18 November, 2018

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Downsizing, Rightsizing SriLankan Airlines

By Sarath De Alwis

Sarath de Alwis

Sarath de Alwis

Two things are infinite. The universe and human folly. SriLankan Airlines with an accumulated debt of Rs.158 Billion is to be restructured and repositioned.

It is a prayer and a hope that holds little promise. Announcing the restructuring of the national carrier, the Minister of Finance promised to convert it, in to a regional airline focused on profitable destinations. This he said, will be achieved by ‘professional management inclusive of local and foreign experts.

There is no such thing as a profitable destination. Making a destination viable or profitable is the business of the Airline – a virtue that has consistently slipped past the grip of Sri Lankan Airlines and its predecessor Air Lanka.

In his crusading reformer mode, the Minister of Finance has added that the government “will pursue an open sky policy with restriction free traffic and invited ‘international airlines to make Sri Lanka a preferred destination.’

Restructuring and repositioning of our debt ridden airline needs to address issues arising from its cavalier expedition in to re fleeting. The financial obligations of the re fleeting exercise are presently shrouded in mystery.

The homily of the Minister of Finance that its total accumulated loses could have financed 45,000 buses, 25 fully fledged universities, 40 fully equipped modern hospitals and 48,000 houses is empty rhetoric. Sri Lankan Airlines will gobble up many more busses, universities and hospitals in the next five years.

The new Chairman who assumed charge in February 2015 writes in the Annual Report of 2014/15 “Faced with continuing losses over the period under review, the fundamental question before the board was weather turnaround is possible, within what time frame and how self-sufficient a manner it could be achieved.”

In the light of the announced decision to restructure and reposition Sri Lankan Airlines , the Chairman and the Board should now tell us the time frame and spell out the ‘self-sufficient manner it will be achieved.”

The Chairman has been handpicked by the Prime Minister. He is perceived as a proven performer in the apparel industry. How will he perform in commercial aviation? Success is interdependent with time. He should master his brief fast. The test of success does not withstand the sands of time.

It seems that his team is not short of charlatanry. The annual report of 1014/15 has the Protem CEO claiming “A red to black campaign and a bright ideas campaign have been initiated and are ongoing and the results have been extremely encouraging. These results have amply proven to the board, the commitment of the employees towards improving financial performance of the company … ”

A red to black campaign to erase a loss of Rupees 158 Billion! We have heard it all. We have heard it all too often. A bright ideas campaign to turn around an airline! Such gobbledygook in the Annual Report of the Airline which is a millstone around our national economic neck is not funny. It is not even sad. Attempting the revival of the loss making national carrier that represents the heights of financial infamy with Boy Scout mottos is a national catastrophe.

However, the recent exposition made by the new CEO at the Chartered Institute of Logistics and Transport indicates a return to professional competence and clearer grasp of realities in global commercial, aviation.

The Air Finance Journal reports that Sri Lankan Airlines has worked out a US$650 million financing arrangement. This transaction was closed on 18th December 2014. The transaction combined a pre-delivery payment (PDP) financing with the sale-leaseback long-term financing of five A330-300 aircraft with operating lessors AerCap and Hong Kong Aviation Capital and a lending syndicate led by Natixis and including Century Tokyo Leasing Corporation. Concluded on 18th December 2014 it was a done deal by the dawn of 8th January 2015.

Yet, another news item in Aviation industry publications informs us that Sri Lankan Airlines has committed to four A321 neo aircraft. This report, dated 23rd February 2015 confirms that Sri Lankan Air Lines has finalized lease agreements with Dutch firm Aer Cap and US firm Air Lease Corporation (ALC) for A321neo aircraft and the two firms Aero Cap and ALC will supply the Sri Lankan national carrier with two A321 neo each.

We shall confine ourselves to this primary information. Repeated attempts by this writer to elicit more tangible information failed because the general manager of corporate communications of Sri Lankan Air Lines could not be accessed. This correspondent was informed by his secretary “At the moment the General Manager Corporate Communication is at a Management Meeting. I will convey the message once he is back that you wish to speak to him.”

The new Sri Lankan Airlines management has to explain how it will proceed to restructure and reposition itself. It acquires added urgency in light of the transactions that are revealed. The restructuring will succeed only when its executives understand the basic and strategic problems they are required to resolve.

