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SriLankan Airlines clarifies issues surrounding aircraft leases

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SriLankan Airlines Ltd. welcomes and respects the rich debate in the public space on matters concerning the Operation of the Airline in General and the ‘Notice of Procurement’ for the Lease of Aircraft in specific. The Board and Management are of the opinion that the discussion on these topics would benefit from more full information.

At the outset, we believe that the response to the following question would set the foreground for a more informed analysis of the areas of interest.

What was the Rationale of the Proposal from Management, and Approval by the Board, to Explore Aircraft Leasing Options in the Global Market?

The proposal from Management was primarily focused on the replacement of Twelve (12) expiring/expired aircraft leases. Nine (09) Aircraft will leave the fleet commencing year-end through to 2025 and Three (03) have left the fleet already during the pandemic period.

Not taking timely action to explore the global market for lease options would effectively translate to scaling down the Airline through route cancellation. In the absence of a Direction or Decision by the Shareholder (Government of Sri Lanka – GoSL) to Scale Down or Shut Down the Airline (along with the dire consequences of such action to debt holders including the State Banks), such failure to act would have been a dereliction of duty on the part of the Board of Directors.

The interplay between Sri Lanka’s Foreign Exchange Crisis and the Operational strategies of SriLankan Airlines was also an important consideration. This topic is dealt with in more detail through specific questions and answers, but the salient fact is that SriLankan, with 85% of its earnings in US Dollars, is a Foreign Exchange contributor to the Sri Lankan Economy (similar to an Export Business). Shrinking the Foreign Exchange earning capacity of the Airline through fleet contraction would in fact be negative to the Country’s Foreign Exchange situation.

The Management proposal was also centered on the fact that the lease market rates are very low at present (savings of 20%-40% relative to the current fleet). The Airline also has the further opportunity to significantly reduce operating costs through the securing of Aircraft which are more fuel-efficient and cheaper to maintain. These are all factors that would improve the USD Cash Flows of the Airline.

The Management additionally sought approval to explore the viability of expanding the fleet by up to Nine (09) Aircraft during the period 2023-2025 to exploit forecasted tourism demand in the years ahead at lower lease and operating costs.

The above and other salient subjects and discussion points are further addressed through the Specific Questions which follow.

At this stage, has SriLankan Airlines Committed to the Lease of (even a single) Aircraft – No

Even at a future stage of the process, if for whatever reason the Airline wishes not to proceed with Leasing Aircraft, would the Airline be still compelled to Lease 21 Aircraft? No, the Airline would be free to Lease as few or as many aircraft as it wishes or to cancel the entire process. The entire process is on a Strictly Non-Binding basis.

Was the Intent of the Airline to Lease Brand New Aircraft? No, the Airline’s focus was on exploring the Global Market for Used Aircraft, to significantly reduce its operating cost structure.

Would Aircraft leases burden the State? No, all leases will be funded through the company’s foreign currency cash flows.

When would the Airline need to take a Decision whether (or not) to Lease Aircraft – and the related quantity, aircraft type, aircraft age, etc.? From the Airline’s perspective, it would be ideal if the Procurement Process was progressed to the level of decision making by October 2022. Failure to do so may result in the cancellation of several routes from March 2023 onwards and the contraction of revenues.

Does SriLankan Airlines draw on Foreign Exchange Resources of the Sri Lankan Economy? No, SriLankan with 85% of its revenues in foreign currency is a net foreign currency earner under normal operating conditions. It should be noted, however, that the Airline Business is susceptible to major disruptions such as the pandemic or a country specific situation that deters tourism and international travel. s

Should SriLankan Airlines consider Replacement of Expiring Leases and Aircraft Additions when Sri Lanka was facing a Foreign Exchange Crisis? Since the Airline’s operations generate foreign currency inflows, shrinking the fleet and resulting foreign currency cash flows will have a negative impact on the country’s foreign exchange balances, while growing the foreign currency cash flows would have a positive impact. The Airline should therefore continue to evaluate the business case for Aircraft Replacement and the very selective addition of new cash generating routes, in the best interest of the Company and the Shareholder.

What are the steps which need to be completed for the Board to be able to make a recommendation to the Shareholder (Government of Sri Lanka) by the end of 2022?

