8th April 2001
Editorial/Opinion| Plus| Business|
Sports| Mirror Magazine
Managing director of House of Fashions clothes chain
By Feizal SamathSriLankan Airlines, the country's national carrier, is preparing for a period of profits and consolidation in the next three years after a mixed-bag operation in the two years since 1998 after it came under foreign management, the airline's chief executive officer said.
The airline reported a profit of 1.3 billion rupees for the year ended March 31, 1999 and a loss of 750.4 million rupees in 1999-2000 while results for the latest financial year - a turbulent one - that ended last month would only be known around November.
Peter Hill, CEO of the airline, told The Sunday Times Business that Emirates had no plans to raise its 40 percent stake in SriLankan Airlines for, "even if we want to, the rules don't permit it."
He said if the government wanted to sell its balance 51 percent stake in the airline it would have to offer it to local investors rather than foreign investors since current rules imply that a majority stake in the airline must be held by Sri Lankan nationals. Nine percent of the shares are held by the employees in addition to the Emirates and government stakes.
"I guess it would be the intention of the government to sell off its stake in the airline in the future. But I think the airline has to prove its track record and show a couple of years of profits to be able to attract serious investors," Mr Hill said adding that Emirates, as the foreign investor, had no objections to working with any other local party if the government divests its interests.
Hit by higher oil prices that has considerably raised operating costs and hurt the bottomline, SriLankan Airlines recently introduced a fuel-hedging scheme where it made forward purchases to cushion against high increases. "This will protect us against any big changes in the oil markets. Oil prices are still high. Over the past 12 months we have seen considerable increases in passenger and cargo rates. Rates have been going up over the year with the last hike on April 1," he added.
SriLankan Airlines rejected charges by some sections of the travel industry that the national carrier was crowding the market and forcing other airlines to pull out. Mr Hill said moves by Aeroflot and Martinair to pull out were purely commercial decisions made by the two airlines and was not, in any way, influenced by the national carrier.
The CEO criticized Aeroflot for seeking to increase its seat capacity on some sectors which could have affected other point-to-point carriers. Aeroflot wanted rights to pick up passengers from Karachi to Colombo after taking off from Moscow, which was reluctantly agreed to by SriLankan Airlines.
But later the Russian airline substantially altered this proposal and wanted rights to operate from Moscow to Colombo via Dubai and onto Kuala Lumpur. "This was an out-of-the-blues proposal. We were surprised and wanted to know what this had to do with bringing in passengers from Moscow to Sri Lanka? They demanded these rights or threatened to pull out of Sri Lanka," Mr Hill said adding that SriLankan Airlines opposed this move resulting in Aeroflot pulling out after a long spell in Sri Lanka.
"This was an outrageous request from a very large country to a very
small country. We should not be subject to big brother tactics any more.
We should be able to stand up to defend our own rights here. If we agreed
to the proposal we would lose all the traffic rights that we won over the
years for Sri Lanka," the SriLankan Airlines CEO noted.
Paradise regainedThe national carrier, which is in the hands of the emirs has been the subject of much controversy in recent times, especially after the takeover.
Nevertheless, its performance has been upto expectations and it appears the powers that be are happy-so much so that it has given the greenlight to the present managers to go ahead with more changes that the latter has envisaged.
Among the proposed changes are overhauling some older aircraft, retrenching some staff, restructuring airfares and expanding the destination network, we hear.
Banks to go privateThe plans to privatize the big banks are going on full steam ahead but so are the plans of the unions to upset the applecart. The unions that oppose the move are mostly red but they have not been shy of asking for assistance from the greens.
Unsurprisingly though, the greens are fighting shy of committing themselves, knowing well that they may have to sing the same tune if and when they hold the reins of power. Their reply has been "yes, we will support a general strike but privatization, well, that's another issue."
White in blackCigarette smoking is on the wane and the monopoly distributor is expecting yet another sizeable decline in sales this year too.
