Brighter or Darker skies over SriLankan Airlines?


by Rajeewa Jayaweera

A media release in October 2016 by Sri Lankan Airlines stated among other things, "The airline’s Group Loss stood at LKR 9.03 billion, which represents a 45% improvement for the 2015/16 financial year compared to the previous year" (2014/15). The annual report confirmed a Group Loss of LKR 9.5 billion, excluding a penalty charge of LKR 2.5 billion, paid for cancellation of one A350-800.

The media release by the national carrier published by The Island last week titled "Brighter skies over SriLankan Airlines financial position" states, "Contrary to inaccurate reports in the press, the management of SriLankan Airlines would like to point out that since the Unity government was formed, the airline’s losses have been dramatically reduced." It further reported a ‘draft’ (unaudited) loss of LKR 13.4 billion during 2016/17 excluding LKR 14.3 billion, paid for cancellation of several A350-800 aircraft.

To describe a LKR 3.9 billion or 41% increase in year on year Group Losses, despite the discontinuation of traditionally loss-making routes of Frankfurt, Paris and Rome as a "dramatic reduction of losses since the unity government was formed" is to be mendacious.

The present management regularly camouflage its abysmal performance with announcements of ‘Company Losses’ and ‘Group Losses’. This directorate or any other directorate cannot be expected to make good, nearly four decades of monumental losses and mismanagement.

However, the present directorate and management can and should be held accountable for their inability to achieve an Operating Profit (surplus) in its core business operations. An Operating Profit/Loss has no relevance to servicing previous loans and payments for future aircraft deliveries/ cancellations. Unlike Sri Lankan Rupee figures, US Dollar figures have no bearing on the depreciation of the Sri Lankan Rupee.

Core business activity of an airlines consist of ‘Passenger & Cargo Transportation, carriage of Mail & Excess Baggage, ad hoc flights (charters) and Frequent Flyer net accruals. Revenue derived thereof is referred as Traffic Revenue. Operating Profit (surplus) is the positive variance between Traffic Revenue and Operating Expenditure, expenditure related to generating Traffic Revenue. Ancillary activities such as Ground Handling, Engineering Services, Duty Free Sales, Catering, Training Centre etc. does not belong to core business activity.

2016/17 Performance

Traffic Revenue has reportedly dropped by 6.1% to USD 790 million in 2016/17 from USD 842 million in 2015/16. Passenger Revenue is down by 6.5% to USD 685 million from USD 725 million and Cargo Revenue down by 7% to USD 80 from USD 87 million.

Key contributory factors have been a 2% reduction in revenue passenger kilometers (RPKs) in 2016/17 from previous year (RPK is calculated by multiplying the number of revenue-paying passengers on board a flight by the distance traveled), a 3% reduction in Passenger Yields and 11% reduction in Cargo Yields from previous year. It has negated a 3% increase in number of passengers carried from previous year.

One of the reasons attributed to the "weakening of the balance sheet" in the media release was the non- recovery of "drop in ticket prices" as a result of "fuel price reduction in 2015". Nevertheless, a reliable source stated "average fuel price paid by the airline in US cents per gallon in 2016/17 was 3% less than average price paid in 2015/16".

Drop in ticket prices need be addressed with innovative and dynamic sales, pricing and marketing strategies, by the commercial division, besides stringent controlling of costs by all concerned, top down.

Drop in ticket prices is a universal phenomenon and not limited to the Sri Lankan market and SriLankan Airlines. Qatar Airways CEO announced last week, a 20% growth in profits of USD 541 million and a 22% growth in passengers carried on year on year basis.

Identity Crisis

The national carrier is undergoing an identity crisis. It is unable to decide if it is a long haul/legacy carrier, regional carrier, intra-regional carrier or a budget carrier. According to the carrier’s website, it currently operates 23 aircraft comprising of 13 wide-bodied and 11 narrow-bodied aircraft to 41 destinations including Melbourne due to commence on October 29. Most carriers, after careful study of new routes demand in existing routes, acquire aircraft for route expansion. SriLankan Airlines introduces new destinations and increase frequency to existing destinations due to an excess of aircraft.

Four weekly flights were introduced to Gan Island in the Maldives in December 2016. With no international carriers operating to Gan Islands, the airline believed it had ‘ownership’ of the route. With a cabin factor below 35% between December and March, the route has not even covered its direct operating costs (D.O.C.).

A business case to operate four weekly flights to Melbourne in Australia has been given the green light to operate daily flights. Scheduled to operate with three ancient Airbus A330-200 aircraft (Melbourne flights would incur heavy losses if operated with newer Airbus A330-300 aircraft due to high lease charges), Melbourne route is projected to be profitable from day one due to a monthly lease charge of only USD 225,000 per aircraft (this lease charge is applicable only for a short period). According to top airline officials, Melbourne route would be a ‘leadership route’.

