By Rajeewa Jayaweera –
After 37 years of making losses, it is abundantly clear, the state of Sri Lanka does not have the political will or the expertise to do what it takes to manage and operate SriLankan Airlines as a viable commercial enterprise. Profits declared during a few financial years have not been from its core business of transport of Passengers and Cargo but from ancillary operations such as Ground Handling and Engineering in which the carrier has a monopoly and by disposal of assets from time to time.
Meanwhile, some ministers have begun speaking of restructuring the airline by way of infusion of ‘direct foreign capital or through a management agreement with a foreign airline’.
Every government is duty bound to decide and act based on what is best for the country. The national carrier played a pivotal role during the years of the armed conflict. It kept afloat, the hospitality industry, the movement of labour traffic to the Middle East and facilitating Sri Lankan exports even at times when foreign carriers withdrew. Traffic Rights could have been better managed allowing the national carrier a reasonable chance to compete with carriers with modern fleets, equipment and large networks. Emirates, Qatar Airways, Etihad, Oman Air, Kuwait Airways and Saudia now operate 84 weekly flights between their home bases in the Middle East and Colombo. It is expected to increase to 98 flights from summer 2016. If a Liberal Aviation Policy or Open Skies is what is best suited for the country in post conflict Sri Lanka, so may it be. However, the national carrier does not have the wherewithal to compete with them. It has been literally overwhelmed, especially in the European markets. This writer discussed this issue at length in an article titled “What ails our National Carrier IV – Question of a National Carrier or a Liberal Aviation Policy” published in the Sunday Island edition of 19 July 2015.
The most important and fundamental issue that need be addressed is ‘does Sri Lanka need an airline’. It need be a hard business decision thought out rationally and not emotionally in the context of archaic concepts such as ‘national carrier’, ‘flag carrier’ etc. nor in the context of the welfare of its 7,000+ employees. More important is that every citizen has to bear a debt of LKR 6,000 on behalf of the national carrier and it is still increasing. The only justification for an airline would be if it contributes to the growth of the country’s economy without being a burden to the Treasury.
A management agreement with a foreign carrier without equity participation is not an option. The state would still be required to provide funds for operating the airline. In case of losses, the management company may at most, forego their management fees. However, no management company will agree to underwrite losses as experienced with Oberoi and Inter-Continental hotel chains etc. Should losses continue, the owners have the option of terminating the management company. That would not be a solution.
Should the state decide to wind up the national carrier, focus will have to be on how best to achieve that objective within a given time period. Key among issues to be addressed will be alternate arrangements for passengers ticketed beyond closure date, a reasonable compensation plan to staff and negotiate best possible terms for the aircraft already in operation and due for delivery commencing September.
However, should it be state’s contention the nation does need an airline, the two options available would be;
1) Go through a process of restructuring the airline and seek one or more foreign investors who will assume the role of major shareholder and take over management of the company
2) Wind up SriLankan Airlines as was the case with Air Ceylon in 1978 and invite local and foreign investors to set up a new airline with the state as a minority shareholder.
The better of the two options would be Option B for a gamut of reasons.
A proper restructuring of an airline for the entry of private investors is an onerous and time consuming task. British Airways (BA) commenced preparations in 1981 and was finally privatized in 1987. Based on its interim ‘survival plan’, number of staff was reduced from 58,515 to 40,440 during this period. The method used to privatize British Airways, was through a “fixed-price offer”. There was no “Golden Share” for the state in the privatized BA. (Privatization of British Airways, Onu Başer – 1999). In 1987, all aircraft (mostly ancient other than the Concords) were transferred by the British government to the new British Airways Plc at a book value of GBP one per aircraft.
Lessons could be learnt from airlines which faced similar situations not so long ago. Sabena Belgian Airlines (subsidiary of Swiss Air) declared bankruptcy and wound up operations never to fly again. All its several thousand employees were laid off. Swissair (SR) grounded its fleet on 01 October 2001 in the aftermath of 11/9. It could not pay its fuel bills in cash as demanded by suppliers. One of its subsidiaries Crossair, thanks to a takeover by UBS and Credit Suisse and a Swiss Federal Government loan, took over SR’s operations until Swiss International Airlines was founded on 01 April 2002. 9,000 SR staff lost their jobs. Around half of them were reemployed by the new Swiss International Airlines strictly on a ‘need’ basis on totally different employment contracts. Privileges secured by different SR employee’s Unions were gone for ever. Swiss International today is a part of the Lufthansa Group. The Swiss government is not a stake holder.
