Ouch: SriLankan Is Paying 170 Million USD To Cancel A350 Order

“National” airlines can represent both a huge opportunity and challenge for developing countries.

Under the right conditions, these airlines can turn profits while also helping to contribute to the infrastructure of a country. Take Air Astana, for example, which has turned a profit every year for the past decade, and has contributed very nicely to the development of Kazakhstan.

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Air Astana 767

But then on the other end of the spectrum you have countries that invest hundreds of millions of dollars in their “national” airlines, only to have that airline never turn a profit. Well, unfortunately that seems to be the case with Colombo-based SriLankan Airlines at the moment.

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SriLankan A330

The airline was on an impressive growth trajectory, having taken delivery of A330s featuring a top notch business class product, and also having several A350 aircraft on order.

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SriLankan A330 business class

Unfortunately they’ve realized that their expansion goals may have been too lofty, as the airline is now cutting two of their three routes to Europe, and is leasing their brand new A330-300 aircraft to Pakistan Airlines at breakeven costs, since they realize they can’t turn a profit flying them.

On to top of that the airline has been trying to find another airline to take over their A350 order, though it seems they haven’t had much luck with that. Per Reuters, SriLankan will pay $170 million to cancel their first four A350 orders, which were to be leased through AerCap, the world’s largest independent aircraft leasing company. That’s a lot of money for the airline to just throw out the window for a mistake.

That doesn’t even cover the cost of canceling their whole A350 order, as the airline has four more A350s scheduled to be delivered around 2020, which the airline hasn’t yet made a decision on.

How poorly is the airline performing? Per the article:

Sri Lankan Airlines, which has taken on lease seven Airbus A330-300s since 2012, has debt of around $3.25 billion.

It posted a group net loss of 16.3 billion rupees ($112.6 million) for the financial year through March 31, narrowing from the 31.4 billion rupees loss of a year earlier, due to lower oil prices. The carrier last posted a profit in 2009, a year after Emirates sold its stake in the venture.

The Daily News in Sri Lanka reports on how the current administration is blasting the previous administration for their order:

However, we are still compelled to bear a loss of 19.6 billion.We could have invested this huge sum of money to uplift the education in the country. We could have provided children books, text books and other necessary school equipment and built school laboratories. We could have built another 100,000 or 200,000 houses for the needy. The procurement of A350 airbuses have been carried out completely arbitrarily and without any transparency. Unfortunately, we are compelled to pay the heavy price for the sins committed by them during the previous regime,” Finance Minister Ravi Karunanayake explained.

Finance Minister Ravi Karunanayake further said that the duty and responsibility of the media is to expose these types of corruption and malpractices. Ms. Mela Karunanayake and several former Colombo Municipal Councillors were also present at the event.

I can certainly see both sides here. There has been a lot of corruption with the Sri Lankan government and with SriLankan Airlines management, though I’m not sure if that’s related to the airline supposedly overpaying for the planes.

That being said, I don’t necessarily think that positioning these planes as unnecessary “super luxury” planes that can fly for 17 hours is fair either. The A350 is very fuel efficient, and in theory under the right conditions it can turn a very nice profit for airlines. At the same time, given SriLankan’s financial situation, they might be much better off buying or leasing used aircraft, given that they can be purchased at a tiny fraction of the cost of new planes.

Bottom line

I’ve enjoyed my flights on SriLankan and have found them to be an overall good airline. On one hand it was great to see them reinvent themselves and modernize the airline, but at the same time Sri Lanka is a really tough country out of which to run an airline. Colombo is known for having among the world’s cheapest airfare, so that’s not exactly a good starting point for an airline looking to turn a profit flying brand new planes.

It’s sad to see the airline downsize significantly, but in reality that might be the only way they can decrease their losses.

No matter the conditions, paying $170 million to cancel an airplane order sucks

Comments

  1. A grammar lesson you make repeatedly in your articles, that was drilled into me in business school: A company is an “its”, not a “their”. “Walmart sold its building” not “Walmart sold their building”. Plural companies are their, but singular is always its. “Walmart and Kmart sold their buildings.”

    You do it twice in this sentence alone: “On to top of that the airline has been trying to find another airline to take over their A350 order, though it seems they haven’t had much luck with that. Per Reuters, SriLankan will pay $170 million to cancel their first four A350 orders,”

    Notice how the news articles that you quoted got it correct.

  2. The cancellation fee doesn’t seem unreasonable given that these planes probably cost around $300 million each for the four planes on order – I’m sure Airbus incurred costs in the process.

  3. I think Sri Lankan’s problem is with its location, its not exactly a great connecting point to anywhere to be honest when you can connect in India or the UAE if going long haul.

    And to be honest I don’t think the sole traffic leaving Sri Lanka is high yield due to the poor country, so how would the average person buy business class tickets leaving CMB.

    Probably a lot of the revenue comes from the tourist flights into Sri Lanka or the frequent flyers bagging cheap tickets from CMB.

    Sad times for them, sadly not every country in the world can sustain a flag carrier these days.

  4. Interesting for a plane with a huge backlog they could not place these orders. Does raise some questions? Did they pay list when anyone who would take the over would want the normal discounts? just doesn’t make a lot of sense

  5. This is parts of a much bigger story involving China which basically provided $$ for control of the Sri Lankan economy. When the previous guy lost the elections the country is trying to get back to economic normality.

  6. The money is owned to AerCap, which is a leasing company, so there may be restrictions on UL’s ability to sub-let the A350’s to a third party. If it was a straight up deal with Airbus, I assume they could have reached some arrangement to swap them for a later delivery of A330’s or A320’s. Airbus could then have used them to accelerate deliveries to someone else on its existing order list.
    AerCap might be thinking they get the $170m off UL and then place the planes with some other carrier, as there appears to be a bit of a waitlist on A350s

  7. Having flown Sri Lankan a bit this year in J, I see several fundamental problems with them as more than just a small player for O&D traffic for Sri Lanka: 1) Colombo airport is awful; there are no respectable overnight hotels near CMB; the immigration is a mess; the security is outrageously inefficient; the layout is poor; the lounges are poor and; there are limited facilities for folks post-security; 2) Colombo’s location is poor–out of the way vs. the ME3 and a long, long flight from Europe (and not currently directly accessible via the US); 3) while the in-flight hard and soft product is great in J, Sri Lankan op-ups/cheap upgrades to an egregious extent, and if you’ve paid full fare (which I did on each of my flights), you see an empty cabin at booking and then board to find a totally full cabin–often with lots of kids and possibly employees/friends.

    They’re much better off going the niche route, with better marketing on flights to HKG, LHR, and CDG, forgoing most other international routings, and building a better infrastructure for offering connections to points within Sri Lanka. I would’ve flown domestic if I knew how slow road connections within SL are and the airline had better positioned itself to offer those flights.

  8. Ben – you are correct on many point here – thank you. I travel to CMB 5-6x / year, and each time I hear of more examples of the corruption of the previous regime. Truly sad when one considers how much wonderful ‘good’ could have been accomplished with that kind of money.

  9. What wasn’t mentioned here is the fact that QR fares are a much better deal than UL. QR is superior in every way over UL on their respective hard and soft products. Also the competition is extremely heavy on intra Asia flights. Difficult for UL to compete with all that.

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