* Expects at least $134.8 mln loss in FY 2012/13
* Last year's loss hit record on Europe, fuel costs
* State plans $500 mln investment over five years
* Airline plans borrowing to make up shortfall
By Shihar Aneez and Ranga Sirilal
COLOMBO, Feb 26 Loss-making Sri Lankan Airlines hopes a five-year plan to fly to more profitable destinations and invest in a more fuel-efficient fleet will help it break even in 2015/16, its chief executive said.
Airlines worldwide have been hit by rising fuel costs which bite into profitability, and state-run Sri Lankan has the extra burden of having to operate unprofitable European routes, because the country's economy, hard-hit by the 26-year war that ended in 2009, relies heavily on tourism.
The national carrier, which was managed by Dubai's Emirates airline for the ten years to 2008, made a record loss of 17.18 billion rupees ($134.8 million) in the 2011/12 financial year, from a loss of 202.3 million rupees a year ago.
"I feel the loss is going to be somewhere around last year or even more because we just introduced more capacity," chief executive Kapila Chandrasena told Reuters in an interview.
"The main reason for the loss is we were operating a network where certain regions were making losses, especially Europe, which consisted of 60 percent of last year's total loss."
Last year, half a million tourists visited the island from Europe, fuelling an industry worth $1 billion.
The airline operates about 253 flights a week out of Colombo to European, Middle Eastern and Asian destinations, using a fleet of 22 aircraft. With half the airline's costs spent on fuel, ageing, inefficient planes have also hit profit, he said.
The company now wants to add routes to more profitable destinations, and gradually replace its fleet with newer, more fuel-efficient aircraft.
Chandrasena said under a five-year strategic plan the company would add more routes to India and East Asia to take advantage of rapid economic growth there. The Middle East is also important because of the hundreds of thousands of Sri Lankan migrants working there.
Sri Lankan has already added three new Airbus A320-200, two A330-200s, and one A340-200 to help boost the fuel-efficiency of its fleet. It now has seven A320-200s and seven A330-300s, six A340-300s and two Twin Otters.
"Our plan is to look at, by 2023, having a next-generation fleet of aircraft which are mainly twin-engine fuel-efficient aircraft so that's a progressive replacement over ten years. Initially it'll start with six aircraft in phased-out manner."
The airline, which is 51 percent state-owned, is not planning to increase capacity in the next four years, Chandrasena said, adding that he hoped it would break even, or be close to that point, in the 2015/16 financial year.
However, government plans to invest $500 million over five years, with $100 million per year through 2016, will leave a shortfall for implementing the turnaround plan, Chandrasena said, as the airline needs that funding within three years.
"There is a gap. So we will look for a bridging facility," Chandrasena said. "This year, the plan is to have $140 million. So the plan is to borrow $40 million subject to certain approval. We want to look at the international market."
Last year, it completed a $175 million sharia-compliant four-year loan facility with Abu Dhabi Islamic Bank, Abu Dhabi's Al Hilal Bank, Mashreqbank, Dubai's Noor Islamic Bank and United Bank Limited for additional capital. ($1 = 127.4000 Sri Lanka rupees) (Writing by Shihar Aneez; Editing by Helen Massy-Beresford)