In the case of Option 1, no investor will invest even a penny in SriLankan Airlines in its current state. The airline will need to prepare a ‘survival plan’ on an urgent basis to see itself through till the exercise of privatization is completed and a new management appointed. The ‘survival plan’ will need to address on an urgent basis, the issue of discontinuing unprofitable routes, especially European routes. The Travel Trade is opposed to withdrawal of flights from Europe. They together with their foreign principles may be called upon to guarantee at least 50% of their customers to Sri Lanka to SriLankan Airlines. Some fear, the Middle Eastern carriers would form a cartel and make Sri Lanka an expensive destination. A quick review of their air fares from Europe to the Maldives would suffice to dispel such notions. They will compete amongst themselves. Quality of their products differs. Pricing is invariably used as a tool to increase market share. Meanwhile, the state will obviously have to restructure the company. It would need to write off the carrier’s carried forward debt. It will also need to address the issue of 7,000+ employees. No investor or management company would wish to face the unenviable task of shedding excess staff, early in their operations thus earning their wrath. There is no other way out. SriLankan Airline’s employee to aircraft ratio with 21 aircraft is one of the highest in the world with around 340 employees per aircraft. Even the highly unionized Air France with 235 aircraft has a ratio of 295 employees per aircraft. Swiss International with 83 aircraft has a ratio of 97 staff per aircraft. They learnt their lesson from their 2002 bankruptcy. At SriLankan Airlines, several poorly negotiated Collective Bargaining Agreements are in place, agreed to by previous managements. For example, Technical and Cabin crew are provided transport to and from their homes even as far as Gampaha, Panadura etc. This practice, at times requires more than one vehicle to be deployed to pick up and drop crew for one flight. No other airline is known to provide such a facility. Until the early 2000s, all crew were picked up and dropped off from/to a location in Colombo, usually a 5 star hotel. The annual cost of crew transport exceeds LKR 300 mil. There are many such anomalies. Such agreements will not be acceptable to foreign investors and will have no place in a privatized airline.
Back in 1993, BA acquired a 25% stake in Qantas (Australian national carrier) for AUD 665 mil. and two positions in the Qantas BoD. By the time British Airways sold their shares in 2004 for AUD 1.1bil., their stake had dropped to 18.25% due to Qantas having raised fresh capital. Meanwhile, BA had also earned AUD 600 mil by way of dividends during the 11 year period. The two carriers introduced an interchangeable coupon system very similar to the scheme introduced by Emirates with SriLankan Airlines for the seamless marketing of each other’s carriers. Even though BA had no management contract, their expertise was made available to Qantas on request. A hallmark of the agreement was the withdrawal of all BA flights to Melbourne, Perth and Adelaide and reduction of flights to Sydney to a daily flight. It was a time when all flights between London and Australia touched down in Singapore, Bangkok, KL or Hong Kong. Qantas began feeding into all BA flights from the four Far Eastern airports besides operating their own flights to London. It was a win win situation for both carriers. BA made an overall profit of AUD 1.7 bil over 11 years from their investment. Qantas, on the verge of bankruptcy received a desperately needed capital infusion. The two negotiating teams had two representatives each from British Airways and Qantas as observers.
The negotiating team from Sri Lanka during negotiations with Emirates in 1997/8 did not have a single observer from Air Lanka. An arrangement similar to BA / Qantas, for Emirates to withdraw from Colombo and feed into SriLankan Airlines from Dubai would have been hugely beneficial to Air Lanka/SriLankan Airlines. All Emirates passengers in any case have to disembark in Dubai. Such input could have been provided by observers from the airline to our negotiators. It is hoped, such an arrangement would at least be in the agenda for discussion, should there be a next time.
In the case of Option 2, the biggest advantage would be the opportunity for the new company to start with a clean slate. The state would play the role of a minor shareholder with no involvement in management and will not be called upon to make good any losses. Ideally, the state should not have more than two positions in the BoD to represent its interests and to assist in ironing out issues arising for the new carrier with different arms in the state sector. The state’s equity contribution could be by way of transfer of all land, plant and equipment, after proper valuation, to the new company with the proviso the new company take over the current lease agreements for all aircraft in the current fleet as well as the four new A350-900 aircraft due for delivery commencing September. Large carriers such as Emirates, Qatar Airways etc. have enormous leverage with Airbus and would be in a better position to find solutions for the unwanted aircraft. In return, the state would have to make concessions, a small price to pay in comparison to the lease charges to be paid for the four Airbus 350 aircraft over a dozen years. It would leave the state with the key issues of writing off carried forward losses and compensation for 7,000+ employees. Some of the laid off staff are bound to be recruited by the start-up airline albeit with revised and more realistic employment terms. The light at the end of the tunnel in such a scenario is, once the state has wound up SriLankan Airlines and settled all outstanding issues, it would be free from providing financial assistance to an ailing enterprise.
It would be beneficial for any Middle Eastern carrier to gain access into the national carrier’s inventory to India. They have run into a stone wall with the Indians on traffic rights under the Modi government who have decided to protect Air India and Indian Airlines. Sri Lanka’s traffic rights and access into India due to an open skies agreement between the two countries (barring a few Indian airports) is the single most important strategic tool in the possession of its negotiating team. It need be utilized in a manner to obtain maximum benefit to the country and the national carrier, may it be with Emirates, Qatar Airways or any other.
Finance Minister Ravi Karunanayake is on record stating the Treasury will support the airline for the next six months only. In case Minister Karunanayke does not make good his threat, the carrier will continue to be a burden to the Treasury. However, if he does make good his threat, what would be the way forward for the national carrier? What would be Plan B in case an investor is not found within six months? The airline’s situation can only further deteriorate with the arrival of the first of four Airbus 350 aircraft in September.
Meanwhile, the clock is ticking for SriLankan Airlines and time is running out.