Govt. takes over national carrier

Harry Jayawardena, P.B. Jayasundera and Tim Clarke
Turbulent skies greet SriLankan
PB who 'knows nothing about airlines'appointed chairman
Staff exodus with Emirates' exit leaves airline struggling
Loss of code share will drastically cut SriLankan's visibility
Emirates could control SriLankan from within and without


In an atmosphere of declining business and insecure staff the Government of Sri Lanka will take over the management of SriLankan Airlines on Tuesday, April 1.
Precipitated last December by the failure of the national carrier to accommodate 35 members including President Mahinda Rajapakse on a fully booked flight from London to Colombo which would have resulted in off loading commercial customers, the ensuing rift between major shareholder Emirates and the Rajapakse government culminated in Emirates cocking a snook at a renewal of the management contract.
Back foot
The government will take over management of the national carrier on the back foot. It has no business plan or a way forward. It has ditched its former Chairman Harry Jayawardena and up until Friday, March 28 was still juggling names for the chairmanship and board. Thus it was that even as late as Friday morning the names of Secretary, Ministry of Aviation, Tilak Collure and Treasury Secretary P.B. Jayasundera were being bandied about.
Finally President Rajapakse appointed Punchibanda Jayasundera as chairman, a man who once told The Sunday Leader he knew nothing about airlines in relation to a question on his appointment as a director of Mihin Lanka. An appointment he later resigned fromon April 10, 2007.
The rest of the government appointees to the board are Nishantha Wickremasinghe, the brother-in-law of President Rajapakse, Lalith De Silva, earlier of Telecom during Thilanga Sumathipala's chairmanship and Central Bank Governor Nivard Cabraal's brother-in-law Sunil Wijesinghe who is also chairman of Dankotuwa Porcelain.
President's man
Informed sources however told The Sunday Leader newly appointed consultant Lalith de Silva, earlier of Sri Lanka Telecom and Saudi Telecom whohad been presenting himself as the President's man, had been pushing for the executive chairmanship of the company rather than as a figure head chairman under the Emirates management deal.
The fact that all executive decisions were being made by Emirates with the GOSL members not having executive powers was another contentious issue raised by the government in early December 2007 at a one-on-one discussion between Wickremasinghe and Emirates'TimClarke.
Knows nothing about airlines
Meanwhile Treasury Secretary Jayasundera is a man who may not know anything about airlines but is well versed in the sale of the national carrier to Emirates as it was he, as chairman, Public Enterprise Reform Commission (PERC) who clinched the controversial deal 10 years ago, widely regarded as one of the most corrupt scams perpetrated on the public weal by the then Chandrika Kumaratunga government of which Mahinda Rajapakse was an integral part. After all, Rajapakse was a part of the Chandrika led cabinet that approved the controversial deal in the first place.
On March 17 this year President Mahinda Rajapakse had called for the resignations in writing of the government nominated directors Harry Jayawardena (Chairman), Nishantha Wickremasinghe, Sanath Ukwatte and Raju Chandiram. The letter written at the behest of Rajapakse calling for their resignations was in fact signed by Punchi Banda Jayasundera himself, who has now clinched the top post to the detriment of Harry Jay. However informed sources said the government was looking for a full time chairman unlike Harry who ran his own business empire.
Saner counsel
Nishantha Wickremasinghe on behalf of the government flew to Dubai two weeks ago for last minute negotiations with the President of Emirates and Director, SriLankan Airlines, Tim Clarke, but Clarke indicated he was unable to meet him and directed Wickremasinghe to CEO, SriLankan, Peter Hill.
Earlier it was only Nishantha Wickremasinghe who emerged as a saner counsel in the chaos following the eviction of Peter Hill. Last week Wickremasinghe declined the chairmanship of the national carrier citing pressure of work.
With Wickremasinghe's refusal two other names were put forward, Singer Chairman Hemaka Amarasuriya and Tobacco Company's new Chairman Jayampathi Bandaranayake. However given the magnitude of the problems the airline was bound to face with the exit of Emirates there were few takers for the post. And here's why.
Exodus at SriLankan
A large number of staff are getting jittery about the future. Already 32 pilots are leaving, many going to Kingfisher Airlines while some 30 engineers have left, a large chunk of them to a maintenance outfit in Abu Dhabi called Gamco. Of the cabin crew some 40 have already left for more lucrative and stable prospects at Etihad and Emirates. Such an exodus would mean the airline would have to shrink its operations, reduce its frequencies and cut down on certain routes as the airline would not be able to operationally sustain itself.
No CEO yet
So far there is still no Chief Executive Officer or Chief Operating Officer appointed although the carrier had advertised internationally for the CEO post. Ironically this was despite the government making the appointment of expatriates as heads of departments, CEO - catering, engineering etcetera one of the primary contentious issues that led to the eventual parting of ways with Emirates.
