14 December, 2017

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SriLankan Airlines Continues To Descend

By Rajeewa Jayaweera

Rajeewa Jayaweera

The national carrier SriLankan Airlines recently held its Thirty Ninth Annual General Meeting (AGM) of the Shareholders last Monday at the Auditorium of The Institute of Chartered Accountants of Sri Lanka at Malalasekera Mawatha in Colombo 7. It was presided by Chairman Ajith Dias and attended by six of seven remaining directors. One director had resigned recently. It was well attended by many former and current employee shareholders, anxious to ascertain the future of the airline.

A Group Net Loss of LKR 28,339,51 Mn was reported in 2016/17, up 135% from Group Net Loss of LKR 12,083.62 Mn in 2015/16. Latest Group Net Loss includes LKR 14,362.81 Mn. paid as compensation for the cancellation of lease agreements for four Airbus 350-900 aircraft.

Significant increases in Operating Expenses compared to previous year were; Aircraft Maintenance & Overhaul (22%), Rental on Leased Aircraft (13%) Employee Costs (12%) and Marketing & Advertising (11%).

In his message to shareholders, Chairman Ajith Dias stated, “Although our financial performance for the year is, on the face of it, less satisfactory than the year before, it has been seen in the context of numerous challenges which we faced”. He need be applauded for highlighting in his message, the airline’s operations being hampered by the “method of interacting, reporting, decision-making through bureaucratic and political channels”, an obvious reference to political interference.

CEO Suren Ratwatte, in his message to shareholders stated, “During the year under review we have carried out a strategic rationalization of our routes and our fleet and repositioned ourselves as essentially a regional carrier”.

It contradicts what was stated during his recent interview with Ada Derana of having submitted a restructuring plan to the government and awaiting approval. Or else, the airline has implemented at least parts of the restructuring plan, whilst awaiting approval. He also claimed during the interview, the carrier required less wide bodied A330 aircraft and more A320/321 narrow bodied aircraft in order to make the airline profitable. However, only 6 out of 24 routes operated with A320/321 narrow bodied aircraft during 2016/17 achieved breakeven load factor. The CEO has elaborated on the reduction in the single biggest cost component i.e. Fuel. It is not known, what percentage of the saving is due to reduction in fuel consumption resulting from discontinuation of long haul flights to Paris, Frankfurt and Rome.  He made no mention of the 12% increase in manpower costs from previous year.

Several former and current staff raised questions related to the airline’s current status. Responses were brief and lacked clarity.

On the issue of monies owed to SriLankan Airlines by Mihin Air, now absorbed by the national carrier, it was stated, the government would eventually reimburse dues. No time frame was specified.

No meaningful response was forthcoming on the issue of high employee costs. The airline employed 7,021 staff to service 24 aircraft, a staff to plane ratio of 292 for each aircraft. Carriers known with staff to plane ratios worse than that of the national carrier are Syrian Arab Airlines 400:1 and Pakistan International Airlines with 391:1. Air India has managed to reduce staff to plane ration from 300:1 in 2012 to 108:1 by 2015.

CEO’s mixed message of repositioning the airline as a regional carrier was questioned on the basis, regional carriers more often than not are low-cost carriers whereas SriLankan Airlines was a full-service carrier. The new daily frequency to Melbourne in Australia due to commence in October is obviously not a regional flight.

The advisability of the payment of USD 115 Mn (LKR14,362.81 Mn) plus loss of advance payments, for the cancellation of four A350-900 aircraft without exploring the possibility of how best to utilize the aircraft was raised by a former employee. It was stated, a complete study had been undertaken if the four aircraft could be meaningfully deployed before arriving at the final decision of cancelling all four leases, despite the high cancellation fees.     

In response to the query of inability to breakeven despite an 80% cabin factor and 50% cargo load factor, it was attributed mainly due to high fuel costs and aircraft lease rentals. The two cost heads account for 23% and 16% of group operating costs, respectively.