Pre-Delivery Payment Financing Transactions are payments that the purchasing Air Line pays to the manufacturer while the new air craft are built. Such an arrangement requires the consent of the manufacturer. To quote an authority on the subject “The manufacturers consent sets forth the price for which the manufacturer agrees that the lender can purchase an aircraft in the event of a default by the purchaser airline.”

Here is the rub. The Purchasers final purchase price is the manufacturer proprietary information and is almost never disclosed to the lender. The lenders starting point in determining the value of its collateral is the price stipulated in the manufacturers consent. The purchase price in the manufacturers consent will in most cases be determined by a US Dollar denominated amount at the time of execution. It will escalate until delivery in terms of the agreement.

The new aircraft A321 neo is one of the most advanced and versatile commercial aircraft in the market. Sri Lankan has ordered four of them but not direct from the manufacturer.[ Viet Jet Air has ordered 21 of them from the Manufacturer.] Designed to meet ongoing advances in technology the Manufacturer – Airbus has 1052 firm orders out of a total of 4300 of the A320 family. Hence the qualifier ‘Neo’. New Engine Options.

It can fly transatlantic from Europe to the US east coast. How will Sri Lankan Airlines fit them to its restructured and repositioned route network? The manufacturers blurb tells us that the A 321 offers the best seat mile cost of any single-aisle aircraft and seating capacities comparable to that of a wide body jetliner. If so, it offers a combination of possibilities. But that calls for imagination beyond ‘housemaid’ and ‘diaspora’ traffic.

Switzerland and Belgium, two developed nations decided that they will not resuscitate their flag carriers Swiss Air and Sabena. In the process they did not diminish in terms of global connectivity. What we need is the imagination to get back to the basics. There is no logic in operating routes at a loss to keep hotels occupied. Paradise is better off without visitors whose travel is subsidized by the national airline. The rule that we need to fly to London seven days a week is not cast in stone. If the seven slots in the Mother Country are so precious, it would not be too difficult to find a competent carrier to operate the route Colombo London as Singapore Airlines did with its Concord service with British Airways. The aircraft was repainted with the Singapore Airlines livery on the left side and BA’s on the right side. There are plenty of ways to carry the flag suffering no first degree burns.

The Minister of Finance and the Prime Minister should heed the advice that Warren Buffet gave his shareholders. “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”

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Latest comments

  • 13
    2

    Emirates were doing a good job at Sri Lanka airlines until the then CEO rightly refused to remove passengers to accomodate the fat Mahinda and his entourage?

  • 21
    0

    Here’s a ‘parable’ about why iffy political appointments are made:

    Once upon a time there was a king who wanted to go fishing. He called the royal weather forecaster and inquired as to the weather forecast for the next few hours. The weatherman assured him that there was no chance of rain in the coming days.
    So the king went fishing with his wife, the queen.

    On the way he met a farmer on his donkey. Upon seeing the king the farmer said, “Your Majesty, you should return to the palace at once because in just a short time I expect a huge amount of rain to fall in this area”.

    The king was polite and considerate, he replied: “I hold the palace meteorologist in high regard. He is an extensively educated and experienced professional, and I pay him very high wages. He gave me a very different forecast. I trust him and I will continue on my way.” So they did.

    However, a short time later a torrential rain fell from the sky. The King and Queen were totally soaked and their entourage chuckled upon seeing them in such a shameful condition.

    Furious, the king returned to the palace and gave the order to fire the weatherman at once! Then he summoned the farmer and offered him the prestigious and high paying role of royal forecaster.

    The farmer said, “Your Majesty, I do not know anything about forecasting. I obtain my information from my donkey. If I see my donkey’s ears drooping, it means with certainty that it will rain.” So instead, the King hired the donkey on the spot.

    And thus began the ancient-old practice of hiring asses to work in the government and occupy its highest and most influential positions…

    • 4
      0

      Thanks pal. It’s a good one also the most suitable example of the present lot.

