What’s With 2015/16 Annual Report Of SriLankan Airlines?

By Rajeewa Jayaweera –December 25, 2016

Rajeewa Jayaweera

Almost nine months since the end of the 2015/16 financial year, the national carrier is yet to publish its Annual Report. Therefore both, shareholders and tax payers are at sea of the airline’s performance during the last financial year.

A media release in October 2016 was followed by a Press meet by the Chairman and CEO. The media release stated “In the Financial Year ending 31st March 2016, the airline recorded a significantly improved performance compared to the previous year”. It further stated, “At the end of the last financial year, without the ‘one-off’ payment relating to cancellation of the lease of one A350 aircraft, the airline’s Group Loss stood at LKR 9.03 billion, which represents a 45% improvement for the 2015/16 financial year compared to the previous year. The net loss after taking the ‘one-off’ item into consideration (Rs 2.56 billion) is LKR 11.59 billion, compared to the net loss of LKR 16.33 billion during the previous year”.

Announcements regularly refer to ‘Company Losses’ and ‘Group Losses’. The current Board and CEO undoubtedly cannot be held responsible for the monumental losses accrued over 35 years.
However, a yardstick which could be utilized to evaluate the success or the lack of it by an airline during a given financial year is the profit or loss resulting from its core business operations. Even though performance in core business operations is generally not referred to, it is a useful yardstick to gauge if an airline with a loss-making history has affected course correction.
Core business activity of an airlines is ‘Passenger & Cargo Transportation, carriage of Mail & Excess Baggage, ad hoc flights (charters) and Frequent Flyer net accruals. Ancillary activities such as Ground Handling, Engineering Services, Duty Free Sales, Catering, Training Centre etc. do not belong to core business activity.

Debt servicing charges, USD 17.7 million. (Rs 2.56 billion) paid for the cancellation of one A350 aircraft etc. has no relevance to the airline’s core business operations. They, along with revenue and related expenses of ancillary activities belong to the net profit / loss of the company.

In 2015/16, revenue from core business operations has dropped by 8%, losses in core business operations has reduced by 33% and Fuel Costs have been 41% less than previous year. Here is the rub. Aviation fuel costs are directly related to the airline’s core business operations. Notwithstanding a 33% reduction in losses in its core business operations and 41% reduction in Fuel Costs amounting to over USD 150 million from previous year, the airline failed to record a profit from its core business operations in 2015/16.

The losses in core business operations during 2015/16 includes a 7% drop in Passenger Revenue and 15% drop in Cargo Revenue from previous year. The reduced revenue need be attributed to the Sales and Marketing strategies and efforts of the present team. In this backdrop, the self-gratifying claim in the October media release ‘In the Financial Year ending 31st March 2016, the airline recorded a significantly improved performance compared to the previous year”, cannot be sustained. The current Board of Directors, the interim CEO and current CEO need be held accountable for the airline’s losses in its core business operations in 2015/16.

The current Board of Directors were appointed commencing January 2015. A board member who had previously worked for Air Lanka in mid 1980s in charge of Duty Free operations not related to the airline’s core business functioned as CEO, in total violation of the company’s Articles of Association. The current CEO, a pilot by profession and zero relevant management experience came on board in October 2015. It is pointless to whine of the “benefit of lower fuel costs being significantly eroded with the airline’s declining revenue due to the addition of capacity to the Colombo market by other airlines and a dramatic drop in airfares in certain markets”. Air Lanka / SriLankan Airlines operated for over three decades under similar conditions. This Board and CEO should consider themselves extremely lucky they did not have to contend with very high fuel costs as done by many previous boards and a civil war impacting tourist arrivals and air fares negatively.

It must be noted, most major operating expenses such as Fuel Costs, Aircraft Lease charges etc. are incurred in USD and not Sri Lankan Rupees. Currency loss as a result of the depreciation of the Sri Lankan Rupee has no bearing when evaluating performance in USD.

The October media release also referred to “Stringent cost controls underscored by heightened accountability and transparency have been cornerstones of the new strategy”. Yet, the carrier’s modus operandi reflects otherwise. For example, the discontinuation of unprofitable European routes was first proposed sometime in the first half of 2015. Operations to Rome ceased in May 2016 whereas operations to Paris and Frankfurt did not cease till end October 2016. Even though flights to Paris and Frankfurt ceased in end October 2016, both offices continue to be in operation today. French and German staff were not issued termination notices till a few weeks ago. Meanwhile, a high-powered five-member team consisting of Head of Human Resources, Head of Group Legal Affairs, Group Legal Affairs Manager, Performance Management & Administration Manager and Regional Head of Europe & Americas paid two visits to Paris recently to sort out termination issues of French staff. It is indeed a strange form of ‘stringent cost controls’. However, judging from the number of participants at the ‘Hospitality Suite’ at Lords cricket grounds last summer, the culture of ‘group travel’ on company business seems to be contagious and prevalent from top down.

 Read More