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 Spotlight

 Emirates puts Govt. to the sword


Peter Hill, Tim Clark, Dammika Perera 
and Dr. P.B. Jayasundera

Letter of demand sent to Govt. calling 
for reinstatement of Peter Hill's status

Calls revocation of work permit and
resident visa unlawful

Emirates accuses government of violating 
shareholder agreement

Angry Clark cancels Jan. 8 board meeting and 
Jan. 9 meeting with President's B-i-L

Peter Hill leaves with wife a day early 
on December 27 on EK 558

Letter of demand sent to Sajin Vass, 
P.B. Jayasundera among others

By Sonali Samarasinghe 

In what is expected to become one of the ugliest spats in the airline industry, Emirates last week sent a hard hitting letter to the Presidential Secretariat calling on the Government of Sri Lanka to immediately reinstate to SriLankan Airlines CEO Peter Hill, his residential status and work permit.

The letter sent by the law firm F.J. and G. De Saram's following the expulsion of Hill, was sent to several persons including  Treasury Secretary Dr. P.B.Jayasundera, the Deputy Director General of Immigration, BOI Chairman Dammika Perera, the Deputy Minister of Aviation Sarath Kumara Gunarathne, and CEO of Mihin Air and President's Coordinating Secretary, Sajin Vass Gunawardena.

The letter demanded the government revoke its decision to cancel Hill's work permit and residence visa as it was unlawful, illegal and contravened the shareholders agreement signed between the Government of Sri Lanka and Emirates.

Letter of demand

The letter stated the arbitrary expulsion of Peter Hill and the cancellation of his work permit without due inquiry was against the law. Sources at Emirates said the government move violated the principle of audi alteram partem and Dubai would vigorously resist in legal terms any attempt by Sri Lanka to bulldoze the duly signed agreements.

The letter sent last week Emirates sources said was the first step in trying to cajole the government to act according to signed agreements and if Peter Hill's status is not restored litigation would follow for wrongful termination of permit and visa.   

Top Emirates sources told The Sunday Leader the initial letter of demand was sent calling for a revocation of the decision pertaining to Peter Hill to the those people who were involved in the discussion that led to his expulsion including Sajin. 

Sajin involved as usual

Indeed it was none other than Sajin who was in charge of making the flight arrangements from London to Colombo for President Rajapakse and his entourage on December 13.

Sajin Vass who in his spare time, when not running errands for President Rajapakse, also runs the budget airline Mihin Lanka, had required 35 seats of which 18 were to be business class.  

Sajin negotiated with the commercial department of SriLankan airlines whose head is none other than his brother Manoj Vass Gunawardena. However the commercial section had been unable to offer the President more than five business class seats as some seats had been booked and paid for by bona fide passengers almost seven months before and could not be arbitrarily cancelled under any circumstances, the sources said.

Emirates sources also suggest that the bookings should have been overseen by Manoj, Sajin's brother as the full practical authority for such matters lies solely in his hands.

Mervyn stays put 

Ironically President Mahinda Rajapakse who in a fit of rage expelled Peter Hill ostensibly for a refusal to grant him and his entourage seats on an already packed aircraft, was yet to sack Mervyn Silva for the unforgivable behaviour at the Rupavahini Corporation last week.

Save for a wishy washy promise of an investigation and another half baked promise of an internal party inquiry both of which as usual will lead nowhere, Silva in the company of his goons including a double murder suspect going by the name, style and firm of Nuwan Gunatilleke alias Kudu Nuwan and Kudu Lal, still roam free. It was only Kudu Nuwan who was produced before court and remanded.

Hill flies out

Be that as it may, SriLankan Airlines CEO Peter Hill, left the island last Thursday (27), a day earlier than required as per the letter sent to Chairman, SriLankan Harry Jayawardena by the Immigration Department on December 19, 2007 (see last week's The Sunday Leader). Hill left Sri Lanka together with his wife Janaki on an afternoon flight to Dubai on EK558. Hill will continue to function as CEO of the national carrier but the move will cause a great deal of inconvenience and expense to the national airline as it will require senior managers of the company to fly to Dubai each month for their usual meetings.     

Clark flies in

The government of Dubai which owns Emirates Airline, top diplomatic sources say, is more than a little troubled by the treatment meted out to the wealthy sheikdom by the government of Sri Lanka. The influential President of Emirates, Tim Clark is an unhappy man. Known for his business prowess and commanding, wide international respect from the aviation industry, Clark is likely to arrive in Sri Lanka this week, on January 2, 2008  to convey his sentiments and perhaps take a decision on the future of the relationship.

Following the expulsion of Peter Hill from the country, Tim Clark was to immediately cancel the SriLankan Airlines board meeting previously scheduled for January 8. He also obliterated from his diary a meeting previously arranged between himself and Board Director Nishantha Wickremasinghe, brother-in-law of President Mahinda Rajapakse scheduled for January 9, to discuss the way forward for the company in relation to Emirates. 

