Sri Lanka's government will take back control of flag carrier as Emirates decides against renewing management contract

A decade after Emirates bought into Sri Lanka's national airline and took over its management, the Middle East carrier is walking away and seeking a buyer for its 43.6% stake.

Emirates had for months been in talks with the Sri Lankan government on a possible extension of its management contract for SriLankan Airlines after its 31 March expiry, but negotiations did not go well. Talks fell apart in December after the Emirates-appointed chief executive of SriLankan, Peter Hill, had his work permit revoked following a dispute with Sri Lanka's president.

The dispute began when Hill refused to bump 35 passengers from a full London-Colombo flight to make way for Sri Lanka's president and his entourage. A month later Emirates announced that it had opted not to renew the contract and was looking for a buyer for its stake, which it ­believes is worth $150 million.

Sri Lanka's government insists it has no plans to bring in a new partner to manage the national carrier, formerly known as Air Lanka, and it will "take total control of the national carrier's ­management" from April.

It adds: "The government will remain the major shareholder of the airline and will not divest or sell its shares to any other ­partner/carrier".

Under Emirates' watch, most of it under the leadership of Hill, SriLankan became consistently profitable and modernised its fleet and operations. It is not yet known if codesharing between SriLankan and Emirates will continue.

Its future as Sri Lanka's dominant carrier also looks unclear, as the government last April launched another state-owned airline called Mihin Lanka. Reportedly named after the country's president, Mihin is a low-fare airline that has been progressively expanding its operations, some of them in direct competition with SriLankan, such as to cities in India as well as Dubai and Singapore.

Mihin has already captured over 10% of the market, as measured by departures from the country's only international airport (see chart). It continues to grow quickly and has suggested that it may take over some of ­SriLankan's profitable services to India in future.

The Sydney-based Centre for Asia Pacific Aviation warns of the collapse of the Emirates partnership that "the timing could hardly be worse for SriLankan's ­future", given that nearby India is allowing more of its airlines to operate internationally, resulting in new competition.

CAPA believes that "termination of SriLankan's 10-year agreement with Emirates will mean a lot more than a simple change of management". It says Mihin Lanka's creation last year and steady growth "could now be seen as part of the preparations - or provocations - for termination of the Emirates management agreement. The Sri Lankan government will now take over operational control of the flag carrier, but long-term support for it - of which the government owns 51% - looks likely to be less than wholehearted," CAPA adds.

"An untidy process is now probable, while the transition is navigated," says CAPA.


Source: Airline Business