Govt. draws plan for profits in 4 years
The debt-ridden national carrier SriLankan Airlines, aiming to be profitable in four years following a restructuring plan, is said to have terminated leased aircrafts from Airbus without prior Cabinet approval. These were revealed at the recent COPE committee meetings.
Ministers Kabir Hashim and Ravi Karunanayake had submitted in 2017 a Cabinet paper requesting to obtain approval for the terminal of lease agreement to purchase three A350-900 wide bodied aircraft.
The Cabinet paper states that “with the proposed network optimisation initiatives and the review of the airline operations undertaken by the Government of Sri Lanka (GOSL) in early 2015, it became apparent that the four Airbus A350-900 aircrafts were not suitable as new additions to the fleet.”
Under the new management, international aviation specialists consultants had advised them that operating these aircrafts would “affect the profitability of the airline operations adversely.”
The termination fee negotiated on the fourth aircraft that was due for delivery in November 2017 was for a termination fee of $17.7 million. The three other aircraft were to be negotiated for a termination fee within the range of $75- 85 million.
The termination fee was renegotiated and reduced from $154 million to $98 million that was conditional upon leasing of a used Airbus 330-200 aircraft and the extension of a lease on an aircraft already leased; SriLankan Airlines takes over the lease on two narrow bodied aircrafts owned by AerCap and leased to Mihin Lanka.
In this respect, the Termination Agreement received a “No Objection” from the Ministry of Finance and approval from the Prime Minister and was entered into by SriLankan Airlines. But the cabinet paper sought approval to the contents of the agreement and to facilitate any actions required to ensure compliance with the terms of the agreement.
However, it had been found that the cabinet paper had not been fully approved and as such the termination agreement had not received cabinet approval.
It had been stated at a COPE committee meeting report in 2017 that Cabinet approval had not been granted for the method of payment. Approval was obtained from the Cabinet for the termination of the agreement and only for the prices being paid.
Another interesting development cited in this report was that Ministry of Public Enterprises Development which was one of the relevant parties of this transaction had only participated at the first meeting held in this regard and the Secretary was not officially informed to participate at any other meting thereafter.
Moreover, no clearance had been obtained from the Attorney General’s Department for the termination of the aircraft agreement for legal clearance. Only an institution called Aviation Legal Experts in UK had been sought to carry out the agreement.
In fact when the AG’s opinion was requested the response had been that since the opinion of the AG was not sought at the time of taking the decision to purchase these aircrafts their opinion now in the termination of the agreement would not be necessary. When the 2013 decision was made to lease these aircraft too, no cabinet approval was sought.
The report had also stated that it was interesting to find that a consultant to the Finance Ministry, and SriLankan Airlines were participating in the discussions but no officers from the Ministry of Public Enterprises Development, which is the subject ministry, were present.
The airline is currently looking at restructuring that would ensure profitability in four years. Firstly, by obtaining shareholder support for the airline to break-even at operating profit level that would entail board and management responsibility, a presentation submitted to the COPE two weeks ago, stated.
In this respect the Collective Bargaining Agreements or payments to staff would be normalized and rationalizing of excess middle management to benchmarked standards.
This would also mean that part of the embarkation fee of the Sri Lanka Tourism Development Authority would be allocated to the airline as they generate 33 per cent of all tourists to Sri Lanka.
Also the airline would be exempted on withholding tax of 14 per cent on international leases covering aircraft, the presentation said.
Secondly, the Treasury would bear a significant portion of debt by restructuring the debt owed to CPC and state banks, and refinance the loans on more favourable terms via a debt to equity swap structure.
Thirdly, authorities would also look to source strategic investors for public private partnership that would be carried out by the Finance Ministry to seek an investor through a transparent bidding process to infuse fresh equity of $250 – 300 million to modernise the business and manage to profitability.
In this respect, the airline would retain 51 per cent Sri Lankan ownership; and the investor selected would be based on their financial strength, management capability, ability to grow tourism and ability to grow airline, catering and ground handling revenue.