Former Head of Commercial, Seelan, now country manager China , and Head of Worldwide Sales and brother of Sajin Vass, Manoj Vass Gunawardena have both applied for the post of COO while informed sources said Manoj had also applied for the post of CEO. Airline staff are more concerned about the post of CEO which they say has to be filled by a knowledgeable man with airline expertise unlike with the post of chairman which is more a political appointment with perks and benefits.
Staff are concerned that political appointments and a large exodus of staff will affect the credibility of the airline.
Changing the structure of the company
The seven member board consists of four government appointed directors and three Emirates Directors - Tim Clarke, Gary Chapman and Nigel Hopkins. Emirates owns 43.63 % of the shares while the GoSL owns 51.05% and employees hold 5.32% of the shares. The government will be unable to change the structure of the company without the approval of Emirates which will remain the national carrier's largest competitor in the skies. Mind you Emirates will also have access to SriLankan Airlines secrets including a huge data base of passengers, routes and agents.
Unsavory options
There are some unsavory options before the government. It can buy out Emirates but so far Emirates run by the astute businessman Tim Clarke is not selling. In January Emirates floated a sum in excess of US$150 million as the value of their stake in SriLankan Airlines but for the time being Clarke said it would retain its equity and maintain a board presence. And their lies the rub for the government.
Emirates bought the 40% stake plus full management control and exclusive rights for 10 years at a mere US$ 70 million.
At the time chief negotiator for the government was none other than P.B. Jayasundera. Perhaps he has been returned to the national carrier to make restitution for his follies 10 years ago.
EGM
While day to day activities and resolutions could be carried through with a 50 plus 1 majority at a board meeting, special resolutions may be passed as per the Companies Act only at an Extraordinary General Meeting and by a majority of 75% of those shareholders entitled to vote and voting on the question and where not less than 15 working days notice specifying the intention to propose the resolution as a special resolution has been duly given.
Special resolution
It would take a special resolution to change the structure of the company. A special resolution would be required to alter the company's Articles of Association, approve a major transaction, approve an amalgamation of the company, reduce the company's stated capital, wind up the company, and change the name or status of the company.
Diluting shares
If for instance the government intending to dilute the share slice of Emirates decided to increase its share capital, it would only be able to do so at an EGM and the special resolution to do so would require 75 percent under the Companies Act. However even international norms require a majority of two thirds that is 66% of the majority.
Unfortunately the government has only 51.05% shares. Even with the employees' shares the government can still only muster 56.37% of the majority and therefore Emirates will remain a formidable force within the company with the government rendered a eunuch.
Share purchase agreement
Furthermore the Share Purchase Agreement between the government and Emirates will not end tomorrow, it will be only the management contract and Business Plan that will cease. Therefore the provisions of the Share Purchase Agreement will also come into play.
For instance if the government decides to sell its shares it is obligatory for the GOSL to offer first right of refusal to Emirates under the agreement and vis a versa.
Aircraft lessors
Maintaining the leases say SriLankan Airlines administrative sources would be one of the biggest challenges. In fact it is reliably learnt that airline leasing companies are already getting jittery about the Emirates pull out as questions arise whether SriLankan Airlines can stand alone surrounded by such huge financial commitments.
The uncertainty has placed the government in a very vulnerable position. The other issue is of guarantors for the leases when Emirates walks out.
Sale and lease back
Emirates operated on a sale and lease back policy of the fleet and therefore the company is cash rich at the moment and the government will not face any immediate monetary anxiety. The Emirates sale and lease approach made sure the company had an easy cash flow with a balance sheet that showed no liabilities and no assets. The government is however expected to face problems from the lessors who will no doubt call upon the government to at least obtain a guarantee from Emirates or come back with a principal operator of stature.
Banks and investors were willing to take risks or negotiate without collateral due to the stature of Emirates as a financial giant, however industry sources say it would be difficult for the Government of Sri Lanka or SriLankan Airlines alone to negotiate in the financial world of airlines at the same level of acceptance.
There was a great deal of economisation with Emirates acting as big brother but with SriLankan having to negotiate on its own probably having to pay cash up front the running will be tough. The government too may have resorted to the sale and lease method of its aircraft but that road has already been travelled by Emirates.
Capital infusion
The national carrier will not be able to stand alone if there is no capital infusion for expansion of fleet, redecoration of aircraft or increase in capacity and routes. With all the negatives in the country, a lack of a modern fleet, a lack of flatbed seats and the prevailing war situation, SriLankan Airlines will face many challenges as it goes it alone.
Company sources said sorely needed refurbishing of the aircraft which will cost a minimum of US$30-40 million or at least a redesign of the seats in business class which will again cost a heavy packet.
Offices
Offices of Emirates and SriLankan Airlines have been amalgamated in approximately 23 destinations and if SriLankan Airlines wants to move out after April 1 that too would involve a cost factor. Moreover station managers and staff would also have to be maintained by SriLankan Airlines further upping the cost factor.
Skywards
Air Lanka had a frequent flyer programme called Serendib Club whereas Emirates at the time did not have such a system. Emirates following the 1998 deal took over the Serendib system, upgraded it into a more sophisticated programme and renamed it Skywards where Emirates became the dominant partner.
