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Mihin cancels Boeing deal; Airbus planes instead
View(s):Mihin Lanka has cancelled a deal for two Boeing 737-800 aircraft after convincing the international leasing company that the costs associated with changing its Airbus fleet to Boeing would cripple its finances. After protracted talks, the California-based Air Lease Corporation (ALC) has agreed to let Mihin have three Airbus planes instead, said Nishantha Ranatunga, the former Chief Executive Officer (CEO), who spearheaded the negotiations. Two of them are new-generation A320neo aircraft while the third is an A319.
Company sources said it had not been easy to reshape the agreement. Mihin had already signed up with ALC for Boeing before Mr. Ranatunga became CEO in April 2014. But it was found that the expense of operating Boeing aircraft (particularly the purchase of spare parts) would squeeze the struggling company’s balance sheet further.
Boeing initially adjusted or introduced some terms to make the deal more affordable. Even this would have required a heavy investment and was not sustainable for Mihin, which had adopted a new business plan. After ALC agreed to lease out Airbus aircraft instead of Boeing, the amended contract was closed in November.
ALC buys new commercial jets directly from manufacturers and leases them to airlines. The international jetliner market is dominated by the European Airbus and the American Boeing companies which are in intense competition with each other.
Mr. Ranatunga, who vacated the post of CEO earlier this month, said Mihin currently had three Airbus aircraft, of which one would be returned. With the addition of the new planes, the total fleet would be five. However, the new Government’s plans for Mihin remain unclear.
Presenting the interim budget in parliament on January 29, Finance Minister Ravi Karunanayake called Mihin “a loss making entity” and said it had incurred a cumulative loss of Rs. 15 billion over five years. He proposed a consolidation of Mihin and SriLankan as an interim solution.
But Mr. Ranatunga said the airline could recover if the business plan — which was produced by Mihin’s own staff and which aimed to make it self-sufficient in four years –was adhered to. The company suffered operational losses of US$ 1.2 million in April 2014. This dropped progressively until it made profits in August the same year. It suffered losses during the last quarter, rallying again in January this year.
The turnaround was a result of Mihin negotiating with its partners to reduce costs, Mr. Ranatunga said. For instance, the company secured a 35 per cent reduction on airport charges in Sharjah. Meanwhile, SriLankan Airlines gave paid access to its resources. The two companies shared country managers and arranged for secondment of cabin and safety crew. Incentive schemes were introduced for technical and cabin crew to facilitate optimisation of labour.
One reason for past losses was a failure by the Government to inject the required capital on time, Mr. Ranatunga said. The State spent Rs. 14.5 billion over eight years on Mihin. Of this, 45 per cent — or Rs. 6.5 billion — was allocated in 2014-2015. “This was a positive factor for us to do well,” Mr. Ranatunga said. He said much of the money was used to settle fuel bills and unpaid airport charges, both local and foreign.
A massive 43 per cent of Mihin’s expenditure goes towards aviation fuel, statistics provided by Mr. Ranatunga show. Only six per cent goes towards staff. Finance charges, at four percent, were “substantial,” he said. Mihin had been trapped in a “vicious cycle”, the former CEO held. When there was no funding to pay for fuel, the Ceylon Petroleum Corporation slapped penalties on Mihin. This caused the airline to borrow from banks, and so it continued.
Mr. Ranatunga said the key challenge administrators faced was to change perceptions. “My personal view is that if you manage this organisation well, you can run it on a commercially viable basis,” he said. He also said that amalgamation of the two airlines was “okay, so long as you run different profit and loss accounts”.
“Mihin’s costs are low,” he explained. “And its recent performance has been good.” The projected loss for this year was US$ 13 million. This has now been revised to US$ 11 million. “If this trend continues, Mihin can make profits in the first quarter of 2017,” he claimed.