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
Sri Lanka still ‘under test’ before it can receive crucial second tranche from IMF
by Sanath Nanayakkare
International Monetary Fund (IMF) staff concluding their visit to Sri Lanka yesterday reaffirmed their support to Sri Lanka to move out of the ongoing economic crisis, but did not specify an exact timeline for releasing the second tranche of its Extended Fund Faculty (EFF) arrangement to Sri Lanka.
The IMF mission team led by Peter Breuer and Katsiaryna Svirydzenka that visited Colombo from September 14 to 27, is yet to be convinced that it has received a robust programme from the Sri Lankan authorities where they indicate how they would be addressing the persistent revenue shortfall besides outlining progress in foreign debt restructuring which would give Sri Lanka a breather to balance its financing requirements as it starts to repay its foreign debt.
“We had constructive and productive discussions with the Sri Lankan authorities on economic performance and policies underpinning the first review under the IMF Extended Fund Facility (EFF) arrangement. The people of Sri Lanka have shown remarkable resilience and the authorities have made significant progress on important reforms. The discussions will continue towards reaching a staff-level agreement in the near term that will maintain the reform momentum needed to allow Sri Lanka to emerge from its deep economic crisis, Peter Breuer said.
“The objectives of the IMF-supported program will continue to focus on restoring macroeconomic stability and debt sustainability, while protecting the poor and vulnerable, safeguarding financial stability and stepping up structural reforms to address corruption vulnerabilities and unlock Sri Lanka’s growth potential, he said.
However, the press briefing given by the IMF team yesterday signaled that they needed to see more economic and financial policies to support the approval of the First Review of the program under the EFF arrangement.
“Sri Lanka has made commendable progress in implementing difficult but much-needed reforms. These efforts are bearing fruit as the economy is showing tentative signs of stabilization. Inflation is down from a peak of 70 percent in September 2022 to below 2 percent in September 2023, gross international reserves increased by $1.5 billion during March-June this year, and shortages of essentials have eased. Despite early signs of stabilization, full economic recovery is not yet assured. Growth momentum remains subdued, with real GDP contracting by 3.1 percent in the second quarter on a year-on-year basis and high-frequency economic indicators continuing to provide mixed signals. Reserve accumulation has slowed in recent months, he said.
Speaking further Peter Breuer said: “Sustaining the reform momentum is critical to put the economy on a path towards lasting recovery and stable and inclusive economic growth. The authorities have met the program’s primary balance targets and remain committed to this important pillar of the program so as to support their efforts to restore debt sustainability. However, revenue mobilization gains – while improved relative to last year – are expected to fall short of initial projections by nearly 15 percent by year end, in part due to economic factors.
“The onus of fiscal adjustment would fall on public expenditure if there were no efforts to recoup this shortfall. This could weaken the government’s ability to provide essential public services and undermine the path to debt sustainability. To increase revenues and signal better governance, it is important to strengthen tax administration, remove tax exemptions, and actively eliminate tax evasion.
“Against continued uncertainty, it also remains important to rebuild external buffers through strong reserves accumulation. Building on the Central Bank of Sri Lanka’s success in controlling inflation, refraining from monetary financing will help keep inflation in check. Other challenges include maintaining cost recovery in electricity pricing.
“The government has made steady progress on structural reforms. Key legislations passed in Parliament, including the new Central Bank Act and the Anti-Corruption Act, could improve governance if implemented effectively. The IMF Governance Diagnostic report would inform future reform measures to strengthen governance when published.
“A new welfare benefit payment scheme was enacted with new eligibility criteria that aims to improve targeting, adequacy, and coverage of social safety nets. To ensure financial stability, steps were taken on conducting bank diagnostics, developing a roadmap for addressing banking system capital and liquidity shortfalls and improving the bank resolution framework.
“The authorities have also made headway on regaining debt sustainability through the execution of the domestic debt restructuring and advancing discussions with external creditors. As Sri Lanka is restructuring its public debt which is in arrears.
“Executive Board approval of the first program review requires the completion of financing assurances reviews. These financing assurances reviews will focus on whether adequate progress has been made with debt restructuring to give confidence that it will be concluded in a timely manner and in line with the program’s debt targets.
“Discussions are on-going, and the authorities are continuing to make progress on their plans for revenue mobilization targets, anti-corruption efforts, and other important structural reforms.”
The IMF team held meetings with President and Finance Minister Ranil Wickremesinghe, Central Bank of Sri Lanka Governor Dr. P. Nandalal Weerasinghe, State Minister Shehan Semasinghe, Chief of Staff to the President Sagala Ratnayaka, Secretary to the Treasury K M Mahinda Siriwardana, and other senior government and CBSL officials, during the visit. The IMF team also met with parliamentarians, representatives from the private sector, civil society organizations, and development partners.
‘Imposing minimum room rates on five star hotels could ruin tourism sector’
By Hiran H.Senewiratne
The imposing of a minimum room rate on five star hotels on the basis of a recent gazette notification is actually killing the industry. Room rates, accordingly, could henceforth rise to between 80 percent and 100 percent, top travel and tourism industry expert Chandana Amaradasa said.
“The minimum room rate of a five star hotel currently comes to about US $ 65 but with the new gazette notification it would go up to US $ 170 per day. But our competitors, such as, Thailand, Malaysia and Vietnam are maintaining a minimum room rate of US$ 80 to US$ 85, Amaradasa told The Island Financial Review.
Amaradasa said that the tourism industry is just picking- up and ‘this type of move is detrimental to the entire sector because these room rates are normally determined by demand and supply and not by gazette notifications.
Amaradasa added: ‘At present, Colombo five star hotels are mainly patronized by Indian tourists, corporate clients and MICE tourists. This will not only impact hotel revenue but the outside supply chain as well. Nowhere in the world is the tourism industry regulated in this manner and this would enable our competitors, such as, Vietnam and Thailand to attract tourists.
“As a long term consequence, some of the airlines could also pull out of Sri Lanka and hotels will halt recruiting new staff and training them with the limiting of their revenue sources.’
ADL’s journey continues: Unveiling new offices in Indonesia and Malaysia for tech excellence
Axiata Digital Labs (ADL), the renowned technology hub of Axiata Group Berhad, is proud to announce the grand opening of two new offices in Indonesia and Malaysia. These strategic expansions, respectively, mark significant milestones in the company’s journey since it’s inception in 2019. This signifies ADL’s unwavering commitment to revolutionizing the telecommunications industry and propelling the global rate of digital transformation.
The inauguration of these state-of-the-art offices exemplifies the dedication ADL has towards expanding its footprint and harnessing the power of innovation across Southeast Asia. As the first CMMI 2.0 Level 3 IT organization in Sri Lanka and an ISO-certified company, ADL is well-positioned to lead the charge in transforming traditional telcos into techcos through its groundbreaking Axonect Product Suite.
Renew firearm license for 2024 before 31st December 2023 – Ministry of Defence
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