By Rajeewa Jayaweera –
Colombo based national carrier of Sri Lanka, SriLankan Airlines (formerly Air Lanka) has announced an unaudited ‘Group Loss’ of LKR 8.9 billion (USD 65 million) for FY ending March 2016, a 46% decrease in losses from previous FY. It is reliably learnt, the loss from airline operations amounts to USD 120 million. During the FY, the airline acquired 5 new aircraft and retired 5 ageing aircraft. The airline is making efforts to cancel the four firm and four optional orders placed with Airbus Industries for A350 aircraft.
Dubai based national carrier of the Emirate of Dubai, Emirates Airlines, the success story of modern aviation, has announced a net profit of USD 1.94 billion for FY ending 31 March 2016, a 56.4% increase in its net profit in the previous FY. During the FY, the airline acquired 29 new aircraft and retired 9 older aircraft. Emirates hope to take delivery of 36 new aircraft and retire 26 older aircraft during the current FY.
SriLankan Airlines, having commenced operations on 01 September 1979 had a head start of six years over Emirates. Table 1 gives the two important indicators vital for any airline in its start-up phase.
Air Lanka, with a paid-up capital of USD 16.6 million in 1979 was better placed than Emirates with a paid up capital of USD 10 million in 1985.
GoSL recently announced the absorption of liabilities amounting to USD 3.2 billion belonging to SriLankan Airlines. This figure, in real terms comprises of accumulated losses of USD 1.2 billion and a contingency liability of USD 2 billion.
Emirates Group Annual Report for 2014/15 (previous year) states, “to date, Emirates and DNATA have generated dividends of AED 14.6 billion (USD 3.97 billion) for the Dubai government. Those dividends have been ploughed back into the economy, helping fund essential infrastructure projects including the various phases of expansion at Dubai International airport and Dubai World Central”.
The start-up background of both carriers reveals many similarities. A glaring dissimilarity is the appointment of a pilot by profession with no management experience as the first Chairman/ Managing Director of Air Lanka who also functioned as CEO compared to the aviation management professional with a proven track record appointed by Emirates to oversee the airline. He carried the title of Group Managing Director.
Air Lanka / SriLankan Airlines
The brain child of then Head of State President JR Jayewardene, Air Lanka was formed as a fully state owned GCEC company. Prime Minister Lee Kuan Yew of Singapore, based on a request made by President Jayewardene agreed to provide assistance and expertise from Singapore Airlines. The airline started operations with two Boeing 707 aircraft leased from Singapore Airlines. Air Lanka took to the skies on 01 September 1979. Its initial destinations during first year of operations were Bangkok, Singapore, Madras, Bombay, Dubai, Abu Dhabi, London, Frankfurt, Paris, Trichy and Trivandrum. The airline came under the direct purview of the Head of State. Its first Chairman / Managing Director Capt. Rakitha Wickramanayake, was assisted by a General Manager, a senior Singapore Airlines staffer sent on secondment.
The brain child of then Minister of Defence HH General Sheikh Mohammad bin Rashid Al Maktoum, Minister of Defence, UAE and member of ruling family of Dubai, he had formed DNATA with four other staff in 1959. In 1985, he co-opted Maurice Flanagan, who had joined DNATA as Director/General Manager in 1978 and nine others to prepare a Business Plan for the formation of an airline. Armed with an approved Business Plan, a grant of USD 10 million and a gift of two leased Boeing 727 aircraft obtained from PIA by the Ruler of Dubai, the airline took to the skies on 25 October 1985. Its initial destinations during first year of operations were Karachi, Delhi, Bombay, Amman, Colombo, Cairo and Dhaka. Sheikh Ahmed bin Saeed Al Maktoum, nephew of Sheikh Mohammad joined Emirates Group as its Chairman. Maurice Flanagan assumed the role of Group Managing Director. It must be noted, the Emirate of Dubai does not a have oil and is dependent on the Emirate of Abu Dhabi for its needs.
The initial passenger profiles of the two carriers can be gauged from the initial destinations of the two carriers. Whereas Air Lanka’s passenger profile in 1979/80 consisted of inbound tourists, labour traffic to Middle East and locals travelling for business and leisure, Emirates passenger profile in 1985/86 would appear to be labour traffic to and from South Asia and Egypt. It would not be incorrect to state Air Lanka was better placed to succeed than Emirates during their initial start-up phase. July 1983 riots did impact Air Lanka’s tourist segment. On the other hand, Dubai had no inbound tourists to speak of till much later.
