Mihin Lanka liquidated, SriLankan floats fresh restructuring plan

Ten years after it was set up as a budget airline, Mihin Lanka is being liquidated. The Auditor General has closed its books and a final annual general meeting is to be held. Liquidation is a process by which a company’s existence is brought to an end. “Now we have a directive from the Government to liquidate and we are doing that,” said Suren Ratwatte, Chief Executive Officer of SriLankan Airlines. “The Auditor General has closed the books. We have to get that approved, have a last annual general meeting and go into voluntary liquidation. That should happen fairly soon and the air operator’s certificate will be transferred to SriLankan.”

In October 2016, Mihin was merged with SriLankan. The national carrier took over all of Mihin’s routes and some of its aircraft. Despite many international airlines making money from a budget operation, Mr Rawatte maintained that he couldn’t have restructured two airlines at the same time. He also said Mihin competed with Srilankan on many of its routes and it was his decision to shut it down.

SriLankan has now absorbed 120 of Mihin’s employees while 180 took a voluntary retirement scheme, funded by the budget carrier. “Mihin only had three viable routes: Dhaka, Chennai and Male,” Mr Ratwatte said. “On Chennai and Male, it directly competed with SriLankan and lowered my yields. So there was really no point in keeping it in those markets.”

“Subsequently, the yields on Dhaka, which was its most profitable route, plummeted because the Maldivian Government no longer takes Bangladeshi workers. That whole revenue stream just dried up.” Meanwhile, with no investment partner in sight, the management of loss-making SriLankan Airlines has floated a fresh restructuring plan that focuses on trimming costs in four areas: the interest on loans, fuel, aircraft leases and staff.

There will have to be a “small headcount reduction”, Mr Ratwatte said. With a total workforce of 7,049, SriLankan has a man-metal ratio of 280 which was “way too high”. And without changing the cost structure, he admitted, the airline was not viable.

Two other areas must be addressed by the Government, Mr Ratwatte said. One is the proposal for a 14 percent withholding tax on international service agreements (introduced in the new Inland Revenue Act) that would include SriLankan’s aircraft rentals. The company spends around US$ 10 million a month on leases and it would be crippling to pay an additional 14 percent on that.

The second is a direct order of four A350 aircraft from Airbus due in 2020 which the Government has decided it does not want. “We do not need A350s,” Mr Ratwatte said. “However, we are committed by a purchase agreement. A compromise needs to be negotiated. There are no easy solutions.”

Talks will start with Airbus “to find a way out”, he continued. How much it will cost the company this time can only be answered once negotiations begin.
The previous regime ordered eight A350s—four on lease, four on direct purchase. The controversial annulment of the leased four has already left gaping hole in the company’s balance sheet. But according to a Board decision on May 2015—approved by Cabinet—SriLankan will not take delivery of the four expected in 2020 either. This leaves the possibility that the cash-strapped airline will incur another heavy fine imposed by Airbus.

“There are several alternatives, as long as we start talking now,” Mr Ratwatte pointed out. “Again, there is no cancellation clause in the agreement. We have to find some way out of this and have asked for the Government’s help because, as an airline, we are not in a position to negotiate. The Government is working with us on that.”

The restructuring plan has been approved by the SriLankan Board of Directors and is now with the Ministry of Aviation. It comes amid a doubling of losses in the year ending March 2017 caused, among other things, by the hefty fine from Airbus for annulling leases on four A350 aircraft.

From April 2015 to March 2016, the airline also saw a significant drop in revenue growth. It went from 8.2 percent when the previous management left to minus 1.6 after the new team took over—a ten percent dip. In 2017, a growth of just 4.8 percent was achieved but this was affected by a three month runway closure which led to the cancellation of 600 flights.

“This financial year, if nothing changes, we spend US$ 60 million in interest (on loans) alone,” Mr Ratwatte said. “And no airline makes US$ 60 million in profit for an operation our size. For us just to break even is not possible, given the current structure of our loans and the airline.” The company borrowed heavily to meet the Airbus fine.

Efforts to find an equity partner for 49 percent of the company have fallen flat. Predictably so, say industry analysts who have looked at the financials and concluded that the company has “no value to sell”. Rumours that businessman Harry Jayawardena is still interested are not substantiated. This has left the company—that incurred a penalty of US$ 98 million just to cancel the A350 leases—scrambling for solutions again.

The Government first decided in 2015 to sell a stake in the airline but abandoned this in the confidence that a private partner would commit to a public private partnership. But the only serious contender was the investment firm Texas Pacific Group (TPG) which, after due diligence, said it was not interested.
Now, Mr Ratwatte wants capital for the airline—not debt equity. He disagreed that his team was floundering. “Our costs are not as far down as we want them to be,” he accepted. “But we’ve reduced them and we’d reduce them even more if we’re given a free hand to do so. The problem is all the vested interest in this country that opposes any change.”

Total staff costs have increased by nine percent. This was attributable to contractual pay rises under collective bargaining agreements. “I had no choice but to give them,” Mr Ratwatte said. “The total cost (of the increase), I think, was US$ 2.2 million.” This was not sustainable, he agreed.

The CEO has conceptualised carving the company into separate business units (SBUs). It is the first time such a suggestion has been made. SriLankan ground handling (with 2,800 employees) would be one entity and security (with 3,000 employees) would be another. Engineering could be divided into two with the 900-strong airworthiness maintenance section forming another SBU.

“I want to split the company into lots of little companies,” Mr Ratwatte said. “Each SBU will be responsible for its respective profits and losses which will be pooled into the group.” There were now multiple inefficiencies: “A lot of people who sit in a corner of their office and watch YouTube videos all day”.

“They don’t do anything because they’re not accountable,” Mr Ratwatte complained. “You just can’t keep track of them, whereas if you split them into little units, each has to perform.”