Sri Lanka throwing good money after bad?

Sept 29, 2008 (LBO) – “Mihin Air was started with pure intentions. It was active for 13 months. There were shortcomings in management. The CEO was removed. The Board was asked to resign.

“After study, we are taking steps to make the organization profitable. . . . Over the 13 months, 215,617 passengers have travelled on this airline. There were revenues of 2.4 million rupees.

“But there were unnecessary expenditures. There were losses of 3,200 million rupees. . . . We wish to purchase six airplanes from China. Eighteen proposals have been received. A technical evaluation committee has been appointed to examine them. We have requested funds for these purchases from the budget.”

The above are translated excerpts from the statement made in Parliament by the Minister of Ports and Civil Aviation, Chamal Rajapaksa, M.P., on 23 September 2008, as reported in the Lankadeepa, 24 September 2008, p. 5. The revenue and loss figures are very strange, but that’s what the Lankadeepa parliamentary correspondent reported.

The fate of Mihin Lanka was foretold: Risky business (4 January 2007) . But the urgent task is to contribute to the debate on whether more of our money should be spent on reviving Mihin.

Intentions

Minister Rajapaksa does not appear to have spelled out the purity of the intentions. Minister Aluthgamage says it was started because Sri Lanka did not have a national airline and because Emirates which managed SriLankan had stopped flights to Buddha Gaya, a claim repeated by Minister Dinesh Gunawardene. So this seems to be the government line on the pure intention.

There was no talk of pilgrims and Buddha Gaya in late 2006 when Mihin first emerged. Then it was migrant workers needing cheap flights. We can better assist pilgrims wanting to travel to Bodh Gaya by giving them 10,000 rupees each rather than by giving continuing handouts to a fundamentally unviable airline. This can probably fund the shopping and tourism they like to do, in addition to the pilgrimage to Bodh Gaya, the main reason SriLankan could not fill the flights. No one wanted to travel only to Bodh Gaya.

The government can give this targeted subsidy to 215,617 applicants (the total who flew Mihin before it became a landline) at a cost of 2.16 billion rupees. That is still less than the 3.7 billion being asked from the next Budget and much less than the debts that will have to be forgiven (around 4 billion rupees).

It is eminently silly to hand out 10,000 rupees each to over 2 lakhs of pilgrims. But at least that’ll be the end of the madness. In the case of Mihin subsidies, there will be no end because it can never make money and it will always be a drain on the tax payer.

According to The Economist (“Shredding money,” 18 September 2008), “at least 30 airlines have gone bust this year, and IATA, the industry’s trade body, reckons its 230 members will lose about $5.2 billion in total, having made a rare collective profit of $5.6 billion in 2007, following $40 billion of losses since 2001.”

It’s not that all airlines will necessarily lose money. It is possible that an exceptionally well managed airline can make money in this environment. But what are the chances that Mihin2 will be a well managed airline?

Shortcomings in management

The previous CEO was incompetent and was fired … to become advisor to the President and travel with him to the UN General Assembly.

The same people who appointed the previous CEO and Board are appointing the new CEO and the Board. And what incentives are there for the new CEO to perform? One thing we can be sure of (maybe) is that the new CEO will not be paid as well as the man who converted an airline into a landline. The new CEO, unlike the previous one has actual experience in aviation, though not of budget airline operation.

The new Chairman is described as an engineer and who “also has a background in business management.” He was Chairman of the government-owned State Engineering Corporation, an organization not renowned for efficiency and profit making.

Work as a junior engineer in Chino, a small city in California (population less than Colombo) does not seem to constitute relevant experience.

The rest of the Board comprises the Commander of an Air Force, the chairmen of the Banks that were foolish enough to give loans to Mihin1 and sundry political appointees.

Only surprising omission is Ashantha de Mel. Mihin owes the CPC a lot of money. The least it can do is to invite Mr de Mel for meetings and offer him tea, sandwiches and an opportunity to discuss cricket selections with really intelligent people. There should be equal treatment for people who extended credit to Mihin. Just because CPC does not directly report to the President, it should not be discriminated against.

Does any of this suggest the kind of management that will make Mihin2 buck worldwide trends?

Corruption

Minister Aluthgamage stated in Parliament that “I do not say that the people who were in this [Mihin] did not take commissions. Commissions were taken.” (translation of report in the Lankadeepa, 24 September 2008, p. 5). Here’s the Sinhala report, in case you doubt the translation: “Meke hitapu minissu komis gahuve ne kiyala mama kiyanne ne. Komis gahuva.”

This damning indictment made by a current Minister on the floor of Parliament should be taken up by the Commission to Investigate Allegations of Bribery or Corruption. Who are the people who fall within the scope of the indictment? Those who were in decision making positions at Mihin1 and are no longer in those positions.

One such person is the former CEO, now advisor to the President who accompanied him to the Buddhist Vihara in New York. Another is the Secretary of the Ministry of Defense who was on the founding Board but is no longer there. The Secretary to the President is also within the scope. At least to clear their names, the Bribery Commission should launch an investigation.

If the Opposition cannot capitalize on internal fissures of this scale, does it merit being called an Opposition?

Minister Aluthgamage says commissions were taken on leases. Can he guarantee that commissions will not be taken on new purchases? What safeguards have been instituted to prevent recurrences of the commission-taking incidents that he confirmed in Parliament (“komis gahuva”)? What is ten per cent of 3.7 billion rupees? Or have I got the number wrong?

Lessons learned

Nothing has changed in the external environment that I described in January 2007. If anything, it has become even more challenging. Air Deccan, which I used to illustrate the risks of the budget airline business, is no longer in business, having been acquired by Kingfisher after mounting losses. The world over, airlines are bleeding red ink.

No evidence exists that an exceptional and experienced management team that can surmount the considerable external challenges has been assembled. There is no one on the management team with experience in running budget airlines. The Board has experience in running loss making state enterprises and making foolish loans, but little else.

No evidence suggests that the conditions for the non-recurrence of the kind of corruption described on the floor of Parliament by Minister Aluthgamage have been created.

Government should not be in the business of flying people to Bodh Gaya for pilgrimage or hauling expatriate workers to the Middle East. That should be the biggest lesson.

A mistake was made. Now it should be remedied by cutting off this gangrenous limb even if it is called Mihin. But the previous CEO made one good decision. Most of the inputs for the misbegotten enterprise were obtained on lease. Exit costs are therefore much lower than if he bought planes.

Now the Minister wants the tax payers of this country to pay for aircraft purchases, managing to make Sajin Vaas Gunawardene look like a whiz kid in the process. The Mihin2 debacle will be much worse than Mihin1. Then there will no Sajin to beat up on; just the brother of the President of the Democratic Socialist Republic of Sri Lanka.

Is this not a case of throwing good money after bad? Is this not a case of not learning from past mistakes but of compounding the errors?

As I said in another column (SriLankan or Mihin Lanka? 24 December 2007), “Instead of running two airlines to the ground, why not just concentrate on one?”