3 December, 2020

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Anything That Just Costs Money Is Cheap

By Sarath de Alwis

Sarath de Alwis

In the Airline business, Cost-based pricing has become price-based costing. An expert analyst in Global Air Transport Dr. Julius Maldutis says it best. The price of an airline seat has no relationship to the cost of producing it, but rather reflects the degree and nature of competition. Costs and prices have gone their separate ways. In fact, the relationship has been reversed. Airline managements are seeking to lower costs in order to match prices.

Spartan mothers when giving shields to their sons departing for war told them ‘Son, either with this or on this’. To come home without the shield implied running away from battle. The dead were usually brought on their shields.

How will the board of Directors of SriLankan Airlines react to the withdrawal of the short listed bidder – Private equity investment firm TPG after its due diligence exercise.
Without the shield? In all probability. On the shield? Not a hope.

The Sunday Times in its May 7th edition reports that TPG has promised to give a report of its findings. The government should obtain the report as soon as possible. Publishing all its findings may not be advisable, but a filtered synopsis would serve the public interest.

The Chairman of SriLankan Airlines, Mr. Ajith Dias has informed the senior management that after “completing the due diligence process, regrettably TPG have informed us they will not pursue a potential investment in SriLankan 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.

For laconic brevity Mr. Dias deserves our unreserved praise. But further down he succumbs to the seduction of mumbo jumbo that is usually described as ‘strategic intent’ in corporate jargon.

He informs his top managers “However the Government is pursuing other options in finding a partner and we should continue on the path of improving our performance both financially and operationally.

The financial year that has ended has been satisfactory considering the downside we have had to undergo with lower yields and drops in revenue. The runway closure, which was very necessary, also resulted in the cancellation of over 600 flights, which also had an adverse effect on our performance.

Obviously, the Chairman has been briefed by his Chief Executive Officer and Chief Commercial Officer that “the financial year that has ended has been satisfactory considering the downside we have had to undergo with lower yields and drops in revenue.”

This writer has another take. In this Trumpian age it has to be clarified that it is not an alternative fact but an alternative to wishful thinking.

The runaway closure affected all airlines operating to Colombo. The home based carrier SriLankan, adjusted its schedules. Others had the option of withdrawal during the closure of the runway. Many airlines curtailed their services. Sri Lankan Airlines carried full loads in and out of Colombo and at considerably higher yields. In the business of aviation, Aristotle, even today sounds very authoritative. “One swallow does not make a summer, neither does one fine day; similarly one day of brief time of happiness does not make a person entirely happy.”

It seems that even now, the propensity to reach convenient notions at the expense of the real has not dimmed.

The withdrawal of the shortlisted bidder exposes some wider truths. This government and this board of directors of the national airline have spurned reason, rejected expertise and have stubbornly refused to learn from the past.

It is time we abandoned this hogwash of Sri Lanka’s strategic geographic location. Our aviation policy is frozen in the time of Marco polo and Ibn Batuta. Visit” [www.aviationmin.gov.lk] the website of the Civil Aviation Authority. You are told ‘The strategic geographical location of Sri Lanka is an advantage of its proximity to populous nations in the world to become an airline hub”
For a contrary point view, listen to Sheik Ahmed bin Saeed Al Maktoum Chairman of Emirates, in an interview with the ‘Economist’ a few years back he traced the silk route in modern civil aviation. “Nearly 2 billion people live within four hours’ flying time of the Gulf and twice as many within seven hours. Since the arrival of ultra-long-range airliners in the mid-1990s in the shape of the Boeing 777 any two big cities on Earth can be linked via Dubai with no other stops.”

SriLankan Airlines and its predecessors Air Lanka and Air Ceylon have all either ignored or failed to define its targeted customers. That has prevented it from offering a competitive mix of product, price, service, relationship, and image.

The bid document prepared for Sri Lankan Airlines offered what was perceived as a solid commercial enticement. It said “The four southern states of India are located closer to Colombo than to Delhi. Colombo can therefore be used as an efficient gateway to the South Indian market, giving it access to 250 million people.