The officially announced reason is that the high price of the legal product has driven consumers to low-priced, contraband 'white' cigarettes. The real reason, as a recent consumer survey showed may be entirely something else: the anti-smoking lobby is gaining ground and the habit is 'out of fashion'.
Of course, strategies are being planned to counter the trend but a big
obstacle is the ban on covert advertising.
Among them were journalists, IT experts and readers. There were others however who were smart enough to spot the story as an April 1 joke.
"Why can't you be more original," said an exasperated reader who called the office.
Another foreign journalist said he was expecting stories of this kind last Sunday and smelt a rat on the Bill Gates affair.
"It was nicely done however," he noted.
An IT office manager wanted to meet Gates hoping that he would in line
for the so-called scholarship that the US businessman was going to offer.
Kelani Valley Plantations Ltd (KVPL) said in its annual report for the year ending December 2000 that continued weakness in the market for sole crepe – the most value added of the firm's rubber products – had severely affected revenues.
"As in previous years the company was able to mitigate the loss of earnings by manufacturing a mix of centrifuged latex and latex crepes," KVPL, which has both tea and rubber plantations, noted.
The company, in which the Hayleys group has a substantial stake, said it posted an after-tax profit of 105 million rupees last year, up sharply from 27 million rupees in the previous year with a significant contribution of the profits coming from tea as a result of better prices and higher production.
It said the reduced rubber output in Indonesia and Malaysia and the diminishing stocks held by the International Natural Rubber Organisation (INRO) are expected to have a favourable impact on the rubber market by the middle of this year.
KVPL is continuing to plant valuable forestry timber including rubber under its forestry programme with the total forestry extent surpassing 400 hectares by the end of the year.
"The scarcity of high quality timber in Sri Lanka will provide a major
opportunity to the company provided the government reforms its current
policies on harvesting and marketing of timber reserves," the report added.
By Chanakya DissanayakeLast week's meeting of a consortium of Sri Lankan bankers with Vanik Inc, largely perceived as the day when the troubled merchant banker was hoping for a bailout package, turned out to be an anti-climax.
The consortium, after Friday's meeting, postponed the final decision on the fate of the company, until they (consortium) obtained an impartial, expert opinion on the viability of Vanik's turn-around plan presented on March 28.
Vanik CEO Justin Meegoda, in his presentation to the consortium, requested additional working capital for its profitable subsidiaries and a grace period of two years to accumulate profits, to pay back debts to the banks. Members of the consortium expressed diverse views on the issue.
A bank CEO, who attended the consortium meeting, said the banks decided to get an independent opinion on whether Vanik's ambitious plan to revive the company could be turned into a reality.
"The issue facing all of us (banks), is to decide whether to call it a day and bite the bullet now, or to let Vanik continue it's operations and take the risk of incurring larger losses", he added.
However, he admitted that personally he is confident of the viability of Meegoda's plan to revive the ailing firm. "There was no uniformity in the sentiment among consortium members. Some were optimistic and some thought that the plan is unrealistic," he added.
At the conclusion of the meeting, the bank CEO's were asked to suggest a suitable expert, having experience on turnaround companies, to study Vanik's plan and offer his or its opinion. The consortium is scheduled to meet after the Sinhala New Year, with the expert's opinion in hand to make the final decision.
The consortium comprised all banks having an exposure to Vanik and included,
Peoples Bank, Bank of Ceylon, HNB and DFCC. Vanik's total debts are said
to be around Rs 3.7 billion, of which Rs 1.5 billion is owed to the banks.
By Hiran SenewiratneSpice production in Sri Lanka is estimated at nearly 30,000 tonnes this year, up from 27,000 tonnes in 2000 if favourable weather conditions continue in the country's spice growing districts, according to the Spices and Allied Production Trader's Association (SAPTA).
