Downsizing, rightsizing SriLankan Airlines

Two things are infinite. The universe and human folly. SriLankan Airlines with an accumulated debt of Rs. 158 billion is to be restructured and repositioned. It is a prayer and a hope that holds little promise.

Announcing the restructuring of the National Carrier, the Minister of Finance promised to convert it into a regional airline focused on profitable destinations. This, he said, will be achieved by ‘professional management inclusive of local and foreign experts’.

There is no such thing as a profitable destination. Making a destination viable or profitable is the business of the airline – a virtue that has consistently slipped past the grip of SriLankan Airlines and its predecessor Air Lanka.

In his crusading reformer mode, the Minister of Finance has added that the Government ‘will pursue an open sky policy with restriction free traffic’ and invited ‘international airlines to make Sri Lanka a preferred destination’.

There is no such thing as a profitable destination. Making a destination viable or profitable is the business of the airline – a virtue that has consistently slipped past the grip of SriLankan Airlines and its predecessor Air Lanka

Restructuring and repositioning

Restructuring and repositioning of our debt-ridden airline needs to address issues arising from its cavalier expedition into re-fleeting. The financial obligations of the re-fleeting exercise are presently shrouded in mystery.

The homily of the Minister of Finance that its total accumulated losses could have financed 45,000 buses, 25 fully-fledged universities, 40 fully-equipped modern hospitals and 48,000 houses is empty rhetoric. SriLankan Airlines will gobble up many more buses, universities and hospitals in the next five years.

The new Chairman who assumed charge in February 2015 writes in the Annual Report of 2014/15: “Faced with continuing losses over the period under review, the fundamental question before the Board was whether turnaround is possible, within what timeframe and how self-sufficient a manner it could be achieved.”

In the light of the announced decision to restructure and reposition SriLankan Airlines , the Chairman and the Board should now tell us the time frame and spell out the ‘self-sufficient manner it will be achieved’.

The Chairman has been handpicked by the Prime Minister. He is perceived as a proven performer in the apparel industry. How will he perform in commercial aviation? Success is interdependent with time. He should master his brief fast. The test of success does not withstand the sands of time.

It seems that his team is not short of charlatanry. The Annual Report of 1014/15 has the Protem CEO claiming: “A red to black campaign and a bright ideas campaign have been initiated and are ongoing and the results have been extremely encouraging. These results have amply proven to the board, the commitment of the employees towards improving financial performance of the company…”

A red to black campaign to erase a loss of Rs. 158 billion! We have heard it all. We have heard it all too often. A bright ideas campaign to turn around an airline! Such gobbledygook in the annual report of the airline which is a millstone around our national economic neck is not funny. It is not even sad. Attempting the revival of the loss-making National Carrier that represents the heights of financial infamy with Boy Scout mottos is a national catastrophe.

However, the recent exposition made by the new CEO at the Chartered Institute of Logistics and Transport indicates a return to professional competence and clearer grasp of realities in global commercial aviation.

Pre-delivery payment financing transactions

The Air Finance Journal reports that Sri Lankan Airlines has worked out a $ 650 million financing arrangement. This transaction was closed on 18 December 2014. The transaction combined a pre-delivery payment (PDP) financing with the sale-leaseback long-term financing of five A330-300 aircraft with operating lessors AerCap and Hong Kong Aviation Capital and a lending syndicate led by Natixis and including Century Tokyo Leasing Corporation. Concluded on 18 December 2014, it was a done deal by the dawn of 8 January 2015.

Yet another news item in aviation industry publications informs us that SriLankan Airlines has committed to four A321 neo aircraft. This report, dated 23 February 2015, confirms that SriLankan Airlines has finalised lease agreements with Dutch firm Aer Cap and US firm Air Lease Corporation (ALC) for A321neo aircraft and the two firms Aero Cap and ALC will supply the Sri Lankan national carrier with two A321 neo each.

We shall confine ourselves to this primary information. Repeated attempts by this writer to elicit more tangible information failed because the General Manager of Corporate Communications of SriLankan Airlines could not be accessed. This correspondent was informed by his Secretary: “At the moment the General Manager Corporate Communication is at a Management Meeting. I will convey the message once he is back that you wish to speak to him.”

The new Sri Lankan Airlines management has to explain how it will proceed to restructure and reposition itself. It acquires added urgency in light of the transactions that are revealed. The restructuring will succeed only when its executives understand the basic and strategic problems they are required to resolve.

Pre-delivery payment financing transactions are payments that the purchasing airline pays to the manufacturer while the new air craft are built. Such an arrangement requires the consent of the manufacturer. To quote an authority on the subject: “The manufacturer’s consent sets forth the price for which the manufacturer agrees that the lender can purchase an aircraft in the event of a default by the purchaser airline.”

Here is the rub. The purchaser’s final purchase price is the manufacturer proprietary information and is almost never disclosed to the lender. The lenders starting point in determining the value of its collateral is the price stipulated in the manufacturer’s consent. The purchase price in the manufacturer’s consent will in most cases be determined by a US Dollar denominated amount at the time of execution. It will escalate until delivery in terms of the agreement.

The new aircraft A321 neo is one of the most advanced and versatile commercial aircraft in the market. Sri Lankan has ordered four of them but not direct from the manufacturer. [Viet Jet Air has ordered 21 of them from the manufacturer.] Designed to meet ongoing advances in technology, the manufacturer – Airbus – has 1,052 firm orders out of a total of 4,300 of the A320 family. Hence the qualifier ‘Neo’ – New Engine Options.

It can fly transatlantic from Europe to the US East Coast. How will SriLankan Airlines fit them to its restructured and repositioned route network? The manufacturer’s blurb tells us that the A321 offers the best seat mile cost of any single-aisle aircraft and seating capacities comparable to that of a wide body jetliner. If so, it offers a combination of possibilities. But that calls for imagination beyond ‘housemaid’ and ‘diaspora’ traffic.

Getting back to the basics

Switzerland and Belgium, two developed nations, decided that they will not resuscitate their flag carriers Swiss Air and Sabena. In the process they did not diminish in terms of global connectivity. What we need is the imagination to get back to the basics. There is no logic in operating routes at a loss to keep hotels occupied. Paradise is better off without visitors whose travel is subsidised by the National Airline.

The rule that we need to fly to London seven days a week is not cast in stone. If the seven slots in the Mother Country are so precious, it would not be too difficult to find a competent carrier to operate the route Colombo-London as Singapore Airlines did with its Concord service with British Airways. The aircraft was repainted with the Singapore Airlines livery on the left side and BA’s on the right side. There are plenty of ways to carry the flag suffering no first degree burns.

The Minister of Finance and the Prime Minister should heed the advice that Warren Buffet gave his shareholders: “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favour by shooting Orville down.”