22 September, 2019

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Emirates Management Of SriLankan Airlines

By Sanjana Fernando –

Over the last one and a half years I have written over a dozen analytical articles on Sri Lankan Airlines. All my articles so far have covered the post Emirates Management period, including under Mahinda Rajapaksa Government and the current regime, where both have made significant losses. 

The losses incurred under the Mahinda Rajapaksa Government were alleged to be due to corruption and mismanagement and was used by the current regime in their bid to come to power in 2015. However, the losses have continued and are now far worse under the current regime. 

These losses at the airline have been so misunderstood by the public and the politicians alike, that last year the President of Sri Lanka initiated a Presidential Commission to investigate the losses. After almost a year, the commission has found no hard evidence of “material” corruption at the airline at the time of the Mahinda Rajapaksa Government and still cannot seem to reconcile accurately the billions of losses at the airline. 

One of the most popular arguments out there is that losses started due to the termination of the Emirates Management contract by the then Mahinda Rajapaksa Government. Most still question as to how the airline managed to make a profit under Emirates Management and started to make losses after their departure. To this day most people hold Emirate Management in high regard for their superior management skills. 

In this article I will not only give an explanation of the losses at the airline by the Mahinda Rajapaksa Government but also how profits were reported under Emirates Management.

For this exercise I have looked at the Annual Reports of SriLankan Airlines for the last two decades, including from the time of Emirates Management, which were not easy to get hold of.

The airline business is a transportation business where mobile assets (leased or owned) are used to transport passengers and goods over a distance. Just like in any transportation business the highest cost item tends to be the fuel cost to operate the mobile assets – in this case the aircrafts. So, when looking at the profit or loss over several periods, it is only meaningful to look at it with respect to the global oil prices that drives the underlying fuel cost. The fuel cost is also the only cost that the Management has little or no control over.

In the analysis below I have looked at the profit and loss of the airline over the last two decades versus the oil price over the same period. The chart shows the profit and losses under Emirates Management period at a time of very low global oil prices, with an average daily oil price of US$42.6 over the 10-year period. 

The Emirates Management contract ended just as the Global Recession kicked-in, resulting in a sharp decline in global air travel and impacting Revenue. For the next 7 years the average oil price more than doubles to US$87.0 compared to the Emirates Management period and there was no way an airline of that size could have ever made any profit under such market conditions. The high fuel costs resulted in the losses and was also compounded by the bank debt which was borrowed to fund the losses. As the oil price did not subside for almost the entire period, under the Mahinda Rajapaksa Government, the losses kept on increasing not only due to the fuel cost but also the growing debt finance costs. Contrary to popular belief, this was the main reason for the losses at the airline under the Mahinda Rajapaksa Government and not due to any alleged large-scale corruption or mis-management.

With the oil price dropping from early 2015, there may have been an opportunity for the current regime to show a profit in FY 2016 and 2017, as I have argued in one of my earlier articles (The “lost two years” of SriLankan Airlines) but that never happened. Instead they were busy using the airline for political revenge and unnecessarily increased the losses in 2016 and 2017 by paying a fine for cancelling the A350 aircraft leases, at a cost of over Rs. 17 Billion.

However, some of our fellow Sri Lankans may still argue that although it is now understandable that it was impossible to make a profit at a period of such high oil prices, if Emirates had remained, they would have done a better job of containing the losses than the locals appointed by the Mahinda Rajapaksa Government. After all it is a Sri Lankan trait to assume that anyone else is better than a fellow Sri Lankan. 

The best way to look at “Management Efficiency” over several different management periods is to simply look at the Operating Profit Margins by excluding the fuel cost as it is variable cost which the management has little control over. 

The chart below shows a startling revelation and hopefully corrects a long-standing misconception that has existed from the time of Emirates departure. It not only shows the superior capability of the Management under Mahinda Rajapaksa Government (“MR”) but also exposes the poor management ability of the Emirates Management team. For every Rs. 100 of Revenue generated the MR Management spent only around Rs. 70 while Emirates Management was spending well over Rs. 80 to generate the same unit of Revenue. In fact, from the available data it is evident that over the last two decades the MR Management was clearly the best management team out of the three. 