  • 4
    0

    Beginning of AIR LANKA era the basic concept was in source almost every support divisions to maintain and run an airline. One good example was having its own transport department to meet all transport requirement including staff transport.
    When this was done airline had more transport vehicles than the number of aircraft and a higher number of staff to maintain and run the department comparing to Flight Operation,In flight and Engineering departments.
    Late nineteens world concept was introduced of out sourcing the support resources. Our national carrier also outsource its Transport division.
    Still many diversions with heavy man power could be outsourced to reduce the burden to an airline.
    To satisfy the obligations of Regulatory Authority in Sri Lanka and to maintain obligations of International Regulatory Authorities where the airline route structure is spread, still Srilankan can out source many departments and confined to the mere definition of an airline.
    Ground Handling, Cargo, part of Engineering and Maintenance, part of In flight services,Training, Human Resources, Medical,Legal, Finance, Properties and Facilities and Information Technologies are some of them.
    Airline should maintain a number of minimum core staff of expertise within the airline, appropriately qualified and experience to coordinate the out sourced departments with the airline and to satisfy the obligations of Regulatory Authorities.
    Out sourcing many support departments from the airline to individual created companies will help to increase employment opportunists in the country as well as better human resource control.
    Airline would save a lot from the reduction of staff strength. However airline and the newly form companies should come to very good understanding to maintain good relationship with the help of sound legal structure.
    On the other hand government should allow the airline to select and if not satisfied to re select any international company as the airline out source department. Therefore a competitive environment could be maintain to achieve higher standards and quality.
    End of the day Sri Lanka will have an Airline with less or no burden to its government and will create many employment opportunities in the aviation sector.
    It is the responsibility of government with the help of Regulatory Authority to amend or re write the necessary rules and regulations to meet the new environment of multi aviation companies.

  • 2
    0

    Mr. Sarath de Alwis: Thank you. Very interesting to learn the intricacies in “Purchase and Leasing” techniques of acquiring air craft. This comes along with the “Philosophy” of “Re Fleeting”. In aviation industry, as we know, most of the commercial airlines embark on a “Re-Fleeting” programme, after very careful consideration of the “Need” to enhance the operations that comes along with profitability and the demand. I suppose to do that, the airlines do take their operational aspects very seriously as it involves a huge capital expenditure. With demand, it also consider aspects such as the “economy” of using an aged fleet against modern cost effective machines that are introduced to the market by the manufacturers. In doing so, I believe, a comprehensive “Route Evaluation” by way of demand and supply aspects along with service competitive considerations are vital. Then comes the financial aspects, chiefly among such being the “capability” of meeting the commitments of payments and the terms of financing.

    In this background the Minister of Finance is proposing to make the National Carrier a “Regional Airline”. What is the “Region” he is proposing? Will that “Region” need all the equipment on order? Then what would be the “size” of the airline and what are the staffing needs? What is “Demand” of that “Region” and what “Competition” that has to face especially in the circumstances of an “Open Sky” policy? Well we wait to hear all that in the coming months of executing the Budget of 2016.

    Coming back to that Protem CEO’s “Red to Black” campaign, what were the feed back up to now?. In Sri Lanka standards, these campaigns are not worth the paper that those are written. These are only “PR” campaigns undertaken to “defuse” the “Tension” brewing in the pot. After the “Waliammuna Report” the entire staff population expected to see the CHANGES and this Board of Directors know that NOTHING took place to change the TIDES. So what they did was to “Divert” the minds of the stake holders in the entire business of running the day to day operations, this “Gimmick” was introduced. I hope the employees would have by now given an “Earful” to the Management and probably “struggling” with “how” to and “what” to do with those suggestions. Will the Management publish a “Dossier” of the proposals received and what actions were taken or intend to take on those in at least the employees House Magazine? We await that too from this Management.

    This, Sri Lankan Airline is a heavy burden on the tax payers. At the moment only the “outsiders” and “non operatives” such as the General Sales Agents appointed in off line countries are making million and they are laughing and possibly still filling the pockets of those who appointed them.

  • 9
    0

    We do not need an airline which loses millions daily while many citizens manage with one meal a day.
    There is no prestige in maintaining such an airline.
    Sell all its assets, give ‘golden hand shakes’ to all staff who can obtain positions elsewhere.
    All can travel in commercial airlines passing through Sri Lanka.
    Hire chartered aircraft for only special occasions.
    When the economy improves we can again think of a national airline.