Appalled

Aviation experts meanwhile are appalled at the belligerent stand taken by the Government of Sri Lanka which has decided to take the airline giant head on. Ironically it was this very newspaper which as early as February 1998 extensively investigated the Emirates deal and warned the government of the day headed by former President Chandrika Kumaratunga, not to go ahead with the deal as it would be detrimental to the national carrier in the long run.

Worst time

Be that as it may, nine years on and under the present economic conditions, aviation industry sources warn that if there was a bad time to get rid of the high flying Emirates whatever the circumstances that brought them into the country may be, then this time is that time.

The national carrier has no assets and no aircraft that it owns. BOI Chairman Dammika Perera insists that nine aircraft have been sold without proper BOI approval even though facilities were obtained via BOI.

Denies sale of aircraft

However SriLankan Airlines sources stoutly deny that nine aircraft were sold stating the airline now has 14 aircraft on financial/dry leases. SriLankan sources say they did own two aircraft which it sold and leased back as it was more financially viable to do so rather than own the aircraft outright. "In today's aviation world it is more financially viable to lease a plane especially for the national carrier," says a source at SriLankan. 

Highest in region

When it was pointed out that according to the agreements SriLankan Airlines was enjoying a fuel subsidy, a spokesperson for SriLankan stated, the government slaps a fuel management levy which has been steadily on the increase and has now become the highest levy in the region. This levy has increased to such an extent it has totally surpassed any benefit from volume based subsidies that SriLankan was getting from GoSL, the spokesperson said.

BOI Chairman Dammika Perera however is of the view that Emirates cannot under any circumstances be allowed to treat its synergic partner Sri Lanka like a poor relation. He charges that Emirates though a partner in SriLankan Airlines has omitted to promote Sri Lanka as a tourist destination in its latest flight brochure.

Perera also charges that ground handling at the Bandaranaike International Airport is one of the highest in the world. For instance Singapore he points out is US$800, Dubai is USD1110 for an A320 aircraft but Katunayake is an astronomical USD2600. He argues that if Sri Lanka is to be a hub port it must first attract other airlines and one way to do that is to keep ground handling costs low. This is why airlines like Jet Airways can't fly here he says. Perera also reiterates that Emirates is intent on crippling the national airline and is under cutting SriLankan on pricing.

Denies charges

Denying charges Emirates is trying to cripple SriLankan Airlines, insiders at Emirates say Tim Clark had even vowed on the world stage to double the SriLankan fleet in five years at a recent prestigious industry event.

Meanwhile responding to the charges a top SriLankan Airlines source said that BOI Chairman Dammika Perera had met the Board of Airline Representatives where the matter of ground handling charges had also been discussed and the matter was explained to him.  

A spokesperson for SriLankan said that there seemed to have been no problem with the pricing nearly 10 years ago when the airline was privatised by these very people who are now making it an issue. The spokesperson said SriLankan Airlines had not changed the charges for the past 10 years and that Singapore Airlines, Thai Airways, Cathay Pacific never had a problem with these charges which haven't changed in 10 to 15 years.

Dumb marketing

The reason Dubai can lower its rates, explained SriLankan sources, was because the airport has grown 10 times over a period of 10 years. Singapore has grown maybe 125 % over a period of 10 years. Their number of landings and takeoffs are massive. On volume base alone there must be one flight landing every three minutes. They can afford to lower their rates. How many flights are landing in Sri Lanka? they asked.

When it was pointed out to SriLankan that the argument put forward by the government was that a more attractive price would lure more airlines into the airport, SriLankan Airlines sources pooh poohed the idea calling it the dumbest thing in marketing.

Traffic flow minimal

Sources explained that when marketing an airline to fly to a destination, ground handling is the least of the worries. "When marketing a conventional airline the two most important criteria are traffic flow and refueling charges. In Sri Lanka the traffic flow is minimal and refueling charges are the highest in the region," the sources said.

It is also vital when marketing a destination to an airline to focus on the kind of passenger mix it would be plying in and out of the country and the region. Airlines would also look at the yields and currency that is being paid. Is it a soft currency or a strong currency. Therefore in lining up criteria to attract airlines into our airport ground handling would constitute only about 2 to 3 percent of the total marketing costs, SriLankan Airlines sources explained. 

They also said that by reducing the ground handling costs all carriers who were paying that amount for the last 15 to 20 years without protest will benefit and Sri Lanka will only give the rich man a discount for them to enjoy as such benefits will have to be afforded to all like Thai, Singapore, Qatar and everybody else.

Top Emirates sources challenged the government to invite KLM, Alitalia, British Airways and other airlines back on a firm commitment at whatever reduced ground handling charges they choose and stated SriLankan Airlines would be happy to negotiate the terms and conditions. But they warned that Etihad left solely due to the fact there was no traffic.

