Probe

   Is this the end of SriLankan Airlines?   

By R. Wijewardene  

SriLankan Airlines’ 2009 Annual Report contains a query from the company’s auditors regarding the viability of the airline. In the face of what is effectively a Rs. 10 billion loss Ernst & Young have expressed “doubts that the company (SriLankan Airlines) will be able to continue as a going concern.”

Figures in the 2009 Annual Report reveal that the company’s liabilities now exceed its assets by an extraordinary Rs. 8,159 million (Rs. 8.1 billion).

A drastic reversal of the situation just a year ago when the airline’s assets exceeded its liabilities by Rs. 3,074 million.

The turn around from Rs. 3 billion in the black in 2008 to Rs. 8.1 billion in the red in 2009 represents a Rs.11 billion year on year decline in the position of the company’s assets — a 100 million dollar change of fortunes.

A colossal loss by any standards but crippling for a small third world airline.

Even allowing for the generally difficult conditions faced by airlines worldwide as a result of the global economic crisis the situation at SriLankan Airlines is exceptionally dire.

Company’s viability

That the company’s own annual report expresses remarks from auditors questioning the company’s viability is an indication of just how critical the situation is at the national airline at present.

The survival of the nation’s flag carrier established as Airlanka in 1978 is now in doubt.

But how could what appears to have been a healthy profit making company in 2008 have become a loss ridden hulk in the space of a year?

Who could possibly be to blame for mismanagement on such an extraordinary scale…

Of course the immediate responsibility for the airline’s losses must fall on the shoulders of the company’s CEO Manoj Gunawardene and the government that recklessly took the decision to expel Emirates under whose management the airline appeared to be functioning profitably.

However while the current management and the Rajapakses administration have certainly played their part in the mismanagement of the airline the reality behind the catastrophe at SriLankan airlines is not quite so simple.

Emirates Airlines responsible

Many insiders in fact hold Emirates Airlines responsible for the present state of the airline.

After its effective takeover of SriLankan Airlines in 1998 Emirates is accused of running the airline extravagantly, making no attempt to cut costs while turning apparent profits by selling the airline’s assets including aircraft, spare parts and even extra engines.

 It is claimed that Emirates recovered the value of its original $70 million investment in Sri Lankan in less than a year and subsequently continued to extract profits by selling additional assets.

 Even during 2001-2007 period during which the airline seemed reasonably stable insiders claim that Emirates continued to spend recklessly and that the airline survived financially only as a result of the massive, several billion rupee, insurance payment Sri Lankan Airlines received after the attack on Katunayake Airport.

The fundamental accusation is that Emirates consistently turned profits only by selling assets and effectively exploited SriLankan Airlines in order to make a significant profit over its $70 million investment. It is also alleged that the salaries of senior management staff during the Emirates era were paid by a third company in such a way that there was no transparency regarding the wage structure at the company. This practice of payments through a third party in order to conceal the full value of the payments received by higher management is said to continue today.

Haemorrhaging money

The reality therefore is that SriLankan Airlines has been haemorrhaging money for years and the impressive profits turned during the period of Emirates management were only achieved through the sale of assets.

By the time the airline balance sheet began to look less healthy in 2008 (when Emirates was kicked out) Emirates was able to blame rising fuel costs for the deteriorating finances, though in reality over staffing, limited automation and poor route rationalisation were the principle factors behind the airline’s losses.

 However once Emirates was evicted from the management of the airline the situation at SriLankan Airlines far from improving only got worse.

Severe over staffing — a staff of over 5200 staff for a fleet of just 12 aircraft has left the airline bearing an exceptionally high cost per air mile flown.

Industry average

SriLankan Airlines employs approximately 400 staff per aircraft while the industry average is closer to 100.

By comparison Kenyan Airlines, the flag carrier of another developing country and an African success story employs just 4000 staff and maintains a fleet of 22 aircraft.

As a result of its exceptionally high costs the airline launched a cost cutting programme, however rather than shed staff — a politically charged issue particularly as SriLankan Airlines is stuffed with various political appointees and cronies the management attempted to reduce overheads by rationalising the airline’s route network.

Flights to several less profitable destinations were stopped. However as this rationalisation was not accompanied by any downsizing the airline’s financial situation only deteriorated further.

Operating fewer routes

SriLankan Airlines was operating fewer routes and flying fewer miles but maintaining its previous staff levels.

As routes and flights had diminished revenue streams declined but expenses remained the same on account of the bloated staff.

Ideally aircraft should spend 14 hours a day in the air — which allows for optimum revenue generation, after cut backs SriLankan Airlines’ aircraft were spending just eight hours a day in the air.

To make matters worse once management of the airline reverted to the government from Emirates, matters that had been rectified through the expertise of a major international airline — food, service, punctuality soon returned to their pre-Emirates state.

UL —‘Usually Late’ began to apply again and services declined with passengers complaining of shoddy treatment and unpalatable food.

Skywards rewards system

The loss of the Skywards rewards system which allowed passengers on SriLankan to claim air miles they could use anywhere on the vast Skywards network was another setback.

Worst of all flights began once again to be diverted and delayed to accommodate ministers and government officials.

While standards dropped however the airline’s oversized staff prevented SriLankan from reducing costs and ticket prices remained high.

SriLankan Airlines ticket prices for a range of destinations in Europe and East Asia were higher than competing airlines operating the same routes yet its service was now markedly inferior.

Flying SriLankan Airlines therefore meant paying more for inferior service and regular delays.

