SriLankan Airlines has released a press release clarifying issues surrounding aircraft leases.
SriLankan Airlines Ltd. has said that they welcome and respect 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, they 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 Currency 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 being from overseas, is a foreign currency earner, similar to an export business. Shrinking the foreign currency earning capacity of the Airline through fleet contraction would in fact be negative to the Country’s foreign currency 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 Currency 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.
- Should SriLankan Airlines consider Replacement of Expiring Leases and Aircraft Additions when Sri Lanka was facing a Foreign Currency 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 inflow of foreign currency to the country, 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 at a lower cost 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?
- 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 in the former case, quantity, price and aircraft type, etc.?
- What other considerations are relevant to the decision to survey the Global Aircraft Leasing Market?
- 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
- What is the Financial Situation of SriLankan Airlines?
- What were the main drivers of improved operational performance
- What was the Impact of the Pandemic on the Global Industry and SriLankan Airlines in particular?
- Shouldn’t SriLankan Airlines be Shut Down? Sold? Liquidated and Restarted etc.?
- How is the Board of Directors Appointed and Remunerated?
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