Identification of Bona-Fide Bidders for Aircraft Leasing through a transparent process

Calling for lease Proposals from eligible bonafide bidders through a transparent process

Evaluation of the bids

Preparation of a Recommendation in terms of Timing, Quantity, Aircraft Type, Age and specifications.

Is it normal practice to make a public announcement of the intent to lease aircraft? It is Best Practice in the interest of Full Transparency and to allow any Potential Lessor to participate. This level of transparency we believe is a significant enhancement to the Airline’s Lease procurement process and should be a consistent practice within the overall governance framework going forward.

What is the current status of the Process? The current stage (Notice of Procurement) was limited to the Submission of Credentials to enable the identification of Bona Fide Bidders with requisite certification and Aircraft Supply over the period up to 2022. No pricing information was called for at this stage. The next stage would be to issue an RFP document to the Qualified Bona Fide Bidders. Based on the suggestion of the COPE, the progress to the next phase of Price Exploration has been deferred by 3 months.

What considerations would be taken into account prior to deciding whether or not to lease aircraft, and quantity, price and aircraft type, etc?

Business Case formulation and evaluation for each and every Aircraft Lease (whether a replacement for an expiring lease or for route addition).

Financial Situation of the Airline at the time under multiple scenarios

Macro-Economic Conditions at the time and projected going forward

The Business Case Evaluation for Aircraft Replacement and/or Addition would necessarily have to factor in the Risk of Exceptional Situations and their mitigation.

What other considerations are relevant to the decision to survey the Global Aircraft Leasing Market?

The Aircraft Leasing market is currently very favorable, with a high likelihood of SriLankan Airlines being able to secure savings of 20%-40% relative to lease rates being paid at present.

The additional opportunity to significantly reduce operating costs through the securing of Aircraft which are more fuel-efficient and cheaper to maintain.

The Notice of Procurement points to the Potential number of Aircraft to be Leased up to the Year 2025 as 21. How is this number derived? The quantity being explored includes 12 replacement aircraft. Nine (09) Aircraft will leave the fleet commencing year end through to 2025 and Three (03) have left the fleet already during the pandemic period. The Management is also exploring the market conditions for a further 9 Aircraft during the period up to 2025 in line with Tourism and International Travel Forecasts published by reputed International Organisations such as IATA (International Air Transport Association).

Sri Lanka announced the Selective Suspension of External Debt Servicing on 12th April – what impact would this have? The downgrade of Sri Lanka’s ratings to default levels is likely to result in potential lessors adding a risk premium to pricing levels in the market. It is nevertheless likely that Lease Costs inclusive of such premium would remain more favorable than lease rates paid by the Airline at present.

To what extent was the Board aware of the Economic Crisis in Sri Lanka

The Board was fully aware of the deteriorating economic conditions in Sri Lanka, which have impacted day to day operations and have been extensively deliberated. A large number of strategic initiatives were launched to mitigate the impact of the crisis on the various dimensions of the Airline’s operation. The strategies adopted by the Airline enabled it to deliver an Operating Profit for the January-March Quarter notwithstanding the worsening economic conditions

With specific reference to the Commencement of a Process to Investigate Pricing of Aircraft leases, for reasons explained above, there was no reason to hold back such an initiative since circa 50% of the fleet leases are expiring and initiatives targeting Direct Cost Savings and the continuation and growth of foreign currency Cash Flows, will directly benefit the company and the Shareholder (GoSL).

The Notice of Procurement was released on the 10th of April 2022. As stated before the COPE, the Company had no knowledge of the intent of the government to announce a Selective Suspension of External Debt Servicing on 12th April. As explained above, this would have some impact on Lease Prices, but it is likely the Airline would have the opportunity to benefit from lower (than current) lease prices regardless.

What is the Financial Situation of SriLankan Airlines?

Promisingly, the Airline has recorded a Group Operating Profit in US Dollar Terms for the January – March Quarter of 2022. This was the first profitable Quarter (in USD terms) after 6 Years. Significantly it is also the first 4th quarter profit (in USD terms) since 2006.

The Airline has, however, over a long period of time, accumulated an unsustainable level of debt which currently stands at USD 878 Mn.

Significantly, and notwithstanding the Operating Profitability achieved in US Dollar Terms, the carriage of USD Debt would, due to the recent devaluation of the LKR by over 50% result in the recording of a non-cash exchange loss (due to revaluation of debt) of circa LKR 146 Bn in the LKR statutory financial statements.

