In-flight Duty Free Sales On SriLankan Handed Over On A Platter To Personal Favourite
- Phoenix Duty Free Services Awarded Contract Bypassing Tender Procedure
Nishantha Wickremesinghe, Chairman SriLankan Airlines admitted that he personally chose a company handling airline in-flight duty free sales to be contracted from April this year to manage and handle duty free in-flight sales on all SriLankan flights. He did so blatantly violating necessary tender procedure given that SriLankan Airlines is a state owned entity.
The coup de gras is that the company “personally” chosen by the UL Chairman coincidentally is managed by Raju Chandiram who is not only a school mate of Nishantha Wickremesinghe, but also sat on the same Board at SriLankan Airlines together during the tenure of former Minister for Aviation Mangala Samaraweera.
SriLankan Airlines sent out an invitation letter on March 14, 2011 requesting for Tenders (Ref. RFP DFS001-2011) for the Supply and Delivery of Fragrances & Cosmetics for their on board Duty Free Sales Program with effect from July 2011. The Tender closing date was April 5, 2011. The Tender bids were opened in the afternoon of the same day at the Conference room of SriLankan Airlines at Katunayake. Five bids had been received.
Inside sources reveal that the company selected, Phoenix Rising Ventures (now termed Duty Free Partners), lacked credibility in their proposal. Further, the selected company, compared to other bidders, had been a small establishment doing the business of one Charter carrier in Canada. They had no other business nor any presence or experience in Asia or a national airline. The ownership of this company is with a Sri Lankan individual by the name of Dilan Wirasinghe who resides in Canada.
Although initially the tender was called for the Supply and Delivery of Fragrances & Cosmetics for a period of 6 months only, it was learned that in April this year , this same company was handed over the ENTIRE management and the total supply of all merchandise requirements for SriLankan Airlines in-flight duty free program which included not only the Fragrances & Cosmetics but also the other categories such as liquor, tobacco, jewellery, watches, gifts, accessories etc for a period of 5 years with the option of extending the contract for another two years.
The outsourcing of SriLankan Airlines lucrative in-flight duty free sales program, bypassing any tender procedure goes against all proper established internal company procedures and practices when awarding a contract of this magnitude.
The revenue SriLankan airlines earned in 2011 for in-flight duty free sales was over USD 7 Million. Therefore for a period of 7 years, such revenue would be a minimum USD 50 Million. The Duty Free sales (in-flight) which was managed (till March 12) by the Airline was profitable, airline sources who requested anonymity said.
The question that needs asking then is this. Why was the whole program, without calling for any tender and/or evaluation of the commercial aspects, handed over to an external company namely, Phoenix Rising Ventures? Nishantha Wickremesinghe himself admitted to The Sunday Leader that this decision was taken exclusively on his directive.
Wickremesinghe however refuted allegations that he accepted a “commission” by way of a Gold Diamond studded Rolex watch worth Rs. 4 million as a “Thank You” for having negotiated this contract with Phoenix Duty Free Services. “No! No! I am just being character assassinated by people. For me this was an honorary job. The wristwatch was a gift to me for my 60th birthday. I am not a wristwatch collector either. I do not get involved in this type of thing – getting commissions. I do what I have to by the company and it is completely an honorary position. Unfortunately because my Brother- in- Law is the President I have to live with this kind of accusation”.
In-flight duty free sales on all UL flights dropped significantly in April this year following two duty free shops at the airport ‘Flamingo’ and ‘Orient Lanka’ introducing a mega promotion on liquor and cigarette sales.
The national carrier which on an average was selling between 6000 – 7000 bottles of liquor per month dropped to a mere 2000 bottles. “These days very few international carriers handle duty free sales in house. This was not the core business of SriLankan. So, I told my CEO to concentrate on the core business. When I went through the inventory there were large stocks of perfumes and jewellery and our monies were tied up – so I said we need to focus on the core business and outsource this aspect. Most airlines outsource this aspect – so it was a matter of looking at some of the companies doing this. There was an American company called Phoenix. I made some inquiries and asked to get them down and I said have a look at it,” Wickremesinghe said.
