SriLankan Airlines bought aircraft like a private company; bailed out as SOE
ECONOMYNEXT – State-run SriLankan Airlines board of directors had bought aircraft like a private company through board decisions, but public funds had been used to bail it out, and sovereign guarantees were also given as a state enterprise, a commission of inquiry heard.
A Presidential commission of inquiry is probing irregularities in SriLankan Airlines and now defunct Mihin Air, a budget carrier.
SriLankan, a privatized firm that was taken back to state control from Emirates Airlines during the time of ex-President Mahinda Rajapaksa made a controversial decision to buy Airbus A350 aircraft, which had since been reversed.
In March 2013, the Finance Ministry, then under President Mahinda Rajapaksa, had informed the cabinet that replacing the ageing fleet with wide-bodied aircraft is a decision for the airline, Cabinet Secretary Sumith Abeysinghe said.
"The decision to replace aircraft like it was done in the past should be taken by the chairman and directors of the airline," he said, reading a cabinet paper in Sinhala.
"The chairman and the board of directors should ensure that the fleet is replaced in a manner that strengthens the airline and its capital."
"The Finance Ministry says it is a matter for the airline, as it is a limited liability company under the Companies Act of 2007, and therefore the chairman, chief executive and the director board should take action,” he said, explaining the cabinet paper.
The Treasury, a portfolio of the Finance Ministry, is the main shareholder of the airline, Abeysinghe said.
He said the government wanted to infuse capital to fund a new business plan the airline formulated to make it competitive and turn losses into profits, which included the purchase of wide-bodied aircraft.
“They (government) wanted a locally formulated business plan approved by a foreign party. It was done in June and submitted to cabinet in July 2011,” Abeysinghe said.
Abeysinghe said according to the 2011 business plan, the cabinet had been told only of aircraft purchases to reduce the fleet’s average age from 11 years to 7 years, and there was no reference to brand new aircraft.
Later an observation had been made informing the cabinet that SriLankan was purchasing brand new Airbus A350 aircraft, he said.
He said the cabinet had approved a 500 million US dollar capital infusion for SriLankan Airlines and 20 million US dollar infusion for Mihin Air, which was included in the 2012 budget.
Abeysinghe said that in March 2012, bridging finance was sought from Mashreq Bank, and the Treasury had provided a counter guarantee to Bank of Ceylon as a collateral to the loan.
"In May, this was changed from a counter guarantee to BOC to a 175 million US dollar sovereign guarantee to Mashreq Bank," he said.
In October 2014 the Finance Ministry submitted an observation, commenting on inefficiency and improper financial management, he said.
"Currently, the airline industry is competitive, and SriLankan Airlines is continuing to make losses," Abeysinghe said, reading the observation in Sinhala.
"This is due to inefficiency, high fuel costs and no proper management of finances.”
The Chairman of the airline at the time was the President’s brother-in-law.
Abeysinghe said Treasury Secretary P. B. Jayasundera had assisted the President in formulating cabinet memorandums and observations.
The October 2014 cabinet observation, which mentioned brand new aircraft, had called for further bailouts for the airline due to its poor financial position, Abeysinghe said.
The observation had requested the airline to report to the Treasury every quarter, but this has not occurred since, he said.
He said the government changed in January 2015.
The new government decided to cancel leases and purchases of wide-bodied Airbus A350 aircraft, he said. (COLOMBO, 31 August, 2018)