A majority of this debt is held by the State Banks and the Ceylon Petroleum Corporation (CPC). Other significant debt includes a Government Guaranteed USD Bond for USD 175 million reissued in 2019.

Over the Past Year, based on enhanced operating profitability and Foreign Exchange Cash Flows, the Airline has commenced paying down debts to CPC, in addition to ensuring timely servicing of other long-term debt.

What were the main drivers of improved operational performance

Operating Profit during December 2021 and January to March 2022, has been achieved through a two-pronged strategy – Cost Restructuring and Opportunistic New Revenue Capture based on new routes, and adapting capacity to demand for both passenger and cargo traffic

Cost Restructuring at SriLankan is based on several phases and the Initiative to Rebase the Cost of Leases to Current (favorable) prices is a critical phase moving forward

What was the Impact of the Pandemic on the Global Industry and SriLankan Airlines in particular?

Globally, the devastating impact of the Pandemic resulted in 26 Airlines entering restructuring and 37 Airlines being shut down

Relative to the global industry, SriLankan has fared reasonably well, with a post-pandemic operating structure that provides a foundation for profitable operations.

Several factors made this possible:

Sacrifices made by the employees of the Airline, a majority of whom took deep salary cuts over an extended period.

Equity injection by the Shareholder of LKR 45.7 billion in 2020.

Successful Cost Restructuring (which brought down operating costs by USD 100 Million during the pandemic) and Exploitation of Market Opportunities – Cargo Services, Repatriation Services, New Demand Capture – for example between India and Australia.

Shouldn’t SriLankan Airlines be Shut Down? Sold? Liquidated and Restarted etc.?

These are valid questions. The critical issue which constrains the Options available is the fact that insolvency or bankruptcy at SriLankan would have a serious impact on the State Banks and CPC which hold a bulk of the historical debt.

Restructuring or Capitalisation of debt and/or liquidation and restart (as some Airlines have done) are decisions that need to be taken by the Shareholder (Government of Sri Lanka) and are beyond the purview of the Board. The Board has however provided the Shareholder with several going forward scenarios along with envisaged outcomes and impacts.

In the absence of such direction by the Shareholder, it is the fiduciary duty of the Board of Directors to maximize the operating performance of the company.

The focus of the Board and Management has been to achieve Profitable Operations and to Commence Paying down long outstanding debt.

How is the Board of Directors Appointed and Remunerated?

Board members are appointed by the Shareholder of the Airline – the Ministry of Finance

The current Board of the Airline was appointed in January 2020 shortly prior to the Pandemic

At the point of appointment, current board members resolved not to accept any remuneration or benefits whatsoever.

Board members extended time and effort towards the management of the Airline on a purely honorary basis.

To be continued



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Dialog Smart Home Enables Seamless Home Automation via Range of Intuitive Solutions 

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Dialog Axiata PLC, Sri Lanka’s premier connectivity provider, introduced a range of convenient and integrated solutions via ‘Dialog Smart Home’ to enable intelligent automation and intuitive control of homes.

The newly introduced range of future-fit smart home solutions by Dialog Smart Home ranges from Home Automation, Home Security & Surveillance and Home Connectivity, and are designed to enable any home to work as one harmonious system where all elements work in tandem together to create a truly intelligent home.

The Home Automation solutions offer homeowners seamless and convenient control of their electronic appliances through their smartphones anytime, anywhere. With the Smart Touch Wall Switches, Smart Power Strips and Smart Fan Controllers, homeowners can take control of existing light bulbs, table fans, rice cookers, chargers, ceiling fans and more appliances. Additionally, the Artificial Intelligence (AI) powered TeDi Alexa Solution enables users to control connected smart devices including TVs, air conditioners, home security systems and more through voice commands.

Home Security & Surveillance solutions transform basic cameras into high-powered CCTV solutions. Baby and house monitoring smart cameras can be placed inside homes to keep a 360-degree eye on children and pets. The Indoor Security Camera has the ability to sound a siren and notify users if a stranger enters their home. Dialog Smart Home has also partnered with Singer to offer customers world-renowned Dahua CCTV solutions.

The Home Connectivity solutions offers consumers Wi-Fi extenders to facilitate uninterrupted internet connectivity across the house to fit the homeowner’s lifestyle and requirements.

