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SriLankan says previous Govt. ordered eight Airbus A 350-900 aircraft
Chairman Ajit Dias issues a statement on selected parts of last week’s Political commentary and our Political Editor responds to it
SriLankan Airlines Chairman Ajith Dias has responded with a statement to some references in last week’s political commentary headlined “More details emerge on SriLankan state of affairs.”A significant highlight of the statement is the disclosure that the previous government ordered eight A 350-900 aircraft and not four as widely believed. Four were direct purchases from the manufacturer whilst the other four were procured through a lease.
The statement says:
(1) “SriLankan Airlines (SLA) has entered into four (04) aircraft lease agreements for four (04) A350-900 with subsidiaries of AerCap which were to be delivered in 2016/2017. In addition, SLA has entered into another Aircraft Purchase Agreement with Airbus S.A.S to directly purchase (04) A350-900 aircraft to be delivered in 2020/2021. The Purchase Agreement with Airbus S.A.S. and aircraft lease agreements with AerCap are two different, separate and isolated transactions.
All of these contractual commitments had been made by SLA in 2013/2014. Out of these contracts, SLA has now terminated all the aircraft lease agreements with AerCap which related to four (04) A350-900 aircraft to be delivered in 2016/2017. SLA has not terminated the Purchase Agreement directly signed with Airbus S.A.S for four (04) aircraft to be delivered in 2020/21. The advice of the Hon. Attorney General was sought on the directive of the Ministry of Public Enterprise in March 2017 as a measure of preparation to terminate the Purchase Agreement directly signed with Airbus S.A.S. No formal opinion of the Hon. Attorney General was sought with regard the termination of aircraft lease agreements with AerCap.
One (01) A350-900 leased aircraft from AerCap was terminated in April 2016 and remaining three (03) A350-900 leased aircraft were terminated on 4 October 2016. The termination of these leased aircraft by SLA was approved by the Cabinet Committee on Economic Management. The final payment terms with AerCap for termination of three A350-900 aircraft were negotiated by the officials of the Ministry of Finance to which the Minister of Public Enterprise Development had assented. SLA confirms its position that SLA had kept the Minister of Public Enterprise Development and his Ministry well informed of this termination of three leased aircraft from AerCap in October 2016, prior to the termination.
The said newspaper article states that by the time the letter by the Acting Secretary was written, the termination agreement had been concluded by SLA and the MPED was seeking the advice of Hon. Attorney General when a deal had already been done.
Political Editor comments: For the first time, SriLankan Airlines has confirmed officially through its “clarification” that a fleet of eight Airbus A350-900 aircraft were to be procured by the previous administration. Four were directly from the manufacturer and the remaining four through a lease – a fact which a vast majority of Sri Lankans and most in the government was unaware of. They were privy only to the acquisition of four A350-900 aircraft on lease, the negotiations to terminate it have been the focus of public attention.
The Criminal Investigation Department (CID) investigation now under way will throw more light though by their own admission that Airbus S.A.S representatives who met SriLankan officials in Dubai in November 2016 were reluctant to come to Colombo on account of it. Now that an order has been placed with the manufacturer, it will not be difficult for the investigators to determine the persons who placed it.
The SriLankan has also confirmed that “no formal opinion of the Hon. Attorney General was sought with regard to the termination of aircraft lease agreements with AerCap.” In other words, it is for the cancellation of a lease agreement where a sum of US$ 146.5 million of taxpayer’s money is involved. As for the references to AG’s opinion being sought only on the Purchase Agreement, it is pertinent to note that the AG’s opinion has extended to the eight A 350-900 aircraft in passing. This is why the AG’s Department noted in its letter that “A Legal Opinion (dated 20.07. 2016) had been obtained by the (present Board of Directors) of Sri Lankan “from an English Law Firm with regard to the consequences of terminating the lease agreements and purchase agreements for A 350-900.” Why a foreign law firm? Is it because, as the SriLankan Airlines says, were “separate and isolated” transactions?
The SriLankan Airlines only says that the termination of four leased aircraft was approved by the Cabinet Committee on Economic Management (CCEM). It is silent on the more important question of whether it was subsequently endorsed by the Cabinet of Ministers. Is it because Public Enterprise Development Minister Kabir Hashim, the line minister, declared in a cabinet memorandum that neither he, his Ministry nor the Cabinet of Ministers was consulted?