    • 2
      2

      Then how will Ra-sirisena and their cronies fill their pockets with filty lucre?

    • 0
      0

      You need a local Airline at least to serve the region.

      One important thing is it keeps prices in check.

  • 4
    0

    Great article.

    A few must do action points.

    1 find a joint venture partner
    2 improve yields. Europe at Rs 59,999 return is not going to do this.
    3 improve load factors
    4 cut down excess staff. Too many staff and too few aircraft.
    5 shut down Europe other than Heathrow
    6 improve regional and Indian connectivity
    7 look at staff costs. Cannot afford to pay a flight attendant Rs 500,000 with allowances on a monthly basis.
    8 segregate ground handling and catering from the airline move them to separate companies.
    9 disclose passenger and cargo results separately.
    10 better governance and recruit the best people and not politically linked people.

    • 6
      0

      “7 look at staff costs. Cannot afford to pay a flight attendant Rs 500,000 with allowances on a monthly basis”.

      Jagath, Is this really true?. If so, I would like to join as a flight attendant ASAP. Only snag is, they will turn around and say , ‘you are over qualified’.
      Please tell me you are not joking. Boy, that old pervert Wikramasinghe (MR’s BIL) must have had a real good time recruiting for his ‘Anthappuraya’.

      • 2
        0

        Flight attendants basic is low but the the flying allowances given to them are very generous. Rs 500,000 per month is correct.

        The quality of flight attendants havevgone down over time and this is pretty obvious. They lack deportment, good communication skills etc etc. I guess the youth today have many more options than being a flight attendant these days.

        Pilot salaries are also very generous. Infact now the Airforce flyers are demanding that they be paid the sama salaries !!!

  • 3
    1

    A good write-up. But the writer has missed the main leaking gap,the bleeding vain of the airline, where serious restructuring is needed.It’s non other than inactive,ineffective commercial division.The place is filled with insecure,plotical aligned old school bunch,the same mouth and trousers who failed year after year.The appointees are from the last regime’s friends and partners who has no Sales experience. The largest revenue hub Colombo was given to a manager with no sales experience from a different department.Revenue management is run by a set of people who has not even spoken to an agent.People with proven track records are kept a side.The world sales division is headed by a election campaigner of Sajin Vas Gunawardena, who switches to total filth after two shots.These few groups of people run the National carrier,according to political,and own needs, taking decisions with no commercial sense.The new board and the top management,will also fail if they go by these,bunch of scavengers.

    • 3
      0

      What levity, Rs 158 billion is treated like 158 rupees. In the last 29 years how many once in authority were shot.

  • 4
    0

    The accumulated debt of Rs:158 Billion is peanuts compared to 18 Billion USD that MaRa milked!

  • 1
    1

    Whatever happened to the report put together by that joker Weliamuna (allegedly at high cost to the taxpayer?) Seemingly confined to the garbage, though not surprising considering who wrote it.

  • 1
    0

    As usual Sarath has simply stated the stark truth which though well understood by most of the readers but may be lost on the UL management and their political masters.

    If restructuring of the Airline is to be seriously considered,many a unpalatable decisions need to be taken including downsizing of staff strength.Believe it is the quality and calibre of most senior Managers that pose a major challenge than the staff numbers per se.

  • 1
    0

    Mr Sarath De Alwis,

    What was the original rationale for establishing a national airline? Was it for national prestige? Was it to bring in tourists? Was it to provide cheap/affordable travel to citizens of Sri Lanka? Or was it merely for profit?

    Most Lankan analysts (not you :)) spend time writing about the symptoms but rarely the problem. As the quacks would say treating the symptoms not the cause/problem.

    Isn’t it time to go back and examine the original rationale – if ever there was one?

    Most of the great leaders of countries are not people who did things but who saw the futility of a national-endeavour and prevented it.

    It’s difficult to give a Sri Lankan example because people – they are too immersed in Sinhala/Tamil, SLFP/UNP, Mahinda/Ranil crap – are blinded by their emotions and become incapable of grasping the simple truths.

