SriLankan Airlines’ long overdue AGM

by Rajeewa Jayaweera-une 29, 2019, 12:00 pm 

The national carrier SriLankan Airlines (UL) held its long-delayed Fortieth Annual General Meeting (AGM) of the Share Holders on Tuesday, June 25 at the BMICH.

It was convened to receive and consider the Annual Report and Financial Statements for the financial year ending March 31, 2018.

As per Company Law, AGM should have been held on or before September 30, 2018. UL violated Sections 133 (1) and Section 167 of the Companies Act.

Since one more financial year had passed after the Annual Report for the fiscal year under review, it would be futile to delve deeply into the airline’s performance during 2017/18. Furthermore, the current Board of Directors, Chief Executive Officer, and Chief Commercial Officer were not involved in the airline’s operations during the said period.

The Company declared a loss of Rs 17,213.57 million for the year under review, a 40% improvement from a loss of Rs 28,929.99 million in 2016/17. Company Revenue increased by 19% to Rs 161,654.46 million from Rs 135,491.19 million while Expenditure increased by 20% to Rs 176,104.44 million from Rs 146,760.81 million. A reduction in losses despite a 42% increase in the Company’s fuel cost, which increased to Rs 47,037.86 million from previous year’s Rs 33,127.99 million is noteworthy. Currency losses in 2017/18 amounted to Rs 1,919.72 million, a 56% improvement in comparison to Rs 4,405.57 million in the previous year.

According to the Notice to Share Holders, the airline’s unaudited losses for period April to December 2018 amounts to Rs 44,310.64. When questioned, company officials attributed higher losses mainly due to the rising fuel costs and drastic depreciation of the Sri Lankan Rupee.

Considering the airline’s historically high Breakeven Load Factor (BLF), a shareholder questioned Directors how the airline hoped to attain profitability. BLF is the average percentage of seats and cargo space requiring to be sold on an average flight at current average fares for the airline’s revenue to break even with its operating expenses. Its 2017/18 BLF was 82%, and in 2016/17, 87%. Actual Load Factor during the two years had been 70% and 69% respectively. In comparison, BLF of Emirates Airlines had been 65.2% and 64.2% whereas Actual Load Factor reported was 67.2%, and 65% respectively. The carrier reported Operating Profits of AED 2.4 billion and AED 4.1 billion during the financial years 2017/18 and 2016/17.

Vipula Gunatilleka, the Chief Executive Officer (CEO), responding on behalf of the Directors attributed losses mainly to finance charges of accumulated debts, high aircraft lease costs, high fuel costs and currency losses.

Past debts are a fact of life due to the airline’s past sins for which the major shareholder (GoSL) is chiefly responsible. High aircraft lease costs resulted due to the involvement of the major shareholder in aircraft acquisitions, a task for which it was ill-prepared. High fuel charges apply to all airlines and are not limited to UL. Currency gains/losses are a fact of life and are uncontrollable.

The CEO briefed shareholders; the airline had negotiated a discounted fuel rate from Ceylon Petroleum Corporation from April 01, 2019. UL was also currently negotiating with GoSL for the waiver of Withholding Tax on aircraft lease payments. He expected these measures to mitigate some of the airline’s losses.

The AGM then degenerated from the sublime to the ridiculous with a few shareholders raising irrelevant issues and monopolizing the floor. The Chairman of the Shareholders Association and several others raised questions, namely; the Official Languages Act (AGM was being conducted in the English language as done since inception in 1979). Some responses were provided in Sinhala. The retiring of old Air Lanka logo (it happened in 1999). Requesting the Treasury to acquire shares given to staff in 1998 free of charge in return for a substantial payment. The number of free tickets given to shareholders every two years to be increased from three to four, and the granting of some such tickets on a confirmed basis (a facility not given by a single carrier worldwide). The airline’s Chairman had to be repeatedly reminded to switch on his microphone when responding. He failed to conduct the proceedings in a disciplined manner leading to the frustration of many other shareholders.

Eventually, with the necessary motions passed and closing of AGM, the Chairman called for the commencement of the Extra Ordinary General Meeting (EGM)

The EGM was convened by Directors based on their Report on the "Serious Loss of Capital" and to consider and if thought fit, to pass a resolution for the continuation of the Company’s operations as a going concern. This was necessary until the completion of the restructuring process based on the continued commitment of financial support by GoSL, the major shareholder.

Contents in the note received by shareholders were reiterated by the CEO. It stated, taking into consideration some key recommendations by international consultants, Management had prepared a comprehensive restructuring plan and approved by the Board of Directors. The plan includes Restructuring of route-network, Fleet-plan to suit the network, Cost/Expenditure control, HR requirements to implement the plan, and Restructuring debts. Other areas receiving attention was the conversion of CPC liabilities to medium term supplier credit facilities and the injection of cash by for debt repayment by the sale of minority stakes in profitable subsidiaries / strategic business units (Catering, Ground Handling, and Engineering). With the appointment of a CEO, other Chief Officers and strengthening of the management team, it was stated the Company expected to break even within three years in the event of the Restructuring Plan being implemented.