The airline business is a ruthless and unforgiving business and irrespective of how good you are at controlling your costs at the Operating Level the uncontrollable variable fuel cost can wipe out all your good work like a tsunami. That is exactly what happened to the great work of the MR Management team in that period, as shown in the chart below.

MR Management operated the airline at one of the worst periods of high fuel prices but seems to have managed to contain the losses significantly due to their superior management efficiency. If for some reason Emirate had extended the contract and stayed on, the losses may have been far worse. Equally if the Government did not change in 2015 and the same MR Management had stayed on, then they may have turned around the airline by around 2017. 

The fuel efficient A350 aircraft were ordered at the time as a solution to the above fuel cost problem at the airline. Unfortunately, they too were cancelled by the current regime based on political decisions.  

It is also ironic that one of the best Management teams the airline had ever seen is now “witch-hunted” by the very people of Sri Lanka and also a Presidential Commission, with allegations of large-scale corruption and mis-management. Then again why should one be so surprised, after all it also the only country in the world to “hang” its own war heroes – by sponsoring their own international resolutions against them.  

Hardcore critics could still argue that what ever said and done, Emirates Management did report profits, almost every year of their 10-year management contract and for this we must be grateful to them. 

A closer look at the reported profits reveal a different picture. It seems that even though they were operating at a period of very low oil prices they were still struggling to show a genuine profit. In order to show a profit, they seem to have switched from operating an airline business to running a “garage sale”, as shown in the chart below.

They seem to have generated a large chunk of the Reported Profit from what is labelled as Other Income. At times they got lucky, even recording a financial benefit when the Colombo Airport was attacked by Tamil Tiger terrorists. 

At other times, they seem to be selling what ever they could get their hands on, so as to dilute the losses.

In 2008 just before they left, they sold the last three remaining A340 aircrafts of the company, simply to show a net profit in their last year of Management – a year in which was in reality a loss-making year.

In fact, if you look at the actual profit they made excluding Other Income, it shows a loss of Rs. 8.2 Billion over the 10-year period as opposed to the reported Rs. 18.1 Billion. Also note that this was at a time of very low fuel prices.

The people of Sri Lanka need to understand that Emirates did not buy into SriLankan Airlines because of their desire to make the Sri Lankan flag carrier a successful profitable entity. At the time SriLankan Airlines, as the flag carrier, had access to lucrative routes through country-to-country air service agreements, which Emirates did not have access to, as it was not the flag carrier of the UAE (but Etihad). Having gained Management control at SriLankan, Emirates was able to strategically reorganise the routes in such a way that would eventually benefit Emirates in the long term. The damage they did to the SriLankan routes is still visible today. Ironically it was also on the advice of the same MD Peter Hill, who was hired as a consultant by current regime in 2015, that the latest European routes were suspended – that gap in capacity is now filled mainly by Emirates.

In fact, at the end of 2005, the former President Chandrika Kumaratunga wrote a damning letter to the Emirate Management seeking an explanation for their very poor performance. The entire letter is shown below.

They say that History is written by those who hang heroes and that may have been the case at the airline up until now. I hope that this article will re-write the history of the airline and will resurrect the real heroes of the airline who have up until now been portrayed as villains but also expose the true villains of the airline and our country.

Appendix:

*The author is a former Investment Banker from London

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Latest comments

  • 5
    5

    An ode to Rajapaksa “management” by one who clearly is in the don’t-hang-war-heroes camp. Perhaps Mr Fernando (if that is his real name and not GL Pieris).
    ” Santana Fernando” has put much effort to convince us civilians that MR’s management was as incorruptible as LeeKuanYew. Let’s not talk about the First brother in law, and his activities with company employees on company time. All this was profitable of course, according to our genius of an analyst.
    He states: “However, some of our fellow Sri Lankans may still argue that although it is now understandable that Emirates had remained, they would have done a better job of containing the losses than the locals”
    Any idiot (Sanjana exempted) can tell you that Emirates is out there to make profits, being a commercial operation. So if they found it impossible to make a profit, they would have simply closed down the airline. That is what our “patriotic ” idiots should have done, instead of making every single Sri Lankan pay thousands even if they don’t fly. But I am sure Emirates might have even gone to the extent of getting fuel at cost from UAE. Or amalgamated UL with Emirates.
    Mr. “Fernando”, do try to leave “war heroes” out of your pontifications. It gives the game away, you know.