    So, for example, if there was an intelligent American leader who understood how history plays out (that people eventually seek freedom and all totalitarian systems break down) and did not get America involve (or did not escalate) in Vietnam how many American (even if they don’t care for others) lives and limbs would have been saved? Those types of leaders with courage to prevent people from their own folly are rare when people are braying for blood. “Can they imagine the darkness that will fall from on high. When men will beg God to kill them and they won’t be able to die? (Bob Dylan)”

    It’s difficult to have long-term vision/plans. Leaders get elected for short periods and they need to be seen to be doing things during that short period; building airports, harbours, starting airlines, and walking into “popular” wars. They thought Vietnam, Iraq was a few months adventure!

  • 0
    1

    I agree with ‘justice’ as above.

    Just ‘bite the bullet’ and make a very definite decision – either have an airline that makes a profit or get rid of it. People can fly with other airlines.

    One last attempt maybe – Try asking Emirates again, whether they will take on management of the airline OR a lease of the airline for a definite period (10 years, 20 years,30 years, whatever ??) Of course there will need to be conditions attached – the main one being NO political interference whatsoever. Permit them to start with a clean slate – no debts, no encumbrances, no liabilities, no ties to present contracts, no staff – the government to accept all these liabilities. Emirates can pick and choose from present staff, contracts and conditions and make up the rest on their own. This will give them a fighting chance for a fresh and viable start. (Also, of course – ALL government employees, President or whoever they be, must pay (NOT credit) for their flights).

    If this is not possible – then get rid of the airline and let everyone use other airlines that fly through Sri Lanka.

  • 1
    0

    I have said it many times before and say it once again, Sri Lankan Airlines must be scrapped.

    Sarath, your analogy of the millstone on every Sri Lankan’s neck is apt.

    We do not need this dollar and rupee eating hydra. All that this Sri Lankan Airlines hydra eats is money and in truckloads. This hydra must be killed – it does not enrich the country but makes our poor country poorer.

  • 2
    0

    please tell me which Sri Lankan state corporation has ever hired its big wigs based on merit?

    All the way from the top to the bottom of the hierarchy, our society is rife with corruption and nepotism.

    Those who challenge it should walk the walk!

  • 6
    0

    How many of the yahapalanay directors of Sri Lanakn airline reside abroad and use their appointment only to get free flying for the family ?

    What are their other benefits and perks ?

    Are they not getting commissions from suppliers and manufacturers ?

  • 0
    3

    What is the main purpose of this article ? To become the chairman ?

    And what news agency does this “correspondent ” work for ?

    CT should charge for self aggrandizement advertisements like this !

  • 5
    0

    Nimal Fernando,
    What was the original rationale for establishing a national airline? Was it for national prestige? Was it to bring in tourists?
    Harry Hatton,
    How many of the yahapalanay directors of Sri Lanakn airline reside abroad and use their appointment only to get free flying for the family ?

    JRJ Launched the Arline with good intentions. He assumed mistakenly that opening up the economy will move the Asian Center of gravity in to his little corner. Cyril Matkhew made sure that it did not even inch towards this benighted land.

    Yes. Personally I have no quarrel with the appointment of the Chairman. At the time of his appointment I said that at last Air Lanka has found a Chairman who is familiar with the first class lounge because he is frequent flier at his own expense to whom air line perks will not be manna from heaven. Yes. Three others are domiciled in UK, New Zealand and Australia. If Prime Minister Ranil Wickeremesinghe wanted proven entrepreneurial wisdom he could have found it in David Pieris who knows his aviation and company restructuring and Meryl Fernando who created the only worthwhile ‘brand’ with a global reach. As a life long Marxist it gives me no pleasure in endorsing businessman. Since you asked. The composition of the present board is horsetrading between Ranil and Chandrika. As for Britto the answer is ditto.

  • 0
    2

    Woken up after a slumber. can this man tell the world as to how he joined the airline.

  • 2
    0

    Apur,

    Can. A.If if it is relevant to the issue in focus.
    B.If you happen to have a name.
    If not, be content in Apur’s Sansar. My apologies to Sathya Jit Ray.

  • 5
    0

    Mr. De Alwis,

    Thank you for taking the time to analyze the aircraft acquisition process and the Sri Lankan method.

