Will 2018 be the year that sees the death of the national carrier, SriLankan Airlines? Or would the airline, which is burdened by massive debts and crippled by management and trade unions that hold opposing views, be able to make itself a viable enterprise once more?
The US$ 740 million debt ridden airline has been struggling to stay airborne these past several years and its future is hanging by the thinnest of threads. In late December, in an attempt to resuscitate the airline, Cabinet approved a US$ 175 million loan from Credit Suisse. It also announced that a new Board would be appointed.
The new loan will only deepen the debt crisis, not only of the airline, but of the entire nation.
The white elephant that the current government inherited has gone through many restructuring programs since its launch in 1979. In the most recent bid to rescue the ailing airline, two committees, a Ministerial committee headed by Prime Minister Ranil Wickremasinghe and an Official committee headed by Treasury Secretary R H S Samaratunga were appointed in November 2017. The Official committee was tasked with finding ways to offset the debt the airline has incurred and finding a partner willing to invest in the enterprise. Meanwhile, the focus of the Ministerial Committee is on policy issues and restructuring management.
While the airline incurred most of its debt during the chairmanship of Nishantha Wickremasinghe, the brother-in-law of then President, Mahinda Rajapaksa, little has been done to stem the trend even under the current government. The airline’s annual report for 2016/2017 posts a 28.2 billion rupee losses compared to 12.6 billion rupees for the previous financial year.
From all accounts, it is apparent that the current management, the CEO, Capt. Suren Ratwatte being the brother of a friend of Prime Minister Ranil Wickremasinghe, has not been prudent in its fiscal handling of the airline.
The only option left now for Srilankan our sources say, is to introduce radical restructuring, and find a buyer. If that too fails, the sources add, declaring bankruptcy rather than the government subsidizing an entity which does not serve 90% of the population, should be the outcome.
Few buy the argument of the tourism sector that closing down of SriLankan would seriously damage the industry. Most airlines, especially the Middle Eastern carriers have an oversupply of aircraft and would be able fill the gap. Similar objections by the tourism industry kept loss making flights to Rome, Paris, Zurich and Frankfurt going for months until it became untenable. No tourism expert has proven yet, that cancellation of the European routes (Srilankan only flies to London now) had a major impact on tourist arrivals from that region.
Sources familiar with the airline industry claim that once bankruptcy is declared, and if planned well, Sri Lanka could launch a new airline within a short time without the burden of carrying forward losses, massive loan repayments, over-staffing, excessive salaries and a fleet of aircraft unsuitable for a regional airline.
Whether it is to be another legacy carrier or a budget airline will be a decision for the government. What is clear, however, is that it would have to focus on being a regional airline, if it is to be profitable.
It took the Yahapalanya government two and half years to face reality, despite a recommendation to declare bankruptcy, by a committee appointed to study the situation in 2015. It would seem as though Prime Minister Ranil Wickremsinghe, was reluctant to implement any drastic action to restructure the airline, following the appointment of his school friends from Royal College to the Board.
Instead, in his usual ‘kick the can down the road’ style he appointed a team of FOREIGN Consultants to advice the government. The irony is that, after two and a half years, and losses incurred in terms of payments to the team, and the airlines debts, the foreign consultants have come up with the same recommendation.
It was at this juncture that Presidential intervention, in terms of a commission of inquiry was announced.-. Last week, a Presidential Commission of Inquiry was appointed to investigate both SriLankan Airlines and Mihin Lanka. While a Presidential inquiry should have been initiated in 2015, its appointment at this point seems to be more of a political nature rather than to save the airline. No doubt such an inquiry will force senior officials of the Airline to spend their time defending their conduct.
The need of the hour is a new Board of Directors, made up of competent professionals who would be unafraid to make tough decisions. It would mean re-negotiating the purchase and lease agreements of aircraft, (cancelling or changing the three A350’s to A320’s) and the fleet ordered by the Rajapaksa regime.
Industry sources point out that the airline is burdened with too many employees, nine unions, and outdated work practices. Additionally, the fleet needs overhauling they say, with more of the smaller A320’s and less of the A330’s and certainly no A350s.
Clearly, the current management team too is attempting to steward the airline towards a more cost-effective enterprise. In a letter to the staff in mid-December, its CEO Capt. Suren Ratwatte wrote that “a much leaner, fitter and more nimble airline, which can respond quickly to changing market forces, is a task we must accomplish ourselves.”
The Airline’s Unions however are adamant that a new management team is needed, claiming that any restructuring that takes place under the current management will be to no avail. An appeal, the government seems to have taken note of, with its announcement in December that a new Board would be appointed.
It is no secret that today’s airline industry, especially in the Asian region is facing immense pressure; increasing fuel costs, low fares and more competitors in the market, have placed many an airline in an untenable situation.
For SriLankan then, the external issues are exacerbated with its own internal demons; old aircraft needing refurbishing, purchasing new ones at higher prices, choosing aircraft models that are not suitable for the present need, government ownership, political interference, and the unions, whose demands must also be considered.
