SriLankan Airlines – total privatization or liquidation?

SriLankan Airlines – total privatization or liquidation?

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As customary since April 2008, national carrier SriLankan Airlines received its regular cash transfusion by way of a government negotiated loan package of USD 200 million from Credit Suisse, USD 150 million on long-term and USD 50 million on a short-term basis.

The company’s accumulated loss since September 1979 amounts to Rs 169,755 million (USD 1.095 million). The cumulative loss of USD 3.2 billion announced by Prime Minister Wickremesinghe in April 2016 probably includes the yet unpaid total cost of Airbus purchases.

According to State Minister Lakshman Yapa Abeywardana, the loan was expected to strengthen the Government’s guarantee for the ongoing discussions with several investors to run SriLankan as a Public-Private Partnership (PPP). He has further stated; “the government did not intend to liquidate the national carrier under any circumstances.” The carrier operated without Treasury handouts during the period 1989-93 when it owned most of the aging fleet and charges for three leased aircraft were low and during 1998-2008 when Emirates managed the airline. Several recent claims speak of profits of Rs 4.4 billion earned in 2007/8, the last year of Emirates management. Note 17.1 of annual accounts state; “Profit on disposal of Property, Plant & Equipment included the gain on sale and leased back of three Airbus A340-300 aircraft amounting to Rs 5.4 billion in the financial year of 2007/8.” If not for the sale of three aircraft, the company’s loss for the year would have amounted to Rs 1 billion.

The most critical and fundamental issue requiring attention is; ‘does Sri Lanka need an airline.’ It need be a rational business decision rather than an emotional decision based on archaic concepts of ‘national/flag carrier.’ Nor should it be in the context of the welfare of its 7,000+ employees. More important is that every citizen carries a debt burden of more than of Rs 8,000 on behalf of the national carrier and it is still growing.

Archaic concept of a national (flag) carrier

Except for USA who operated a CIA funded airline (Air America 1950-76) primarily for non-commercial purposes, most other western nations owned and operated national carriers. BOAC, Air France, KLM Royal Dutch Airlines, Lufthansa, Sabena, Swiss Air, and Iberia were some of the better-known carriers. Pan American, TWA (both American) and UTA French Airlines were privately owned airlines with a global reach.

Ceylon, along with many nations gaining independence in the post-WWII period, ‘aped’ the west by launching their national carriers. It was a matter of national pride for emerging independent countries. Air travel was limited to the elite and affluent. Airlines were small. Managing airlines was not complex. High airfares ensured profitability.

The 1973 Arab Israeli war followed by the OPEC oil embargo changed the world of aviation. Ballooning costs and resulting losses swamped airlines. Western governments met the challenge by privatizing national carriers and diluting government ownership by assuming the role of minority shareholders. Professional and competent non-governmental directors replaced government directors.

Free of the burden of loss-making state-owned airlines, governments deregulated the industry and encouraged private airlines. It helped to cater to the increasing demand for air travel albeit at cut-rate ticket prices. Deregulation resulted in the liberalization of traffic rights and the concept of ‘open skies,’ broadly considered healthy for competition, was born.

Sri Lanka, along with its neighbors Bangladesh, India, Nepal, and Pakistan and several African countries stubbornly stuck to the ‘national/flag carrier’ concept. Misplaced national pride prevented governments from visualizing the negative impact of diminishing airfares, increase in the cost of fuel, aircraft and manpower, the resulting losses and burden on their economies. Almost all such airlines became politically rather than commercially driven. Suffice to state, besides SriLankan Airlines, Biman Bangladesh, Air India, Nepal Airlines, PIA, Kenya Airways and South African Airways are all loss-making concerns today and a severe burden to their respective national treasuries. Nigerian Airways ceased operations in 2003.

Our leaders in the early 1990s failed to envisage and develop a politically bi-partisan national aviation policy to prepare the country to meet challenges of deregulation. Instead, Sri Lanka continued with the dying concept of a ‘national carrier’ and kept underwriting the carrier’s losses it could ill afford. Simultaneously, traffic rights were granted liberally without any consideration of its impact on the national carrier. The policies contradicted each other and were self-defeating.

Privately owned and operated airlines without government involvement are found in some South Asian and African countries, notably in India. It is a fact ignored by governments in countries such as Sri Lanka. Its ministers continue to make nonsensical statements such as “not liquidating the national carrier under any circumstances.”

In search of a Strategic Partner

Since January 2015, the buzz word in town has been Public Private Partnership, commonly known as PPP. The first attempt by way of an Expression of Interest (EoI) went awry. Selected bidder US equity firm TPG, after completing a due diligence process informed, “allocating the human and financial resources to make the airline profitable will not realize sufficient returns, compared to the many other investment opportunities that are available to them in India.”

Qatar Airways CEO Akbar Al Baker and Emirates Managing Director Tim Clark visited the country, met the Prime Minister but nothing materialized.

Accenture PLC, a Dublin based global management consulting and professional services company was hired to advice on how best to disengage from the Airbus aircraft deal. Four of eight purchased aircraft are still in Airbus order books. London based Nyras, an independent, international aviation consultancy firm, was tasked with the preparation of a restructuring plan to turn around the airline. A preliminary report has been supposedly handed over to the Prime Minister a few days before Christmas.