When current management assumed office in January 2015, company staff strength was 7,870 which has increased to 8,029 within two years. Group Employee Costs for 2016/17 amounted to LKR 20,015.18 Mn., a 96% increase from LKR 10,186,63 Mn published in 2015/16 Annual Report.

In response to clarification sought from the Chairman, CEO’s response forwarded by Chairman stated; “Reporting classification has changed. Previously the Pilot and Cabin Crew costs were reported separately, not in ‘employee’ costs. Now we include the crew salaries in the same line as other staff, but hotel and meal allowances are reported in a separate line”.

The change in reporting classification is not stated in the Accounting Policies and Notes on pages 63 through 102 in the Annual Report.

CEO’s response further elaborated, “the 96% increase is a misunderstanding of the annual accounts. Staff have increased (due to CBAs) but headcount has not gone up much, (total of 34) even though we are operating many more aircraft and ASKs.

Loss making companies, especially those to be restructured, generally freeze staff recruitment as done by GoSL in 1996, in preparation for privatization. Current staff strength exceeding January 2015 levels is an indication, most if not all positions falling vacant due to resignations and retirement have been filled, despite mounting losses, downsizing of route network and resulting reductions.

In 2016/17, Group Employee Costs including Crew Salaries amounted to LKR 20,015.81 Mn. Crew Expenses consisting of allowances amounted to an additional LKR 5,435.70 Mn making the total Salaries and Allowances bill a massive LKR 25,451.51 Mn.

Despite the three additional aircraft inducted to the fleet in 2016/17, only a marginal increase of 0.42 block hours has been recorded in aircraft utilization. CEO’s “More ASKs” (Available Seat Kilometers – passenger seats offered for sale and distance over which they are carried) is factually incorrect. Whereas ASKs in 2016/17 amounted to 15,608.10 Mn with 24 aircraft, it is less than ASKs in 2015/16 amounting to 15,790.28  Mn. with 21 aircraft and 16,180.27 Mn ASKs in 2014/15 with 21 aircraft. 

Aircraft Maintenance & Overhaul Costs amounted to LKR 17,644.09 Mn. in March 2016/17, a 48% increase from LKR 11,932.41 Mn. in 2014/15, despite the induction of several new aircraft which generally results in reduced maintenance & overhaul costs.     

The low utilization of the fleet of 24 aircraft was raised but no valid reasons were provided. Aircraft utilization during 2016/17 with a fleet of 24 aircraft amounted to 12.44 block hours per day in comparison to 12.02 block hours with a fleet of 21 aircraft during previous year. The industry norm for wide bodied aircraft exceeds 15 block hours per day. 

A major factor leading to the low aircraft utilization is the two unwanted Airbus A330-200 aircraft in the fleet. When lease agreements for three old A330-200 aircraft expired early this year, the CEO was directed by the Board to extend lease agreements, provided, Pakistan International Airlines confirmed the long-term leasing of three of the national carrier’s six newer A330-300 aircraft which did not materialize. Meanwhile, the CEO extended the lease agreements of three older A330-200 aircraft of which, two are no longer required. SriLankan Airlines then attempted to back out of the agreement and was faced with litigation in the commercial courts in London, forcing the airline to accept all three aircraft, of which only one is required. An attempt by some Directors to hold an inquiry was quashed by a sub-committee of three cabinet ministers Sarath Amunugama, Malik Samarawickrama and Kabir Hashim and the Prime Minister’s Financial Advisor R Paskaralingam who concluded, no inquiry was necessary. Meanwhile, an insider, on condition of anonymity confirmed, utilization of six A330-200 aircraft commencing April has plunged from a previous low of 11.67 block hours per day to an even lower 9.58 block hours per day.