Back in 1999, as a solution to the huge loses the carrier was making the Chandrika Kumaratunga administration sold a 40 percent equity stake in Air Lanka to Emirates.
The Dubai-based carrier rebranded the airline as SriLankan and turned it into a profitable entity. In 2008 SriLankan was making a profit of Rs. 4.4 billion. Troubles began once again, when the government of Sri Lanka led by then President, Mahinda Rajapaksa decided to buy back the stake owned by Emirates.
It all started over a spat involving the CEO’s refusal to dump paying business class passengers to accommodate a presidential entourage flying back from London after an official tour. The former President had the contract with Emirates terminated, and asked its CEO to leave the country.
Then the Rajapaksa government set about purchasing a fleet of airbuses without a proper business plan, incurring great losses to the national carrier, despite the fact that the airline was already in financial trouble. Under Emirates management, there had been a 30% reduction of its staff cadre, which the Rajapaksa regime brought back. The cadre that was at about 5000 in 2008 had increased to 7870 by the end of 2015. Furthermore, sources claim, all employee agreements had been re-written, with increments and benefits for all.
The re-fleeting programme initiated by the Rajapaksa government amounting to $2.3 billion is currently under investigation. The airline was at the time, under the Chairmanship of Nishantha Wickremasinghe, Rajapaksa’s brother-in-law.
With urging from government leaders, including P. B. Jayasundara, the then Treasury Secretary to ‘buy the latest state of the art equipment.’ six A330-300 were bought directly from Airbus (an aerospace company). Informed sources claim that the purchases were made at a rate that was at least US$ 25 million more per air craft. A seventh A330 had been ordered, and leased for US$ 950,000, while the six ordered earlier, had been leased at US$ 1.1 million per month, per aircraft.
This was followed by a decision to purchase eight more of the latest model aircraft of the Airbus Industrie, – A350, at a cost of US$ 175 million per plane, which sources allege was way above market prices at that time. These were to replace, six A330-200’s which had been bought by Emirates. Four of the A350’s that were purchased directly from Airbus with a delivery date in 2020 were later cancelled by the present government incurring a penalty of US$ 115 million.
To add to its woes, resurfacing of the tarmac at Bandaranaike International Airport in 2017, resulting in cancellation of 600 flights, contributed towards loss of revenue. There had been, however, profits from its Strategic Business Units, such as Catering and Ground Handling, following significant improvements in performance.
In a bid to increase minimise losses, three Airbus-330’s were leased to Pakistan International Airlines (PIA) in August 2016. In March last year, the management of the PIA returned an Airbus-330 that had been taken by them on a wet lease with pilots, engineers and cabin crew staff, claiming that it was not profitable.
Even while four members of the Board disagreed, and negotiations were ongoing with the PIA, SriLankan’s management decided to extend the lease of the three aircraft with SASOF11 Aviation, Ireland for a further 72 months. Attempts to cancel the lease with the Irish company, when the PIA deal fell through, saw SriLankan being taken to court in London. The end result was, a high powered committee appointed to investigate the deal, approving the extension of the lease, citing it to be the only viable solution.
It’s plan, in 2017, to have an external investor came a cropper too, when the US based private equity firm TPG Capital pulled out of its deal to buy 49 % stake, in August last year. The government had called for bids to sell a 49 % stake in July last year, hoping to strike a deal by the end of the year. However, with the short-listed partners backing out, that plan was shelved.
In a memo to staff, informing them of that outcome, SriLankan Airlines Chairman Ajith Dias stated, “after completing the due diligence, regrettably TPG have informed us they will not pursue a potential investment in Sri Lankan airlines. It is their opinion that allocating the human and financial resources to make the airline profitable will not realize sufficient returns compared to the many other investment opportunities that are available to them.”
SriLankan’s most profitable routes as they stand today are to the Maldives, South Asian networks and the many destinations in India. Of its long-haul routes, SriLankan does not have a direct competitor to its Tokyo and Melbourne markets.
Given the current industry situation, Airline sources claim that Low Cost Carriers (LCC) are the future, with its lower fares and lower costs in salaries. To move in that direction, SriLankan would also need to streamline its fleet into a single type aircraft. As Capt. Ratwatte claims, of the purchase of two A320neo aircraft and three A321neo aircraft in 2017, ‘these aircraft are perfectly suited for our new strategy, focusing on building regional strength.”
Meanwhile, the Malaysian AirAsia Group, has proposed to set up a low-cost subsidiary in Sri Lanka, “AirAsia Sri Lanka(Colombo Int’l). The proposal which would give 51% stake to the government, will, as a Low Cost Carrier, be a direct threat to SriLankan, which has had to rely on a government loan of LKR 13.2 billion, when the Texas Pacific Group (TPG), decided not to go ahead with its plan to acquire a 49% stake of the national airline.
The net result is that the national flag carrier is now a burden that the country can no longer shoulder. Both the Rajapaksa regime and the Yahapalanya government have made unwise decisions and plundered the resources of the country, as though they were their personal treasures.
ASLIDOMINO
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