SriLankan Airlines, in its recent Press Release refers to a 4% drop in revenue from previous FY and announced a ‘Group Loss’ of LKR 8.9 billion for FY ending March 2016. The release did not specify if 4% drop in revenue relates to Group Revenue or Airline Revenue. SriLankan Airlines has attributed its losses to “addition of capacity to the Colombo market by other airlines” (which are incidentally sanctioned by the airline’s major shareholder GoSL) “accompanied by a dramatic drop in air fares in certain markets and depreciation of exchange rates”.
Emirates Airlines, despite a drop in revenue of 4.3% from previous FY have declared a profit of USD 1.94 billion for FY ending March 2016. The reduction in revenue has been attributed to “the strengthening of the US Dollar against many currencies and downward pressure on prices caused by sharply reduced fuel prices”.
Whereas both SriLankan Airlines and Emirates have reported a drop in revenue of 4% and 4.3% respectively due to competition and strengthening of US Dollar, the former has incurred an unaudited loss of USD 120 million whereas the latter has declared an audited profit of USD 1.94 billion.
It must be highlighted SriLankan Airlines’ loss of USD 120 is despite a saving of USD 160 million in fuel costs and other cost saving measures introduced by the management. Competition and a strong US Dollar are global factors and faced by all airlines.
It is pertinent to examine reasons for one group to incur a carried forward loss of USD 3.2 billion over 37 years and the other group to declare dividends amounting to USD 3.97 billion over 30 years.
Various factors such as a 26 year civil war in Sri Lanka, coping with Trade Unions etc. not faced by Emirates need be factored in. However, two vital factors surpass all others.
Air Lanka / SriLankan Airlines has had to contend with a majority shareholder in the form of the state who insist on being involved in all major and most minor decisions of the airline. Decisions are more often than not based on political rather than commercial considerations.
At Emirates, there are no reported instances of interference by the Ruler or decisions based on non-commercial considerations. It was administered by its Group Managing Director till a few years ago and since, by the President of the airline, both aviation specialists and expatriates.
Criterion for appointment of Chairmen and Directors to the board of SriLankan Airlines by the majority shareholder, since January 1989, has been based on personal relationships, friendships, school ties and as a form of rewarding political loyalists. Expertise in specific fields, experience in corporate governance and what they could contribute to the airline is not the criterion. Even the few Directors with requisite expertise appointed by the majority shareholder from the country’s blue chip companies prefer to take a back seat and flow with the tide for fear of the companies they represent being penalized by the majority shareholder for not doing its bidding. The 13 to 15 Chairmen appointed during the airline’s 37 years consisting of an Airline Pilot, Civil Servants, a Retired General, Chairmen of Blue Chip companies, a Secretary to the Head of State, a Lawyer, a Secretary to the Treasury, a Planter and finally an owner of an Apparel Exporting company has contributed little other than carry out instructions from the majority shareholder. It has also had 5 CEOs including the incumbent, the first two being expatriates and remaining three locals.
Emirates have had a very stable management structure with Sheikh Ahmed continuously serving as Chairman since the inception in 1985 to date. Besides being President of Dubai Civil Aviation Authority, his portfolio of positions includes Chairman/CEO of Emirates Airlines & Group including DNATA, Chairman Dubai Airports, and Flydubai, and the Chairmanship of 16 other companies. It therefore can be safely assumed he delegates the management of each of the companies to the respective Managing Directors / Presidents, limiting his involvement to macro affairs. He is never seen attending Trade Fairs in Europe or Agent’s Awards Functions. Maurice Flanagan remained at the helm till he passed away in 2015. He was succeeded by Tim Clark, designated as President of the airline. Clark joined Emirates in 1985 as its first Commercial Director.
Unlike the Ruler of Dubai, GoSL is incapable of appointing competent and dedicated professionals as directors and leave them unhindered to manage the airline. Recent statements by current leaders of a Public Private Partnership indicate yet another ruse for the majority shareholder to retain control. It may be recalled when Emirates, despite having a 43% equity share and management control of the airline could do nothing when the work visa of the CEO appointed by them was revoked and made to leave the country for not permitting the majority shareholder to have its way.
It is in this background that this writer argues in favour of the need for the majority shareholder to step down and assume the role of a minority shareholder where by the majority in the board will represent interests of private investors. Their priority will be to protect and enhance their investment and not local politics, tender bending, family-bandysm or cronyism. The benefits garnered by such a policy can be observed in the phenomenal growth and profits earned by Emirates Airlines during its 31 years of operations and contribution of USD 3.97 billion by the Emirates Group to the Dubai economy.