A few months ago, in response to an advertisement to fill forty-five vacancies in the airline’s Security Dept., forty applications were received from the line ministry. Only seven applicants possessed minimum requirements. Ministerial approval is now required, initially for all staff vacancy advertisements and once again, to employ all selected candidates, resulting in the passing of months prior to completion of recruitment formalities. It would appear, the line minister, who recently complained to the President of being bypassed by the airline in decision making process has now managed to bring the Board and CEO to heel. The transformation of SriLankan Airlines Ltd. to SriLankan Airlines ‘Corporation’ providing ‘jobs for the boys and girls’, begun during previous administration would now appear to be a fact of life. Meanwhile, the much-hyped transforming of the national carrier to Tamasek / Singapore Airlines format now seem to have flown right out of the flight deck, airline jargon for cockpit.       

In a bizarre development, a proposal has been made to award a performance bonus of LKR 10 Mn to CEO Ratwatte on the basis, he had achieved his target. What is meant by achieving target is, Actual Operating Deficit being less than Budgeted Operating Deficit. It is understood, his contract letter contains a clause of a performance bonus of LKR 10 Mn in case of achieving his target.

Suffice to state, in airlines the world over, a CEO who does not achieve at least an Operating Surplus receives a caution, not a performance bonus. A CEO who commits to an unnecessary expenditure of USD 17.2 Mn would have at least faced a disciplinary inquiry, if not dismissal.

In our Paradise Isle, a CEO of a company not breaking even and responsible for the loss of USD 17.2 mil due to an unsound decision is recommended for a whopping performance bonus of LKR 10 mil.

The proposal had been shelved due to the vehement objections by some directors.

Footnote

This article was sent to the Chairman who was overseas, for his observations. The response received contained observations from CEO and Head of Finance. They covered the issues of Employee Costs and Crew Expenses which have been incorporated.

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Latest comments

  • 4
    0

    It appears all the new aircraft are leased at above market rates on 12 year leases with no termination clause.

    This means it is impossible to operate them profitably – and there are still more on the way!

    There is also nothing that can be done as these are legally binding contracts.

    My guess would be that all this was done to increase the total value of the “deal” and the subsequent commission paid out. Some people made a lot of money out of this deal.

    No investigation into this of course.

    The only way out of this mess is bankruptcy.

    • 1
      0

      Don’t talk nonsense men! It’s not like they were bought from Ebay, they were bought from the largest leasing company in the world at market rates. That is why it’s not investigated, because there was nothing wrong with the purchase.

      The PM is hellbent on burning all what happened in the previous government that took the very foolish decision to terminate theses lease, without understanding the financial and legal implications.

      And who pays for this purely political decision – the public.

      Long live the PM!

    • 4
      0

      Excellent analysis by Rajeeva. Keep up the good work.

      The airline has no chance of becoming profitable with present board and management and the political influence.

      One example is the daily flight to Melbourne. In order to lower the costs, they are going to deploy the old A 330 which has lower lesser costs. The expected loss is approx Rs 40 million monthly with a loss of around Rs 500 m per year on this route.

      The airline is reluctant to separate huge loss making passenger business from profitable catering, ground handling and engineering businesses. We have not made any profits on passenger business for more than 10 years now !!

      staff costs are unsustainable with pilots now on Rs 2 million per month with allowances and stewardesses on Rs 500,000 per month with allowances.

      Best to give it at one USD to a regional airline so that we cut the losses. The current loans to BoC and PB is around USD 500 m. There could be further losses on cancellation of existing A 350 orders. Mahathir sold Air Asia for one USD to Tony Fernandes 20 years ago and today it is the largest Asian low cost airline.

      • 1
        0

        No one will pay One US$ for it men, when the actual value is a massive negative number. No chance in hell of selling it at all!!