    • 4
      1

      Can this “Mr Fernando” also elaborate (with graphs/charts and all ) on Mahinda’s great “airline management skills” by analysing the economic profitability of commercial flights landing in Mattala five minutes after taking off from Katunayake?

      I bet he wouldn’t! :))

      Makes one wonder why Lanka – and nowhere else – is flush with this type of analysts! :)))

  • 3
    4

    You did not compare the stats those of a profitable Air line. I heard Emirate Airline owned only 40% of the airline. Yet they made the Sri lankan Air line profitable. when All the airlines in the world were consolidating, Mahinda Rajapakse should not have established a second budget air line. Mahinda Rajapakse govt also appointed their henchmen to the Top Management. They were using it as a private airline, His OLD man womanizer Brother in Law having air hostesses in his several lodgings, Transferring Air line women to work with Namal Rajapakse, Mahinda Rajapakse diverting one plane to go to Japan and back to England. Another person was an unemployed engineer from California and he did not have specific air line experience. You say Emirate air line did not know how to run it profitable. If so, why their airline has the largest number of A380s. Your article does not match with the facts we know. some where it said, the Manufacturer gave VVIP kit as a gift. In order to that happens, they must have extra if not full 100% of the list price. Generally, their list price, and the selling price are very different. It looks you have written a political article. further to that, you say, you say you WERE and are) a Investment analyst or a Banker.
    Ranil is an Idiot and is a big time LIAR. His words or actions can be accountable only for non-educated farmers.

  • 4
    5

    Very good analysis, problem is most people in Lanka do not want to acknowledge to true facts. EK was here only to fatten their airline and most of our top guns in the senior management team (mist who are still there in the airline) backed an I’ll qualified CEO as in Peter Hill. The art of running an airline business was clearly shown by Harry Jayawardena. Why In earth did CBK ever give to EK is the big question

  • 3
    1

    We hung our head when the then Executive President ordered the then Emirates-appointed CEO, SriLankan Airlines, Peter Hill to bump 35 passengers from a full London-Colombo flight to make way for him and his entourage. For not complying Peter Hill’s work visa was revoked.
    Straight away the ‘Culture’ of corruption/nepotism/impunity was introduced.
    The rest is history. We saw SriLankan spiralling down together the offshoot.
    .
    Sanjana Fernando claims that the MR management must not be blamed. The unkindest cut is the suggestion that if the Government did not change in 2015 and the same MR Management had stayed on, then they may have turned around the airline by around 2017.
    .
    Sanjana Fernando claims to be a former investment banker and that he has written several articles during the past year. Links please.
    PS: Sanjana has said somewhere that the present GoSL passed a UNHRC resolution against itself.
    Was the giving away of the identity intentional?

  • 2
    1

    This looks very much like an article with a political intent. Why so called `war heroes’ being brought in. Anyway if really nothing as alleged happened – then why not have an international transparency enquiry and clear your so called `war heroes’. Then there will be no more issues.
    Srilankan is a good airlines but with many bad rotten apples. That is a fact.

  • 0
    2

    Sanjana, first such name I have seen from Lanka, glad you started revealing yourself. Amazed why you have decided to change gears. Emirates never came to bed with us for the love of it. It was just another Investor to Lanka but with a hidden plan. Simply they wanted to clamp on or rather hold on to Sri Lankan (UL) growth till they sorted themselves, with the fleet, network and especially their need of consolidation into India, where UL had much freedom. Emirates played dirty from the time they started talking to BOI, it was so shady that they recruited the person who was involved in BOI with the investment project. A google search will tell you the houses, gifts and payments some top Govt. officials got. The airport attack was a blessing in disguise, Emirates could not even pay the salaries of UL and with the insureance recovery they came ashore. Even the first procurement of aircraft to UL was what they had ordered and not wanted, so it was transferred to Sri Lankan with no cancellation fee. Pulling out of Europe, bringing in Emirates management were expected. Look at the good side of it they brought in a new culture, glamour and international fame to UL. They discouraged just empty talk and wanted performance. They introduced email and computers in thousands to staff, and created a world class IT division even Emirates wanted to learn from. Shifted to World Trade Center and lots of puffy positions held by old school beaurocrats were ejected. Then they sold the shares of SITA held by AirLanka for a substantial amount.
    With all that to say MR did a splendid job during the time 2008-14 ? You have a hidden intention under your sleeve or you are off your mind.