Just three paragraphs from a lengthy Cabinet Memorandum from Public Enterprise Development Minister Kabir Hashim tell it all. This was exclusively revealed in the Sunday Times of February 26, 2017 (Political Commentary) they were:
n The negotiations had been with AerCap, whereas the initial lease agreement has been entered into with International Lease Finance Corporation (ILFC). Neither the Ministry of Public Enterprise Development nor the Cabinet had been advised as to why the negotiations were with Aercap and not with the ILFC. The Agreement entered into with ILFC does not provide any requirement to negotiate with AerCap.
n SriLankan Airlines had on October 4, 2016 entered into three early Termination Agreements without the approval of the Ministry of Public Enterprise Development, the Cabinet of Ministers and the Attorney General.
n The Public Enterprise Development Ministry Secretary on October 20, 2016 inquired from SriLankan whether the execution of the Early Termination Lease had Cabinet approval. SriLankan had on October 28, 2016 submitted a Cabinet Paper (not through the Ministry of Public Enterprise Development) requesting for approval to enter into an agreement. By this time, SriLankan had already entered into the agreement (even before Cabinet approval).
Who is right? SriLankan Airlines which says its line Minister was kept informed or the Minister who says he was overlooked and was unaware? Were these not part of the concerns which ministers raised issue over at the Cabinet meeting on June 20? Did it not lead to President Sirisena summoning the Board of Directors of SriLankan Airlines? It is known that two UNP Ministers grilled SriLankan Chairman Ajit Dias during a heated session at President Sirisena’s office in the Presidential Secretariat. This has prompted President Sirisena to initiate further action.
SriLankan Airlines: (2) The direction of the Acting Secretary to the Minister of Public Enterprise Development (MPED) by his letter dated 8 March 2017 was only to obtain the opinion of the Hon. Attorney General regarding the cancellation of the Purchase Agreement with Airbus S.A.S. for four (04) A 350-900 aircraft to be delivered in 2020/2021. The Purchase Agreement with Airbus S.A.S. had not been terminated by that time and it is still in effect to date. By that time, SLA had concluded the termination of A 350-900 leased aircraft with AerCap in October 2016 with the approval of the Cabinet Committee on Economic Management. The directive of the acting Secretary of MPED on 8 March 2017 did not refer to the aircraft lease agreement for A 350-900 with AerCap which had in fact been terminated by that day.
Therefore, it is factually incorrect to state that the Ministry was seeking the advice of the Hon. Attorney General when the cancellation was already completed. The newspaper article had linked the advice of the Hon. Attorney General to a matter which they did not advise and totally distorted the facts relating to the termination of A 350-900 leased aircraft.
The newspaper article attempts to highlight that SLA has paid AerCap in excess of US$ 98 million as the termination fee and SLA has to commence negotiations to recover the excess payments.
Political Editor: References to the AG on this matter have been made in some detail in my response to the first issue above. Sri Lankan is stating the obvious. As our report noted quite clearly on March 8 the acting Secretary to the Ministry of Public Enterprise Development wrote to “seek advice from the Attorney General’s Department regarding the cancellation of the aforesaid Purchase Agreement….”
The reference to the “glaring disparity” in the positions taken up by the MPED and SriLankan Airlines, as the statement reveals, is still glaring and now even more revealing. Must anything more be said when the line Minister in charge, Minister Hashim has declared in a cabinet memorandum that he was unaware of most matters happening at SriLankan Airlines. He told his ministerial colleagues on June 20 that he was being overlooked.
The Sunday Times has seen the six page Termination and Amendment Agreement (Airbus A 350-900) signed by SriLanka CEO Suren Ratwatte on behalf of Sri Lankan and Sean Sullivan, CEO of International Lease Finance Corporation (ILFC).
The highlights of the agreement, including a clause calling for secrecy, involved the payment of US dollars 146.5 million to Aercap through Citibank NA, London. Just over a month before the Termination Agreement was signed, the Cabinet Committee on Economic Management (CCEM) said in a note to the Public Enterprises Development Ministry that:
“Termination of the A350-900 lease contract between SriLankan Airlines and AerCap: As per the previous CCEM decision termination of the A 350 lease contract has been renegotiated and it was explained by SriLankan Airlines that the reduced termination from US$ 154 million to US$ 98 million and the leasing of a used Airbus A 330-200 and the extension of an existing lease is acceptable. It was also explained that as a consequence of not accepting this offer, a default situation which would lead to a court case would delay the restructuring of the airline and jeopardise the EOI (Expression of Interest) process, and it should be avoided……”
Nowhere in this agreement, a copy of which is now in possession of the Sunday Times, is there a reference to the CCEM decision of a US$ 98 million cancellation payment. How the amount of US$ 146.5 million was arrived at and paid has not been explained. Is this not a serious flaw in an agreement which is expressly designed for the payment of compensation for the termination? In the light of this, our report last week noted that “Sri Lanka would now have to begin negotiations with Aercap to seek the release of the balance amount of money.”