  • 2
    0

    It is USELESS to discuss this Public Venture named “SriLankan Airline” the National Carrier. It will NEVER make a “Life Come Back” in the thinkable future. If allowed to go on, the country and the people would be only maintaining an “ELITE” class of people with no returns what so ever. So what is the solution? In Government’s own policy go for “Public/Private” partnership. Why can’t the Government open this venture for “Private Partnership” from within S/L? I have seen many such “Private Business” expansions through acquisitions and performing exceedingly well. For example SOFTLOGIC; HELEYS; LAUGHS etc. Why can’t the Government negotiate with local entrepreneurs through Chambers of Commerce and get them to form a CONSORTIUM to take over this venture and give it complete control and freedom to run the Airline based on a Public/Private business basis. Since the Government is presently meeting all the financial obligations, this CONSORTIUM to be formed could be given a “ZERO” Balance Sheet on the financial commitments and hand over present Assets as Capital Contribution. From the “Appointed Date” all functions including management/ administration must be left in the hands of the “Consortium” and the Government must only have an “oversight” role to monitor its compliance with “Public Policies”. Let us throw this “Challenge” to the “Local Private Sector” and see how it works. I am confident, it will work.

    • 1
      0

      My good friend, do you have any idea what happens to the DEBT when the Balance Sheet is ZEROed? It does not disappear you know. Neither does it get paid by the PM. It goes to the Treasury and will need to get serviced again by the tax payer. So NO, the Debt cannot be removed from the company’s Balance Sheet. Good intention though!

  • 1
    0

    In 2015, the Sri Lankan air line Management should have been replaced. they discontinued Mihin air only a fewwks ago, I suppose.

  • 7
    5

    Rajeewa Jayaweera,

    Ever since the new management took over Srilankan airlines in 2015, You have been continuously attacking the management. Is it because you have a personal issue with PM or the Director board or is Killi Maharaja instigating you.

    Already Killi Maharaja together with MS has ordered a frigate from russia costing billions which is unnecessary at this time.

    • 5
      2

      Vasu, so maybe Mr. Rajeewa should shut-up and let the PM’s men plunder the state assets, like in the bond scam.

      Mr. Rajeewa, please ignore these cu#%s and continue the great analysis that you have been doing, you seem to have a good operational and financial knowledge about the airline, which is very valuable for us to understand the mismanagement better.

      Good work!

  • 4
    0

    Air Lanka should be closed down instead of squandering the tax payers money to sustain this colossal loss maker.

  • 2
    0

    A Sri Lankan Airlines AGM is an exercise in futility. A complete waste of time. The government doesn’t mind about ‘mismanagement” at their preferred in-house mode of international transport (after all they control appointments), and those appointed to manage the airline haven’t a bloody clue. WE the People (99.9%) will never use the service, but WE will pick up the tab. An Alice-nona-in-wonderland scenario.

  • 5
    0

    Mr Jayaweera can you please list the names of the Board members of the airline appointed by this government, their qualifications in the airline business and also
    1) monthly salary( income)
    2) other benefits enjoyed by them since the appointment( including all free flying etc)
    3) how many of them are foreign citizens or duel citizens( like Arjun Mahendran)
    4) what were they doing prior to their appointment

    Thank you

  • 1
    0

    The fine paid by CEO Suren Ratwatte for stubbornly terminating the contract for the A350 leases was around $150 Million. In comparison the last market valuation of SriLankan Airlines was only $126 Million (based on 44% stake sale by Emirates for $55 Million, valuing the company at $126 Million in 2010). There are allegations that proper procedures were not followed by the CEO in the contract termination, resulting in a significant loss to the state.

  • 0
    1

    Debt: Thanks. You are correct. The “Debt Load” already existing as at a date of a “New Takeover” will be transferred to Government and from that day there will not be any “Hand Outs” from the Treasury for the airline. The advantage of this step is to stop continuance of doling out funds from the Treasury to a continuing loss making and cash trapped Public Venture. The “New Venture” administrators must bear the day to day running expenses and inject necessary capital. How that is possible is left to be worked out through a “New Business Plan” by the “New Venture Administration.

    • 1
      0

      Dear Douglas, there is close to Rs. 100 BILLION worth of Debt in the Balance Sheet. Are you suggesting that Government take on the debt and service the debt from the Treasury, instead of the Government funding Working Capital requirements. and letting the Company service the Debt?