SAPTA Chairman Sarada de Silva told The Sunday Times Business that output was expected to rise by about 3,000 tonnes last year as weather conditions were ideal for a bigger harvest.
He said that Sri Lanka had tremendous growth potential for an industry like this, as much of the terrain was suitable to grow spices. Nearly 90 percent of the country's spices output is exported.
Total production of spices and allied products which comprises cinnamon, cardamoms, cloves, nutmeg and mace recorded a 5 percent growth last year from 1999 with earnings from export reaching more than 11 billion rupees.
The land area under spices and citronella was estimated at 91,106 hectares in 2000 including areas that came under home cultivation, Mr. de Silva said.
Other exporters noted that there was potential to increase production and productivity to cater to an increasing demand for spices in the world market.
Ghulam Chatoor, Chairman of Chatoor & Co and a veteran in the business, said that demand was very high for exports but Sri Lanka was unable to service this demand and invariably accounted for just three percent of the world market.
"The non-availability of lands and the lack of technological know how has affected growth in the industry," he added. Another exporter M.C.M Zarook noted that as the domestic market was small, there is a need to focus on the international market by encouraging more growers to plant spices.
He said spices fetched high prices in world markets and the government should provide more encouragement so that revenues can rise sharply which would also benefit the country.
SAPTA is in the process of conducting a series of seminars to popularize this industry in the plantation sector by maximizing the use of abandoned lands, Mr. Zarook said
Traders said organically cultivated and processed spices had a rising share in world markets. Sri Lanka, for instance, exports around 150 tonnes of spices using organic fertilizer each year. Local companies engaged in exports send spices in bulk as well as in value added forms such as powders, mix, essential oils and oleoresins.
The main spice-growing areas are Kandy and Matale in the Central Province, Galle and Matara in the south and Ratnapura in the Sabaragamuwa region.
Samurdhi for all but for the poor
There is no doubt that Sri Lanka has a high proportion of its population in poverty. Both the exact extent of poverty and whether poverty has increased or decreased is an area of contention. Different studies and surveys reveal widely differing figures. This is to be expected. There are differences in the definitions of poverty and the methods of collecting data. The responses of individuals and households could also vary. If we take an average statistic of poverty from the various surveys, it is in the region of 20 to 25 percent of households. This is certainly a large enough number to be concerned with.
The human dimension of this is that about a fourth of our population go to bed hungry and awake with little hope of meeting their basic needs.
This is a human condition with which the readers of this column are unlikely to be able to empathise. This is because your condition and mine are so totally different. At most we may sympathise with these poor people. There is no doubt that this is a serious enough condition to require governmental action. The causes of this poverty could be a number of reasons. This we will not go into except to say that the fundamental causes of poverty have to be tackled to make a worthwhile dent in the problem. There must be actions to change the fundamental reasons causing poverty. These relate to the distribution of assets and resources as well as opportunities to gain skills and knowledge that would give them higher income generating opportunities.
It is also well known that the development of economic and social infrastructure in the remoter regions of the county would enable increased employment opportunities and increased incomes. No doubt the overall economic growth of the country would have an important bearing on the improvement of the economic conditions of the poor. Some of these are essentially long-term solutions. There is therefore a need to find means of alleviating the conditions of the poor immediately as well.
The issue we want to raise is whether the main programme for poverty alleviation, the Samurdhi programme is really serving the purpose. Certainly vast sums of money are being spent on it. The extent of the finances expended on this programme has raised concern. It is estimated that Samurdhi payments absorb about 4 per cent of GDP.
While the amount of money expended is large and is a fiscal concern, the other pertinent question we wish to raise is who gets the money and does it really benefit the poor? Studies have revealed that much of this expenditure does not reach the intended beneficiaries. The number of unintended beneficiaries has been large. This is very clear even from the fact that over 50 per cent of households obtain Samurdhi benefits. This is an exceptionally large proportion for any county in the world. Certainly the statistics of poverty we quoted do not warrant such a large number of households getting Samurdhi benefits.
