SriLankan Airlines confirmed that while the government would be making a final call regarding the fate of the blighted Mihin Lanka PLC by the end of the year, there would be a significant number of layoffs at Mihin Lanka.

Speaking at a press conference held last Wednesday in the presence of Chief Executive Officer of SriLankan Airlines, Captain Suren Ratwatte, the Chairman of SriLankan Airlines, Ajith N. Dias pointed out that the Airlines had reduced losses by 45% despite losing money due to the increased cost of fuel.

Cost cutting and other measures taken by the Airlines were the reasons given for this achievement.

In the financial year ending March 31, 2016, without the one-off payment relating to the cancellation of the lease of one A350 aircraft, the Airlines’ group loss stood at Rs 9.3 billion, which represented an improvement of 45% for the 2015/16 financial year when compared to the previous year. The net loss after taking the one-off item into consideration is Rs 11.59 billion, compared to the net loss of Rs 16.33 billion during the previous year. The performance for the first five months of the current financial year witnessed a 37% improvement, with a lower group loss of Rs 2.32 billion compared to the previous year’s group loss of Rs 3.71 billion. The interest cost alone for this period was Rs 2.53 billion.

It must also be noted that apart from the addition of capacity to the Colombo market by other airlines, it has been accompanied by a dramatic drop in airfares in certain markets.
Dias added that while at the time of taking over, the Airlines had inherited a huge debt and the Government had since pledged to take it away from the balance sheet, thereby allowing the Airlines to embark on a public-private partnership, a decision regarding sans debt and turn it into a profitable venture. In fact, it has been impacted by a loss of Rs 1.3 billion just for the five months of this financial year alone.

“We could break even if not for the debt”, Dias said.

The total quantum of debt that the Government has stated it would absorb is USD 450 million. It is also a significant fact that the Airlines carry a huge finance cost which again contributes to the increase in the group’s loss. The total interest bearing liabilities as at August 31 to banks and financial institutions is USD 478.5 million (Rs 69.7 billion). The interest cost for the current financial year is estimated at Rs 6.2 billion.

Several prospective partners who have communicated their expressions of interest are being shortlisted at present and due diligence is being exercised in this transaction pertaining to which the National Savings Bank is the lead manager.

Dias observed that the Airlines had decided to return four A350 long range aircraft that the company did not require, following the termination of the leases on the aircraft last Tuesday (October 4) after the payment of an acceptable termination fee. This took place subsequent to hard negotiations (done by the Ministry of Public Enterprise Development and the Treasury) on the lease contracts signed two years back, which were no longer competitive lease rates and if the aircraft were kept and flown would result in unacceptable losses. The contingent liability was USD 800 million. He noted that four more A350s had been contracted to be used from 2020 onwards.

“Mihin Lanka will be amalgamated with the Airlines for better efficiency”, Dias said while explaining further that one could not successfully operate an airline with three or four aircraft.

The routes of Mihin Lanka along with the planes and some of its staff would be taken over by November 1. Mihin Lanka flew to Chennai, Male, Bahrain and Muscat. The Mihin Lanka company will be in operation till December 31, by which time the Government will take a decision. All employees will be looked after, according to Dias. The total Mihin Lanka staff is below 300. Most of the job cuts from Mihin Lanka, more than half will be absorbed by SriLankan Airlines, according to both Dias and Ratwatte. They said there will also be downsizing. Mihin Lanka will cease to continue as Mihin Lanka.

“We have improved productivity. We have a committed staff. When we took over the culture and morale was at a low-ebb. There were few issues, the vast majority of which have been resolved. We are also working closely with the unions,” Dias remarked.
Meanwhile, Ratwatte addressing the issue of restructuring an airline to bring it to profitability, likened efforts to being akin to changing an engine of an aircraft in midflight. He highlighted the need for the right fleet and the proper strategy.

He emphasized that the biggest problem facing the market at present was the significantly excessive overcapacity of carriers. According to Ratwatte the airline industry is facing a recession of sorts.

As a part of rationalizing investments, SriLankan Airlines has decided to discontinue flights to Paris-Frankfurt due to it not being sustainable amid fierce competition from Gulf carriers. Henceforth, London is to be the Airlines’ sole European gateway to which it currently flies nine times a week. The ultimate plan, according to the duo is to double the daily flights to London.

“We are focusing on the network of regional routes. We are reducing wide-bodied long range aircraft and we are increasing the number of narrow bodied short and medium-range haul aircraft. This helps reduce costs while we concentrate on strengths such as safety and service,” Ratwatte elaborated.

Both Dias and Ratwatte grimly noted that the Government as shareholders were aware that the temporary shutdown of the Bandaranaike International Airport in Katunayake from January to April next year for maintenance related work would affect them severely as 200 flights would be cancelled, resulting in an expected revenue loss of USD 47 million, not to mention fixed costs which could not be changed. They noted that the Airport had space and runway related issues.

“Although the possibility of buyers to sell to was discussed, it was not an option and neither was sub-leasing. The service provided to Mihin Lanka was at costs. The Weliamuna Report was a very useful document, as we have made a few changes to the organization’s structure based on it and we have taken in new management at the senior level. Everything has been submitted to the Prime Minister’s office. We fly to the Seychelles and from November there will be nine flights a week. We want to fly from Colombo to Hong Kong. Other destinations include Lahore and the Gan island in the Maldives. Airbus A320neos instead of A350s are part of the strategy of expansion to the South Asian and South East Asian region. From January, we are leasing four such aircraft each from the Air Lease Corporation and AerCap. All lease contracts are negotiated ones. They wanted the A350 issues sorted and for us to share our restructuring plans with them. We provide a full service product. Due to the yield degradation throughout the world, the situation is grim”, said Ratwatte.