Photo clockwise: Nishantha Wickremasinghe, Peter Hill, Tim Clark, Harry Jayawardena and Nigel O’Shea
President’s B.I.L Nishantha Wickremasinghe met Tim Clark early December to strike a compromise
Nishantha wanted Govt. to negotiate with
Emirates in good faith
Nishantha wants a strong chairman and board that could work free from political interference
Tim agreed with NW to enhance fleet, phase out expatriates and grant executive status to all board members
Emirates pull out will be an IT nightmare for a fully integrated SriLankan say airline staff
Tim Clark agrees to manage Mihin but refuses to take over huge debt and staff except cabin crew
Sajin gets Mihin to pay spa bill in Istanbul and Rs 40,000 for one day’s meals
President asks Tim Clark how Emirates can help Mihin
By Sonali Samarasinghe
With Emirates announcing it will not seek a renewal of the contract with SriLankan Airlines, the Rajapakse government is now faced with a myriad financial problems, as it prepares to take on the formidable challenge of running the national carrier.
Even as the relationship deteriorated rapidly following the expulsion of SriLankan Airlines CEO Peter Hill, Emirates reacted angrily, sending a Letter of Demand calling for a reinstatement of his status.
As the troubled partnership saw various interested parties including the likes of Sajin Vass Gunawardena hovering like vultures, Chamal Rajapakse as Aviation Minister and Mahinda Rajapakse as Finance Minister acted heavy handed and bullish. Yet saner counsel was to have prevailed even inside the President’s own camp although going unheeded in the end.
In the hope of a more profitable and less acrimonious end to the 10 year partnership, President Rajapakse’s brother in law and SriLankan Airlines Director Nishantha Wickremasinghe was to undertake a one on one negotiating process with Emirates’ President Tim Clark late last year. To this end in early December last year before the hostility between the two major shareholders came to a head, Wickremasinghe met Tim Clark and put forward the concerns of the government.
Revision of terms
It was Wickremasinghe’s considered view that a renewal of the contract must include a revision of terms with regard to management. He viewed as flaws in the Emirates Management the following:
(1) Emirates appointing expatriates as heads. For example CEO Peter Hill. Expatriate heads in catering, engineering etc.
(2) All executive decisions being made by Emirates alone.
(3) GoSL members not possessing executive powers.
(4) Emirates not having a concrete development plan for Sri Lanka (i.e: Expansion into South Africa, Australia etc.).
The meeting with Wickremasinghe whose sophisticated approach and negotiating skills sat well with Tim Clark, was therefore somewhat of a measured success.
The Sunday Leader learns however that except for CEO Peter Hill the only other expatriate seconded to Sri Lankan is Nigel O’Shea. An Indian Niraj Kumar who was head of finance has also left and it is learnt O’Shea may soon leave also. In any case airline sources said these appointments had no adverse impact.
Nevertheless Clark for the moment agreed as follows:
(1) To remove all expatriates from SriLankan Airlines and to head hunt suitable Sri Lankans to take over the positions over a pre agreed time frame.
(2) To give all GoSL board members executive status.
(3) Agreed to enhance the fleet to 22 aircraft in the next five years.
The Sunday Leader investigations reveal that Wickremasinghe had in turn recommended to President Rajapakse a set of options which were sound in every respect.
Option (1) -
(a) To enter into some kind of transitional arrangement with Emirates before SriLankan fully taking over the management.
(b) To negotiate in good faith considering how Emirates held SriLankan together after the airport attack.
Option (2) -
(a) If negotiations break, Wickremasinghe had mentioned that SriLankan Airlines had very talented people who could take over.
(b) He had also mentioned it is learnt that a very strong chairman and a board should be constituted that could work free from political interference.
Wickremasinghe puts forward a valid argument. Despite the corruption that pervaded the signing of the contract in 1998 with the government losing out by not negotiating a better deal for itself, Emirates was a viable outfit that had made a huge impact in the skies since its inception in 1985 to meet the challenge.
Despite allegations Emirates planted its discards at SriLankan to keep good employee relations within its own airline, the management skills of the outfit cannot be disputed whether or not it was used to the benefit of GoSL or otherwise.