Wickremesinghe went onto add that SriLankan was earning ’X’ number of dollars on in-flight sales, “but at the same time we were carrying our own inventory where our money was tied up. So my CEO and a team worked it out – Now we are getting more than double of the profit – they have to pay on the sales and per passenger – they pay a percentage on passenger”.
He added that despite having bypassed tender procedure the Board had approved the contract with Phoenix on the principle that revenue would go up. And that SriLankan would not hold any stocks. Also that an internationally reputed company would come in.
Wickremesinghe meantime admitted that following the sealing of this contract in May this year together with Kapila Chandrasena CEO of SriLankan Airlines were invited to Singapore by Dilan Wirasinghe and Raju Chandiram to attend a symposium on duty free sales. They were hosted at the Grand Hyatt – Singapore. Last year Wickremesinghe and Kapila Chandrasena were hosted in Cannes by Wirasinghe and Chandiram to attend a similar symposium. In this backdrop the question is this. Surely it cannot be good practice for senior staff of a company to be hosted by a supplier as if it is so, then clearly the commercial judgment of these people are impaired and biased by accepting such opulent and generous gifts.
Incidentally, following their visit to Singapore in May this year, Nishantha Wickremesinghe invited Alicia Long the Vice President for Business Development Asia for Phoenix to Sri Lanka to conduct a training session for in-flight management on best practices of in-flight services. Ms. Long was flown courtesy SriLankan on Business Class and put up at the Cinnamon Grand Hotel in Colombo last week. All her expenses were met by the airline.
Phoenix Duty Free Services meanwhile on the heels of having secured this contract with SriLankan have successfully secured a similar contract with Air India. When President Mahinda Rajapaksa was tipped off of the deal during one of his many recent foreign tours he went ballistic. He summoned SriLanka Airline CEO Kapila Chandrasena who was on board and demanded that the deal be cancelled immediately. However Wickremesinghe said the CEO had met President’s Secretary Lalith Weeratunga and explained the matter.
Kapila Chandrasena CEO For SriLankan Airlines Says…
“We did call a tender. One of the respondents which was Phoenix was willing to manage this on a consignment basis. So we are not buying anything. They supply the stuff, use our warehouse and manage the sales on board. They pay a rental of Rs. 400,000 a month for the warehouse and when a sale is made then they work on a formula they gives us a profitable margin.
The agreement with Phoenix states that irrespective of whether they sell or not they have to guarantee more than that margin.
Our profitability depends on the passengers we carry. When we compare last April we made a profit on in-flight duty free sales of Rs. 18 million. This April it was almost Rs. 30 million.
This modality they started on April 1, this year. From April 1 – the variety of goods we sell have increased from 170 to 240. We have also included local arts and crafts – They are also doing the duty free book which is now of much better quality. (This is where Srilankan has been taken a for w ride by Phoenix. The amount of fuel used by a plane depends on the weight and some international airlines such as Emirates have stopped in-flight duty free service since they have calculated that it is not profitable once the extra fuel is calculated.)
But there is problem with the liquor sales. It is to do with the pricing. The duty free shops in the airport are competing as a consequence there may have been a drop in the liquor sales. What I am told is from last week Phoenix have matched the prices – but irrespective of those anomalies the contract guarantees a minimum profit for the company based on the passengers SriLankan carry – So that is the safety mechanism we have – we are guaranteed of a minimum profit. So because of this minimum guarantee despite sales being down we are still making money.
The main feature of the contract is that the airline will be paid a minimum guarantee for 35% of the total sales as the profit. The minimum guarantee is calculated at the rate of USD 0.84 per pax and this rate will increase every year as per the agreement.
Additionally, a 4% commission on sales as handling fees is also guaranteed plus Rs. 400,000 per month for the warehouse rental.
As a company we have safeguarded our interests. The President did not yell at me. But the President like you told was otherwise. He just asked me what this whole this was and I explained it to him.”