  • 0
    1

    To continue MR ran the airline as if it was his family vehicle, sending it where he wanted transferring passengers to hotels paying millions, taking a wide body aircraft with him on his private trips and parking it there till the party was over with the crew and pilots given hotel accommodation, allowance. Also running Mihin with UL funds and using UL people it was never revenue generating but only a book adjstment. Then they appointed known thief as CEO to further milk the company. Every system agreement, GSA appointment, internet booking division was just given out for a Rs. 8 million a month kick back! He made money and signed agreements even if the digit is thrown in prison he would still keep making money. Ironically the people who signed these deals and agreements are still heading the company smiling as silly jackasses and bumsucking the board members playing the same game. Please read the presidential commission reports to understand the depth of these corrupt and fraudulent deals. The list goes on till aircraft leases at 40% above market value and they have gone laughing all the way to The Bank Sanjana for this reason none of the routes will make money and the present heads keep mum about these. The Borad, Govt keeps gazing at the bottom line wher major damage is done in customer service , other revenue channels, loyalty front and it’s a matter of time before It’s going to be belly up. Let’s discuss post 2015 looting in another episode

  • 2
    1

    Mr Fernando (Part I)
    *
    Thank you for an interesting article. It has some valid points besides some inconsistencies.
    *
    Your piece contains 5 illustrations. Two does not contain data for the period 2003 – 2012, the reason being “No Data Available.” Two others do contain data. The airline’s website provides Annual Reports starting 2008. Perhaps you could provide an explanation for this ambiguity.
    *
    Whereas you have factored in Global Recession commencing 2009 in your analysis, you have ignored two factors influencing air traffic in 2001 which lasted a while. The attack on Colombo Airport on 23 July 2001 affecting traffic to Sri Lanka, 9/11 affecting air traffic globally and impact of Tsunami in December 2004 have been completely left out. As per your illustrations, EK management has record an Operational Deficit in 2001 but Operational Surplus in 2002 2003, 2004 and 2005 despite these drawbacks.
    *
    High fuel margins was a global phenomenon for the aviation industry the world over and not unique to UL. Please do refer annual reports of carriers such as Emirates who will show profitable operations albeit reduced volumes during recession years.
    *
    Also to be factored in is the civil war in the country during the entire EK management period 1998/2008 whereas it was not a factor commencing 2009. In your esteemed opinion, what impact does a civil war have in a country’s tourism industry, the biggest market segment of UL?
    *
    Continued

    • 0
      2

      Great response, Mr. Jayaweera. You have demolished “Sanjana Fernando’s” bogus analysis with facts.

  • 0
    1

    Part II (continuation)
    *
    President CBK’s letter in the closing shadows of her administration notwithstanding, there were many in instance she overruled the Sri Lankan Directors at the behest of EK Directors. It is best we do not discuss Share Holder’s agreement. The Sri Lankan Shareholder failed to provide necessary security to protect the foreign investor’s operation and allowed 4 out of 12 aircraft to be blown up beyond repair and 2 to put out of action for six months. EK had no choice but to withdraw from Rome, Amsterdam, Stockholm, and Berlin. Paris was closed for 3 months from July to September 2001 (I should know as I was the Manager in France at the time). Frankfurt, closed in October 2001 was reopened in late 2004. Switzerland, closed in July 2001 was reopened sometime in early 2005. Did President CBK’s officials who prepared the memorandum erred in their report in October 2005.
    *
    Did her officials and she envisage operating these routes with her fleet of CTB busses? When Peter Hill requested assistance from Treasury Secretary, he was told GoSL was but only a Share Holder and the Managing Agent should fix the problem. It took time to increase the fleet gradually.
    *
    The major Share Holder – the Treasury, despite terrorism in the country did not give UL one red cent between April 1998 and March 2008. That was the main purpose of partially privatizing the national carrier.
    *
    The Treasury commenced pumping money into the airline commencing 2010 and it continues to date.
    *
    You have also failed to factor in the corrosive effect of enhanced level of corruption which took place during the Rajapaksa administration. They do not reflect under Cost Heads but does impact the bottom line.

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