![\"\"](\"https:\/\/www.colombotelegraph.com\/wp-content\/uploads\/2016\/02\/SriLankan-Airlines.jpg\")
<\/a><\/span><\/p>\nThe 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.\u00a0<\/span><\/p>\n 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 \u201cmaterial\u201d 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.\u00a0<\/span><\/p>\n 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.\u00a0<\/span><\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.\u00a0 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.<\/p>\n 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 \u201clost two years\u201d 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.<\/p>\n 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.\u00a0<\/span><\/p>\n The best way to look at \u201cManagement Efficiency\u201d 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.\u00a0<\/span><\/p>\n 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 (\u201cMR\u201d) 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.\u00a0 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.\u00a0<\/span><\/p>\n 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. \u00a0<\/span><\/p>\n It is also ironic that one of the best Management teams the airline had ever seen is now \u201cwitch-hunted\u201d 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 \u201chang\u201d its own war heroes \u2013 by sponsoring their own international resolutions against them. \u00a0<\/span><\/p>\n 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.\u00a0<\/span><\/p>\n 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 \u201cgarage sale\u201d, 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.\u00a0 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 \u2013 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 \u2013 that gap in capacity is now filled mainly by Emirates.<\/p>\n 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.<\/p>\n<\/a><\/span><\/p>\n<\/a><\/span><\/p>\n<\/a><\/p>\n<\/a><\/p>\n<\/a><\/span><\/p>\n<\/a><\/p>\n<\/a><\/a><\/p>\n<\/a><\/p>\n<\/a><\/a><\/a><\/a><\/a><\/p>\n