News
Cancellation of aircraft deals: SriLankan faced multimillion dollar fines, deposit forfeiture
The Presidential Commission of Inquiry which investigated into SriLankan Airlines and Mihin Lanka operations from 2006 to 2018, noted that due to the insufficiency of time, it was unable to make an in-depth analysis of the agreements and outcome but the excerpts from the evidence/affidavits of certain witnesses explains the factual background in this aspect.
Excerpts:
Witness Dulitha Wickrama, Manager Financial Analysis and Strategic Projects, by his Affidavit revealed the following facts before this commission:
Mrs. Manique Gunasekara who functioned as the Chief of Corporate Affairs Officer of SriLankan Airlines from 2013 to 2016 and headed the Corporate Affairs Division while in office compiled a file with sets of documents pertaining to the cancellation of four A350-900 aircraft to be leased from lessor AerCap as a management reference resource.
The airline management carried out a wide-body fleet renewal and re-fleeting programme during 2012-2015 with the objective of replacing the ageing A330-200 and A340 aircraft. Under this programme, the then management had decided to induct eight A350-900 to the fleet progressively. Four of these aircraft were agreed to be leased from lessor AerCap (formerly known as “International Lease Finance Corporation” prior to being acquired by AerCap) and the remaining four aircraft were to be purchased directly from the manufacturer, Airbus.
As per the lease agreement with the lessor AerCap, three aircraft were scheduled to be delivered in the latter part of 2016 and the fourth was to be delivered in the latter part of 2017. However, in the Restructuring Plan of 2015 developed by the new management of SriLankan Airlines Ltd., under the direction of the Government of Sri Lanka (GOSL), the operation of A350-900 aircraft was considered non-viable, given the nature of the business model and fleet plan proposed by the said Restructuring Plan. This decision was ratified by the international consultants Sky Works of the USA, which was subsequently appointed to carry out a fleet evaluation and Business Plan review.
The Senior Management decided to terminate the lease agreements with AerCap for the four A350-900 aircraft. Accordingly, the lease agreement for A350-900 aircraft that was to be delivered in 2017 was terminated in April 2016 at a termination fee of USD 17.77 million (cash settlement of USD 15.27 million plus retention of security deposit of USD 2.5 million).
The termination agreement for the lease of the remaining three aircraft was reached with the lessor AerCap in October 2016 at a termination fee of USD 98 million (cash settlement of USD 90.5 million plus retention of security deposit of USD 7.5 million). This agreement also included conditions of extending the lease of existing aircraft (MSN 627), transfer on additional aircraft MSN 1008 to SriLankan and transfer of leases pertaining to two Mihin Lanka aircraft to SriLankan Airlines Ltd.
A number of board meetings were held with the participation of senior management to discuss the decisions pertaining to the cancellation of A350-900 lease agreements, and the following Board officials had participated at the said meetings; Chairman Ajith Dias, Rakitha Jayawardene, Joseph Brito, Chanaka de Silva, Mahinda Haradasa, Col. Sunil Pieris, Niranjan Deva Aditya. Harendra Balapatabendi, and Company Secretary Dalrene Thirukumar.
At the Board Meeting held on August 3, 2015, the operating feasibility of A350-900 aircraft and termination options were taken up for discussion.
It was decided at this meeting to obtain the service of an external consultant in addition to Nyras, which had been working with the airline through the Finance Ministry, to assist in A350 lease renegotiations. Two companies, namely Sky Works and DVB Bank, Germany were suggested and Head of Finance Yasantha Dissanayake was instructed to obtain the Request for Proposals (RFPs) from all three companies (Nyras, Sky Works and DVB Bank).
After further discussions the committee decided to appoint Sky Works as the consultant based on the comprehensive nature of the proposal, credentials and experience, and substantial reduction in fees.
In addition to the main lease and purchase agreements for A350-900 aircraft, the airline had entered further agreements for the provision of related supplementary products and services — Seats, In-flight Entertainment (IFE), Spare Engines & Total Care, E-Ops with Zodiac, Thales Inc, Rolls-Royce, and Airbus software solutions respectively. As the management decided to terminate the procurement of A350-900 aircraft, it was decided to terminate the agreements for the aforementioned supplementary products and services as well.
In the Board Paper CEO/2016/07/69 dated 20.07.2017 it was indicated that there would be break cost (exit cost) for lesser amount for engines, IFE and Buyer Furnished Equipment (BFE). This paper was presented to the Board Meeting of 28.07.2016.
In the high level termination fee (break cost) calculations provided by the consultants Nyras it was indicated that in addition to aircraft termination cost, the termination cost of Rolls-Royce Total Care maintenance agreement and spare engine would be around USD 56 Mn. Nyras had indicated in their evaluation of termination cost that only “big numbers” were considered. Therefore, termination costs related to seats, IFE and E-solutions could not be found.
