraft and all seven A330-300s with A350-900s.

Sri Lankan, which had been managed by Dubai’s Emirates Airline for a decade until 2008, aims to achieve a modern and fuel efficient twin-engine fleet by 2023.

The A340 has lost favour with airlines due to the cost of running four engines in an era of high fuel prices. Airlines are switching to lightweight new-technology airplanes such as the carbon-fibre A350 and Boeing Co’s 787 Dreamliner, but sales of the older A330 have held up better than expected due to its availability and competitive pricing, aerospace analysts say.

Boeing offer

Chandrasena said the airlines considered offers by both Airbus and Boeing.

“We looked at who is giving more value for us. In that discussion, it was apparent that the Airbus offer of A330-300s in the interim and long-term A350-900 is much more favourable than the Boeing,” he said.

“Boeing did not have interim aircraft. They were only interested in the long-term offer, which was the 787.”

Sri Lankan Airlines estimates that it incurred a loss of $134.8 million in the 2012/13 financial year to March 31, similar to the previous year, and is finding it difficult to finance new aircraft purchases.

“We don’t have cash,” Chandrasena said. “So what we are doing is a sale and lease.”

He said the airline would work with either a financial institution or a leasing firm that would buy the aircraft and lease them back to the carrier.

He said the national carrier would be looking at a lease period of 10 to 15 years, with a shorter period for the A330-300s and a longer period for the A350-900s.

“We are talking to various (leasing companies) right now about the sale and lease-back on the six 330-300s,” he said.

The airline operates about 253 flights a week out of Colombo to European, Middle Eastern and Asian destinations.

Chandrasena said in February that, with fuel comprising half the airline’s costs, its ageing, inefficient planes were a heavy drain on profit.

It has the extra burden of having to operate unprofitable European routes, because the country’s economy, hard-hit by a 26-year war that ended in 2009, relies heavily on tourism.

The airline, which is 51 percent state-owned, is expected to break even, or be close to that point, in the 2015/16 financial year.

Additional reporting by Tim Hepher in Paris. Editing by Edmund Klamann.

Copyright (2013) Thomson Reuters.