News
SriLankan changes strategy: A330s and regional focus
View(s):Namini Wijedasa extensive interview with the debt ridden national carrier’s CEO
Chief Executive Officer (CEO) Suren Ratwatte. Pic by Indika Handuwala
In a marked departure from the previous management’s business strategy for the national carrier, SriLankan Airlines will focus on becoming a regional carrier flying mostly narrow-bodied aircraft, Chief Executive Officer (CEO) Suren Ratwatte said.
He also admitted that finding capital to run the airline was his biggest headache; that arrangements have been made for a voluntary retirement scheme (VRS) for staff; and that SriLankan’s credit rating (defined as an estimate of the ability of a person or organisation to fulfil their financial commitments, based on previous dealings) was “not very good”.
Mr. Ratwatte declined from the outset to discuss financial issues covered by non-disclosure agreements. Therefore, he would not–despite being pressed–reveal how much was paid to abrogate leases on three A350s ordered by the previous Government.
“There are a lot of numbers around,” he said. “You pick what you wish. But let me tell you this. That number that we paid was less than what we would have lost in the first year of operations if we had to accept those aircraft.” The A350s are now being leased out to Pakistan’s national carrier, PIA.
Mr. Ratwatte pointed out that the air transport business anywhere in the world–but for a few exceptions–racked up losses. But the biggest issue SriLankan faced was access to capital. “We just don’t have the capital and because of that, our hands are tied, and it makes doing business very, very difficult,” he said.
The most significant cost was fuel, accounting for 25 percent (16% was staff and about 18% was aircraft leases). The Ceylon Petroleum Corporation was using its monopoly to gain unfair advantage. “The only places on our network where fuel is more expensive than Colombo is Male and Dhaka,” Mr. Ratwatte said.
As a result, the bigger airlines like Emirates, Qatar, Cathay Pacific and Singapore Airlines brought their own fuel. If the fuel was priced rationally, they would buy it here. But the CPC is not interested in lowering its margins. “It doesn’t even want to talk about it,” the CEO said.
There were too many flights into the country by other airlines, Mr. Ratwatte said. “Our regulatory authority has been essentially giving out a blank cheque,” he said, adding that the Civil Aviation Authority has allowed unlimited capacity increases by everybody else.
As a result, Air Arabia operates to Colombo three times a day; Flydubai, four times a day; Etihad, three times a day; Qatar, four times a day; and Emirates, five times a day. He drew parallels with the recent developments in the container ship industry.
“They increased capacity without looking at the marketplace and now you can get container space for essentially nothing,” he said. “So, one of the biggest South Korean shipping lines went bankrupt. That’s what’s going to happen to the airline industry.”
Mr. Ratwatte said the CAA’s recent directive for all airlines operating into Colombo to publish their fares will probably not work “because they (regulatory) don’t have the financial muscle to bring the other carriers to heel”.
There is no such thing as an open skies policy, he also maintained. “When you want to operate into the country, you apply to the regulatory authority for permission,” he explained. “And the regulatory authority is supposed to look at the traffic in and out of the country, what is necessary, and make a decision based on that.”
The CEO took umbrage at the claim that SriLankan was a profitable airline under Emirates’ management. Emirates, he said, did not make money when they ran Sri Lankan. They only broke even or made a small profit in some years through their monopoly on ground handling and catering and due to fuel being priced at market rates.
“But at air transport level, Emirates lost money every year that they ran SriLankan,” Mr. Ratwatte insisted. “Their cumulative loss at air transport level was Rs. 32 billion.” He also claimed that their group level profit primarily came (“and you can quote me on this”) from the insurance payout when the Tamil Tigers destroyed those airplanes on the ramp. On this, Emirates made US$100 million.
“Emirates didn’t replace the airplanes that were destroyed,” he said. “They took the money. They then rationalised the staff, reducing it by 30 percent through a very generous VRS, and brought the company down to a level that was sustainable. They then ran with the money that they had, using the profits from ground handling and catering to subsidise air transport level.”
Right at the end, Emirates had aircraft on finance leases–where you pay every month and end up owning the assets. Then, the company did a sale-and-leaseback. They sold the aircraft to a leasing company, leased them back and made cash profit on that transaction.
