Downsizing, rightsizing SriLankan

Airlines

Tuesday, 1 December 2015

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 manufacturers 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 purchasers 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 manufacturers consent. The purchase price in the
manufacturers 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
manufacturers 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 ColomboLondon 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 BAs 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.
Posted by Thavam