Where eagles dare…

Wednesday, 9 July 2014 00:00 -     - {{hitsCtrl.values.hits}}

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 far-sighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favour by shooting Orville down – Warren Buffett, famed investor known world over as the oracle of Omaha ‘SriLankan Airlines…you are our world...” – SriLankan Airline advertisement   Obviously among our population there is only a handful that can claim a sound knowledge of business or economic realities. On the contrary, many seem to have a distorted vision of how and why things happen. The vast majority in this country would have no concept of how public money, which is collected through various taxes on the people, is utilised and accounted for. That every telephone call made from a Government owned telephone to every car used by the Government is paid for with his money is an idea which will appear far-fetched to the average Sri Lankan, who according to statistics earns only about $ 3,000 an year (in fact many would envy an annual income amounting to $ 3,000!). He little realises that the Parliament, to which he elects a member periodically, is the ultimate authority in accounting for public money. SriLankan and Mihin Air But despite his woeful ignorance of the workings of the financial structure, there is hardly a person who is not aware of the fact that our State-owned Airline, SriLankan Airlines, is a huge loss maker. Its losses are in the billions of rupees. As if one loss-making airline was not enough, sometime back the Government floated another airline named Mihin Air. From the beginning this too became a heavy charge on the public purse. It has been said that the amounts of money lost through these two Government-owned airlines would have been sufficient to maintain several universities and hospitals. A healthier and better educated society is potentially a lot more of an asset than an airline. But our Government has decided otherwise, and seems determined to prove Warren Buffett wrong in his assessment of airlines as a business prospect. US dollar bonds issue The Chief Executive of SriLankan Airlines is exulting that US dollar bonds worth $ 500 million issued by his airline evinced interest among international investors. Although the issue is carrying a Government guarantee, the airline nevertheless is paying 5.3% which is markedly higher than what an average five-year US dollar sovereign bond would fetch. If Warren Buffett was looking at investing in bonds issued by various third world countries, he would surely take an interest in the bonds of SriLankan Airlines. There are two features of these bonds that will draw his attention straight away. The return on the SriLankan Airline bonds is more than the average for such bonds, a superior return being one of Buffett priorities. More important, Buffett hates to lose his money. Since the Government of Sri Lanka is guaranteeing the bond issue, there is no risk of losing his money either. Borrowers’ point of view But that is from an investor’s point of view. How does it look from the stand point of the borrowers, who are after all the people of this country? We are told that this huge sum is being raised in US dollars for re-fleeting the airline and also to modernise it. This means new aeroplanes and high value equipment which are the standard wherewithal of this business. In many countries, particularly third world countries where transparency in large government procurement is low or non-existent, such transactions often attract suspicions of commissions and kick-backs. National carriers That aside, there are many other worrying aspects to our foray into the big world of airline business. The sheer size of the investment required warns against acting on a whim. These are not ventures to move into merely because someone else is doing it, one has some vague notion about it or want to make a statement. In the early days of newly-won independence for former colonies, mainly in the heady 1950s and60s, many countries went into creating national carriers. We, always up with the trends, created Air Ceylon. The larger countries like India, Pakistan and Malaysia had domestic needs which ensured a certain amount of business. The smaller countries had to depend solely on international traffic. Most of them failed, an exception being the iconic Singapore Airlines which went on to become an international brand and a true eagle among competing airlines. Singapore success story Obviously every county, in geography, in financial strength, in human resources and culture are differently endowed. At the time of independence, Singapore, home to three large ethnic groups (Chinese, Malay, and Indian), no natural resources to speak of, high unemployment and little money did not look like a story with a good ending. But although nature did not favour Singapore with natural resources, it did gift it with a man called Lee Kuan Yew. Within a short period of about three decades this man took Singapore from a third world shanty town to the ranks of the first world. Today the quality of life for the average Singaporean is on par with the best. Singapore Airlines came into being in 1972 when the former Malaysia-Singapore Airlines split somewhat acrimoniously. At the time Singapore was working determinedly to make itself a financial centre in South East Asia. It was opening up industrial parks and other facilities, developing a duty free port and adjusting its tax regime to attract maximum investments to the country. Changi Airport The City State had three small (former) RAF air fields. After much consideration, Changi was chosen as the site to develop the then largest airport in Asia. Committing an investment of $ 1.5 billion, the Changi Airport was opened in 1981.In 2013 more than 53 million passengers passed through the Changi Airport. Nearly 1,000 planes land there on a daily basis. The story of Singapore Airlines and Changi Airport go in tandem. In the words of Lee Kuan Yew, “I spelt out the need for the Singapore Airline to be competitive and self-supporting; it would close down if it incurred losses. We could not afford to run an airline just to show the flag like other countries did.” How they did it, the extremely high quality of its management, the forward planning, careful route selection, obtaining lucrative landing rights, attention to detail and outstanding service quality of Singapore Airlines are long and complex stories which bear close study and cannot be discussed in one short article. Nor can we explain the success of the Singapore Airline without examining the overall success of that island city. Such gigantic achievements do not happen by accident. Words of Lee Kuan Yew Words of Lee Kuan Yew even picked randomly, give a clue to the spirit in which he approached the transformation of Singapore. (From Third World to First – 2000) “No critic has been able to fault the Singapore government for corruption, nepotism or immorality” “The single decisive factor that made Singapore’s development was the ability of its ministers and the high quality of the civil servants who supported them” “Corruption, nepotism and cronyism in Asia were condemned by the Western critics as proof of the fundamental weakness of ‘Asian values’. There are many different value systems in Asia-Hindu, Muslim, Buddhist, and Confucianist. I am able to discuss only Confucian values. Corruption and nepotism are a debasement of Confucian values.” “In a debate on the Budget in March 1985, I took the opposition to task for opposing ministerial pay increases. J.B. Jeyaratnam of the Workers Party had contrasted my monthly salary of S$ 29,000 with that of the Prime Minister of Malaysia who was paid S$10,000, but took only S$ 9,000. I went further to compare salaries of Philippines President Marcos at 100,000 pesos yearly ,or just over S$ 1,000 a month and President of Indonesia governing 150 million people at a salary of 1.2 million rupiahs or just S$ 2,500. However, they were all wealthier than I was!” “In Singapore, Customs officers would receive bribes to speed up the checking of vehicles smuggling prohibited goods. Personnel in the Central Supplies provided information on tender bids for a fee. Officers in the Import and Export Department received bribes to hasten the issue of permits. Contractors bribed clerks of works to allow short piling. Principals and teachers received commissions from stationary suppliers. Human ingenuity is infinite when translating power and discretion into personal gain.” This was before Lee Kuan Yew declared war on corruption and the setting up of the CPIB. “ It was the high standards we maintained that made Prime Minister Goh Chok Tong order an investigation into purchases in 1995 of two properties each made by my wife on my behalf and by my son Lee Hsien Loong , the Deputy Prime Minister.” As we know Singapore with a population of little more than five million commands a GDP of approximately $ 270 billion today. In Sri Lanka, with a population of more than 20 million, we have a GDP of about $ 60 billion. Even if we maintain an impossible annual growth rate of 10%, it will be a long time before we catch up with the island state. As Singapore rises higher and still higher in its national voyage, we are reminded of the old jingle of the Singapore Airlines, “Singapore girl…you are a great way to fly”. (The writer is an Attorney-at-Law and a freelance writer.)

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