“That is what put them in the black for the period,” the CEO said. “They ran it very efficiently by the standards of running a profitable company. You do what you have to do. You use your assets effectively. But to say there was some magic, and they ran the company profitably when nobody else was able to, is actually incorrect.”
There has been considerable political discussion over the lease and purchase of a large number of aircraft by the previous Government. Six A330-300s were ordered from airbus. “We paid the deposits,” Mr. Ratwatte disclosed. “We actually didn’t have the money to pay the deposits so we had to borrow that money as well.”
It was borrowed from other leasing companies, under a “very complicated financial structure”. The six A330-300s were all delivered. Four other A350s were ordered from Airbus and are due in 2020. Another A330 was leased while six other A320s were also taken on lease.
All this was done according to a business plan designed, for the most part, in-house and analysed by Seabury Aviation Consulting. The Government had been planning a long-haul carrier. They had proposed to increase flights to London, Rome, Paris and Frankfurt and to add add Zurich, Amsterdam, Moscow and Melbourne to the network. But the business plan could not work in reality because of a price war waged by Gulf carriers, resulting in a dramatic lowering of yield. “The yield out of Colombo has gone down by about 30 percent a year,” Mr. Ratwatte said. “In two years, the yield has dropped 60 percent and it’s no longer possible to get the revenues forecast.”
SriLankan’s new management has its own business plan, with a heavy focus on regional operations. It was not possible for the national carrier to compete on long-haul sectors. “It’s best to leave that market and go to markets where we are the leader, which is what brings us to the region,” he explained. “In South India and the Maldives, we are the dominant airline.”
The airline’s best markets were regional, he continued. “For all practical purposes, we are the national carrier of the Maldives because we dominate the Maldives,” he said, adding that SriLankan was the first international airline to go to Gan in the Maldives
“Both South India, specifically, and the Maldives, are where the bulk of our passengers come from and the bulk of our money is made,” he said. “And we want to use that as a vehicle for future growth. The narrow-bodied strategy, the A320s, works for us going forward.”
SriLankan has now applied for additional slots to Hong Kong. The A320s will allow the airline to offer a single-aisle product on long and thin routes. “Given the nature of where we are located and our population base, long, thin routes are the reality,” he stressed. “We can’t fill A380s out of Colombo.”
This strategy was backed up by two international consultants. “Both of them told us two salient things,” the CEO revealed. “One is that the A350s do not work for us, regardless of the price of fuel. And second was that our strength is regional. Because we don’t necessarily believe one person, we had another set of consultants who essentially told us the same thing.”
What was SriLankan’s wish list? “We would like a rational fuel price,” Mr. Ratwatte said. “We would like competition on fuel price going forward. We would like more terminal capacity. We would like them not to close the runway on us but that is inevitable now and we have to accept it. We would prefer if a lot of the infrastructure development had happened in Colombo rather than elsewhere, but again that’s a decision that preceded me and I wasn’t a party to it.”
“But if you want to know what I want moving forward,” he reflected, “I want breathing space. I want the ability to reorient the airline from trying to compete on these long-haul routes and to concentrate on our strengths. As a regional carrier, we are very, very, competitive.”
| Privatisation: Shortlist to be finalised on Tuesday The National Savings Bank which is handling the SriLankan Airlines privatisation, is expected to shortlist the bidders on October 25. It will then have up to 120 days for due diligence, taking the period up to February. After this, the Government will select one from the list of those bidders who still have interest in the airline. However, the SriLankan Airlines management has moved ahead with key changes and strategies on the verge of privatisation. The Chief Executive Officer explained that these were decisions that could not wait till the process was complete. It included the shedding of three A350s, now being leased out to Pakistan’s national carrier. Keeping them till the privatisation was over would have cost the airline around US$75 million, Suren Ratwatte said. SriLankan’s losses are one of the issues to be discussed with any party interested in acquiring the management stake in the airline. Mr. Ratwatte said the company was paying “Libor plus a large number” on their loans. He refused to disclose the rate of interest. “A lot more,” he said. “We’re paying a lot, way more than we should be.” |