      Taking the Debt out of the Company B/S and transferring it to the Treasury, makes it worst-off, and that is why it is not done. Please try to understand it from a Cash Flow point of view.

      Even if all the Debt is removed, the airline still does not have ANY VALUE at all, not even ONE DOLLAR.

  • 1
    0

    Thank you Rajeewa for briefing us on the weakness in the way SriLankan Airways is being directed.
    We can see from the comments here that the weakness may be due to constant interference from outside.
    Looks like SriLankan Airlines will self-fold soon.
    National airlines and airports have become a prestige but in our case we just cannot afford it.

  • 1
    0

    Why on earth do we need a “national’ anything, that is running into losses in the billions and managed by a set of incompetents?

    Shut it down, operate an open skies policy and watch the tourism arrivals grow and the employment opportunities in and around K’yake boom.

    • 1
      0

      Upul, what if another incident like the “Airport bombing” happen again? We will certainly have CLEAR SKIES, never mind open skies. Us Sri Lankan’s will have to swim in and out of the country.

  • 3
    3

    Good old Rajiva Jayaweera hitting all round the wicket at his old hobby horse-Sri Lankan Airlines.His cantankerous,acidic style is reminiscent of Papa Stanley’s missives in the good old days.

    The difference is while the son writes in English, the father wrote reams in Sinhala and the English educated recipients promptly had them filed with a chuckle…… without bothering to read them of course !!! That was how “Sinhala Only” was looked upon by the Sinhalese themselves in the 1950s upto the late 70s!!

  • 3
    0

    Brilliant analysis by R Jayaweera.The airline is being blead to extinction by a set of vultures.
    What does the recommendation of a whopping bonus in a loss making, haemorrhaging airline to the inexperienced, totally incapable CEO Ratwatte suggest? Would Chairman Dias have done similarly to a CEO working in one of his Jungee factories or at Coffee Bean in similar circumstances?Can we ever compare Ratwatte to say the brilliant CEO of Qatar Airlines,Al Barkar?There are very capable local people to be CEO at Srilankan but they have no chance.

  • 1
    1

    @aercap

    There was everything wrong with these leases (see the Weliamuna Commission Report).

    It has been admitted that these aircraft have been leased at above market rates on 12 year leases with no termination clause – even rogue CEO Suren Ratwatte had said it.

    This is also why it is impossible to sell the Airline – these leases represent several Billion Dollars in forward liabilities.

    Sri Lankan taxpayers are already on the hook for at least 1.5 Billion Dollars as a result of this mess – and still no investigation….

    They only option remaining is bankruptcy.

    • 1
      0

      @UKCitizen
      No there was absolutely nothing wrong! All these commission are set up by Ranil as witch hunts. Are you surprised that Suren also agreed?

      Try to de-blind your self from the politics and look at the commercial transaction that took place. You can even file an RTI and get the necessary data now, including the prices agreed and the prevailing market prices at the time. It was with a global listed company, where you can’t ask for kick-backs from them – so why would anyone want to but it at any premium to the market. All nonsense to sling mud and cover ones inability.

      And NO, that is not the reason why it’s impossible to sell the airline, it is due to poor management of the operating expenses.

      No doubt the lease rent will sit as a liability in the Balance Sheet (until obligation fulfilled) but remember that these leases also would have also generate significantly more Billions of Dollars in Revenue, if they were utilized. Even if losses are inured, they would have been spread over the lifetime of the leases (12 years), rather than a bullet payment all at once, and the accumulated losses (Present Value of the Future Losses) would have been far less than the fine paid for the cancellation.

      Silly political decisions by silly men are costing the rest of us through the nose!

  • 3
    0

    One thing all are forget. This corrupted and failed management backed by corrupted politicians, owe every single cent to the general public they are spending. These money and luxuries perks comes from poor people tax. They should be shamed to even walk in public.

