By Rajeewa Jayaweera –
The national carrier SriLankan Airlines (UL) held its Forty-First Annual General Meeting (AGM) of the Shareholders on November 8 in the ‘Mihilaka Medura’ at the BMICH. Chairman GS Withanage presided and, five of seven remaining directors were present. It was refreshing to see several directors appointed for no other reason than their connections quietly dropped, including the Air Force Chief. Replacements include three Treasury Representatives. The attendance of shareholders, all former and current employees, was much less than in previous years.
A Group Net Loss of LKR 41.7 billion was reported in 2018/19, up 124% from Group Net Loss of LKR 18.5 billion in 2017/18.
Chairman Withanage’s message to shareholders stated, “The airline continued to record its highest revenue in history for the third consecutive year with a total Group Revenue of LKR 184 billion.” It amounts to an 11.8% increase over the previous year. He further stated, “our operating cost continued to expand as well.”
Group Expenditure amounted to LKR 215 billion, a 23% increase over the previous year.
In his message to shareholders, Chief Executive Officer Vipula Gunatilleka stated, “If fuel cost and finance cost were excluded, the unit cost was 2.9% lower than the previous year reflecting the effectiveness of our cost reduction initiatives.” He did not elaborate if the previous year’s comparative costs were inclusive or exclusive of fuel and finance costs.
Gunatilleke, during the long-delayed AGM for 2017/18, held in June 2019, said almost the same things. Responding on behalf of Directors, he attributed losses mainly to finance charges of accumulated debts, high aircraft lease costs, high fuel costs, and currency losses. Little has changed.
Fuel cost is not unique only to UL but common to every operating airline.
The CEO joined the airline in August 2018.
For the benefit of the laymen, the Annual Report glossary explains, “The Unit Cost relates to the total operating cost of the Available Ton Kilometer (ATK).” “ATK is the measure of transport production. The ATK produced by a flight is the capacity for the payload of the aircraft measured in tonnes multiplied by the distance flown.”
The Annual Report and other announcements regularly refer to ‘Company Losses’ and ‘Group Losses.’ Any single Board of Directors and the CEO of the day cannot be held responsible for the monumental losses incurred over 40 years.
However, a yardstick that could be utilized to evaluate the success or the lack of it of an airline during a given financial year is the Surplus or Deficit resulting from its core business operations. It is generally not referred to in annual reports. Nevertheless, it is a useful yardstick to gauge if an airline with a loss-making history has affected course correction or heading in the same direction.
Core business activity of airlines is Passenger & Cargo Transportation, Carriage of Mail & Excess Baggage, ad hoc flights (charters), and Frequent Flyer net accruals. Expenses relevant for this purpose are those directly linked to the operation of core business operations.
The airline’s revenue from its core business (Traffic Revenue) was more than LKR 165 billion. In contrast, Operating Expenses exceeded LKR 195 billion, a deficit of over LKR 30 billion, up 30% from the previous year.
Passenger Revenue amounted to LKR 149 billion, up 12% from LKR 132.5 billion, and Cargo Revenue LKR 15.9 billion, up 8% from LKR 14.8 billion. The percentage point increases are higher than actuals in US Dollar terms due to currency depreciation.
Ancillary activities such as Ground Handling, Engineering Services, Duty-Free Sales, Catering, Training Centre, etc. do not belong to core business activity.
Significant increases in Operating Expenses for the year under review compared to that of the previous year were; Aircraft Fuel LKR 60 billion, up 29% from LKR 47 billion, Other Expenses LKR 15 billion, up 91% from LKR 7.8 billion and Exchange loss LKR 10.7 billion, up 491% from LKR 1.8 billion.
The five cost heads of Fuel, Aircraft Leasing, Aircraft Maintenance, Other Expenses, and Exchange Loss of LKR 143.7 billion amounts to 73% of total Operating Expenses and 87% of total Traffic Revenue.
Under the cost head Other Expenses, the airline has made provision to pay LKR 6,972 billion as Withholding Tax (WHT) as per the Inland Revenue Act no 24 of 2017.