Meanwhile, statements from government ministers send all the wrong signals. A Deputy Minister during a media briefing stated; “the government will keep the ‘right to administer’ the national carrier even though a stake of it will be given to the private sector. The government will continuously control SriLankan Airlines despite the conversion of it into a private-public partnership”. Another Deputy Minister is on record stating; “the government is not looking at retrenching existing staff of SriLankan Airlines. He has given an assurance the privileges enjoyed by the 6,700 employees would not be changed.”

It is time, the government took stock of the present situation and seriously contemplate on reasons for its failure to attract a foreign investor/partner despite the efforts made during last three years. An Einstein is not required to explain, clearing the decks with statements of government absorption of past debts alone, as announced by PM Wickremesinghe on April 26, 2016, will not suffice.

The need for a new approach is obvious. In addition to wiping out past debts, GoSL willingness to divest 80% or more equity to an investor/s might help in its search for a partner.

Lack of will and commitment

After depredations of the Rajapaksa administration and its loyalists, hopes were high after January 09, 2015 of the new government turning around the airline.

A Board of Inquiry headed by a President’s Counsel carried out a superficial and limited investigation of malpractices during the tenure of the previous Board and CEO. Once the report was submitted, the new Board and the government did nothing with the findings.

The Prime Minister promised a Singapore Airlines styled management and an organization similar to Temasek, the holding company of Singapore Airlines, to manage State Owned Enterprises (SoE) in Sri Lanka which turned out to be a damp squib.

Before long, government interference, as in the past, returned to normal. The recruitment of Chief Executive Officer and Chief Commercial Officer was not merit based but by Royal command. Despite the airline’s retirement age being 60 years, a mid-level General Manager reaching retirement age received a two-year extension based on a directive from powers that be. The government has exhibited a penchant to be involved in day to day operational issues, regularly overruling Board decisions.

The current Board was appointed in February 2015 and new CEO named in October 2015. In a comical development, a Board member appointed acting CEO, was directed to prepare a Recovery Plan rather than expediting the recruitment of the CEO and COO and tasking them with the development of such a plan. During the Emergency General Meeting of Shareholders held on June 16, 2015, the Chairman spoke of awaiting government approval for the submitted Recovery Plan. When requested for details of the plan after seven months during the Shareholder’s Meeting held on January 19, 2016, the Chairman declined to provide details as only 80% of the plan had been approved but remaining 20% was pending. He did state, the approved 80% was being implemented but declined to respond if the carrier would withdraw from its loss-making routes to Europe and London. It was a tragicomedy. How is a Recovery Plan implemented piecemeal and that too without the route network which is key to the decision of the number of aircraft required in the fleet?

Eventually, the government approved the discontinuation of flights to Paris, Frankfurt, and Rome but directed the retention of London flights. Sources claim London flights were retained for prestige purposes aka Vanity Route. The route is currently covering its operating costs but indicates an overall negative. The fleet needs to maintain two Airbus A330-300 aircraft to operate the daily London route.

More importantly, it is an indication; after three years in office, no decision has been made on the fundamental issue if the airline need be a global or a regional carrier as well if it should be a full service or low-cost carrier. Meanwhile, the carrier’s losses continue to mount amidst such indecisiveness.

The number of employees in 2015 amounted to 7,000 which has not changed in 2017 despite the reduction in Production (Passenger and Overall Capacity). The management has made no efforts to reduce manpower. Besides the decrease in payroll and related staff costs, such an exercise would be a plus in the eyes of prospective investors. It is doubtful if any investor would take on the burden of an airline with a Staff to Plane ratio of 292 staff.

Even the mention of liquidation results in howls of protests from unions. An unstable government with multiple elections in the offing will not make sensible business decisions required at this critical point. Under the guidance and instructions of the previous incompetent Chairman, the airline concluded multiple Collective Bargaining Agreements (CBA) with several Unions. Some of the perks and facilities granted are unheard of elsewhere. No efforts have been made to renegotiate such CBAs possibly for fear of industrial action. Both GoSL and Unions need to appreciate the fact, renegotiation at this stage is preferable to meeting demands of investors or worse, liquidation. GoSL is bound to face massive retrenchments which will follow if and when an investor is found, and management of the airline handed over.

State Enterprise Development Minister on Thursday, announcing his decision to appoint a new Chairman and Board has stated; “We are making a determined effort to turn it around. That is no easy task, but we have decided to face the challenge and take the bull by the horn.” Boards need to be allowed to function independently without political interference. The government’s report card at the end of three years indicates, the ‘bull’ has not been taken by the ‘horns’ or for that matter, from any other part of its anatomy!

Considering the track record of governments, both present, and past, its inability to perform the role of a responsible majority shareholder is abundantly clear. Furthermore, it is also abundantly clear that the best option would be the model adopted by developed (western) countries a few decades ago of governments in the role of a minority shareholder or not being a shareholder at all.

by Rajeewa Jayaweera | island.lk

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