SriLankan Airlines’ come back after losing six aircraft in July 2001 following the LTTE attack was commendable even though detractors would say there were huge insurance payouts on the aircraft. SriLankan’s unflinching presence in the sky while other big airlines like Swiss air folded up after the September 11, 2001 attack was also creditable. Neither did the airline crumble as it suffered another blow with two air attacks by the LTTE in March 2007.
SriLankan Airlines in July 2001 took a series of bold decisions shutting down non profitable routes and strengthening those that brought the highest yield. Using Male as a hub due to adverse travel advisories and bad publicity, the airline plied the lucrative markets of Europe and Japan.
World Trade Centre attacks
The management also carried out a stringent cost reduction exercise and when two months later the world reeled after the World Trade Centre attacks in New York, SriLankan Airlines was ready to meet the challenge and even expanded its network.
Be that as it may following the Wickremasinghe/Clark talks, there for a space the matter rested. Alas enter in the meantime blunderbuss and Head of Mihin Lanka, Sajin Vass Gunawardena into the equation. His mishandling of the non issuance of 35 tickets to President Rajapakse and his entourage to fly from London to Colombo in time for the budget debate on December 14, was nothing short of a one ring circus. Given moreover, that it was his own brother, Manoj Gunawardena who is the SriLankan Airlines head of worldwide sales and in overall charge of such matters in any event.
It was after a futile furore created by the government culminating in the expulsion of CEO, SriLankan, Peter Hill that Emirates fired a Letter of Demand calling for the reinstatement of Hill’s work permit and visa. Tim Clark may have flown down to Colombo on January 2, but not before he angrily cancelled two pre scheduled meetings. First a board meeting of SriLankan scheduled for January 8 and the other another one on one meeting with Nishantha Wickremasinghe on January 9.
In one fell swoop Sajin Vass Gunawardena and others of his ilk in a bid to feather their own nests and hang on to their preferred status as Rajapakse darlings for the time being, destroyed the good work done by Wickremasinghe and plunged the national carrier into a financial loop de loop.
As these columns reported three weeks back on December 23, the Presidential Secretariat had approached SriLankan Airlines and requested it take over the debt ridden Mihin Lanka and help run the spluttering airline under the experienced SriLankan Airlines wing.
The talk among industry personnel was that Emirates was being hounded out in this ill thought out manner only to accommodate the grandiose plans of Sajin Vass. Emirates sources in Dubai confirmed to The Sunday Leader President Rajapakse himself had wanted to know how Emirates could help Mihin Lanka.
Sources close to Tim Clark told The Sunday Leader that while Clark had not objected to SriLankan Airlines taking over the management of the loss making Mihin Lanka it had refused point blank to take over the huge debt and large numbers of staff except perhaps the cabin crew.
Re-engineer the management
It is interesting to note in this context that President Mahinda Rajapakse in his budget speech 2008 ironically said that while Mihin Lanka – the new budget airline was set up to facilitate foreign travel of low income travellers a process had commenced to re-engineer the management of SriLankan Airlines in a manner favourable to the country.
It is not an irony however that was lost on the highly respected Tim Clark who was surprised not only at the huge debt incurred by the budget airline but according to our sources in Dubai also commented that Mihin was the first budget airline he had come across with business class seats.
Mihin is heavily in debt owing over Rs. 420 mn to the Ceylon Petroleum Corporation, and over US$1 million to SriLankan Airlines. It is recording a loss of about Rs. 7-8 million a day and about Rs. 240 million a month.
At an adjournment debate last Thursday (10) UNP MP Ravi Karunanayake stated that while SriLankan Airlines had lost US$ 300 million in 10 years only showing profits in catering and ground handling, Mihin was losing Rs. 240 million each month. And one of its planes was grounded as not airworthy. The government does not know how to take this country forward, he charged.
Another HSBC loan
Karunanayake also inquired if the government had allocated money to run SriLankan Airlines or whether it would have to go for another HSBC loan.
The UNP MP also pointed out that 40% of the passengers on SriLankan Airlines were controlled by Emirates. He asked how the government intended to get these passengers back and inquired how new offices were to be set up and how the government would find the start up costs.
While Aviation Minister Chamal Rajapakse by a most opportune coincidence was spared a reply by having to run off for a funeral, his Deputy Sarath Kumara Gunaratne said the airline will not be privatised and the government stood ready to buy Emirates’ shares.