War the reason

Indeed industry experts say the reason for the low traffic is the on going war, adverse travel advisories and a poor tourist inflow. It is the government's own hard line policies and poor economic management that is impacting on the national carrier and the tourism industry, they say.

Questioned on the charge that Emirates had not included Sri Lanka in its promotional material for 2007/2008 a top airline source said that in its latest World Destination Brochure Emirates has devoted six pages to Sri Lanka. However if one were looking at a book promoting Australia or another region one was unlikely to find Sri Lanka featured just as much as Dubai is not featured in the latest SriLankan Holidays brochure, the source said. 

Synergies gone sour

Be that as it may nine years ago the cabinet of ministers of which President Mahinda Rajapakse was an integral part, approved the deal on March 25, 1998 and just five days later on March 30, 1998 the deal was signed.

On March 24, less than 24 hours before the cabinet paper was presented, PERC chairman at the time P.B.Jayasundera and its Director General Mano Tittawela were to appear before the Committee for Public Enterprises (COPE). They were to put on the show of a lifetime by pretending no deal had been finalised, that negotiations were not over and that Emirates was not yet approved as a partner. Within days the subterfuge was revealed as the champagne flowed at government expense and several parties were thrown to herald the synergic partnership.      

Jeyaraj eats his words

Aviation Minister at the time Jeyaraj Fernandopulle called this newspaper by many an epithet as he justified the deal along with his cabinet colleagues nine years and eight months ago. Two weeks back this same Fernandopulle was to castigate the Emirates deal signed by his government as a scandal.

However the Mahinda Rajapakse government after nine years now adopting the very same arguments put forward by this newspaper and by the detractors of the 1998 deal such as Ravi Karunanayake MP, is widely seen as an attempt to make use of the situation in order to gain control of the airline on behalf of personal henchmen rather than in the public interest.

Industry sources warn that Emirates pulling out at this juncture would spell disaster for the national carrier. Emirates which commenced operations in 1985 is the fastest growing airline in business and while other carriers in the region struggle, Dubai-based Emirates is on track to become the world's biggest airline.

Influential

Tim Clark has been in the civil aviation business since 1972. He is the President of Emirates Airlines and Managing Director of SriLankan Airlines. One of the most influential figures in the industry he runs the airline operation within the Emirates Group and decides some of the largest aircraft orders. Clark is also charged with developing Emirates' network and making the airline into the world's biggest long-haul carrier within the next five years.

The Chairman of Emirates is Sheik Ahmed bin Saeed al-Maktoum of the ruling family of Dubai and the airline is one of the few to be consistently profitable, with ambitions to become larger still.  Maktoum has a huge stash of money to the tune of US$82 billion from his government, the airline and other financiers to dump into the airline. Emirates has recently ordered 55 super jumbo A380s, to create the biggest fleet of these double-decker craft.

A formidable partner

Furthermore the economies of the Middle East are among the fastest growing in the world and aviation, say analysts, has helped transform Dubai, a desert trading post to a place where people are flying in - some 25.6 million passengers landed there last year. Furthermore the plan for modern Dubai was created by Emirates Chairman Sheik Ahmed's late older brother and is now overseen by the current ruler, Sheik Ahmed's nephew, Sheik Mohammed bin Rashid al-Maktoum.

Meanwhile Dubai has recently planned to invest $15 billion to create a company that will lease planes, develop airports and make aircraft parts to tap into demand for air travel in the Middle East and Asia. By this Dubai seeks to rival the two largest aircraft lessors, which are units of American International Group and General Electric. This is a brief profile of our strategic partner as of today.

Cash strapped

Sri Lanka on the other hand is cash strapped and is in the throes of economic disaster. The government is forced to not only go for disastrous bond issues but also print money in order to sustain its war, its subsidies, its state recruitment, its jumbo cabinet and its lavish lifestyle.

Rajapakse continues to devour funds set aside for infrastructure projects on recurrent expenditure as he teeters on the edge of a financial abyss. Inflation meanwhile has hit an all time high 24%. Added to that the heavily debt ridden and loss making Mihin Air has doubled the burden on the treasury and on the national carrier. Mihin owes over one million US dollars to SriLankan Airlines and owes the Ceylon Petroleum Corporation Rs. 300 million for fuel purchases.

Back track

For the sake of clarity let's go back in time nine years to March 30, 1998. The government divested a 40% stake in Airlanka along with full management control to Emirates for a purchase price of US$ 70 million.

The agreement signed in 1998 by the People's Alliance government bestowed upon Emirates exclusive flag carrier status, full management control, exclusive rights to ground handling operations and catering for all aircraft at BIA for a period of 10 years and BOI facilities for a period of 15 years.