Studies have also revealed that as much as 44 per cent of the beneficiaries are in the top 30 per cent of income households. This statistic bears witness to the fact that large sums of money are being siphoned off by the rich and the influential. Besides this we find the Samurdhi programme is investing money in the purchase of shares in a bank. We wonder how this is possible.
There has also been a new bureaucracy to administer this programme.
It is widely known that this staff has been used for political purposes
at the last election. This bureaucracy has added to the costs of this programme.
It is vitally necessary that the programmes of welfare and poverty alleviation
should be recast and revamped. The government must have the political courage
to do this. In fact the government's response to the previous Janasaviya
programme was that it would introduce a better-targeted programme. What
they have achieved is just the opposite. The Samurdhi programme has assumed
the level of public ridicule as everyone knows that the money is expended
largely for purposes other than the intended. It is too large a sum of
money to be wasted. The really poor must be assisted. The amount of money
that is needed to do this is probably much less than what is spent today.
By Feizal SamathBT:On the issue of SriLankan Airlines being the cause of other airlines pulling, as stated by some sections of the industry?
Peter Hill: Traffic rights between Sri Lanka and other countries are controlled as a result of negotiations set up through the Director of Civil Aviation (DDCA). These are government-level discussions. The national carrier or the designated national carrier - in this case SriLankan Airlines - is always asked to give a comment. We sometimes say we are interested in improving the traffic with a particular country or consider starting operating to a new country.
If it is a new set of bilateral discussions, it might go on for two or three meetings. We along with the national carrier of the other country participate in these talks. But we have no real say in the decision that is eventually taken. We give our views and try to be as commercially oriented as possible. We never lose sight of the fact that we are talking of bigger issues here. It is not SriLankan Airlines alone that we are talking about. We are talking about tourist, business flows to these countries. We make our views, we contribute to those discussions but by no means do we in the final outcome say this is what we want. It is the DDCA that makes that decision.
But isn't generally accepted that the authorities go by what the national carrier of a country says in such issues?
It used to be. Before 1998, the national carrier used to influence the decisions of the DDCA. The position has totally changed since privatization of the airline. What we are trying to do here is to improve the commercial opportunities for SriLankan Airlines and at the same time, when we do that, its based upon reciprocity of the national or designated national carrier of the country we are negotiating with.
An example... when we (Emirates) came in 1998, SriLankan Airlines was entitled to fly four nights a week to the UK and the national carrier of the UK, British Airways, had reciprocal rights to Sri Lanka with stopovers in between and points beyond.
We have held discussions and progressively increased this so that by the winter of 2002, both national carriers can fly between the UK and Sri Lanka upto 14 times a week. Currently British Airways has decided not to operate. That's their commercial decision. We can't influence that decision. Otherwise we would be delighted to see them back on the road. They have the rights to operate. It is not SriLankan Airlines that is stopping British Airlines from flying here.
We find it lucrative to fly to the UK and do so 10 times a week. The only time we comment on a carrier's request to fly into Sri Lanka or increase frequencies is when we believe the traffic is not going to basically support the increase.
Last month a Middle East airline asked for additional rights from a point in the Middle East to Colombo. That carrier already operates daily services. We have the same entitlement in the reverse direction. Both of us (the two carriers) will agree that traffic is actually declining on these routes. So why do you need additional capacity on a route that is showing a decline and is operating for half the year at far less seats available on the route?