This writer, who is also a shareholder raised the following issues.

Q: Is a foreign Consultancy firm involved in the preparation of the Restructuring Plan?

CEO: No, it was an in-house initiative.

Q: The measures explained in the Restructuring Plan were very similar to those outlined in several previous Business and Restructuring Plans. Strategic Business Plan by former Chief Financial Officer SA Chandrasekera in 2010 at the cost of Rs 750,000, InterVista in 2011, Seabury in 2013 at the cost of USD 635,000, Skyworks and Nyras hired directly by the Treasury at the cost of GBP 2 million. The firm had filed a case in the UK for non-payment of invoices. Did Management consider recommendations from previous plans?

CEO: Was not aware of the contents of the previous plans; the latest plan did include some recommendations made by Nyras but denied any direct involvement of a foreign consultancy firm.

Q: When does the three years’ timeline to break even start?

CEO: April 01, 2019 and ending on March 31, 2022.

Q: What impact does the April 21 suicide bombings have on the Restructuring Plan?

CEO: Negative impact of USD 90 million on overall revenue. UL was working on specific measures to bridge the gap.

Q: In the new Restructuring Plan, what model does the airline hope to adopt, i.e., full-service long-haul carrier or Regional carriers

CEO: The airline intends to retain its premier routes such as London on a full-service basis. Many short haul routes would be operated with narrow-bodied aircraft without full service.

Q: Does the Restructuring Plan envisage the reduction of staff and aircraft?

CEO: UL was not overstaffed. Recruitment has been frozen. Political support would be required for staff reductions, a contentious issue in an election year. The decrease in aircraft was not addressed.

When pressed for an answer, the CEO admitted, the Restructuring Plan validated by the Board of Directors had not been approved by the major shareholder, GoSL yet. Meanwhile, measures not requiring GoSL approval were being implemented.

It is a possibility; the Restructuring Plan is currently being held up between the so-called Panel of Experts tasked with turning the airline and ‘experts’ in the cabinet of Ministers.

It need be stated, not even the most successful aviation team in the world will be able to bring UL out from its present predicament so long as there are factors beyond their control. This would be other than factors such as fuel prices and currency fluctuation faced by all airlines. A prerequisite for such a team to succeed is an independent Board of Directors devoid of the major shareholder’s ‘Yes’ men. Directors from the private sector must make decisions without fear of repercussions to their other business interests.

A Business Plan based on commercial considerations should not require approval by ‘Panels of Experts’, Steering Committees or even Committees on Economic Management packed with politicians.

Directors and a CEO dependent on ‘political support’ and ‘constraints during an election year’ to decide on an optimum number of aircraft and staff required, besides which routes to fly and which vanity routes to discontinue have little or no chance in hell of succeeding in turning the airline around.

A perennial complaint by both present and past Directors and top Management has been the high aircraft lease charges. The CEO lamented; lease charges for each of the seven new Airbus A330-300 aircraft amounted to USD 500,000 above market rates.

If lease charges are unaffordable, such planes need be disposed of. Nevertheless, no mention was made of retiring these highly priced long-haul aircraft necessary to operate so called Premium routes. One does wonder how breakeven would be achieved without addressing the issue of high aircraft lease charges.

Despite the CEO’s claim of UL not being overstaffed, its Man to Plane ratio of 270 staff to service each of its 26 aircraft indicates otherwise. Leaving out the mega carriers, Egypt Air has a ratio of 143 staff to maintain each of its 63 aircraft. Finnair has a ratio of 76 staff to service each of its 72 aircraft. Garuda Indonesia has a ratio of 56 staff to maintain each of its 140 aircraft.

Dissent was expressed by several shareholders during the EGM and afterward over the plan to divest Catering, Ground Handling, and Engineering, the strategic business units or cash cows of the airline into subsidiaries. When questioned, most could not provide meaningful justifications for their objections other than sentimental reasons.

What need be evaluated is the fact, once these business units are divested and Management handed over to investors, the airline will have to pay commercial rates for their services. UL has paid subsidized rates for its catering requirements in Colombo. Ground Handling and Engineering Services were available received in-house at cost. Divesting such services could result in GoSL having to increase its subsidy to the airline. If not, dividends from strategic business units will need to exceed what they charge the airline for services rendered.

Board Members were appointed in March, the CEO in July and the Chairman in December 2018. The next AGM for the presentation of Annual Report and Financial Statements for the financial year ending March 31, 2019, is due on or before September 30, 2019.

An insider, on condition of anonymity, stated the Company’s loss from Air Transportation for 2018/19 exceeded Rs 30 billion and Group Loss exceeded Rs 37 billion.

These are the early days. If this Chairman, Board of Directors, CEO and his team could make a difference is to be seen.

The CEO has promised to breakeven by March 31, 2022. The first assessment will be at the end of the financial year ending March 31, 2020.

Meanwhile, let us wish the entire team at the national carrier success in their endeavors to attain profitability.

This article was sent to CEO Vipula Gunatilleka for comments relating to his presentation. A minor correction requested was accommodated.