One is intrigued. Assuming ‘leadership route’ means the operation of non-stop flights, were not Frankfurt, Paris and Rome too ‘leadership routes’ with sizable ethnic markets similar to Australia, in addition to established tourist markets to boot? SriLankan Airlines operating four weekly flights to Frankfurt was virtually driven out of the German market by Emirates, Qatar, Etihad and Oman Air who collectively operate to Dusseldorf, Munich, Berlin, Hamburg and Hannover besides Frankfurt. Australia too has international gateways in Sydney, Adelaide and Perth besides Melbourne. Emirates, Singapore Airlines, Malaysian, Thai and Cathay operate to these gateways and are able to connect Colombo bound passengers through their respective hubs. Did decision makers consider reintroducing Frankfurt instead of Melbourne using aircraft with a monthly lease charge of USD 225,000? Germany is a tourist market established over five decades. This writer who strongly advocated a total withdrawal from UK and Europe in the past, opines, Frankfurt with established tourist and ethnic markets would have been preferable to Melbourne with an ethnic market but no established tourist market.

Omissions of Board of Directors/Unity Government

The Board of Directors erred in permitting former CEO who was banished to UK with a fancy title of Director Europe and a princely salary of over Sterling 13,000 plus perks by the previous administration, to remain at his post in UK. He could have easily been deployed as CEO or Chief Commercial Officer. In doing so, the carrier would have incurred two and not three hefty remuneration packages. Further, there is no commercial or financial justification in maintaining a Grade 13 Head in charge of operations in UK and off-line Europe.

The airline is saddled with three unwanted ancient Airbus A330-200 wide-bodied aircraft due an erroneous, arbitrary and unilateral extension of lease agreements by the CEO. Total lease cost for three aircraft six-year lease period amounts to USD 54.54 million. This transaction will "weaken the balance sheet" annually whilst the culprit, recruited for a princely salary of Rs 3 million plus perks, is not disciplined. To be fair, a majority of directors objected to CEO’s decision. They were overruled by a cabinet sub-committee. As a result, this costly mistake was not discussed during the meeting between Board members and CEO with the President, Prime Minister and cabinet of ministers last Tuesday.

The pilot community is up in arms. They are protesting the induction of the CEO into the pilot training schedule to renew his license for Airbus A320 aircraft, obviously a prelude to obtain A330 license. Pilots question the benefit to the carrier of a person nearing 60 years in age being given time in the flight simulator, causing a financial loss to the company. It is also believed, Instructors are required to visit the CEO’s office at WTC Building in Fort to give theory lessons, contravening civil aviation regulations.

Recruitment, Promotions & Mismanagement

Recruitment and Promotions appear to be on ad hoc basis rather than on a need based criteria. Despite all the brouhaha in media releases on cost conservation, there has been no reduction in employee numbers since January 2015. Average number of employees in 2015 and 2016 were 6,987 and 6,959 respectively. Current employee count including 110 employees absorbed from now defunct Mihin is 7,029. Fleet size has been 21, 21 and 23 aircraft in said three years. Retirement and resignation of staff are routine occurrences. It is understood over 1,100 replacements have been recruited since this directorate assumed office, despite increasing losses and discontinuation of some loss-making destinations.

A few months ago, two Grade 11 General Managers responsible for Worldwide Sales and Revenue Management, Planning & Commercial Support in the commercial division were upgraded to Grade 12 Head of Division positions, despite the reduction in their job size and responsibilities. Both vacancies had one applicant each and were one horse races. Post of Head of Marketing has been shelved. There were three applicants.

From Emirates management era, holder of Grade 12 Head of Service Delivery position overlooked Airport Services and Inflight departments. A former serviceman, placed in the HR Division in a Grade 10 position by previous administration was promoted to Grade 11 and titled General Manager Airport Services and Head of Service Delivery re-titled Head of Inflight by current CEO. General Manager Airport Services was recently promoted once again to Grade 12 and re-designated Head of Airport Services. For no justifiable reason, one Grade 12 position has been split into two Grade 12 positions, incurring two salaries, perks and vehicles to carry out the same work load hitherto carried out by one person.

The Grade 11 position of General Manager of Sri Lankan Aviation College (the training arm) has recently been upgraded to a Grade 12 position of Head of Aviation College.

As losses pile up and business shrinks, all these promotions result in increased costs besides making the airline top heavy. The time-tested procedure for upgrading a position by a process of job evaluation, introduced by Emirates seems all but dead.

Any directorate interested in turning around a loss making company would have frozen all recruitment and promotions.

Price & Product mismatch

An acquaintance of this writer recently enquired from SriLankan Airlines, ticket price for a return ticket to London for travel in May and December and was quoted a fare in excess of LKR 500,000.

During a recent trip to Singapore, this writer utilized SriLankan Airlines. Seated in the Serendib Lounge for Business Class passengers, it was shocking to observe more than 50% of the lounge chairs badly worn out, torn and faded. The accompany photograph says it all. After much thought, this writer decided to utilize one of the photographs taken with a mobile phone in the hope it would prod Board members and highly paid airline officials with international expertise who are also regular users of the lounge to take remedial action. Charging over half a million rupees and providing such lounge chairs gives the country, carrier and people a bad name.

Meanwhile, the skies over SriLankan Airlines get darker by the day.

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