Giving an indication of how much the government will have to fork out, last Sunday Tim Clark told AFP in Dubai he valued Emirates’ stake in SriLankan Airlines at “150 million USD,” a figure The Sunday Leader also reported exclusively last week. He also revealed that “Emirates would retain its 43.6 % equity in the company for the time being, and continue to have a board presence.”
Be that as it may a top SriLankan Airlines source speaking on condition of anonymity told The Sunday Leader that the national carrier would not be able to stand alone if Emirates were to pull out at this juncture.
Industry sources told The Sunday Leader it was obvious Emirates had been getting ready for any eventuality. By selling the two remaining aircraft owned by the national carrier and then leasing them back Emirates had successfully liquidated their assets. With 43.6% of the shares they would also have equal status on a future board and could be the biggest stumbling block in any decision.
Emirates would remain SriLankan Airlines’ formidable competitor in the skies with one horrific advantage. Emirates would be able to control SriLankan not only from within but also from without including through their IT reservation system with which SriLankan is now totally integrated.
Moreover SriLankan Airlines will not be able to stand alone despite the government bravado it is ready to take over management come April first. And that’s no joke. The operational costs of running a national carrier is enormous.
|Why SriLankan can’t stand aloneThe national carrier will not be able to stand alone if there is no capital infusion for expansion of fleet, redecoration of aircraft or increase in capacity and routes.Emirates sources earlier told The Sunday Leader the reason Emirates was brought in as a partner was to ensure the national carrier would not be dependent on government funding and said the level at which SriLankan Airlines is now is a reflection of their excellent management. With all the negatives in the country, a lack of a modern fleet, a lack of flatbed seats and the prevailing war situation, SriLankan has become today a top level international airline.The company cannot move forward without refurbishing the aircraft which will cost a minimum of US$30-40 m or without redoing and redesigning the seats at least in business class which will again cost a heavy packet. However airline sources said, “we won’t be able to survive in the skies if we don’t do that.”
BoI Chief Dammika Perera however pointed out that even at this moment there was no infusion of capital by Emirates in any case. Perera also earlier noted that SriLankan had been afforded a huge fuel subsidy of Rs.500 million in 2002 as well.
Air Lanka had a frequent flyer programme called SERENDIB CLUB whereas Emirates at the time did not have such a system. Emirates following the 1998 deal took over the SERENDIB system, upgraded it into a more sophisticated programme and renamed it SKYWARDS where Emirates became the dominant partner.
BOI sources told The Sunday Leader the entire programme was controlled in Dubai and even the membership is not made known to the overseas SriLankan country managers and adding its efficiency was highly overrated.
Be that as it may this is a huge customer base and Sri Lankan stands to lose these customers. Possibly Emirates will hand over the customers who have engaged as SriLankan Airlines customers but there will be no benefit to us by this. However if we are to remain in the programme Emirates sources indicated they would charge the usual commercial going rates. If SriLankan pulls out of the system now it will incur a huge customer base loss and a synergy loss as there are other benefits added to SKYWARDS like Star Thai Alliance and relationships with other major carriers.
(2) Code Share
Both carriers benefit from the code share agreements and given that SriLankan does not fly to many countries like US, Canada, Rome, Zurich, and code share with Emirates including flights code shared to Singapore, two points in Germany other than Frankfurt and some lesser known points in UK like Birmingham this would be a major loss. SriLankan’s international visibility will drastically decline which will in turn affect its load.
(3) Reservation system – an IT nightmare
SriLankan has been totally technologically integrated with Emirates. The national carrier shares the Emirates owned Mercator system which was up graded at preferential rates of US$1-2 million. However it would be an IT nightmare to pull out now. Not only does Emirates have access to all SriLankan Airlines data they will either withdraw the service or charge SriLankan the going commercial rates of US$5-6 million to remain. If SriLankan goes back to the old system we would be going back five years in time an airline source said as Mercator is a sophisticated system.
(4) Aircraft lessors
Maintaining the leases say SriLankan Airlines administrative sources would be one of the biggest challenges. In fact it is reliably learnt that airline leasing companies are already getting jittery about the Emirates pull out as questions arise whether SriLankan Airlines can stand alone surrounded by such huge financial commitments. The uncertainty has placed the government in a very vulnerable position as it takes over management on April 1 this year. The other issue is of guarantors for the leases when Emirates walks out.
