“Despite the financial challenges facing the Airline, SriLankan remains steadfast in its commitment to the country...”
This was how the Annual Report for Financial Year ending 31st March, 2009 concluded in which SriLankan Airlines sunk into the red reporting a loss of Rs. 9.3 billion from a profit of Rs. 4.4 billion recorded in its previous financial year. Since that financial year and up to the end of 31st March 2017 – a span of only eight years, the airline has accumulated a staggering loss of around Rs. 140 billion.
The 2009 Report was significant for both Sri Lanka’s flagship national carrier and the country as it marked the first partial year of operation managed by appointees of the government of Sri Lanka. This followed the controversial termination of a 10 year management agreement held with UAE-based Emirates airline entered into by the former President Kumarathunge’s regime in April 1998.
It was also the first time for Nishantha Wickremasinghe – the brother-in-law of ex-president Mahinda Rajapaksa to sign the report as Chairman having been appointed to the position at the end of September 2008. At the time Wickremesinghe took over, Chamal Rajapaksa, the brother of President Rajapaksa held the portfolio of the Minister of Aviation, the subject Ministry in which the airline fell under.
“In 2008/9, even before the new Senior Management Team was appointed, the Airline suffered a staggering “air transportation” loss of Rs. 5.8 billion in the first quarter, simply by following the operational policies that it had been left with,” stated the then newly appointed Chief Executive Officer, Manoj Gunawardena, passing a share of the blame on the losses for that year on the operational policies followed by Emirates.
However, if one is to go by the reported performance of the airline since the takeover from Emirates, the carrier has clearly nosedived financially into a much worse situation and is now a major burden on the taxpaying public.
While the accumulated profits during the period Emirates managed SriLankan Airlines was around Rs. 4.4 billion, losses incurred in the seven years, from 2008 to the end of 2014, under the local management appointed by the previous regime was around Rs. 100 billion.
“By 2015, the national carrier’s accumulated losses stood at Rs.128 billion with a debt of Rs.76 billion and balance sheet discrepancies of Rs.74 billion. On the other hand, the staff of 5,113 in 2008, was also increased to 6,987 by 2015 heavily raising the operational cost of the airline,” authoritative sources said.
Explaining the reasons behind the continued losses at SriLankan, President of the Airline Pilots Guild of Sri Lanka, Captain Ruwan Vithanage said it has been primarily due to political appointees who have little or no experience in the industry holding key positions and making unsuitable decisions with a negative long term financial impact whilst bringing disrepute to the airline.
“Accountability, wanton mismanagement and misuse of company resources are yet to be addressed,” Vithanage highlighted.
While the mounting debt crisis at Sri Lankan airlines has forced the new government to seek international partners to inject capital and manage the airline, there have been no successful takers so far. Even if a partnership is managed, there is almost no doubt that the liabilities of the airline in its current state would have to be taken on by the Government. Adding to the woes, public perception of the airline as a ‘den of corruption’ has also diluted prospects of finding potential private partners who would be willing to infuse capital and revive SriLankan, say sources at the airline.
Delivering a keynote address recently, World Bank Country Director for Sri Lanka and the Maldives Dr. Idah Pswarayi-Riddihough said that between 2012 and 2015, the net transfers from the Treasury to Public Enterprises amounted to 460 billion rupees, amounting to more than the health budget of Rs. 380 billion rupees. Restructuring public enterprises like SriLankan, which have the potential to become profitable if better managed, must therefore be a priority, experts say.
Restructuring SriLankan
With a new government in place in January 2015, the new administration of SriLankan Airlines under the Chairmanship of Ajith Dias kicked off a restructuring exercise aimed at repositioning the carrier primarily as a regional airline. This was in consideration of the fact that Asia is the engine of growth of the global economy today and India and China to be the major markets.
Although the Board successfully reduced costs through steps such as route rationalization and amalgamation of Mihin Lanka and SriLankan Airlines as one entity, decisions such as the termination of four A350 aircraft leases entered into during the previous regime, dealt a severe financial blow.
