SriLankan Airlines continues downward spiral

SriLankan Airlines continues downward spiral

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The national carrier SriLankan Airlines recently held its 39th 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 was reported in 2016/17, up 135% from Group Net Loss of LKR 12,083.62 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 six 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 canceling 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 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. Crew Expenses consisting of allowances amounted to an additional LKR 5,435.70 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 the 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.

By Rajeewa Jayaweera

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