(5) Exodus of staff and pilots
With the lid off on the ban on recruitment of SriLankan staff by Emirates Airlines, pilots are being offered attractive packages elsewhere even as a worldwide shortage of pilots has made them an indispensable commodity. Already some 20 pilots are leaving SriLankan as uncertainty of the future grips the staff at the national carrier.
SriLankan has approximately 202 pilots even though 220 would have been a more comfortable figure to work with.
Chairman Harry Jayawardena last Thursday (10) was to address the staff and local pilots at the Bandaranaike International Airport stating he would increase their salaries and assuring them of a stable future.
However a pilot who wished to remain anonymous told The Sunday Leader, Harry in his usual style had also dropped a large hint widely regarded as a threat by casually mentioning in passing that when India faced a problem of pilots taking up jobs in other countries it’s aviation authority cancelled their licences. Some pilots were visibly upset with one stating he was definitely going to move out after that veiled threat.
Undercutting SriLankan was the main issue – Dammika
BOI Chairman Dammika Perera said the government would take over the management from April 1 and run it ‘very efficiently without any problem.’ He charged that at the time Emirates took over in the first year the airline had a fleet of nine aircraft and made a profit of Rs 1.9 billion whereas by last year the profits had come down to Rs 500 million with no ownership of a single aircraft. He said all aircraft with SriLankan currently are on lease.
Perera also told The Sunday Leader the reason Emirates was unable to negotiate was because the BOI had already shown evidence of the way Emirates was undercutting the national carrier while remaining a shareholder and synergic partner. The turnover on the code share routes is approximately USD 1.5 billion Perera states. ‘So even if our sales are US$ 300 million per annum then according to the regulations 25% of that which is US$ 75 million must come to SriLankan.’ Undercutting its own partner is the biggest reason for this problem. This is the reason that they had to move out because they had no answers.
Perera had earlier on several occasions publicly accused Emirates of undercutting SriLankan Airlines.
What is good for the goose.
Perera also posed the question if Emirates maintained it was the accepted financial practice to lease planes and it was on this basis it sold all SriLankan owned aircraft and leased them back, whether the Emirates’ huge fleet was leased as well or owned by Emirates. Highlighting the duplicity of Emirates in dealing with SriLankan, Perera said 10 years ago we had nine aircraft, now we have 14 on rent.
‘We don’t even have that asset. What has Emirates done to develop our airline other than sell our assets and leave us with lease payments,’ he asked. There is a profit on ground handling and catering but even if we didn’t have an airline we would have made a profit on those two sectors which are the cash cows.
Furthermore Perera also pointed out that Emirates’ undercutting was so perfectly constituted it would undercut SriLankan on pricing even on a ticket on the same plane with customers having to pay more if bought through SriLankan and less if through Emirates. The BOI Chairman said this was like a bus conductor charging a passenger Rs. 100 if he got in from the front of the bus and Rs. 95 if he got in through the back door.
It is Emirates that has violated the agreements, he said.
This is what happens when you appoint a wharf clerk as CEO - Ravi
UNP MP Ravi Karunanayake told parliament last week Mihin Air was running at a loss with the father’s Lanka Putra Bank giving a loan to the son’s airline. He also said Mihin does not even fly to India now and noted one of its aircraft was grounded as not airworthy. “This is what happens when you appoint a wharf clerk as the CEO of a company,” Karunanayake quipped.
The UNP MP also alleged that the personal bills of Mihin Lanka CEO Sajin Vass Gunawardena including for spa treatments at the Holiday Inn Hotel in Istanbul were eventually paid for by Mihin Lanka. This despite Sajin receiving a salary of Rs.450,000 a month. According to the hotel bill, Sajin had spent Rs 40,000 for one day’s meals courtesy the budget airline.
His spa treatments had cost approximately Rs.16,000 with the grand total for one night being approx Rs. 138,000. As this newspaper has revealed in its past issues the Lankaputra Bank headed by none other than Sajin Vass Gunawardena’s father has far from granting small and medium enterprises loans decided to extensively fund among other top level companies, Sajin’s Mihin as well.
It will be recalled that the Treasury had initially pumped in Rs. 250 mn while the cabinet had later authorised another Rs.500 million to Mihin. The Lanka Putra Bank which was originally set up to help poor farmers and small and medium enterprises has also invested a sum of Rs.300 million as redeemable preference shares.
The total operational cost of Mihin Lanka as of March 31, 2007 was Rs. 195,410,886.41 and despite extensive state patronage Mihin Lanka is incurring some Rs. 8-9 million in losses each day.