  • 2
    0

    When JR requested Late Mr.Lee Kuan Yew to let go a Singapore Airlines pilot so that he could start Air Lanka Mr.Lee told JR that it was not the time for Sri Lanka to have a national carrier but rather he should concentrate on developing and managing the most important areas in the country and further he said how could a pilot run an airline company.

    JR did not listen and went ahead with Air Lanka. Today Sri Lankan is the biggest loss making institution in the country, 16,181 Million loss as at 2014.

    Sri Lankan should be closed down and the money saved should be used for education instead.

  • 0
    0

    Shut it down and cut the losses, without adding to it daily. Now a Rs.10 million bonus for Ratwatte for causing additional losses

  • 0
    0

    Debt: That ” 100 Billion Debt” already on the shoulders of the Government of the PEOPLE of Sri Lanka will be increased by further 10 Million once the CEO is paid that “BONUS”.

    • 1
      0

      Douglas

      The 100 Billion is still not on the government’s shoulder. But if what you are proposing is executed, then it will be. So be careful what you wish for!

  • 1
    0

    @AerCap

    Don’t dismiss the Weliamuna Commission Report – it paints an extremely accurate picture of the situation at the Airline. Why do you think it was de-railed?

    I am one of those who submitted information to the Weliamuna Commission – letters and emails proving abuse of power by several of the senior managers. Please don’t insult the brave people who came forward to tell the truth.

    As for the aircraft leases – I stand behind my previous comments. Once again a small group of people have profited at the expense of the entire country. An investigation will reveal this which is why any investigation is being blocked.

  • 1
    0

    The Airline employed 7021 staff to service 24 aircraft,a staff to plane ratio of 292 for each aircraft says the writer.
    Would this beat the staff to Bus ratio of the CTB?

  • 1
    1

    @UKCitizen

    The Weliamuna Commission was a WITCH HUNT – nothing more. With the help of pawns like you they put together a political propaganda piece. It was used to to grab power and thrown away into the dustbin like a used condom.

    Don’t feel too sad – they did worst to us Muslims. They desecrated Wasim Thajudeen’s grave, simply to get a few of our votes. That’s politics for you.

    No one profited from the aircraft leases, it was an international commercial agreement with a listed company. Your accusations are baseless and just like the Weliamuna Commission Report distracts the current corruption and mismanagement at the airline.

    I dare you to publish all the letters and emails you so bravely handed over to that Kangaroo Court. As your identity is not revealed you should not have any issues. I dare you!

  • 0
    0

    The Internet has spawned the false feelings amongst all of us commenters, that anyone gives a whiff about our opinions and conclusions.

    When the Yahapalanayas appointed Dias as Chairman, they were not looking for a person who knew how to turn around a messed-up business. They needed to fill the board, so, being a Royalist was the first tick, and being a sipping or sucking buddy the second. When it came to the CEO slot, again, they were not looking for an competent, aggressive, trained manager. They once again needed to fill the seat and what better way to do that than the brother of a side-kick!

    Till today, NO ONE, including COPE has found out what all these clowns have done for the last 30 odd months and more importantly what they have cost the airline by way of emoluments, freebies and incentives. Now we find out that Ratwatte is getting a bonus for just getting up in the morning!!

    Not bad, if one can get a package like this.

  • 0
    0

    @AerCap

    Your reply is indicative of the problems within Sri Lanka – people refuse to accept the truth.

    I’m not on any “side” – I’m a victim of Abuse of Power by senior management at SriLankan. I am nobody’s pawn.

    There are no sides – just Rogues protecting each other while stealing from the people of Sri Lanka.

    Since the Rule of Law is completely absent in Sri Lanka there is no way for me to obtain Justice and prosecute those who are being protected at the highest levels.

    So I’ve chosen to expose these people instead – I stand behind every word I’ve written.

    It saddens me that you continue to deny the truth.

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