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CBSL implements extraordinary measures to support banking sector

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The Central Bank of Sri Lanka, considering the prevailing macroeconomic conditions and its impact on the banking sector, has decided to implement the following regulatory measures to support the banking sector to facilitate effective financial intermediation and the flow of credit to the economy, whilst ensuring the soundness of the banking sector.

• Sri Lankan banking sector maintains a Capital Conservation Buffer (CCB) of 2.5% to ensure that banks have an additional layer of usable capital that can be drawn down during stress times. An industry wide flexibility is granted for banks to drawdown the CCB (up to 2.5%), if needed, subject to restrictions on distribution to shareholders/ repatriation of profits and submission of a capital augmentation plan to rebuild CCB during a period up to three years.

• The current deadline for licensed banks to meet the enhanced minimum capital requirement (31.12.2022) is extended up to 31.12.2023. Licensed banks which are unable to meet the minimum capital requirement by 31.12.2022, need to submit their capital augmentation plan, including plans to consolidate or merge with suitable financial institutions, by 31.12.2022 and these licensed banks too shall refrain from distribution of dividends/ repatriation of profits until the minimum capital requirement is met.

• Licensed banks are encouraged to move to approaches such as The Standardised Approach (TSA) or alternative TSA for computation of risk weighted assets for operational risk for the purposes of computing the Capital Adequacy Ratio, subject to supervisory review.

• Licensed banks are given the flexibility to stagger the unrealised mark to market loss on Government Securities denominated in LKR on account of the recent interest rate hike for Capital Adequacy purposes until Q2 of 2024, subject to conditions.

• Licensed banks are granted flexibility on the treatment for Other Comprehensive Income (OCI) for Capital Adequacy purpose in line with the International Standards.

• The deadline for licensed banks to submit the document on Internal Capital Adequacy Assessment Process (ICAAP) for 2022, to the Central Bank of Sri Lanka is extended by one month, until 30.06.2022.

• As a short-term measure to support licensed banks to adjust their liquidity profiles, licensed banks are provided with the flexibility to operate maintaining the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) not lower than 90% up to 30.09.2022. Furthermore, the Central Bank of Sri Lanka, on 06 May 2022 decided to restrict certain discretionary payments of licensed banks, such as declaring cash dividends and repatriation of profits, until the financial statements for the year 2022 are audited by its External Auditor, engaging in share buy backs, increasing management allowances and payments to the Board of Directors until 31 December 2022 with a view to strengthening the liquidity and capital positions of licensed banks under these exceptional circumstances.

The above measures were introduced with the aim of providing the licensed banks with more flexibility and opportunities to operate in these challenging conditions and support economic recovery, while taking measures to improve their safety and soundness. The Central Bank of Sri Lanka will periodically review the implementation of these policy measures and expects licensed banks to avail these measures in the best interest of the customers and the economy at large, while supporting the banking sector to remain resilient.

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CEAT official tyre supplier for locally assembled Tata Ace HT 

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CEAT Kelani Holdings has been appointed as the official tyre supplier for Tata Ace HT series compact trucks which are assembled in Sri Lanka by DIMO in collaboration with India’s largest automobile manufacturer TATA Motors.

 CEAT RHINO PLUS TL tyres in the size of 155R12 8PR, manufactured at the CEAT Kelani plant in Kelaniya are used for the TATA Ace HT series vehicles, popularly known in Sri Lanka as “DIMO Batta” under this project. The locally manufactured CEAT RHINO PLUS TL tyre features a zig zag pattern on its circumference and ribs with lateral notches that contribute towards uniformity and better wear and tear on local roads.

 Commenting on this latest OEM agreement of the company, CEAT Kelani Holdings Managing Director Mr. Ravi Dadlani said: “As a brand that has been at the forefront of local value addition in Sri Lanka, CEAT is excited to contribute further to the process through its association with this assembly operation. This is particularly relevant in the prevailing situation in the domestic market. We are able to provide high-quality tyres engineered for local conditions at competitive prices and ensure uninterrupted supply, while at the same time helping to conserve foreign exchange.”

In January this year, CEAT was appointed as an OEM for a range of heavy-duty trucks, tippers and light commercial vehicles assembled in Sri Lanka by Lanka Ashok Leyland PLC (LAL), a joint venture company of Ashok Leyland India. In November 2021 the brand was chosen as the OEM for Bolero City Pik-up vehicles assembled in Sri Lanka by Mahindra & Mahindra India in collaboration with Ideal Motors.

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