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Termination turbulence!


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SriLankan Airlines Chairman Ajith Dias (left) and SriLankan Airlines CEO Capt. Suren Ratwatte brief the media yesterday - Pic by Shehan Gunasekara

 

 

  • SriLankan Airlines tight lipped on the figure but Govt. says cancellation of 3 Airbus A350s to cost $ 98m
  • SriLankan management admits “significant one-off cost” but insists considerable savings compared to original cost of $250 m
  • Says sale wasn’t an option under contract and no takers for sub-lease
  • If persisted with A350s, carrier to incur $ 800 m contingent liability and $ 480 m operational loss for 12 years
  • Aviation experts claim total cancellation of 4 A340s was costly at $ 116 m and alternate options not aggressively pursued
  • Allege AerCap action tantamount to inflicting more wounds to an already bleeding airline 
  • Move would push soaring UL debt to near $ 600 m from current $ 485m
  • ​Lower oil prices and other improvements help reduce losses in FY16 and first five months of current year
  • SriLankan to re-negotiate all other existing lease arrangements

By Nisthar Cassim and Uditha Jayasinghe

SriLankan Airlines yesterday justified the termination of its lease agreement on four Airbus A350 saying it was in the best long term interest though industry experts were wary.

Shielding itself behind a Non Disclosure Agreement (NDA) with the lessor AerCap, the national carrier said the cost of the termination agreement, finalised on Tuesday cannot be disclosed. 

However there have been reports to suggest that the cost was around $ 98 million (or Rs. 14 billion) whilst Finance Minister Ravi Karunanayake said Rs. 25 billion and Reuters quoting the latter stated $ 170 million (Rs. 24.6 billion). Cabinet spokesman Minister Rajith Senaratne on Wednesday afternoon concurred with the $ 98 million penalty figure. 

SriLankan Airlines Ajith Dias said the figure could be made public over the new few weeks and CEO Capt. Suren Ratwatte said he could only disclose it to be “a two digit” dollar figure. 

At a media briefing the duo said the original termination fee quoted by the lessor was $ 250 million which was more than double the final settlement price and they were successful in reducing it considerably. The negotiating team included officials from the Ministry of Public Enterprise Development and the Treasury. 

Nevertheless the airline admitted that the settlement was a “significant one-off cost.”

Daily FT reliably learns the final cost of termination of 4 A350s was $ 116 million or nearly Rs. 17 billion comprising $ 98 million for the latest three A350s and $ 17.5 million for the previously cancelled A350.

Aviation industry experts were critical that debt saddled (to the tune of $ 478 million or over Rs. 70 billion) and multi billion rupee loss making SriLankan Airlines had failed to negotiate a better way out from the problem of contracted A350s. 

Originally ordered by the President Mahinda Rajapaksa regime the A350s were part of an ambitious and costly re-fleeting program, which the then Opposition and current regime criticised as tainted with corruption. The order included eight A350s, six Airbus A330-300s and four Airbus 321 NEOs.

Questions being raised about the termination deal between SriLankan and AerCap include whether the national carrier can afford the cost hence could have refused to pay and go for arbitration. The fact that the original deal was overly priced and allegations of corruption could have been used as a strong reason. Alternatively, SriLankan could have further negotiated the fee as some experts claimed the penalty value was 24 months of the lease as opposed to industry norm of 3-6 months. If this is true, then AerCap action was tantamount to inflicting more wounds to an already bleeding airline or the Sri Lankan negotiations team lacked more competent persons. Another poser was whether more financially viable alternatives were explored including sub-leasing or sale of the four A350s.

Some claimed the maximum fee should be in the region of $75 million to $85 million as agreed by the Cabinet Committee on Economic Management (CCEM). One of the A350 aircraft was cancelled with a penalty of $17.5 million and if the same price was fetched the total would have been $ 70 million. In the final analysis the fee was slightly below $ 30 million per aircraft which SriLankan believes was commendable. 

Public Enterprises Minister Kabir Hashim has told the CCEM that an offer had been received to buy the three aircraft outright and sell them for $330 million to another company. There were other interested buyers too.

Chairman Dias said if the national carrier was to take on the A350s, the contingent liability would have been a massive $ 800 million over the 12 year lease period and an operational loss of $ 480 million or $ 40 million annually. “If we taken these aircrafts and flown them the loss will be completely unbearable. So what we have negotiated is a fraction of that loss,” said the SriLankan Chairman who yesterday revealed improvement in the carrier’s operations by way of lower losses in FY16 and in the first five months of FY17 in comparison to a year earlier. 

“These aircrafts were contracted for 12 years at a lease rate which is no longer competitive,” added CEO Ratwatte. “Because we are rationalising the route network we don’t need the A350s. This is a legally binding contract with a large contingent liability. We were able to negotiate it down to what is an acceptable termination fee which is much better than taking the aircraft and operating and eventually losing the same amount of money in two years time. Return on the termination fee is two years which is quite reasonable in these types of transactions,” he added.

SriLankan also said as per the lease agreement sale wasn’t an option though the Lankan team discussed it. Regarding the sub-lease option, Ratwatte said: “We tried that too but we had no takers. Airlines are going through a recession. We tried every possible avenue to reduce the cost of this (termination) and this is the best we could come up with.”

He also said that SriLankan hopes to re-negotiate existing lease arrangements. “We have been talking to all our lessors about reducing our lease cost. But there were two pre-conditions. One was settle A350 issue , which is now done and the other we share our restructuring plans with them which we did last week. Next month or two we will be negotiating all our lease contracts to get further reduction and support us in our restructuring and recovery,” the national carrier’s CEO revealed.

With regard to finalising this termination of A350s contracted on a deal allegedly tainted with corruption, SriLankan Chairman Dias said: “Our purview was to negotiate as it was. Other matters are being looked in to by various other bodies and it is left to the Government.”

He also said the decision on the four remaining A350s scheduled for delivery from 2020 onwards will be left to the new strategic partner of SriLankan Airlines, for which the selection process is now on.


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