An ambitious advertising campaign and promotion costs are a staggering Rs. 25,249,614.13. The amount spent on staff salaries and allowances are Rs. 16,129,577.06 and the aircraft wet leasing charge is Rs.90.8 million.
Managing Director/CEO, Sajin Vaas Gunewardena draws a monthly salary of Rs. 450,000 while Senior Manager – Flight Operations, Errol M. G. Cramer makes Rs. 500,000 a month. Head of Flight Operations, Athula Dissanayake gets a salary of Rs. 600,000, according to particulars furnished to parliament on December 10, 2007. Head of Commercial, Rohan Perera and Head of Finance and Administration, Lohan Sajiva Suwaris draw Rs. 350,000 each.
There are also six officials drawing Rs. 250,000 per month while Coordinator to CEO, Vimal Perera and Manager, Human Resources and Administration, Joyce Kandaragama are paid Rs.150,000 each per month. Mihin Lanka according to documents furnished to parliament employs a total of 157 personnel.
On December 31, SriLankan Airlines withdrew its ground handling facilities due to non payment of funds. Mihin was compelled to manually pushback its aircraft before take off.
The controversial supposedly low budget but high cost airline faced further ignominy in the new year when it was compelled to use its own staff to handle the check-in counters as well.
While check-in services were relatively easy and could be taken over by untrained Mihin staff, ground handling including take off, landing, luggage and technical services were specialised jobs which required particular skill.
Sources revealed Mihin Lanka was now desperately looking to recruit retired personnel from SriLankan Airlines in order to set up their own ground handling services. It is learnt even the aircraft toilets could not be cleaned as a result of the withdrawal of the facilities.
Just the week before, Mihin was compelled to ground its A320 aircraft plying to Indian destinations due to non payment of dues. The Bulgarian company that leases out the A320 aircraft to Mihin on a wet lease had instructed its pilots not to fly the aircraft as Mihin had not settled its dues under the lease.
Mihin currently attempts to fly to seven destinations. They are Dubai, Male, Bangkok, Tiruchirapalli, Trivandram, Gaya and Singapore.
Sajin’s Mihin currently owes the Petroleum Corporation Rs.420 million and SriLankan Airlines over US$ 1 million.
These debts SriLankan will now have to carry with the change of management as Sajin looks to piggy back on the national carrier to maintain his standard of living.
Tim Clark on 2007 performance
The year under review saw an increase in competition from government supported carriers mainly in the Middle East and from several new low cost carriers that are operating notably in the South Asian, Far Eastern and Middle Eastern regions. However, the continuing level of traditional SriLankan hospitality and service has enabled SriLankan to preserve its market share despite these developments.
Amidst the competition, passenger revenue grew 10.67% with a 5.36% increase in passenger traffic and a 5.66% growth in yields. Cargo revenue increased by 15.24% with a 8.15% growth in cargo carriage and a 7.42% increase in yield. As a result, revenue of the airline grew by 11.12% to reach Rs. 67,963.76 million during the year.
Break even load factor of the airline rose to 72.34% from 72.00% due to a rise in operating expenditure resulting from escalating fuel prices and the weakening of the Sri Lankan Rupee against major foreign currencies.
SriLankan flies to 51 destinations in 28 countries in Europe, Asia, Middle East, Australia and North America but these include a large number of code share flights. Sri Lankan is the most frequent foreign airline into India with a total of 95 flights per week. In 2007 passenger revenue was Rs. 54.6 million a 10.67% increase from 2006 which was Rs. 49.4 million. The number of passengers carried in 2007 was 3.18 million as opposed to 3.01 million in 2006.
GoSL - 51.05%
Emirates - 43.63%
Employees - 5.32%
By virtue of office, three of the government nominee directors including the chairman own one ordinary share each of the company.
At the time of privatisation in 1998 the national carrier’s fleet consisted of nine aircraft. That is four ageing Lockheed L1011 Tristars, two Airbus A320s and three Airbus A340s. These were owned by the airline. Today SriLankan has 15 aircraft all on financial leases. They are six new A330-200 aircraft, four A340s, five A320s, two Antonov AN12F Freighters, a Cessna Caravan aircraft and two Turbo Otter amphibious aircraft.
Published January 13,2007 in The Sunday Leader