Manique Chantal Gunasekara also presented evidence before this Commission, and she confirmed the facts revealed by witness Gayan Duleesha Wickrama using a compilation of documents prepared by this witness. She also spoke with regard to certain proposed Restructuring Plans. Some important facts stated by her can be set out as follows;
A cabinet decision had been taken (based on a Cabinet Memorandum dated 17.04.2015 to direct the Chairmen and the Board of Directors of both SriLankan and Mihin to prepare a viable and comprehensive Business Plan for each airline at the earliest, and each airline to prepare an appropriate Plan to amalgamate SriLankan and Mihin at the earliest.
Accordingly, a Committee consisting of Mr. Manoj D.V Gunawardena, Mr. Yasantha Dissanayake, Mr. S.A Chandrasekara, Mr. Rakhitha Jayawardane and Manique Gunawardane partook in the preparation of the Plan.
The proposed Restructuring Plan was presented to the Board on the 26.05.2015 and as per that Plan, the fleet requirement of SLA was 10 wide-body and eight narrow-body aircraft, where at the time it had 13-wide-body and eight narrow-body aircraft. Several fleet optimisation options had also been identified including the possible deferment of the four Airbus 350-900 aircraft on order from Airbus for delivery in 2020 and 2021.
This Plan was to be presented to the Prime Minister and certain other ministers, and the presentation was made; it contained the following two options;
- Option 1: to restructure SLA with Mihin becoming a subsidiary
- Option 2: to Migrate SLA Business and Mihin Business to a new entity.
The Cabinet of Ministers on June 24, 2015 had given approval to concur with the recommendations/decisions of the Cabinet Sub-Committee on Economic Affairs, which had selected Option 1 referred to above.
The Board of Directors had decided to engage the services of an expert to assist with negotiation of the A350-900 aircraft lease agreements and also to provide recommendations on the ideal SLA Fleet requirement, and for this purpose, Sky Works had been appointed on 09.09.2015.
In an interim report to the Board, Sky Works had stated that;
- A350-900 aircraft was not suitable for the flight schedule evaluated.
- None of the European Routes planned for termination was projected to be profitable on current conditions.
- The Interim Reported highlighted the need to engage AerCap urgently.
It has further identified possible break cost and mitigation strategies. As per the report, the negotiated settlement it was likely to be in the range of USD 50 million and 100 million.
AerCap and SLA had commenced communications on October 30, 2015.
On December 22, 2015, SLA, at a meeting with Airbus, sought the assistance from Airbus to find solutions for the A350-900 aircraft to be delivered by AerCap in 2016 and 2017.
On January 7, 2016, AerCap had met SLA and suggested inter alia that its claim could be in the region of USD 250 million if SLA did not honour contractual obligations.
On January 11, 2016, a presentation had been made to the Hon Minister of Public Enterprises Development, Kabir Hashim and the Deputy Minister, including the negotiation on the A350-900 aircraft of AerCap and the direction from the GOSL, which had been sought. Even Sky Works had made a presentation to the Minister and the Deputy Minister on 22.01.2016. The presentation had identified the options available to SLA at that time, together with a recommended approach. As per Sky Works the best approach would be not to induct the A350-900 aircraft during the plan period.
In February 2016, AerCap had made an offer to terminate the fourth A350-900 aircraft due for delivery in November 2017. The Termination Agreement had been signed in April. The final amount of the settlement was USD 17.77 million which included the forfeiture of the deposit.
At the Board Meeting held on February 9, 2016, a detailed presentation had been made by the CEO regarding inter alia the various options available to SLA at that time: the need to appoint a consultant to validate the best option for SLA, the scope of the consultancy services required, which included a recommendation on negotiating strategies with lessors, Airbus, Rolls-Royce and other creditors/stakeholders.
Nyras had been selected by the Board of Directors after a detailed discussion.
Nyras Report dated 18.03.2016, which reviewed the options available, highlighted the challenges. This report was tabled before the Board on 24.03.2016. As per certain options, the losses are increased, according to Nyras, by the operation of the A350-900 aircraft compared to the A330-300, on the same routes. It has also mentioned in the context of options available to SLA, that SLA should prepare for negotiation with AerCap, Airbus and Rolls-Royce, with the intention that it exits all contracts related to the A350-900 aircraft.
On July 5, 2016, the Chief Risk Officer of AerCap had met with SLA in Colombo. No mutually acceptable solution had been found for the remaining three leased A350-900 aircraft.
At the end of August an offer had been received by SLA from AerCap to terminate the remaining leases by paying a cancellation fee of USD 146.8 million. The deposit of USD 7.5 million also would have to be forfeited.