    The concept of a national airline is essentially post World War II, when each recovering country wanted to establish minimum levels of air transport. For the crown colonies, the first step was flights to neighbouring colonies and then LONDON. Some of us might recall how difficult it was to get a seat on Air Ceylon to London.

    With the crony capitalism of the Dharmishta anduwa of 1977 was born Air Lanka. With that came the idea that the national airline can be a vehicle to steal. From then, until today it has been a carnival of fraud and blatant thievery of the highest order. Even ‘gratis’ tickets are a form of theft if one is not entitled to them.

    When Mihin air was floated, Rs.3000 million was transferred from the
    ETF as an investment. I knew then, that was essentially lost money. The State banks have been used particularly by the Rajapakses as sources of funding and all the current lot can do is make loud announcements but take no action. Why? Because they must preserve the loop holes that exist so when their turn comes….you get the point.

    Today we have people running Sri Lankan who have never negotiated anything at a national airline level. We hear claims that they have experience. Would you appoint a mechanic or even a store manager as CEO of United Motors? What will he say or do when he meets with the Chairman of Mitsubishi? Would he know what forward financing is or understand an XL spreadsheet with recurring cots of destination acquisition? This is where the second tier management at the airline have managed to get away with their own rackets in purchasing, hiring and contracts. When the top is clueless, the next level down are calling the shots.

    Ranil W’s problem is the same that Mahinda had. Inability to find trusted, capable capos. Yes capos. He is not interested in getting independent, competent managers. He wants ‘yes men’ who will implement his proxy because his sphere of authority is extremely limited despite his PM post. His UNP ministers are playing pandu. Ravi Karunaratne is an excellent example. It seems they only know capable people within their own families. What a bunch of introverts.

    • 0
      0

      An excellent analysis. Kudos to Mr De Alwis.

  • 1
    0

    I think Sri Lankan airlines has around 2 flights a day to London. If SLA need to preserve the landing rights, can’t the flights be reduced to one flight a day with departure times on alternative days being different so that you cater to those who like day and night options and then target full flights or at least 80% occupied. Other destinations will also need to be looked at seriously by cutting down to a single flight or doing away with loss making destinations. In some instance there are competing carriers departing to the same destination including SLA with about one hour time difference. This too needs to looked into so that gaps are widened to avoid loss of traffic. I am no expert in this area but simply making some suggestions after all this is public funds. The earlier arrangement with Emirates controlling was better. It was a pleasure to fly SLA at the time. There were critics and will be such critics in future as they have narrow minded agendas.

  • 0
    0

    Mr Alwis thanks for your article which have helped to identify the real aviation lovers and real jalouse fans to this industry.
    Anyhow the top government officials and top airline management should realise the real facts about our national carrier based on the views of few so far commented to the article.
    It is high time to build multi aviation related companies in Sri Lanka with appropriate certifications and approvals to cater both airlines, SRILANKAN and MIHIN with any upcoming airlines in future.
    Initially you may seek international collaboration and or assistance in this matter.
    I am very sure there are many experts could be found within our country itself especially who had local and international experience in the sector and may be now siting at home or may be working abroad.
    Out sourcing of some of its departments fro the Airline will off load the heavy burdens from the overall budget.
    Charges,rates and agreements between these supporting companies and the airlines should meet all available and necessary international standards and should be under strict government Regulatory authority control.
    The government ministry and the Regulatory authority should hire aviation experts with qualification and experience to monitor and guide the aviation sector in Sri Lanka.
    Hambanthota MRI airport facility is an ideal location to start up with an engineering and maintenance facility to support the both airline currently making heavy losses and mainly due to heavy maintenance costs.
    As the case always we Srilankan aviation sector employees are doing very good all over the world. Therefore we should train more and more school leavers as pilots, technicians, cabin crew etc.. and allow experienced staff from the industry to find out more lucrative job opportunities in overseas. Again Hambanthota facility could be utilised for this matter.
    Selecting correct type of equipment, routes and to apply correct marketing strategies to airline should be handled by well qualified and experience boards but not by individuals within the airline itself or by politicians.
    SRILANKAN should keep in mind that you cant simply lay off your employees but find them out with equal or better job prospect within Sri Lanka. The professional trade unions should involve intervene in to this.

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