GoSL provides loans and overdraft facilities to the airline on the one hand and the other hand, rakes in billions by way of WHT. The bulk of it accrued from lease payments for aircraft. Such is the ingenuity and brilliance of the Finance Minister and his Deputy, also the airline’s line minister.
Income from other revenue streams such as Ground Handling, Engineering Services, Aviation College, SriLankan Holidays, Simulator, etc. amounted to LKR 10.8 billion. Ground Handling contributed 91% thereof.
The airline operated 37 routes in 2018/19. A well-informed source, on condition of anonymity, confirmed, two routes, namely Male and Abu Dhabi, had generated a Surplus after recovering total route costs. In contrast, ten routes had not even recovered Direct Operating Costs (DoC). The remaining routes posted Deficits, having recovered DoC but failing to recover Fixed Costs. The primary routes of London, Tokyo, and Melbourne all posted Deficits.
For the benefit of laypeople, a Surplus is a positive variance between Traffic Revenue and Route Costs of a route. Route Costs comprise of Direct Operating Costs (DOC) and Fixed Costs (FC). Non-recovery of one or both cost factors amounts to a Deficit.
No airline records a Surplus in all its routes. Some routes will generate a massive and some others a moderate Surplus, whereas a lesser no of routes will post a Deficit. In the case of an overall Surplus, the airline posts a profit. In the case of UL, only a handful of routes have historically posted a Surplus. Such an airline cannot be successful. Hence the billions of rupees in losses reported year after year.
GoSL made an unwise decision to reduce Handling Charges in Colombo for six months commencing August 2019. It was meant to encourage tourists to visit Sri Lanka in the aftermath of the Easter Sunday bombings. No airline reduced its fares as a result. Sri Lankan Airlines’ revenue is expected to be negatively impacted by around USD 5 million due to this decision.
Meanwhile, at the time of going to Press, the Minister for Transport and Civil Aviation has announced the increase in Air Navigation charges after 38 years. It contradicts the directive to the national carrier to reduce Handling Charges.
A well-timed UL Media Release published on the day of the AGM announced, “SriLankan cuts losses in half.” According to the release, losses during the first half of 2019/20 have been trimmed by 11.6% to 76 million. It further elaborated, “Revenue down to USD 43 million and operating revenue down by USD 55 million.” Come to 2019/20 AGM; Easter Sunday bombings will be the primary reason for losses during the year. The release also referred to further expansion of its Australia operations to include Sydney. Other destinations mentioned were Ahmedabad in India, Ho Chi Minh City in the Far East, and returning to Frankfurt, Paris, and other earlier destinations.
The announcement of further expanding current Australian operations to Sydney and the reintroduction of European routes require thorough examination. It is no secret; the airline is paying massive lease rentals for the seven Airbus A330-300 aircraft. Not even in the early 1990s when Air Lanka operated several Lockheed Tristar aircraft fully paid up and owned by the airline, and no burden of lease charges did the European and Sydney/Melbourne routes post a Surplus on a year-round basis. The recently introduced Melbourne route reported a Deficit of nearly 15 million dollars in 2018/19.
In such a backdrop, both the airline and majority shareholder GoSL should delve into the viability of the airline’s current business model. Can Sri Lanka afford and sustain a full-service airline operating long haul routes requiring widebody aircraft? It is a deliberation requiring much thought without outdated notions such as a national carrier. Most European carriers remain the flag carrier of their country of origin. Still, ownership has been diversified with governments either having sold out their interests or continuing as a minority shareholder. British Airways is still Britain’s flag carrier, but many of its shareholders are not British. The Qatari government owns 20% of British Airways!
The President of one of the world’s top airlines Emirate, Sir Tim Clark, recently spoke on both UL and Sri Lanka and gave some sound advice. He advised it would be best to “build up a network in Asia rather than Europe. Procure good reliable workhorses like the new single-aisle Airbus 321s. Negotiate a deal for about 20 of these, keep the fleet simple, and build a solid route network in Asia.” He also advised UL should enter into codeshare partnerships where it makes commercial sense.
If the national carrier wishes to come out of its 40-year-old loss-making predicament, some out of the box, innovative thinking is required. In addition to Clark’s advice, it must take cognizance of current trends in the aviation world.
