• New revival effort focuses on better aviation fuel pricing, resolving aircraft leases; debt servicing cost, and realignment of human resources
  • CEO says recent operational measures have helped to boost revenue
  • If not for $ 45 m hit by partial BIA closure, airline could have achieved break-even
  • Engineering to be spun off as a subsidiary; three new aircraft hangers at BIA proposed provided taxation issues are addressed
  • Many of the 15 Airbus aircraft ordered by previous regime are unsuitable and all are overpriced
  • Deciding on future of three A330-300s contracted will benefit turnaround

The latest restructuring focuses on several issues, including price of aviation fuel, aircraft leases; debt servicing cost, no adverse new taxation and realignment of human resources.

The airline is awaiting Government backing for the new restructuring effort which if approved will be rolled out from second half of the current 2017/18 financial year. This is amidst parallel plans by the Government to seek a strategic investor under a Public-Private Partnership model.

The new Board of Directors and management team since the election of new Government in 2015 had taken a host of measures to reduce losses as well as improve operational efficiency.

SriLankan Airlines CEO Capt. Suren Ratwatte says if not for the partial closure of the Bandaranaike International Airport for three months this year, the National Carrier could have achieved break even.

As per provisional estimates the airline recorded a Group net loss (before finance and one-off charges) of Rs. 6.49 billion for financial year 2016/17. The loss arising the partial closure of airport between January and March is estimated at $ 45 million with SriLankan cancelling over 600 flights.

Commenting on the proposed adjustment of aviation fuel prices, which is a key part of the restructuring, the CEO said that the National Carrier used to enjoy a pricing of MOPS + 10 US cents per gallon when Emirates was partly owning and managing the airline. However, the airline in recent years were slapped with a higher pricing of MOPS + 30 US Cents.

“A reduction to 15 US Cents or reverting to 10 US cents will be a big benefit,” points out Capt. Ratwatte, who previously served in Emirates as a pilot and joins a select group of former pilots running airlines as CEOs including Lufthansa Group, IAG, Continental Airlines, Jet Airways, Australian Airlines, China Eastern and Royal Jordanian.

SriLankan also has a debt service of $ 50 million per year at LIBOR + 6%, which Ratwatte says is an exorbitant rate imposed on the airline which it is unable to reduce.

With regard to leases, the CEO claimed that rates negotiated by previous managements were at least 20-30% more expensive.

“In the new restructuring plan, we have made our position on these issues very clear and suggested remedial measures,” Capt. Ratwatte added.

A proposed move is converting Engineering (which has around 1,600 employees) to a subsidiary similar to Catering as well as construction of three new aircraft hangers – oneto accommodate wide body aircraft and two for narrow body. This would depend on the tax issues relating to the Group’s BOI status being finalised.

At present the National Carrier has two aircraft hangers. The proposed expansion is estimated to cost $ 50 million whilst the CEO said there is industry interest to co-invest/finance via a joint venture. Capt. Ratwatte said that given SriLankan Airlines’ engineering excellence, the scope is greater, especially with the aviation industry in India expanding considerably.

Whilst SriLankan Airlines’ audited accounts for the just-concluded financial year of 2016/17 is pending, the CEO said that the airline managed to boost revenue by Rs. 6.5 billion but the staff cost rose by Rs. 2.2 billion.

Though there hasn’t been a significant increase in cadre which is around 7,000, the salary revisions agreed upon by the Collective Bargaining Agreements signed previous to 2015 was one of the reasons. Employee cost accounts for 17% of total expenditure of the airline. The restructuring plan has addressed the overall human resource aspects as well.

Burden of past aircraft orders

Detailing on the major challenge of aircraft ordered by the previous management in 2013/14, the CEO said many of the aircraft were unsuitable and all of them were overpriced.

SriLankan Airlines ordered eight Airbus A350-900s which has extra wide cabin and very long range that can fly up to 17 hours making it the longest range aircraft in the world. Four of the A350-900s were sourced direct from Airbus for delivery in 2020/21 at an approximate price of $ 190 million per aircraft.

Four more were obtained on lease from ILFC/Aercap, a large aircraft lessor at a rental of $ 1.43 million per month, for 12 years which imposed a contingent liability of around $ 824 million over the contract period.

The CEO said the leases on these four aircraft were cancelled after protracted negotiations in 2015 for a fee of $ 100 million, which he said is less than two years rental per aircraft as per the original arrangement.

“Had the airline accepted these aircraft, the rental for the first year alone would have been $ 75 million for the four aircraft and the spare engine. The return cost of the four older A330-200 aircraft we would have had to give back to their lessors would have been in excess of $ 50 million. Obviously therefore the termination cost has already been saved and the future exorbitant lease rentals of A350s is no longer a liability,” Capt. Ratwatte explained.

Additionally the then management also ordered six A330-300s directly from the manufacturer for delivery in 2014/15 along with another sourced via lease from CIT Leasing.

Capt. Ratwatte declined to reveal specifics but aviation industry sources claimed that the six direct orders of A330-300s cost around $ 116 million each at the time of delivery. “This is $ 10 to 20 million more than equivalent aircraft cost for other airlines at the same time,” they said.

The aircraft were subject to a “sale and leaseback” with two lessors (ALC one aircraft and HKAC five aircraft) which meant that lessors paid the airline the cost of the aircraft in return for an undertaking to lease them for 12 years at a monthly lease cost of $ 1.05 million each. This imposed a contingent liability of $ 907 million or $ 151 million per aircraft during the contract period. In contrast according to sources, the seventh aircraft leased for CIT costs $ 0.89 million per month, which reflects the lower acquisition cost paid for A330-300 by the lessor, they added.

According to Capt. Ratwatte, three of the A330-300s were the “low gross weight” version which are unable to fly to London all year round with a full passenger and cargo load.

“These aircraft are far too expensive to operate on other routes and finding a short or long term solution for these aircraft is a priority,” Capt. Ratwatte emphasised. “Finding solutions for these expensive and unsuitable aircraft continues to be a priority to the airline,” he said, stressing, “any turnaround would be dependent on this issue being resolved.”

The National Carrier however is expanding with the Airbus A320 neo aircraft. Two new A320neos and the first A321neo joined SriLankan’s fleet during the year, with two more A321neo aircraft due to join before the end of the year. They are 15% more fuel efficient than the previous generation A320 family aircraft and deliver almost a 50% reduction in noise footprint.

Business development

From a business development perspective, the National Carrier has expanded services to 41 destinations, the highest-ever in its history. By August SriLankan will regain its position as the biggest foreign carrier to India with 126 scheduled flights a week to 14 destinations, and the CEO said this would help SriLankan’s commercial efforts and its quest to become a regional carrier of note.

SriLankan has also implemented several other network changes from 15July in line with its strategy of adapting its route network to align with the current market realities. These include new daily non-stop flights to Guangzhou, China (eliminating the previous Bangkok stopover); new five times a week non-stop flights to Hong Kong(eliminating the previous Bangkok stopover that had operated for decades); flights to Bangkokincreased from daily to three times a day, to cater to the demand and to enhance network connectivity and flights to Delhi, India increased from daily to 11 times a week.

SriLankan’s destination count is set to increase further from the upcoming Winter season, as it launches new daily non-stop flights to Melbourne. This represents SriLankan’s re-entry to Australia after a hiatus of 16 years. The airline has already seen very strong forward bookings on this route – which gives confidence that it is the right choice.

“Further expansion of services on strategically important routes are also planned for the winter season,” according to CEO Capt. Ratwatte.

This article originally appears on DailyFT.


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