“In addition to the negative impact of the foreign currency fluctuations and the increased finance costs in comparison to the previous year, the Company had to incur a one-off cost of LKR 14.3 million associated with the cancellation of three A350-900 aircraft lease agreements.
“The decision to terminate these lease agreements was based on a series of detailed evaluations and advice of international aviation consultants. Despite the negative impact on the current bottom line of the Company, the cancellation of these agreements was considered the most viable option to ensure the future sustainability of the Airline,” Chairman Ajith Dias told stakeholders in the 2017 Annual Report.
During the financial year ended March 31, 2017 net loss of SriLankan Airlines drastically increased to Rs. 29 billion from a loss of Rs.12.6 billion suffered in the previous financial year.
New Board
Early this month, the government appointed a new Board of Directors, under the Chairmanship of Ranjith Fernando with a view to accelerate the restructuring process and create the enabling environment to proceed with entering into a public-private-partnership with a strategic investor.
“If we can convince the top executives at SriLankan Airlines that we cannot go on like this by living on public funds, I am confident that we can turn things around,” says Fernando, whose success in restructuring the formerly state-owned National Development Bank is cited as a key reason for his selection to the position.
Initiating a self critique, he points out that the government has appointed a smaller Board of five comprising of all professionals and asserted that “it is not a politically-colored Board in that sense”.
“We as a Board have also decided that we are not going to draw a cent as salary. Because, you are living on public funds and there is some pride in all of us,” he says estimating that the carrier had suffered a loss of around US$ 100 million in the 2018 financial year.
In addition, he points out that the airline is reeling in debts to the tune of US$ 750 million largely owing to aircraft leasing contracts entered into previously on disadvantaged terms compared to the market rates that prevailed.
“On top of that we have some local borrowings from local banks as well. As a result, you can never run the airline at a viable level with these kinds of debts hanging over you,” Fernando highlighted.
He notes that although there is a restructuring Committee called a Public Private Partnership Unit appointed by the government in order to secure a private party to invest (perhaps an airline similar to the Emirates restructuring joint venture), with the current state of SriLankan’s finances, it is however difficult to solicit a strategic investor unless they see a way of reviving it.
Outlining that execution of restructuring plans was the way forward, Chairman Fernando said Nyras, the international aviation consultant hired after a competitive bidding process by the government, have laid down ten priority measures that need to be taken. Their proposals consist of re-examining the route network, re-negotiating the leases, cancelling unnecessary purchases already made, shedding excess staff and re-negotiating terms on local borrowings.
“The new Board is studying their (Nyras) proposals and implementations of these plans will commence soon after deliberations with all stakeholders,” the Chairman said.
It is learnt that Nyras was retained to carry out a strategic options review of viability and opportunities for SriLankan Airlines last year with a requirement to deliver break-even profitability within two years. This report had enabled the government to clearly understand the underlying performance and issues facing their national airline, and to implement a number of critical restructuring initiatives.
“When analysis was complete, our team, together with the SriLankan Airline’s executive committee, prepared initial presentations containing strategic options, findings and recommendations for the Board of Directors, and then to government ministers. Following these meetings, Nyras was asked to write a detailed report with the evidence, findings and recommendations of each strategic option, complete with financial evaluations in terms of profit, cash flow and balance sheets,” the firm stated on its website.
Explaining some of the proposals set for implementation, Fernando noted that the new Board will reassess the suitability of planes used on both long haul flights and short haul flights with a view to reduce operational costs and examining route viability.
Noting that the Airline has inherited a Purchase Agreement for the delivery of four A350 aircraft in 2020/21 which have no relevance in the context of the restructured business plan, he said the new Board will soon commence negotiation with suppliers towards amending the deal.
“The earlier Board had cancelled a similar order and had to incur a penalty. Now we are trying to renegotiate to try and not get a penalty by swapping those aircraft to what we need. What we have ordered is wide-bodied aircraft which we don’t need and we are hopeful of getting what the airline needs without incurring a penalty,” he said.