Discontinuation of the London route is anathema for GoSL. The airline cannot afford such sentimental thinking. It requires the allocation of a minimum of two widebody aircraft for its operation, a route unable to post a Surplus on a year-round basis.
Air Lanka commenced flights in 1979 and Air New Zealand in 1982 to London Gatwick. Air Lanka moved in 1990 and Air New Zealand in 1994 to London Heathrow. The New Zealand carrier recently announced the discontinuation of its daily Auckland/Los Angeles/London flight from October 2020 after 36 years of operations and replaced with non-stop flights to New York. This move will slash 130 jobs. Following is the Acting CEO’s justification for the decision. Inbound tourists to New Zealand are increasingly coming from Asia and North America, so future passenger growth is closer to home, rather than the UK and Europe. It was a commercial decision made with no sentimental attachments to New Zealand’s traditional links to the UK.
Qatar Airways discontinued In-flight Duty-Free last June. They commenced on-line sales with purchased items delivered directly to the boarding gate in Doha. Its CEO, Akbar Al Baker, explained the rationale being the decision. “A lot of airlines do not realize that inflight duty-free is not a big revenue generator. People don’t realize that every kilo that we put on an airplane costs us fuel burn. The fuel burn that we sustain to carry duty-free is really not worth it,” KLM and Scandinavian Air Services (SAS) have followed Qatar Airways. The concept is bound to be emulated by airlines, always on the lookout for innovative methods for fuel conservation.
UL earned LKR 882 million in the year under review and LKR 774 in the previous year. The 14% increase notwithstanding, US Dollar revenue in all probability may have been less than the last year due to currency depreciation. The national carrier would do well to compute actual costs including fuel burn off for the carriage of duty-free stocks on board to ascertain it’s viability.
During the AGM, the CEO came under a barrage of reasonable and unreasonable questions from shareholders. He endeavored to respond and also explained some of the difficulties faced in managing an international airline while being governed by state policies such as aircraft procurement. He told a shocked audience of the need of approximately 148 days to obtain cabinet approval for an aircraft lease agreement. Let alone an aircraft leasing company, not even a secondhand vehicle dealer in Sri Lanka will wait 148 days for a buyer.
The carrier owes Ceylon Petroleum Corporation a whooping LKR 26.8 billion in unpaid bills for fuel.
The CEO does not lose a single opportunity to impress listeners with his many “cost reduction initiatives.” He would do well to explain the need to exile a former CEO to London designated Director of Europe. His remuneration package, supposedly over GBP 10,000 a month, amounts to more than three times the allowances paid to a regular Manager posted to London.
If the government does not divest its interests and control over the airline, the fate of UL will be no different from that of Air Ceylon.
Prime Minister Ranil Wickremesinghe, having abused the airline for nearly five years, has announced once again, he would convert the airline to a profitable venture. He has stated, “we are considering the possibility of obtaining the support of a foreign airline.” He should first enlighten citizens, what happened during the last five years. Why did not a single reputed carrier come forward when the Yahapalana government called to Requests for Proposals? Meanwhile, all his promises of handing over UL to a Holding company similar to Temasek, holding company of Singapore Airlines has come to naught.
By the time this piece is published, the country would be preparing to welcome a new President, barring a second count.
One wonders what is in store for the carrier with the newly elected President.
Candidate Gotabaya Rajapaksa has been silent on the issue. All we know is the manner the airline was mismanaged by a not so intelligent close relative of the family during the Rajapaksa administration. It was treated like a family heirloom to be used and abused at will. One can only hope, lessons have been learned from past mistakes and not repeated if he wins the election.
Candidate Sajith Premadasa began his campaign, stating he would close the airline and divert that money to Janasaviya. The story changed almost overnight. He declared the airline a national asset and will be protected. One of his regular promises is to emulate his father, the late President Ranasinghe Premadasa. One hopes that will not be the case with aviation. Political interference did not exist from the airline’s inception in 1979 during former President JR Jayewardene’s administration. The politicization of the airline commenced with the administration of former President Ranasinghe Premadasa from 1989. This writer watched it happen from within, real-time.
It will not be long before we know.