SriLankan clarifies A350 business plan and termination

In response to an allegation made by the Joint Opposition last week, SriLankan Airlines yesterday issued a statement clarifying various inaccuracies as well as the basis for the termination of three Airbus A350 aircraft orders. 

It said the total penalty paid was $ 98 million (or Rs. 14.7 billion) and not Rs. 150 billion as reported. Among the many challenges inherited by the present management of the national carrier, was the decision to order eight A350 aircraft by the previous management of SriLankan Airlines.

There was no existing business plan that supported the acquisition of this, or any other new long-range aircraft. A study commissioned by a consultant for the airline, compared the A350 and the B787, but at no stage were the economics of a new long-range aircraft ever considered.

The A350 is an ‘extra wide-body’ aircraft that is specifically designed for long haul routes. The main customer airlines utilise the aircraft on routes such as the Gulf to North America and Australia. Singapore Airlines uses the A350 on the world’s longest non-stop flight between Singapore and New York.

Continuing with the pragmatic approach of returning the national carrier to profitability, the decisions was made to withdraw from some European destinations. With this difficult decision, the A350 aircraft became an unnecessary type for the airline. It was decided to negotiate with the owner and lessor AerCap to enable the cancellation of these aircraft. 

The previous management had also ordered seven A330-300 aircraft as replacement for the ageing A340 aircraft for operations on European routes. These attracted a lease cost of approximately $ 1 million per aircraft, incurring losses of $29,640 million in 2015/16 and had we taken and operated the A350 aircraft at a monthly lease cost of $ 1,425,000 per aircraft, the losses would have been significantly higher. We would also have a contingent liability of $ 800 million over the 12 year period and also an operating loss of $ 50 million a year or $ 600 million over the same period. As such, SriLankan averted payment of $ 100 milliona year by returning these four A350 aircrafts and the termination fee will be recovered in 14 months. The termination agreement and charges were discussed and approved by all the relevant ministries, the CCEM and the Cabinet. 

The suggestion of purchasing these aircraft from the lessor to sell these off in the secondary market was rejected by AerCap, who clearly informed that they are not in the business of selling aircraft but only leasing them. The market value of a new A350 is in the range of $ 170 to 200 million and it was highly unlikely that the airline would have been able to sell these aircraft anywhere close to this price.