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By Nisthar Cassim The National carrier SriLankan Airlines’ losses have swelled to Rs. 6.5 billion in the financial year ended March 31, 2001 from Rs. 750 million a year earlier despite a healthy 25% growth in revenue to Rs. 30.4 billion. The disappointing performance was before the setback of July 24th LTTE attacks, which destroyed four brand new Airbuses parked at the BIA. That reduced the national carrier’s fleet from 12 to eight aircraft and several destinations were cut. A downsizing exercise initiated before the attacks was expanded laying off nearly 1000 employees. The negative bottom line performance would have been worse if not for the contribution of Rs. 3.4 billion by way of ‘Other Income’, which included Rs. 3.3 billion profit from the disposal of property, plant and equipment. The deteriorating financial performance of the national carrier has caused growing concerns both within the public and private sectors, especially since it is managed and part owned (43.6%) by Emirates, one of the most profitable and fast expanding airlines in the world at present. Only last week, Emirates, which has been profitable for the past 15 years, created aviation history, by placing a mega order for 58 aircraft of Boeings and Airbuses worth US $ 15 billion (or Rs. 1.3 trillion). Analysts said that the difference could be the war as the UAE is relatively peaceful and cruising well with its strategy of inventing a more prosperous future as against Sri Lanka which is limping with the debilitating war that has destroyed the country for nearly two decades and hopes for a better future. Interestingly, though the government-owned Emirates would not be seeking a cent from the UAE government for the mega order, the airline is also a case study since the UAE follows open-air skies. On the sidelines of the Dubai 2001 air show, the Daily Mirror last week spoke to Emirates Director Tim Clark, who is also the Managing Director of SriLankan Airlines, to find out how Emirates’ first overseas investment (in an airline) is faring and how SriLankan fits into the Emirates’ future growth strategy. In the exclusive interview Mr. Clark also reacted to some of the criticism levelled at the Emirates management. Following are excerpts. Q: How do you assess the performance of SriLankan as per the Business Plan? A: We expanded the airline initially but it was contracted due to the LTTE attack. We are not replacing the four aircraft lost but trying to consolidate what we have and focus on three principle European areas – France, Switzerland and UK, the Far East and the Middle East, try and get ourselves back to profitability. This, we hope, will become a reality in the course of the winter months, which produce peak demand for Sri Lanka, particularly for leisure market. If this goes on by the middle of next year we should be in a much better shape. Q: Yes the airline was affected by the July 24 attack. But your results for the year ended March 31, 2001 showed a loss of Rs. 6.5 billion, higher than the previous year. Can you explain? A: Number of things contributed to this. Primarily, trading conditions were so adverse. All our debt is in US Dollars and we get affected once the rupee is devalued. (The airline suffered a Rs. 1.3 billion in currency loss in 2000/1). High cost fuel was a real hit as fuel bill for SriLankan accounts for about 28% of the total cost as against 15% of Emirates. So when 28% of your expenditure faces a doubling of double of price you could imagine the impact on the bottom-line. (Increase in the fuel bill was Rs. 3.4 billion). Unfortunately the contractual arrangements with main tour operators in UK prevented us from passing on the additional cost to customers. They continued to get a good deal but as fuel prices went up and things worsened the company’s break even rose. At one point we were carrying people at less than the cost. In early part of 2001 Emirates stepped in to take control of marketing, sales, public and corporate communications, reservations and yield management etc and we arrested the decline. So things were just starting to turn the corner when we ran into July 24th attack. Coming back to your point, yes by the end of March 31, 2001, the situation was, I would say, bleak not in terms of people as we were having 75 to 78% seat factor but costs were going up. Had July 24 not come along, we could have turned around. The reason was that we had initiated many measures and several proposals were before the Board to cut cost such as restructuring route network and downsizing. The July 24 attack changed things completely. Q: Can an improvement in second half be helpful? A: It is too early to comment. After July 24 came September 11 and our seat factor fell below 50%. You don’t make money on 50% in this business today. The numbers are rising now and the Commercial Division reckons it would be over 70% December and January notwithstanding general elections, which may have an impact on outbound and inbound demand. Cash position remains okay and we are hoping to come good. We will not make a profit this year (2001/02) due to July 24th and September 11 attacks on top of the difficult trading conditions. But we are trying our best. We have introduced Male on our European operations and demand has been good. The Japanese market started to come back after changing the route to Tokyo-Male-Colombo. The loads began to rise as we were getting 250 to 280 per flight. Then the bombing started in Afghanistan and the Japanese stopped flying and loads dropped. That’s the kind of examples you face in this business. Q: Emirates has been making profits for the last 15 years and still positive despite September 11 attacks and war in the region? How do you feel a profitable, award winning and expanding airline like Emirates managing a loss-making airline? What’s your credibility? A: It is a challenge that Emirates wants to make good. Given a chance and if everything moves in our favour and if Sri Lanka pulls itself away from the rather difficult times and put an end to the military conflict and boost travel confidence SriLankan Airline would come