Indisputably true. But during due diligence, the Texas based TPG would have taken due diligent note of virulent anti South Indian sentiments expressed by Sinhala chauvinists and political pundits champing the Gota candidacy in 2020. But more damaging would have been the ‘Little Bo Peep has lost her sheep ‘defense offered by the ruling elite in defense of their declared intention of greater economic integration with the sub-continent. Just for a lark, ask the top leaders of this enlightened ‘yahapalana’ regime how Arahat Mahinda arrived in Sri Lanka. By air to the top of the Mihintale rock, they would insist ignoring the archeological evidence at Kanyakumari at the tip of the sub-continent that the Ashokan emissary came by land. The Maha Nayakes they regularly visit in Kandy will not be pleased otherwise.

To return to the subject of the Air Line, the team that made the due diligence study would have taken due note of the locust years of its management by Mahinda’s brother in law and the handpicked team of the current Prime Minister.

In September 2016, this writer in an article captioned SriLankan Air Lines; Arrival at crunch time said this of the composition of the many boards of directors appointed by successive governments. “Successive regimes have resorted to offer a seat on the Board of the National Carrier to a very special type of people. They come from the entitlement class. Those selected are the Cognoscenti drawn from the corporate world who have access to the sanctum sanctorum of, to follow the genesis in order, Ward Place, St Sebastian in Hulftsdorp, Rosmead Palce and Fifth Avenue.

…… the present ‘yaha palana’ Prime Minister seems to have followed the precedent and offered the bounty and bonanza to buddies. Its present composition is eloquent testimony. Except for two, the son of a former secretary to a former president, and another whose allegiance is ditto to the same President, all others are Royal College buddies of the Prime Minster. They have a common denominator. They all have abiding interests, professional or private, beyond the shores of Sri Lanka. A seat on the Board of the Air Line is ‘open sesame’ to the cave of unlimited travel just as in ‘Arabian Nights.’

There is one finding the team doing due diligence would have discovered very early on. State ownership can destroy value of any undertaking, if best practices in ownership and management are not applied.

Again, we have arrived at a critical time that calls for decisive action. We cannot afford to keep SriLankan airlines flying or on ground. What the due diligence study by TPG, has discovered is that it has no immediate value. We must give it away, to a mega carriers in the Middle East or the Far East better positioned and equipped to discover the magic of our geographic location that we hear in nauseating repetition. There is another alternative. A joint venture with South Indian States with a domestic catchment area of 250 million people. A dream of course.

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Latest comments

  • 1
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    A strategic partnership with a airline is the only viable option. A PE firm will not work as the investment criteria are completely different and would not stack up when they look at all options out there which is not limited to the industry.

  • 1
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    The Chairman informed the Senior Management: “Completing the due diligence ……. regrettably TPG have informed us they will not pursue a potential investment…….. It is their opinion that allocating the HUMAN and FINANCIAL RESOURCES (highlighted by me) will not realize sufficient returns compared to the many other investment opportunities that are available to them”. Did not this Government and the members of the Board of Directors, CEO, the COO and the rest of the Senior Management who took control of the affairs of the SriLanakan Air realize this crystal clear TRUTH at the beginning? Every citizen of this country knew of that TRUTH since the days of Rajapakse’s Brother-in-Law took control of it. The TRUTH is: Allocating HUMAN and FINANCIAL RESOURCES in the airline do not bring returns compared to allocating those resources elsewhere. To this I would add: MISMANAGEMENT OF AVAILABLE RESOURCES by the Senior Management led to the debt burden running into Billions. With these writings on the wall, it is no surprise for any investor to RUN AWAY from taking our this venture.

  • 4
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    One more time, the Asian miracle Yahapalanaya government is doing its magic by putting Srilankan Airlines into its magical hat and pulling out another Hangbangtota port. The war heroes decide to save their Mullivaaikkaal of Air Lines Industry by defending at UNHRC with Bell Porringer’s “Lies Agreed upon.”(Even that one they did not make locally in the Sinhala Cinema Industry) Is there a need for national carrier when the estimated loan is $52 billion? Whose pride is saved on this venture by taxing the Biriyani eaters and feeding then with Arrack?

    Foreign investors not just do the math to check if the plusses are higher than the minuses. In that case junior accountants who carry out basically all the financial analysis in the corporate world are greatest investors. An investor has foresight than the figures in front of him/her when make decision.