There were no positive statements coming from the airline concerned. They said they wanted to improve cultural ties and business opportunities between the two countries. That is nice and flattering but at the end of the day we both have to make money. If we can't make a commercial success of it, what is a use of operating? There is no purpose in flooding the market with added capacity where demand doesn't justify it. We told them let's see an increase in the traffic flows and then let's talk again. If traffic grows, then certainly we will support extra flights
In this particular case, we knew what the underlying objective was. That airline wanted to bring traffic outside the region - outside the Middle East - from Europe, Middle East into Sri Lanka. By doing so, it would potentially lower selling levels that would ultimately result in the direct operators from Europe pulling out again. The reason why established carriers like BA and KLM pulled out a few years ago was because the fares came down to such a low level, they could not sustain a profitable operation. We are trying hard to get these carriers to come back. SriLankan Airlines does not mind healthy competition. We have a product now that would stand up against the best.
We welcome competition but what we want to prevent is carriers flooding the market with low-cost seats that will attract the wrong kind of tourists and ruin the market for the point-to-point operators by bringing down the fares to (sharp) lows that it would be uneconomic for us to continue to provide direct services.
Then the travelling public would be up in arms saying why can't our national carrier fly into points in Europe economically.
That's what we are trying to do. We are trying to get sustainable, viable operations to points in Europe, preferably non-stop and to encourage airlines at the other end of the route to return to Sri Lanka.
How many airlines have pulled out in recent times?
A few airlines have pulled out for different reasons. None of those reasons is anything to do with SriLankan Airlines trying to influence them. For instance Martinair around last September started a new frequency between Amsterdam and Colombo. They have now decided to withdraw their services and pull out of the Sri Lankan market. Why? Presumably for commercial or operational reasons, they decided that this market was not what they thought was going to be. SriLankan Airlines has no influence in that decision nor would want to have anything to do with that decision. We welcomed Martinair's flights as there were no direct services between Amsterdam and here.
In the same way, the French airline AOM that used to fly to Colombo en route to Australia, decided to pull out and re-route its flights through Los Angeles. That had nothing to do with SriLankan Airlines. It was a purely commercial decision.
One of the points being made by sections of the travel industry is that airlines pulling out reduces seat capacity to Colombo making it more difficult for people to come in.
This is not true. For instance, AOM pulled out of the Paris-Colombo route because it was uneconomical. In reality, that airline was carrying 40 or 50 passengers per flight twice a week because most of the seats were filled up by passengers travelling between Paris and Australia. Probably 100 seats were lost as a result of AOM pulling out. That's not a big deal. SriLankan Airlines or carriers operating indirectly can easily fill this gap.
Aeroflot is a good example. We bent over backwards to try and encourage them to fly to Sri Lanka as they have been flying here for many years. They were routing their flights via Karachi. They wanted the opportunity to pick up passengers from Karachi and bring them to Colombo in order to fill up the seats of people who got off at Karachi. We don't have reciprocal rights to do that if we chose to operate to Moscow. But in a spirit of commercial cooperation, we offered to recommend to the DDCA to provide local traffic rights between Karachi and Colombo.
They were happy and promised to continue flying to Colombo via Karachi twice a week as they have been doing. But Aeroflot (officials) in Moscow looked again at the proposal and turned it down and presented a new operational plan to operate from Moscow to Colombo via Dubai and onto Kuala Lumpur. This was an out-of-the-blues proposal. Aeroflot then requested traffic rights for Dubai-Colombo and Colombo-Kuala Lumpur. We were surprised and wanted to know what this had to do with bringing in passengers from Moscow to Sri Lanka? They demanded these rights or threatened to pull out of Sri Lanka. We opposed this as it was not based on reciprocity. This was one- way traffic and no benefit to Sri Lanka's national carrier. This was an unreasonable request and both we and the DGCA couldn't agree to.
This is an outrageous request from a very large country to a very small country. We should not be subject to big brother tactics any more. We should be able to stand up to defend our own rights here. If we agreed to the proposal we would lose all the traffic rights that we won over the years for Sri Lanka.
Again I make the point, many of the airlines have pulled out for commercial reasons and not because we had something to do with it. We have many unused traffic rights which we don't use as they are currently not viable like resuming services to South Africa as the economic climate will not support a commercially viable service between South Africa and Sri Lanka. We will lose money.