good. We believe Sri Lanka and the airline can bounce back. Certainly when things improve we can get the airline back on track. We are going to do that and that’s why we are there. Q: There is criticism that in your original Business Plan you would have factored in the conflict and other country constraints yet you projected growth. A: At the time we did the Business Plan, the Government forces had captured Jaffna peninsula and it had the upper hand. The President also introduced the concept of devolution, which to us seemed an excellent means of getting stability and prosperity for people. We took a view back in 1997 (when GDP grew at a high 6.3%) and early 1998 that things were improving quite significantly in Sri Lanka and it’s a good time to enter the market. That didn’t work out quite that way and of course we have to deal with that. But we are still going to carry on with our investment to the best we can. Q: If fuel cost is a burden Dubai is a source for competitive fuel procurement. Why couldn’t Emirates free itself from the requirement that purchases must be from CPC and buy direct from Dubai to mitigate the impact? A: We can’t do that as CPC has the sole franchise. There is a quite a dealt on fuel prices as SriLankan is paying well over the international markets when buying from CPC. We do tanker-in whenever the ability to do that but Colombo is SriLankan’s base. Q: How are you addressing the debt servicing issue? A: We are trying to mitigate its impact as well. Talking to bankers, lessors, trying to improve conditions under which they leased or lent money. With interest rates coming down it will be helpful. We haven’t reached any finality and I cannot confirm whether there will be a moratorium. We are still okay on the cash. The airline operations are going flat out and so far it has been fine. However if the winter doesn’t come good and inbound tourism doesn’t’ develop then we will be facing a problem. We are only airline managers and we can’t go and create the tourist market. Sri Lankan government and the leisure industry need to do more to create interest on Sri Lanka. It’s a team effort and SriLankan Airlines has been doing a lot and will continue to do its part. Q: Do you feel Emirates still could add value to SriLankan through synergies and make it international class as per your original plan? A: That’s what we are trying to do and have been doing since the start with an original fleet of 12 aircraft. We have almost done everything that we said we would in our Business Plan in 1998. The only thing we didn’t plan was getting Emirates getting control of the commercial side of SriLankan. We do pricing in Dubai along with control of the inventory, yield management and others in partnership with SriLankan staff. Q: There is an allegation that you have run-down the national carrier. A: If anybody can produce bona fide evidence and not fabricated ones that Emirates has done that I would love to see that. The company’s operations have been in the public domain since we came in. All results have been transparent and audited. The company has not been afraid to answer any questions thrown out at it. Q: Do you still have faith that Emirates’ investment in SriLankan will work well? A: I have got my personal judgement on the line there. I took (Emirates) in on the basis that it is a very good investment. The fundamentals are right on Sri Lanka. The country has got best value for money in the planet in terms of leisure. Stability, both political and economic, would flow from a cessation of hostilities and it will transform the country. We hope that it will happen sooner rather than later. If there’s an upside to the September 11 attacks it’s the realisation that conflicts don’t work. Parties in the conflict need to get into a dialogue and sort it out. Then you may find that you are in a far better position than you were when fighting with each other. When that happens, the airline will just rocket. That’s Emirates view. We are holding on till that happens. Q: The Government selected Emirates to deliver results and you came in with confidence to make it good in Sri Lanka. Achievements have been mixed and problems continue. Are both sides losing patience? A: I don’t think. The Government hasn’t told us ‘you are not performing or we don’t like what’s happening.’ I think they are pleasantly surprised that we are still with SriLankan. After July 24 they thought we would walk out. We said what needs to be done such as laying off staff and other restructuring which might be painful in the short-term but beneficial in the longer-term for the airline and the country.
What the auditors say… “The company incurred a net loss of Rs. 6.5 billion during the year ended March 31, 2001 and as of that date, the current liabilities exceeded its current assets by Rs. 4.4 billion. And its total liabilities exceeded its total assets by Rs. 3.7 billion. These factors raise doubt that the company will be able to continue as a going concern, However, the remedial measures, initiated by the management, are expected to improve the financial position of the company.” – SriLankan Airlines auditors Ernst &Young in the 2000/1 Annual Report. Company responds… Since the balance sheet date, the company has secured additional credit lines, reduced aircraft lease rentals through the use of interest rate swaps, established a fuel risk management program and launched a cost reduction initiative. These measures have resulted in an improvement in the financial position of the company. Further, consequent to the destruction and damage to a number of aircraft operated by the company on July 24, 2001, the company has embarked on a restructuring program, which includes rationalization of the route network. Accordingly these financial statements are prepared on the assumption that the company is a going concern, i.e., as continuing in operation for the foreseeable future. Gloomy skies for SriLankan. Its Managing Director Tim Clark (Inset) hinted the national carrier would suffer a loss in 2001/2 due to the impact of recent terrorist strikes here and in the US.
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