COPE missing wood for the trees with @flysrilankan

by Rajeewa Jayaweera-March 7, 2020, 12:00 pm

The Committee on Public Enterprises (COPE) recently summoned the new Directors of SriLankan Airlines (UL) to obtain further information on the Airbus aircraft acquisition and related bribery scandal. Also discussed was the subsequent cancellation agreement upon the payment of USD 115 mil besides the forfeiture of pre-delivery payments.

The COPE Committee members present on that day comprised of Chairman Sunil Handunnetti, Wijeyadasa Rajapakshe, Susil Premajayantha, Harsha de Silva, and Ajith Perera.

Chairman Asoka Pathirage, other Directors, and CEO Vipula Gunatilleka, assisted by a host of other senior staffers, represented UL.

The entire session was a tragicomedy. COPE member Rajapakshe insisted on a response from the airline’s Head of Group Legal Affairs for failing in his responsibility to advise directors to consult the Attorney General. The hapless senior staffer stuttered and went gobsmack!

The aircraft acquisition and subsequent cancellation took place under two different Boards of Directors. Pathirage and current directors have been in office for less than two months. It is not clear what COPE members hoped to learn from them.

The inability of COPE to summon Ministers (both former and present) and former state officials and hold them accountable for their deeds severely diminishes its effectiveness.

During the session, some other useful information came to light from statements made by Pathirage and Gunatilleka. The Chairman’s opening lines were, "we have just joined as you know, and we are trying to understand what we can do and make this airline profitable." He elaborated; UL in the past had paid CPC only USD 6 mil of monthly fuel bills amounting to USD 14 mil. He had increased payments to USD 8 mil. Anticipated losses for 2019/20 were approximately USD 130 mil chiefly due to the Easter Sunday attack and the more recent COVID 19 epidemic. He estimated losses in the following year to reduce to USD 30 mil subject to no calamities beyond the Board’s control.

Then comes a gem we the public have got used to hearing for decades from every new Chairman and Board of Directors. "We would make this airline profitable soon, maybe in two to three years down the line."

Towards this end, "just joined" directors, "trying to understand what we can do" are already mulling over introducing flights to Europe and Sydney. To do so, the Chairman declared, the airline requires to lease two additional Airbus aircraft available in the leasing market for around three to four hundred thousand dollars monthly per plane. He failed to disclose the Airbus model.

UL already has an Airbus A330-200 (MSN 1008) not utilized due to configuration and seat pitch incompatibility with other aircraft in the fleet. It also has no Inflight Entertainment equipment. The Chairman should ask his advisors, what are the chances of obtaining two planes compatible with configuration and seat pitch similar to existing aircraft. He also claimed, "from what I hear from my technical people; fuel wise A350-900 aircraft are not very efficient." Airbus A330-900 neo is more fuel-efficient than the A350-900 but not available in the lease market, certainly not for three to four hundred thousand US dollars!

Then comes another gem. CEO Gunatillake, who joined the discussion, stated, "Airbus has agreed to switch the order for four A350-900 to four A330-900 neo or two A330-900 neo plus four narrow-body aircraft. We have accordingly prepared a Business Plan. With the new Board, we are relooking at some of the milestones, including operating to Frankfurt."

Other airlines identify potential destinations and acquire aircraft to operate such routes. UL’ s modus operandi is to acquire aircraft and select destinations to operate.

COPE members, Chairman Pathirage and CEO Gunatillake, have entirely ignored two very fundamental issues.

a) Does Sri Lanka require a state-funded airline?

b) If yes, what should be the business model (budget, regional, full service, long-haul, etc.)

The answer to (a) is, the island’s tourism plant notwithstanding, a state-funded airline is not a must. Over 70% of the Maldives’ economy is dependent on tourism but it manage without a national carrier. Therefore, the need for an airline to drive the nation’s economy holds no water. Other airlines invariably step in to fill such voids in lucrative markets.

In the case of (b), it would be appropriate to share the opinion expressed by one of the world’s leading aviation professionals and President of Emirates Airlines Sir Tim Clark, during a recent visit to Sri Lanka. Speaking on both UL and Sri Lanka, he gave some sound advice. He advised it would be best to "build up a network in Asia rather than Europe. Procure good reliable workhorses like the new single-aisle Airbus 321s. Negotiate a deal for about 20 of these, keep the fleet simple, and build a solid route network in Asia." He also advised, "UL should enter codeshare partnerships where it makes commercial sense."