As fewer people chose to endure the poor service occupancy at the airline fell still further and profitability plummeted.

High costs, and poor service lead only to further falls in demand, creating a cycle of diminishing revenues which added considerably to the woes of an airline already reeling from the dual blows of the financial crisis and high oil prices.

Airline’s effective destitution

Ultimately the blame for the airline’s effective destitution lies with Emirates but also with the current management who failed to implement vital cost cutting measures.

Fundamentally the airline’s current management has failed to define a vision in terms of how it intends to take the airline back to long term profitability.

The government of course is also to blame particularly for treating the airline as a personal plaything of the country’s leadership rather than a genuine national airline run for and in the interest of all the country’s people. The fact that the government has continued to flirt with the empty prestige of Mihin Airways instead of making a sincere effort to address the problems of the nation’s only real airline is almost criminal.

 However apportioning blame for the effective failure of the airline is simply irrelevant at this juncture when the nation faces the real challenge of keeping the national carrier alive.

The priority now is retuning the airline to a state of financial stability if not profitability.

While the idea of national carriers has become somewhat outdated with several developed countries — Switzerland for example — allowing their national carriers to fold the reality is that Sri Lanka simply cannot function without SriLankan Airlines.

Isolated country

Katunayake Airport is the only way to enter or leave what is in fact a very isolated country.

With only a handful of international airlines still operating in and out of Colombo SriLankan Airlines is the umbilical chord that links Sri Lanka to the outside world. Without SriLankan this island would become one of the most isolated countries on Earth.

All the government’s plans for development would vanish overnight if people; businessmen, tourists, migrant workers are unable to cheaply and easily enter and leave this country.

SriLankan is simply a vital part of the nation’s economy which means that ultimately the airline cannot and will not be allowed to fail. That the government will step in and provide the relevant handouts from the Treasury is now inevitable.

However beyond bailouts from the Treasury and the usual trick of purchasing fuel for credit from the much abused Petroleum Corporation, SriLankan Airlines desperately requires a long term plan if it is ever to provide the service this country desperately needs it to.

eNIC tender cancelled 

By R. Wijewardene  

A multi billion rupee tender to upgrade the National Identity Card to an electronic card has been halted. The Cabinet last week cancelled the awarding of this controversial tender following charges that the tender had not only been awarded to a favoured party but also fell short of requirements which would prevent doctoring of the card.

Last week The Sunday Leader revealed the inconsistencies and contradictions behind the government’s eNIC programme. Following the The Sunday Leader’s report which highlighted the fact that the original specifications for the card’s security requirements had been watered down to suit the interests of a favoured bidder, it emerged this week that the tender for the implementation of the eNIC project had been cancelled.

Aside from the diluted security requirements, The Sunday Leader also highlighted the huge expenditure scheduled for the programme — several billion rupees — at a time when, in a post war era, there are surely more urgent priorities than a new NIC card. For now anyway the eNIC tender has been cancelled and we can only hope this particular project remains on the back burner until it returns in a more transparent and rational form.

A smart(er) more up to date card

In 2008 the government announced plans to modernise the flimsy piece of plastic on which our right to free movement is today contingent by introducing a smart(er) more up to date card capable of storing more data and incorporating enhanced security features.

Given the importance of the NIC the introduction of an entirely new card system, and a new database containing information on every citizen in the country should of course be a matter of intense debate.

However for the most part the government’s announcement regarding the new eNIC passed largely un-remarked on, failing to capture the interest of the press or the public.

Few bothered to question what security features would be included in this new eNIC card and there was little debate regarding how much personal data a government notoriously keen on unviable databases — mobile phone registry, citizen registry, should legitimately require its citizens to provide.

A people cowed by threats to security and the old and unfortunate mantram of totalitarianism — ‘if you have nothing to hide you have nothing to fear’ are not particularly interested in matters of privacy or data security.

However from a more practical perspective — security, there are real concerns about the eNIC project.

Outmoded and too easy to forge

The new cards were deemed a necessity as the existing NIC is regarded by the country’s immigration and security agencies as outmoded and too easy to forge.

Therefore when tenders were issued seeking bidders to implement the eNIC project a number of advanced security features were stipulated as mandatory. Bidders wanting to implement the project were required to provide cards featuring micro text printing, optical variable ink and ultra violet visible print — all to make the card more difficult to forge.

Crucially it was stipulated that the new card would have to feature multiple laser image printing — the latest of the various anti fraud techniques available and considered at present to be virtually un-forgeable. And it was also stated in the original tender that cards would have to be made of durable composite material — i.e. not paper based, or laminated.

While the specifications issued by the Ministry of Internal Administration were for an extremely secure card incorporating the latest security features, on May 14 and 26, 2008 the Ministry issued circulars both extending the time available to bidders and crucially altering the original security specifications.

Multiple laser imaging

As per the new specifications the requirement for multiple laser imaging was dropped, as was the requirement that the card be made of an advanced composite rather than laminated material.

Therefore the Ministry was calling for a card that was less secure — which seems unusual as the stated purpose behind the new NIC project was enhanced security.

The accusation in this case is that the bidding period was extended and security specifications lowered in order to suit the interests of one of the parties bidding; that one of bidders was from the outset a favoured candidate.

Allegations have been raised claiming that Hitec Padu/Epic Lanka the company that currently supplies the Sri Lankan passport is the favoured bidder — and that changes were made to suit its bid which complied with the terms of the amended/relaxed bidding requirements but not with the original specifications.

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