Disclosing that the consultants have also observed that the airline had an excess staff of about 2,000 from the total of 7,000 employees, however, he said retrenchment of staff will not be one of his Board’s priorities.
“When you get to human beings, it’s a very difficult thing which we have to tackle quietly People will say it is not the staff who have created the problem but it is the top. So, to start from there is not the best option,” he said.
Pics by Susantha Wijegunasekara
Pilots’ union speaks up on how to rescue the national carrier
The Airline Pilots Guild of Sri Lanka (ALPGSL) last week said they were supportive of any positive restructuring plan devised and executed by competent individuals with an in-depth knowledge in the required fields and the required experience needed to restructure successfully.
In an interview with The Sunday Observer, President of the ALPGSL, Captain Ruwan Vithanage also highlighted some of the most important factors that need to be addressed to resuscitate the ailing airline.
The following are excerpts from the interview;
Q: What do you think of the planned restructuring process by the new Board of SriLankan Airlines? Do you oppose restructuring?
A: The intention of the ALPGSL has always been to ensure that our company functions as a sustainable and successful business entity.
We are supportive of any positive restructuring plan devised and executed by competent individuals with an in-depth knowledge in the required fields and the required experience needed to restructure successfully. However, we at this stage have not received any detailed restructuring plan.
Q:What are the recommendations of your Union to solve the present financial crisis at SriLankan Airlines?
A: A few of the important factors that need to be addressed among others are;
The immediate renegotiation of aircraft lease costs which are well above industry norms
A competent board conversant with the demands of the industry and appointment of experienced and result oriented industry professionals to key positions
Identify the objectives and business model of the national carrier.
The Government should consider if the national carrier is to be solely a profitable venture or be a foreign exchange earner by way of promoting Sri Lanka as a holiday destination and bringing in tourist who will bring in the much needed foreign revenue whilst also helping the employment status of locals especially in the hotel industry. This foreign exchange revenue brought in is not quantified or reflected by the national carrier’s route profitability. In this context, the GOSL cannot depend on other carriers to promote tourism in Sri Lanka, as most major airlines promote their own countries by way of events such as shopping festivals or formula 1 races etc. Promotion of Sri Lanka as a travel destination should be a joint effort of the Sri Lanka Tourist Board and SriLankan Airlines. The airline’s contribution to the national economy is totally overlooked. The airline cargo carriage per day is 715 me tons in the network and carry 16000 -17500 passengers in a day and prior to pulling out from Europe we carried 67% of the tourists to the country
Is it a full service carrier or budget carrier? SriLankan needs to identify its business model, no Airline can be sustainable if it is charging premium prices and offering a budget service to passengers.
The utilization of aircraft specific to destinations needs to be reevaluated. For example we have downsized to a narrow body aircraft to Hong Kong which operates 5 times a week whilst our competitor on this route has increased their frequency to a daily wide bodied aircraft service and a separate cargo freight operation.—- we lost USD 23000/- per flight in cargo revenue and HKG has been a good cargo hub for us
Q: What should a restructuring process of the airline include? What areas should not be touched, how should management changes take place?
A: We reiterate that a successful restructuring process should include a comprehensive long term business plan suitable for our operation and the objective of the GOSL being devised and carried out by competent professionals. The Guild has serious reservations on downsizing the route network and regionalizing the airline with focus only in Asia, due to the rapid expansion of airline route networks in China and India and also the low cost carriers that are operating in the same region. Sri Lanka is ideally geographically located so that it can bridge the west, east and Australasia in a spoke and hub concept of operation. Our core product and image should not be compromised and focus should be on enhancing it.
5. In hindsight, do you think quitting the Emirates agreement in 2007 and not re-negotiating for an extension was a bad idea?
The ALPGSL is not aware if there were efforts of re-negotiating the agreement or the objectives and concerns of the then Government for not pursuing such an option. What is obvious is that the losses have been a major burden to the economy under those appointed to manage the airline since the agreement lapsed.