Mind you, Airlanka at the time was making US$18 million per annum on ground handling and US$ 7 million per annum on catering. These two services were bringing into Airlanka US$ 25m per annum. However the Public Enterprise Reform Commission (PERC) in their wisdom negotiated a deal based on a 1994/1995 balance sheet and valuation. As far as Emirates was concerned they got a good deal and as any good business enterprise would, grabbed it with both hands.

Walk out

Top sources at Emirates told The Sunday Leader the giant airline would not bat an eyelid to walk out of the agreement come March 30, 2008. However the sources pointed out that notwithstanding an abrogation of the agreement Emirates would still own 40 percent of the national carrier and it would depend on how much the Government of Sri Lanka was willing to pay for the shares or if the management of Emirates was willing to sell at this time.

Certainly then at this juncture it is the Government of Sri Lanka that is eventually caught on the back foot.

International repercussions

GoSL also faces severe repercussions internationally if it were to renege on its agreements. Sri Lanka herself has signed several investment protection agreements with a number of countries which generally provide for protection against nationalisation and expropriation; prompt payment in any such event; free transfer of capital, profits and business fees; and settlement of investment disputes under the ICSID. The country's constitution also guarantees the safety of foreign investments through these agreements.

Sri Lanka is also a founder member of the Multi National Investment Guarantee Agency (MIGA) which is a member of the World Bank group. Usually all foreign investors may insure their property against commercial insurance risks in foreign currency through a domestic or foreign insurer.

Shareholder agreement

However one will recall that Article 8.6 of the Shareholders Agreement dated March 31, 1998 at page 28 under the heading 'MIGA Insurance' it stated that "The GoSL undertakes to pay all premiums payable during such term to MIGA in respect of any expropriation cover obtained under a contract of guarantee of MIGA for the benefit of the investor with respect to the purchase and holding of shares purchased by it pursuant to the share sale and purchase agreement."

Therefore it is the Government of Sri Lanka that undertook to pay the premium on insurance to MIGA which it was estimated at the time would cost a sum of US1.8 million per annum and a staggering US$18 million for the period of 10 years.

If the Government of Sri Lanka violates the agreement however they will be liable under the MIGA and will have paid the premium for the privilege as well. If that isn't idiocy one does not know what is.

The Rajapakse regime should therefore scrutinise well the agreements signed by the Chandrika Kumaratunga government of 1998 of which President Mahinda Rajapakse was a prominent member, before it makes decisions based on advise given by the likes of Sajin Vass Gunawardena and the promoters of the loss making Mihin now trying to piggy back on the country's national carrier.

Powerful document

The Shareholders Agreement for instance is a powerful document that in 1998 handed over the family silver to Dubai. The government cannot renege on that agreement without huge economic repercussions which Sri Lanka can ill afford. For instance Article 2 of the Agreement deals with operations and management of the company. Article 2.2.1. states that "notwithstanding its status as a minority shareholder in the company, Emirates is vested with management, power control and authority over and responsibility for the business and affairs of Airlanka for the purpose of the implementation of the business plan and in all matters over which Emirates is vested with management power, control and authority, the GoSL and Airlanka agree that Emirates should not be required to refer such matters  to or to seek the approval at a general meeting of Airlanka or the board of directors and that such matters will be validly conducted without such reference or consent."

Therefore Emirates was granted an unlimited licence and the board of directors of which the majority shareholder GoSL has four members was rendered nugatory.

Recall that the government last week adduced as one of the main reasons for the cancellation of Hill's work permit, the sale of nine aircraft without BOI approval. The government position was that Peter Hill had disposed of nine aircraft without BOI approval having purchased them under special facilities afforded by the BOI.

With consent of govt.

SriLankan Airlines sources argued as we published last week that if in fact aircraft had been sold it was done with the full consent of the government through its board members and chairman. The government representatives on the SriLankan Airlines Board are Chairman Harry Jayawardena, and Board Members Raju Chandiram, Sanath Ukwatte and First Lady Shiranthi Rajapakse's brother, Nishantha Wickremasinghe who is of course the brother-in-law of President Rajapakse no less.    

However the generously constituted Shareholder's Agreement may be interpreted to allow Emirates to sell such aircraft without board approval. In which case the Government of Sri Lanka is standing on very shaky ground considering that from the contents of the letter of demand already sent to the government, Emirates will seek to rely heavily on the agreements it signed with GoSL.

Perhaps nine years from now as in the case of the Emirates deal, the very promoters of the debt ridden Mihin will see the light and proffer the very same arguments against the launch of Mihin as argued by this newspaper in a series of investigative articles published in 2006 and 2007 on the subject.

But Sri Lanka today is much worse off economically than it was nine years ago. In two years of Rajapakse rule the country's coffers have come to naught and fiscal discipline is non existent. The public cannot afford such mistakes any longer.  


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