UL’s Chairman and CEO both are minnows in terms of Clark’s knowledge, experience, and standing in the aviation industry. They have a responsibility to provide the various options to President Gotabaya Rajapaksa and the next Prime Minister. After that, if the decision is to continue with the bottomless pit swallowing billions of taxpayer’s monies each year, suffice to state, people deserve the government they get.

Much has been said and written of UL’s operations to Europe, as did this writer in a series of articles over the last several years. An article titled ‘Parexit and Fraexit by SriLankan Airlines’ published in the Sunday Island on July 17, 2016, contains some relevant details and may be accessed through the link http://www.island.lk/index.php?page_cat=article-details&page= article-details&code_title=148739

In the backdrop of the possibility of reintroducing flights to Europe, provided herewith is a snapshot of the national carrier’s previous experience.

Illustration 1 – loss-making vanity routes

It contains route results of the infamous vanity routes of Moscow and Milan. Operating Surplus/(Deficit ) means Traffic Revenue (Passenger, Cargo, Excess Baggage, and Mail) less Total Route Costs (Direct Operating Costs and Fixed Costs). Costs include fuel and aircraft lease charges of respective routes. No explanation is required. Both were loss-making routes.

UL discontinued flights to Moscow and Milan sometime in 2014, to Rome in May 2016 and to Paris and Frankfurt in October 2016.

Market Share data provided herein are from Market Intelligence Data Tapes (MIDT), a software program. The tool collates segments of reservations of airlines from individual cities/countries to other cities/countries or what is known as City Pairs. They do not include data on budget carriers and web sales through airline booking engines. MIDT updates data periodically and, finally, after the completion of each month. Most carriers utilize this analytical tool for the gathering of historical and competitor data besides planning purposes. Figures are not absolute but sufficient for planning and evaluation purposes. Data presented are categorized Sri Lankan Airlines on its on, Emirates, Qatar Airways, Etihad, Oman Air, Kuwait Airways and, Saudia as Middle Eastern Carriers and all other carriers as Other Airlines.

Illustration 2 - Market Share in French, German, Italian and UK markets

It contains market share in 2014/15 and 2015/16 of carriers operating from France, Germany, Italy, and the UK to Sri Lanka. Whereas UL enjoyed a market share of over 50% in each of these markets till around 2005, it has progressively lost ground to competitors over the last several years. UL’s Market Share in 2015/16 in French, German, and Italian markets amounted to an abysmal 28%, 22%, and 25%, respectively. In the UK, it amounted to 37%. Middle Eastern carriers enjoyed a combined market share above 50% in each of the four countries, the highest being 72% in Germany.

Illustration 3 – Route Results

Revenue of four European routes in 2015/16 declined by 20% compared to 2014/15 despite no terrorism, a boomimg tourism industry and a 43% reduction in fuel costs for flights operated. Readers, please note, losses incurred in Paris and Rome routes in 2015/16 exceeded losses in 2014/15 despite a substantial decrease in fuel expenses.

With no terrorist attacks, epidemics, and fuel price hikes to blame, the then Chairman attributed the losses to increased competition and strengthening of the US Dollar. He stopped short of stating, UL has been overwhelmed and driven out of these markets by Middle Eastern carriers. They are well entrenched in these markets today.

In the early 1990s, UL operated flights to Amsterdam, Frankfurt, London, Paris, Rome, and Zurich utilizing eight Lockheed L1011 aircraft. One was on lease from Royal Jordanian Airlines. The remaining seven, some over 25 years old, were fully paid up and owned by UL. Despite the absence of aircraft lease payments, all European routes returned deficit figures each year. Surpluses were mostly limited to a few weeks during peak periods.

In such a backdrop, it is gratifying to learn of a game-changing Business Plan prepared by the current CEO and his team. It proposes to continue paying aircraft lease payments of over UDS 7 mil monthly till 2022, lease out two further Airbus jets, reintroduce European routes besides flights to Sydney and turn the airline profitable in three years.

The next COPE would be well advised to leave the bribery scandal to the Attorney General and focus on the critical issue at hand, which is to stop the hemorrhage in the national carrier.

One factor is abundantly clear. The new directors, together with the CEO, must be made to sign off on their grandiose plans and held accountable even after they relinquish their positions. That is, of course, if there are no terrorist attacks and epidemics besides fuel prices remaining low and the US dollar remains weak!

Let not the next Board of Directors appear before a future COPE and state once again, "we have just joined as you know" and promise to make the airline "profitable" three to five years on.

PS

International Air Transport Association (IATA) said on Thursday, COVID 19 could result in passenger airlines globally losing up to USD 113 billion or more this year. Cathay Pacific has parked over 50% of its 152 aircraft after reducing 75% of its flights. Prudent airlines are consolidating and not expanding.