After all, the agreement provides for the” reduction of the termination fees “provided each of the conditions” has been fulfilled. Why has this clause been included? Now that SriLankan claims it has met all the conditions, is it now saying there is no reduction? Why then was a provision made for reduction? The question about the unexplained financial commitment was done in the national interest since public funds are involved. How did the amount become US$ 146.5 million? Was the Cabinet of Ministers kept informed of how the sum was made up and which amount constituted the termination fee? Was such a payment of US$ 146.5 million approved by the Cabinet? Were the Ministers given a breakdown of the figures, if indeed it went before the Cabinet?
SriLankan Airlines: (3) The termination fee of US$ 98 million was agreed to by AerCap subject to SLA fulfilling certain conditions set out in the Termination Agreement dated 04 October 2016. Should SLA fail to fulfil those conditions, SLA was required to pay a sum of US$ 56 million totalling the termination fee to US$ 154 million. SLA has already paid a sum of US$ 98 million and fulfilled other conditions. AerCap has formally confirmed to SLA that SLA has fulfilled all the conditions in the Termination Agreement including the payment of US$ 98 million and therefore, no further payments to be made.
The statements made in the newspaper article insinuating that SLA has paid in excess and that no mention is available to recover any surplus are factually inaccurate. SLA at no time paid any surplus to AerCap.
Political Editor: To even the dimmest witted, the question that begs answer is why the Termination Agreement is completely silent on amount of US$ 98 million which was approved by the CCEM as termination fee. The reason for the additional payment or why such payments are being made is not explained. Hence, how does SriLankan convince its own Minister, the Cabinet of Ministers, the Government and even the public that the payment for termination is only US$ 98 million when the amount is not even reflected in the legal Agreement? Why is there a clause to maintain secrecy? Does it apply to the Sri Lanka Government and Ministers too? The issue raises more questions than answers.
SriLankan Airlines: (4) SLA has paid pre delivery payments only to Airbus S.A.S. under the said Purchase Agreement for the A 350-900 aircraft to be delivered in 2020/2021. This Purchase Agreement has not been terminated to date and it is still in effect. No pre-delivery payment was payable under the aircraft lease agreement with AerCap. As such, the pre-delivery payment was not a factor for discussion with AerCap and it will be a matter to be dealt with when terminating the Purchase Agreement with Airbus S.A.S. for the aircraft to be delivered in 2020/2021.
Political Editor: As revealed last week, a pre-delivery payment of US$ 19 million had been paid by the previous SriLankan management as first pre-delivery payment. The present Board of Directors has decided to terminate such payments in November 2016. The SriLankan statement confirms that more negotiations would become necessary since instalments on a second order, revealed by its statement, gets under way. One need hardly say billions of more rupees may have to be paid.
SriLankan Airlines: (5) The said newspaper articles (sic) mentions that SLA has informed the Ministry that Airbus S.A.S. had informed that termination is not an option when SLA has terminated the aircraft lease agreement.
SLA wishes to state that Airbus had informed that termination is not an option for the termination of the Purchase Agreement to which they are a party. The position of Airbus S.A.S. informing that termination is not option is not relevant to the termination of the lease agreements with AerCap since Airbus S.A.S. has no role to play in the negotiations.
Political Editor: All one has to do is to read correctly what was reported in the Sunday Times (Political Commentary) of June 25. This is what the relevant paragraph says: ”Minister Hashim says according to SLA , the possibility of cancelling the said purchase agreement had been broached at a discussion with Airbus in November 2016 and the SLA reported to the board of directors that the Airbus had indicated ‘cancellation is not an option…….”
The SriLankan statement also claimed that it was standard “industry practice” to confine only to purchase of aircraft and engine. The other requirements had been sought from other sources. Two international aviation consultancy firms, it said, have confirmed that the operation of A 350-900 does not help SLA achieving profitability.