Tell us about your bottomline, profits, revenues, etc?
The airline industry had a bad year in 2000 as a result of escalating fuel prices which went through the roof. The net impact on our bottomline last year was the fuel bill that increased by US $ 40 to 50 million over the previous year. Our fuel bill out of total operating costs rose to 24 percent in 2000 from 13 percent (in the 1 April 1999-31 March 2000 financial year).
Hence this year, which just ended (March 31) is not going to show any significant profit for the airline.
Can't you give some numbers?
No, not at the moment as the report would be ready only in November. We had a small loss in the 1999-2000 year.
What about 2001-2002?
That looks a lot better. We now have a fuel-hedging policy adopted by the airline to protect us against huge oil increases. This scheme began a few months ago where we make forward purchases. That will cushion us against any big changes in the oil markets. Oil prices are still high. Over the past 12 months we have seen considerable increases in passenger and cargo rates. Rates have been going up over the year with the last hike on April 1. The next three years would be a period of consolidation and profitability.
How is the fleet expansion progressing?
At the moment we have stopped at 12 aircraft. We do have options to purchase more aircraft, either more A330s or more A340s. But for the time being we are not purchasing any more aircraft. We are stabilizing our fleet, we are stabilizing our route structure and we are looking at consolidating from where we came in the last three years to allow us to operate profitably in the next 12 months and beyond.
We want, and we project a good profit at the end of the next financial year. We have done all the hard work. We have made all the investments. Now is the time to reap the benefits of those investments.
What were the plans three years ago? Were you going in for 12 or more aircraft?
We have taken on board six new A330s and one additional, used A340. We have acquired seven new aircraft in the last two years. We did have an option of purchasing another six aircraft but we have not exercised that option yet because of the crisis here. When you have a situation in the country, Sri Lanka is not on top of the international travellers wish list.
There have been times when virtually no one has been coming. In the last six months we have seen a change in the economic climate of the country. Tourist arrivals have improved. The recent British cricket tour has brought many visitors and shown that Sri Lanka is a safe place, is a fun place, is an affordable place and that has done a lot of good to promote the image of the country around the world. We are looking forward to a good year this year.
The impact of peace negotiations on the industry?
I hope that gathers momentum. If that happens, the future looks good for the country and good for the airline. We may then use the option of expanding our fleet provided we see a profitable return for inbound tourism, particularly the leisure market.
Any plans for Emirates to increase its stake in SriLankan Airlines?
Emirates has a 40 percent stake, nine percent is owned by the employees and 51 percent owned by the government. One of the difficulties of course is that many of the bilateral agreements that we have say that the majority stake in the airline must be held by nationals of Sri Lanka. If the government is to sell off more of the airline, then it has to offer it to local investors rather than foreigners.
I guess it would be the intention of the government to sell off its stake in the airline in the future. But I think the airline has to prove its track record and show a couple of years of profits to be able to attract serious investors.
So you won't be able to increase your stake, even if you want to?
I think it would be difficult for a foreign shareholder to increase the stake above 45 percent.
Assuming the government sells its stake to local investors in the future, how do you see a local investor fitting in your structure?
I think it would work well and there are good examples of foreign and local investors working together in projects in this country. We have a 10-year management contract. It is a medium to long term investment not a short term one. Profits are not easy to make but if you look at the international aviation scene, there are very few airlines that have been making profits in the last 12 months.
There has been industrial unrest in the past ... has that been sorted out now?
In the first year we inherited an awful mess of industrial relations from the pilots, the engineers, the catering staff, the ground staff. Everybody had a grievance. We had a couple of strikes and all sorts of problems.
But after 12 months sitting down with the unions, we worked out a new set of agreements with all sections of our employees. We are in the third year of these agreements and we have no disputes, no problems and excellent relationships with all our employees and the unions. This must be one of the most stable organizations in the country at the moment!
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