Emirates will quit its management contract with SriLankan Airlines following a public spat after the Sri Lankan government withdrew the work permit of Peter Hill, Emirates' secondee and CEO of the Colombo-based carrier.

The trouble started when SriLankan refused to offload 35 passengers on a London Heathrow-Colombo flight in order to accommodate President Mahinda Rajapaksa and his entourage. The government owns 51% of the airline while Emirates holds 43.6%, and negotiations have been underway for 18 months to renew an eight-year-old management contract.

EK now faces the prospect of divesting some or all of its stake. It purchased 40% for US$70 million in 1998 when the management agreement was forged and picked up the remainder at a later date. President Tim Clark has suggested a selling price of US$150 million, according to the Sydney-based Centre for Asia Pacific Aviation, which indicated that there are doubts surrounding the value of the airline. "Sri Lanka benefited from India's restrictive international aviation policy, and thanks to its relative openness towards the small island neighbor, Colombo became India's major sixth-freedom gateway hub," CAPA said.

However, India since has liberalized its international routes for its own airlines, eroding Colombo's importance. Last year the Sri Lanka government set up a new low-cost airline called Mihin Lanka, which is operating head-to-head with SriLankan on routes such as Colombo-Dubai. Compounding the situation, Rajapaksa has been ineffective in taming the Tamil Tiger rebel groups that have dampened tourism to the country.