The final settlement negotiated had a payment of a cancellation fee of USD 98 million provided that SLA leased A330 MSN 1008 Aircraft, extended the lease on MSN 627 aircraft and took over two narrow-body aircraft from Mihin Lanka (Pvt) Ltd which were already being operated by SLA at that time.
Board approval had been obtained for the final terms on September 28, 2016 and the Termination Agreement had been signed by SLA on October 4, 2016.
Yasantha Dissanayake also corroborates the above facts by his affidavit dated 08.04.2019 .
Four (4) A350-900 Aircraft ordered directly from Airbus
The purchase agreements for four aircraft ordered directly from Airbus for delivery in 2020 and 2021 are valid as at date.
However as submitted to the Commission, discussions are ongoing between SriLankan Airlines and Airbus regarding a mutually acceptable solution to both parties. In this regard, an offer is made to convert the four A350-900 aircraft order to eight A321 Neo narrow-body aircraft.
As per this offer made by Airbus upon signing of the A321 Neo purchase agreement, the purchase agreement for four A350-900 aircraft will be cancelled. The PDP’s paid up to November 2016 amounting to USD 19,214,638.45 will be used to set off against PDP’s payable on the A321 Neo aircraft. No PDP payments were made since then. Under these circumstances, there will be no loss to SriLankan on the PDPs paid up to date.
In the event no agreement is reached, Airbus is in a position to seek suitable remedies available to them under the A350-900 purchase agreement.
It appears, the obligation to pay USD 1.5 million per aircraft for the VIP kit with the cancellation of a A350-900 aircraft will be transferred to the new purchase agreement. Accordingly, if SriLankan fails to take delivery of any one A321 Neo aircraft an amount of USD 750,000 will be payable to Airbus. In the event a new purchase agreement is not signed and SriLankan does not take delivery of the four A350-900 aircraft, Airbus is in a position to claim the USD 6.0 million from SriLankan.
VIP Kit
It appears that originally Airbus has offered a VIP kit worth USD 15 million most probably for the use of Head of State on a Credit Memorandum.
Mayuka Ranasinghe while referring to a document marked (e) SLR MAR 11 in his oral evidence given on 04.04.2019 referred to certain terms in the agreement. Although some witnesses tried to explain that this was a gift given to the GOSL or a concession given, as per Mayuka Ranasinghe’s evidence, the buyer has requested it and the value of it seems to have been distributed among the 10 aircraft to be brought (six A330-300 and four A350-900). If SLA fails to purchase, SLA has to pay USD 1.5 million for each aircraft. As per the oral evidence given by Mayuka Ranasinghe SLA has already cancelled the requirement of a VIP Kit in early 2015 but it appears that the commitment to pay USD 1.5 million for each aircraft that SLA refuses to purchase, still exists. Thus, cancellation of four aircraft may create a position that enables Airbus to claim USD 6 million among other claims.
It must be noted that SLA is not a Government department but a separate legal entity, which has a separate existence even though the GOSL is its main shareholder through the Secretary to the Treasury. It is not clear who made the request for a VIP kit from Airbus. When there are so many other options Airbus would not have itself chosen a VIP kit to be offered on a Credit Memorandum. Is this indicative of separate discussions outside the procurement procedure? What is the need of a VIP kit for the business of SLA? Was there such a demand? Was there any projection of revenue through the use of the VIP kit? Whatever it is, it is the duty of the Board to take business decisions and no one else.
Anyway, the facts revealed before the commission establish that the management of SLA decided to engage in a re-fleeting exercise when it was in a financially dire state. Even the type of fleet they chose was not suitable or profitable for its operations.
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| What Mahinda Rajapaksa said in 2008 has now become a reality | |
| The Commission of inquiry appointed by the President to inquire into alleged irregularities in SriLankan Airlines Ltd, SriLankan Catering Ltd and Mihin Lanka (Pvt) Ltd from January 1, 2006 to January 1, 2018 in its report has taken note of a statement made by former President Mahinda Rajapaksa. The report said, ‘As per page 22 of the Sri Lankan Airlines Annual Report 2007/2008, it must also be noted of a statement made by former President Mahinda Rajapaksa during an address to the staff on April 3, 2008 at the BIA. He said, “Taking back the management of Sri Lankan will not bring prosperity by itself. What we have done is to take the responsibility into our own hands. If this Airline does not achieve success in the future, we have no one else to blame but ourselves.” The PCoI report said: “Having considered the balance sheet, Annual reports from 2006 to 2017 end, the material elicited in our report by way of evidence, would demonstrate deterioration of Sri Lankan Airlines. It is very opportune to take serious note of the above statement of the President. Today it has become a reality.” |
| Sajin Vass main cause for Mihin Lanka crash | |
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