In 1972, Union de Transports Aériens (UTA) became Air Ceylon's partner, introducing French-made aircraft into the fleet. UTA ended the partnership on 31 March 1977, leaving Air Ceylon without a European aide. In 1978, Air Ceylon was shut down by the Sri Lankan government due to bankruptcy, and Air Lanka was established as new national carrier.
During that period, Air Ceylon offered multiple-stopover flights, which were leaving Colombo on three routes: To Europe, to Australia, and a regional one to India. KLM was the important partner airline, serving as general sales agent for Air Ceylon.
Due to more modern aircraft with a longer range, fewer stops were required on the long-distance routes, reducing travel time. Air Ceylon passengers could reach additional destinations (in Europe and towards Australia) with co-operative BOAC or Qantas flights.
The co-operation with BOAC and Qantas was reduced at that time, instead a codeshare-like agreement was signed with Indian Airlines. As a consequence, Air Ceylon re-launched services to Australia and expanded its European network.
On 7 September 1978, an Air Ceylon Hawker Siddeley HS 748 (registered 4R-ACJ) was destroyed in a fire while parked at Ratmalana Airport. Two pilots had been carrying out pre-departure checkups, when the fire started by the explosion of a bomb in the aircraft cargo hold.