Airbus contracts end up in London court

SriLankan Airline's board calls for ministerial inquiry against management; CEO justifies transactions

An international company through which SriLankan Airlines extended leases on three A330-200 aircraft has filed action in London after the national carrier attempted to overturn the contracts saying they were not legally binding.

This transpires against the backdrop of a major clash within SriLankan’s board of directors, with a faction saying CEO Suren Ratwatte signed the contracts without approval-- a charge that he vehemently denies.

A case was lodged in the commercial arm of the High Court of Justice earlier this month. The claimant-- SASOF II Aviation Ireland Ltd--is seeking a declaration that SriLankan Airlines is contractually bound by the relevant extension agree- ments. It is also seeking an order that all rental payments falling under the extended leases are paid in accordance with the contracts; and costs. The Sunday Times has copy of the SASOF claim.

The aircraft in question are three older A330- 200s first leased by SriLankan in 2010. The original agreements were due to expire in January and February 2017. But Mr Ratwatte extended the leases last year despite a SriLankan board decision to do so only if three other planes ( new A330- 300s) were given on dry lease to Pakistan International Airlines (PIA).

The PIA deal did not turn out as anticipated. The Pakistani carrier took only one aircraft on wet lease for several months b e fore re t u r ning it to SriLankan. It did not lease the other two. SriLankan is yet to collect US$2 million plus interest from PIA whose own CEO is being investigated over the deal.

At the board’s intervention, therefore, SriLankan wrote to SASOF giving notice that it will return the three A330-200s at the end of the original leases, ignoring the extension agreements. The carrier said the approval of its board to the extensions had been conditional upon dry lease agreements with PIA.

“Your purported notice is rejected and your intended action is a breach of contract,” SASOF replied in writing to SriLankan. The conditionality attached to PIA leases was never discussed with SASOF. Nor was it agreed to by the company and forms no part of the extension agreements or any other binding contractual document, it said, before taking the matter to court.

A legal battle, if it comes to that, will be costly. But detractors of the extension agreements say keeping the three long haul A330200s will also impose a substantial financial burden on the cash-strapped airline. The monthly rental is about US$ 225,000 or Rs 34,146,000 for each aircraft. This amounts to more than Rs 1,229,256,000 for all three aircraft per year. (The rates are in the SASOF claim).

For his part, Mr Ratwatte insists the leases on the older aircraft were decided as part of a restructuring plan which saw the urgent need for a reduction in aircraft lease costs. “If these aircraft were not extended, they would have had to be grounded beginning August 2016 for lease return checks,” he told the Sunday Times. “In order to forestall this (which is a very expensive exercise with no return on investment) and ensure the schedule could be flown, the decision was made to extend the leases on very favourable terms.”

He said the monthly lease cost was reduced by fifty percent (the original was more than US$ 460,000 per aircraft per month) and the return conditions were reduced to a minimal sum, allowing the aircraft to be flown back to an airport designated by the lessor. “This resulted in immediate cash saving of US$ 43.8 million, which was the anticipated return cost,” he said.

But Mr Ratwatte is up against at least half of the SriLankan board that maintains they did not approve the lease extensions. Last month, Directors Chanaka de Silva, Rajan Brito, Rakitha Jayawardena and Harendra K Balapatabendi wrote to Chairman Ajith Dias demanding an investigation into how the CEO had signed the contracts in excess of his mandate. They want an inquiry by the Ministry, Attorney General’s Department or an independent panel. The chairman has not complied.

Separately, the Ministry of Public Enterprise Development has requested the SriLankan board for a report on whether the CEO had exceeded his mandate in entering into the lease extension agreements which are binding on SriLankan. The four directors say their own inquiries have caused them to collectively conclude that the management “appear to have clearly exceeded the Board Mandate and unnecessarily risked placing the Company to legal claims”.

In other documents received by the Sunday Times, it is claimed that the CEO at meetings in 2017 did not inform the board that he had already signed the extension agreements in September last year. The extended agreements were “never tabled at a board meeting and/or intimated to the board”. And the board only ever ratified the extension of one aircraft for a month and the termination of the leases of the other two.

Mr Ratwatte admits that management was instructed to attempt a short extension. But he also argues that the extensions of all three aircraft were approved by the board “as can be shown in company documentation”. Such evidence has been presented before and accepted by a ministerial committee appointed to arbitrate on this matter.

These disputes and legal claims cannot come at a worse time for SriLankan. Just this weekend, a team arrived from Texas Pacific Group (TPG) which is shortlisted by the Government to take over the company’s management. The global private investment firm has hired a third party to carry out a due diligence--an appraisal of the business with a view to determining its assets and liabilities and evaluating its commercial potential.

The SriLankan board is scheduled to meet on Wednesday. The airline now has 13 widebody and 10 narrow-body aircraft in its fleet. It will experience a surplus of aircraft in the summer season, a condition Mr Ratwatte says the company is trying to address.