BOI Chairman Dammika Perera earlier lamented to The Sunday Leader the entire programme was controlled in Dubai and even the membership is not made known to the overseas SriLankan country managers.
Meanwhile Skywards members have already been informed in writing of the key changes from April 1, 2008 as follows:
"Earning Miles: You can continue to earn Skywards Miles for travel on SriLankan Airlines until March 31, 2008. Any missing miles can be claimed within six months of the travel date.
"Reward tickets: Rewards on SriLankan Airlines should be redeemed by March 31, 2008 and will be valid for a period of one year from the date of issue. Assistance with any ticket changes will continue to be handled by Skywards service centres."
However now comes the crunch. With regard to Gold and Silver membership benefits starting April 1, 2008, the following benefits will only be available when flying with Emirates:
(1) Priority check-in at Business Class counters when travelling in Economy Class.
(2) Guaranteed excess baggage allowances.
(3) Guaranteed seat reservations for Gold members.
(4) Lounge access in Colombo when travelling in Economy Class for Gold members.
And from April 1, 2008, all Skywards queries are to be directed to the Emirates office in Colombo.
Skywards of course continues to be internationally accepted and with Emirates' expansion to over 100 destinations worldwide, and a global network of partner airlines, hotels, car rentals and financial services, Skywards could be used not only for travel but for upgrades and inspirational shopping and a variety of exclusive holiday and leisure rewards.
SmiLes
SriLankan Airlines meanwhile has commenced a frequent flyer programme called SmiLes. However industry sources say the scheme is localised and gives no value to the customer especially in the international market.
Locally oriented and more designed for a local budget carrier rather than an international airline, the quaint scheme offers exclusive privileges on SriLankan Airlines flights, free miles when you fly with SriLankan, airlines ticket purchases / partial payments, purchases on in-flight duty free, Serendib Treasures and purchases on holiday packages from SriLankan Holidays.
SmiLes members who reach the Silver Tier level can also opt to join the Baggage Plus or Baggage Premier programme. The Baggage Plus members will get an additional 25kgs and Baggage Premier members will get additional 35kgs. SmiLes Baggage Premier members will also have access to the airport lounge and guaranteed seating on economy class.
Meanwhile obviously Emirates is holding on to its huge customer base from Skywards courtesy SriLankan Airlines.
Code Share
Both carriers benefit from the code share agreements and given that SriLankan does not fly to many countries like US, Canada, Rome, Zurich, and code shares with Emirates including flights code shared to Singapore, two points in Germany other than Frankfurt and some lesser known points in the UK like Birmingham, this would be a major loss.
SriLankan's international visibility will drastically decline which will in turn affect its load. The loss of code share flights also means that customers are inconvenienced. Furthermore a code share Emirates flight gave SriLankan Airlines 25% of the fare which SriLankan would now lose.
Reservation system
SriLankan has been totally technologically integrated with Emirates. The national carrier shares the Emirates owned Mercator system which was upgraded at preferential rates of US$1-2 million.
Not only does Emirates have access to all SriLankan Airlines data they will either withdraw the service within six months or charge SriLankan the going commercial rates of US$5-6 million to remain. Mercator was an outgoing system from Emirates that was handed over to SriLankan.
Industry sources earlier told The Sunday Leader it was obvious Emirates had been getting ready for a pull out. By selling the two remaining aircraft owned by the national carrier and then leasing them back Emirates had successfully liquidated their assets. With 43.6% of the shares they would also have equal status on a future board and could be the biggest stumbling block in any decision. Emirates would remain SriLankan Airlines' formidable competitor in the skies with one advantage.
Emirates would be able to control SriLankan not only from within but also from without including through their IT reservation system with which SriLankan is now totally integrated.
Receding from a position of strength
Route Network
SriLankan flies to 51 destinations in 28 countries in Europe, Asia, Middle East, Australia and North America but these include a large number of code share flights. SriLankan is the most frequent foreign airline into India with a total of 95 flights per week. In 2007 passenger revenue was Rs. 54.6 million, a 10.67% increase from 2006 which was Rs. 49.4 million. The number of passengers carried in 2007 was 3.18 million as opposed to 3.01 million in 2006.
Share holding
GoSL - 51.05%
Emirates - 43.63%
Employees - 5.32%
By virtue of office, three of the government nominee directors including the chairman own one ordinary share each of the company.
Aircraft
At the time of privatisation in 1998 the national carrier's fleet consisted of nine aircraft. That is four ageing Lockheed L1011 Tristars, two Airbus A320s and three Airbus A340s. These were owned by the airline. Today SriLankan has 15 aircraft all on financial leases. They are six new A330-200 aircraft, four A340s, five A320s, two Antonov AN12F Freighters, a Cessna Caravan aircraft and two Turbo Otter amphibious aircraft
Profit
SriLankan Airlines Group posted a post-tax profit of 862.18 million Sri Lankan rupees (7.8 million dollars) for the financial year ended March 31, 2007 - a drop of 50 percent from the previous year.