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“The challenge when I took over in March 2014 was to run the organisation in a commercially viable manner without compromising the safety and the services to the passengers. The three tasks that were set out for the staff was to get rid of unnecessary waste, reduce cost and increase revenue,” he said.
Together with the Mihin HR team Ranatunga set up a process to allow the staff to put forward their recommendations within a two week period of his appointment. Within a month he claims they were able to come up with the recommendations from the staff while simultaneously preparing the business plan for a four-year period. Early projections pointed to the fact that Mihin was in no position to run profitably unless changes were made.
From Boeing to Airbus
Two Boeing aircrafts had already been ordered at the time of Ranatunga’s appointment and the matter was taken up with the Ministry of Aviation as well as the Treasury.
“We told them that with these two products coming in, it would be difficult to run the organisation in a profitable manner for the next seven to eight years. We gave them a second option in switching to Airbuses which would allow us to achieve our target in three years,” he said.
The Government gave the green light for negotiations to commence with Boeing and at the time the additional cost was around $35 million. The reasons behind the additional costs were, as Ranatunga explained, expenditure on technical knowledge enhancement and training for pilots and cabin crew. The airline would also have to spend on spare parts and accessories for the new aircrafts.
Negotiations with Boeing resulted in Mihin managing to bring down the additional cost to about $5 million but making profits was still not a possibility within the ensuing five years.
After several discussions with the Aviation Ministry, the Treasury and the staff, a decision was taken to switch to three Airbuses instead.
The former Mihin Lanka Chief confirmed that the organisation had ordered two Airbus A320neos and A319 which will arrive in 2016.
“We found then that according to our business plan we would be able to make profits by the third quarter of 2017. The month I took over, we had losses of about $2.4 million and within a month those losses were halved to $1.2 million. By May the losses had reduced to $800,000 and in June it reduced further to $600,000 and July to $300,000. In August, Mihin made approximately $300,000 in operational profits,” Ranatunga stated.
Following the month of August, Mihin encountered three bad months in September, October and November, when its aircrafts had to undergo C-checks, which are extensive aircraft maintenance checks. In January, once again Mihin managed to turn in a small profit.
“Our anticipated budgeted loss for this year was $13 million but the way things are going we can end with around $11 million in losses which is $2 million better than expected. I am confident that if we run the organisation in the same manner, we will be able to become profitable by the first quarter of 2017. Then we no longer have to depend on the stakeholders or the investments unless we need more aircrafts.”
Mihin’s battle against rising costs
Fuel is Mihin’s major cost and amounts to around 43% of its total cost whereas aircraft leasing and maintenance amounts to only around 12% each.
Fuel costs had reduced significantly from the months of October-November in the international market and Ranatunga claimed that the benefit of the reduced fuel costs will become clearer in time to come.
The small scale aircraft purchases also hurt Mihin in the short term as high leasing costs were directly attributed to the fact that only one or two aircrafts were purchase at a time. According to Ranatunga, Mihin’s competitors were purchasing around 20 to 50 aircrafts and getting them for 40% to 50% less.
Ranatunga identified two aspects that have emerged as Mihin’s main strengths, which are its staff and the support it receives from SriLankan Airlines. Staff cost is around 6% out of which 80% is paid to the cabin crew and technical crew. They constitute around 60% of the staff which as Ranatunga stated, meant that the rest of the staff was not very well paid.
New administration and amalgamation plans
When asked for his opinion on the proposed plans of the Government’s to amalgamate SriLankan Airlines and Mihin Lanka, Ranatunga claimed that the plan’s success hinged on the policy makers but admitted that he could not see the benefit of doing so as he believed costs would rise as a result.
“There’s no real advantage unless they amalgamate and keep two separate PnL accounts,” he stated.
Ranatunga explained that the amalgamation would result in increased staff costs as Mihin currently has around 100 employees per aircraft who earn far less than SriLankan employees.
“Although our budgeted staff strength is 330, we have only 301 as of January, so around 100 per aircraft; But SriLankan has around 260 to 280 per aircraft and their salaries and perks are higher than ours.”
Instead he suggested that the two airlines be run as separate entities, adding that it was also important that a member of Mihin Lanka continues to be on the SriLankan Airlines Board and vice versa in order to maintain the understanding between the two organisations.
Mismanagement allegations and waning reputation
Ranatunga admitted that when he took over at Mihin, the carrier’s reputation had been compromised and focus had to be diverted into improving its public image.
“When I took over I held discussions with the staff and explained to them that the perception of Mihin in the market was not very good. We had busted a substantial amount of money from the tax payers and we needed to change that,” he said.
Several allegations of malpractice and financial mismanagement have been levelled at Mihin Lanka in the past but the former Chairman and CEO stated that his task was to try to turn things around at the organisation in terms of profitability and not to conduct a fact-finding mission. He claimed that he had no time during his tenure to look into matters of misconduct or corruption though he assured the public that no such malpractice or misconduct took place during his time at Mihin.
In response to recent revelations made by Minister Karunanayake regarding the large amounts of losses made by Mihin Lanka as well as SriLankan Airlines, Ranatunga stated that the Minister may not have been aware of the budgeted losses.
“From an airline’s perspective you shouldn’t only look at what the airline makes. You must look at the contribution you made to the economy and in terms of tourism; in terms of businesses we transport a substantial amount of vegetables and fruits to the region; we provide opportunities of employment and training etc. There are so many unseen opportunities in the aviation industry,” he said.
Way forward for Mihin and reorienting the aviation sector
Adequate funding has always been a problem for Mihin according to the former Chairman. He claimed that 60% of the total investment for the organisation came just last year. He pointed out that it sucked Mihin into a vicious cycle which resulted in borrowing from banks and paying higher interest.
“When the fuel bill is not paid on time, the CEB (Ceylon Electricity Board) charges us interest so we get whacked there as well. I don’t know if it’s a matter of malpractices or bad management. I’m not a judge on that but I can tell you that scale and timely funding were two issues that contributed to not allowing the organisation to run profitably,” he said.
He further suggested that his personal view was that if Mihin Lanka had around eight to ten aircrafts, it would be able to become profitable. Mihin also had identified several other avenues of income to improve its balance including training and cargo services.
Finance Minister Ravi Karunanayake stated earlier this week that Sri Lanka needed to reorient the aviation sector to act as a gateway to India and Ranatunga agreed with the Minister’s vision but stated that the country shouldn’t only look at India but also China.
He suggested that Mihin should look to target regional travel as well as focus its efforts on regional businesses, limiting its flying time and allowing SriLankan to specialise in long-haul flights.
“India and China are the two largest growing markets in the aviation industry as well as Indonesia. We have the links and infrastructure to provide services to those three countries. Mihin should look at 3½-4½ hours of flying time.”
Importance of a second carrier
In the debate regarding the necessity for a small nation to maintain a second carrier, Ranatunga made his stance clear by stating that competition for the national carrier should not be dismissed as unnecessary.
Pointing to the understanding between the two organisations, he concluded that both airlines complement each other and have developed a somewhat co-reliant relationship.
Referring to a presentation he had conducted for the new SriLankan Airlines Chairman Ajith Dias, he added that the fate of Mihin’s success rested squarely on the new SriLankan administration which needed to continue the work done at the organisation and put into implementation the plans that have already been drawn up.
