The restructuring of SriLankan Airlines is emerging as a critical test of Sri Lanka’s commitment to fiscal discipline, as the state carrier navigates bond haircuts, capital infusions, and oversight linked to the International Monetary Fund program.
At the centre of the plan is a Rs. 25.2 billion Government capital injection completed in December 2025. The funds were used to extinguish outstanding state bank debt under a newly agreed restructuring package. The move strengthens the airline’s balance sheet but simultaneously increases direct state exposure, as new shares are issued primarily to the Government.
The recapitalisation follows a sharp deterioration in financial performance. For the year ended March 2025, the airline group swung to a Rs. 2.7 billion loss from an Rs. 8 billion profit the previous year, while revenue contracted significantly. The reversal has intensified scrutiny over the sustainability of state ownership.
A parallel negotiation addressed USD 175 million in Government-guaranteed bonds maturing in June 2024. Talks between the airline’s advisors — Lazard and Norton Rose Fulbright — and an ad hoc bondholder group represented by Akin Gump resulted in a proposed 15% haircut on principal. The remaining claims would be settled via a mix of cash and medium-term Government bonds at 4% interest.
Crucially, the deal requires Cabinet approval and IMF non-objection, aligning the airline’s restructuring with the country’s wider sovereign debt overhaul. By removing the Government’s guarantee liability upon completion, the agreement would reduce contingent fiscal risks a key metric under IMF debt sustainability analysis.
Treasury officials argue that settling 99% of external debt will help stabilise Sri Lanka’s credit outlook and support a future return to capital markets. However, analysts caution that restructuring addresses legacy debt but not structural inefficiencies. Without operational reforms or a credible strategic investor, recapitalisation risks becoming cyclical.
Compounding uncertainty is the leadership vacuum following CEO Richard Nuttall’s departure to Philippine Airlines. A new chief executive will inherit the challenge of restoring profitability while potentially negotiating private-sector participation.
The airline’s future now hinges on whether financial engineering and IMF-aligned oversight can translate into operational turnaround or whether deeper structural transformation will be required to secure lasting sustainability.