Anything that just costs money is cheap

Wednesday, 10 May 2017

In the airline business, cost-based pricing has become price-based costing. An expert analyst in global air transport, Dr. Julius Maldutis says it best. The price of an airline seat has no relationship to the cost of producing it, but rather reflects the degree and nature of competition. Costs and prices have gone their separate ways. In fact, the relationship has been reversed. Airline managements are seeking to lower costs in order to match prices.

Spartan mothers when giving shields to their sons departing for war told them: ‘Son, either with this or on this’. To come home without the shield implied running away from battle. The dead were usually brought on their shields.

How will SriLankan Board react?

How will the Board of Directors of SriLankan Airlines react to the withdrawal of the shortlisted bidder private equity investment firm TPG after its due diligence exercise? Without the shield? In all probability. On the shield? Not a hope.

The Sunday Times in its 7 May edition reports that TPG has promised to give a report of its findings. The Government should obtain the report as soon as possible. Publishing all its findings may not be advisable, but a filtered synopsis would serve the public interest.

SriLankan Airlines Chairman Ajith Dias has informed the senior management that after “completing the due diligence process, regrettably TPG have informed us they will not pursue a potential investment in SriLankan Airlines. It is their opinion that allocating the human and financial resources to make the airline profitable will not realise sufficient returns, compared to the many other investment opportunities that are available to them.”

For laconic brevity, Dias deserves our unreserved praise. But further down he succumbs to the seduction of mumbo jumbo that is usually described as ‘strategic intent’ in corporate jargon.

He informs his top managers: “However the Government is pursuing other options in finding a partner and we should continue on the path of improving our performance both financially and operationally.

“The financial year that has ended has been satisfactory considering the downside we have had to undergo with lower yields and drops in revenue. The runway closure, which was very necessary, also resulted in the cancellation of over 600 flights, which also had an adverse effect on our performance.”

Obviously, the Chairman has been briefed by his Chief Executive Officer and Chief Commercial Officer that “the financial year that has ended has been satisfactory considering the downside we have had to undergo with lower yields and drops in revenue”.

This writer has another take. In this Trumpian age it has to be clarified that it is not an alternative fact but an alternative to wishful thinking.

The runaway closure affected all airlines operating to Colombo. The home-based carrier SriLankan adjusted its schedules. Others had the option of withdrawal during the closure of the runway. Many airlines curtailed their services. SriLankan Airlines carried full loads in and out of Colombo and at considerably higher yields. In the business of aviation, Aristotle, even today sounds very authoritative. “One swallow does not make a summer, neither does one fine day; similarly one day of brief time of happiness does not make a person entirely happy.”

It seems that even now, the propensity to reach convenient notions at the expense of the real has not dimmed. 

Wider truths

The withdrawal of the shortlisted bidder exposes some wider truths. This Government and this Board of Directors of the national airline have spurned reason, rejected expertise and have stubbornly refused to learn from the past.

It is time we abandoned this hogwash of Sri Lanka’s strategic geographic location. Our aviation policy is frozen in the time of Marco Polo and Ibn Batuta. Visit www.aviationmin.gov.lk, the website of the Civil Aviation Authority. You are told: “The strategic geographical location of Sri Lanka is an advantage of its proximity to populous nations in the world to become an airline hub.”

For a contrary point view, listen to Emirates Chairman Sheik Ahmed bin Saeed Al Maktoum; in an interview with the ‘Economist’ a few years back he traced the silk route in modern civil aviation: “Nearly two billion people live within four hours’ flying time of the Gulf and twice as many within seven hours. Since the arrival of ultra-long-range airliners in the mid-1990s in the shape of the Boeing 777, any two big cities on Earth can be linked via Dubai with no other stops.”

Sri Airlines and its predecessors Air Lanka and Air Ceylon have all either ignored or failed to define its targeted customers. That has prevented it from offering a competitive mix of product, price, service, relationship, and image.

The bid document prepared for SriLankan Airlines offered what was perceived as a solid commercial enticement. It said: “The four southern states of India are located closer to Colombo than to Delhi. Colombo can therefore be used as an efficient gateway to the South Indian market, giving it access to 250 million people.”

Indisputably true. But during due diligence, the Texas-based TPG would have taken due diligent note of virulent anti-South Indian sentiments expressed by Sinhala chauvinists and political pundits champing the Gota candidacy in 2020. But more damaging would have been the ‘Little Bo Peep has lost her sheep’ defence offered by the ruling elite in defence of their declared intention of greater economic integration with the sub-continent.

Just for a lark, ask the top leaders of this enlightened ‘Yahapalana’ regime how Arahat Mahinda arrived in Sri Lanka. By air to the top of the Mihintale rock, they would insist ignoring the archaeological evidence at Kanyakumari at the tip of the sub-continent that the Ashokan emissary came by land. The Maha Nayakes they regularly visit in Kandy will not be pleased otherwise. 

SriLankan appointments

To return to the subject of the airline, the team that made the due diligence study would have taken due note of the locust years of its management by Mahinda’s brother-in-law and the handpicked team of the current Prime Minister.

In September 2016, this writer in an article captioned ‘SriLankan Airlines: Arrival at crunch time’ said this of the composition of the many boards of directors appointed by successive governments: “Successive regimes have resorted to offer a seat on the Board of the National Carrier to a very special type of people. They come from the entitlement class. Those selected are the cognoscenti drawn from the corporate world who have access to the sanctum sanctorum of, to follow the genesis in order, Ward Place, St. Sebastian in Hulftsdorp, Rosmead Palce and Fifth Avenue.”

The present ‘Yahapalana’ Prime Minister seems to have followed the precedent and offered the bounty and bonanza to buddies. Its present composition is eloquent testimony. Except for two, the son of a former Secretary to a former President, and another whose allegiance is ditto to the same President, all others are Royal College buddies of the Prime Minster. They have a common denominator. They all have abiding interests, professional or private, beyond the shores of Sri Lanka. A seat on the Board of the airline is ‘open sesame’ to the cave of unlimited travel just as in ‘Arabian Nights’.

There is one finding the team doing due diligence would have discovered very early on. State ownership can destroy value of any undertaking, if best practices in ownership and management are not applied.

Again, we have arrived at a critical time that calls for decisive action. We cannot afford to keep SriLankan Airlines flying or on ground. What the due diligence study by TPG has discovered is that it has no immediate value. We must give it away, to a mega carrier in the Middle East or the Far East better positioned and equipped to discover the magic of our geographic location that we hear in nauseating repetition. There is another alternative. A joint venture with South Indian States with a domestic catchment area of 250 million people. A dream of course.