    In the 1960 Sirimavo nationalized the British Industries. After that, so far no point-able foreign investment has flowed into any particular industry. But interestingly The Srilankan Airlines was run by Emirates UAE Airline. It was an opportunity to demonstrate how cordial Lankawe to business initiation. But the Magnificent war Hero King Dutugemunu proved, if the foreign investors had misjudged the nature of Lankawe with Sirimavo’s nationalization that it is volcano hole that would burn out anything the foreign investors could pour in. The story is there are abundant supply of Chemical weapons and cluster bombs in Lankawe, but a serve shortage to Thikukkaivaal for some acute problems.

  • 2
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    The biggest lesson to foreign investor is the British banks hedged against the petroleum price went to court to have their insurance premiums collected. The same rowdies are still saved by the Lankawe’s “impunity to Royal Heroes”. One single penny out of the billions stolen is recovered. It is reported in Colombo media that mansions of a prince has been repossessed and auctioned by courts, but the same courts could not find the owner. How these courts do coming to know that there are Mansions no one calming ownership? Is Gil-mart of Yahapalanaya a confidence creating act for the foreign investors? (Why the courts could not find the owners of these mansions may be connected to the Yahapalanaya’s looting of central bank)

    Lanakaweyans rob from government and people in trillions but if a corporate leader takes money they write in paper after paper “We can do it but the Aanduwa is keeping this Suddha to rob us. Anee see what a colonial, slavery mind”.

    This is Airline is a cesspool created by excretion of nepotism. Drunkard Pilots caught but they successfully sued the Airline. That is the law of the Land. Yahapalanaya has not made one single change in the Business and Industrial law to attract foreign investments. Clawing more into Chinese loans are threat more of Chinese administration in the Appe Aanduwa. Even the runway repair seems to a Chinese pressure rather than a priority. Airlines operated in Mattala had returned back to Katunayake as the conditions there were no adverse like Mattala.

    Most of the white van may have been parked, but the mentality that gave birth to white van culture is in more wide swing.

    In this condition, who want to adopt a wildchild born by sleeping with wildlife? Dismantle it and save the tax payers food.

  • 1
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    “In the Airline business, Cost-based pricing has become price-based costing. An expert analyst in Global Air Transport Dr. Julius Maldutis says it best. The price of an airline seat has no relationship to the cost of producing it”
    Quite true. A ticket to Trivandrum in India costs about 31000. But one can fly AirAsia to Bangkok or KL for less.
    “There is another alternative. A joint venture with South Indian States with a domestic catchment area of 250 million people. A dream of course.”
    Yes, very much a pipedream. The GMOA will strike , citing the risk of stowaway Indian doctors. Dr.DJ will see another Chola invasion, airborne this time.
    Shut down the airline NOW. Restart it as a regional operation with a fleet of small turboprops and jets. Stop paying cabin crew more than doctors or engineers.

  • 2
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    “The strategic geographical location of Sri Lanka is an advantage of its proximity to populous nations in the world to become an airline hub”
    Rather like the current debate over the “strategic importance” of Trinco’s rusting oil tanks. Some think India wants to park aircraft carriers there, in this age of the cruise missile.

  • 1
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    This so called Private Equity funding firm should be one called Vulture funds. They come to suck as much as life blood from the company. Once they get enough profits they sell it to the highest biddr and leave. IT is good they did not buy it.

    I read some where, Ravi KArunanayake asking various fund managers to come and invest. Probably, he was asking this particular firm to buy it. Anyway, all the fund managing firms come to profit and that will never work for the country.

    Sri lanka’s problem is every institution in Sri lanka is controlled by politicians, their cronies and trade unions. So, every institution loses money. Until politicians and their cronies are fired and remoced, Until the trade unions are removed, these firms cannot be run.

  • 1
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    Corruption is as old as human civilization.

    Recently it is evolving as a component of democracy. Politicians clamor for positions to “make hay”. Unfortunately the bales are getting bigger and bigger – stashed overseas.

  • 1
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    NEPOTISM GAVE US ARAJUN MAHENDRA BOND SCAM. NEPOTISM GAVE US AIR LANKA MANAGEMENT. NOTHING NEW. JUST SOME BASKET CASES BEING RECYCLED.

  • 0
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    nepotism works, look at SLIIT and Dilmah ! Give SLA a chance

  • 0
    0

    Sarath what has arahath Mahinda’s visit to do with yahapalaya’s airline management?
    It sounds it has got something to do with your animosity towards Buddhism or just threw one to poke fun?

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