The story behind the airbus deal

The news came many months after a Criminal Investigation Department (CID) probe into the procurement of Airbus A-350 aircraft by SriLankan Airlines and its findings remained in limbo.

All of a sudden, the Attorney General’s Department directed the Police this week to obtain a warrant from the Magistrate’s Court and arrest Kapila Chandrasena, a onetime Chief Executive Officer of SriLankan Airlines and his wife Niyomali Wijenayaka for alleged bribery. The CID could not locate them and a government minister said they were not in the country. The couple surrendered to their office on Wednesday. Their statements were recorded, and they were produced before Chief Magistrate Ranga Dissanayake and remanded till February 19.

This unexpected development came after it transpired in a British Court that the

wife of SriLankan Airlines (“SLA”) Executive, through a straw company” registered in Brunei, was offered up to US$ 16.84 million by Airbus to “influence SLA’s purchase of ten Airbus aircraft and the lease of an additional four aircraft. The Court heard that the Special Frauds Office (SFO) in London had discovered that only two million dollars of the US$ 16.84 million had so far been paid. Of the ten aircraft to be procured, four were related to the purchase of the new A 350-900 and sparked the CID investigation. The CID’s findings had remained pigeonholed until matters surfaced in a British court. At least one director of SriLankan Airlines knew five years ago that all was not well. He raised issue but did not succeed.

Here is an abridged account of how it played out: SriLankan Airlines entered into a purchase agreement on June 28, 2013 with Airbus S.A.S. in France for the manufacture and delivery of four A 350-900 aircraft. The delivery dates were from the second quarter of 2020 with the last aircraft being delivered in the first quarter of 2021. The total cost of the four aircraft was US$ 222,356,600.85. That is over 2.2 billion US dollars or more than Rs 28.2 billion, according to then prevailing exchange rates. Financial information provided to the Cabinet at that time (2012-2013) showed that SriLankan recorded a revenue of only just US$ 948 million for ferrying 4,140,305 passengers. Its overall performance for 20152016 was US$ 1251 million for ferrying 4,789,902 passengers. Thus, the order with Airbus even exceeded SriLankan operating costs.

SriLankan paid pre-delivery payments since November 2016 totalling US$ 19,214,638.45. This is besides a further US$ 7.5 million made as “pre delivery payment.” However, in that month (November), the board of directors of SriLankan decided to stop any further payments. By then the UPFA government, under whom the deals took place, was out of office. The Yahapalana or ‘good

governance coalition’ had come to power. There were more payments made for different reasons as time went by.

It is during 2016 when the Yahapalana coalition was taking stock of the previous regime’s financial commitments that details began to emerge. Kabir Hashim, Minister of Public Enterprises and Development, under whom SriLankan Airlines was a subject, told Cabinet that there was an approximate cost of US$ 1.45 million per month per aircraft. It was to be spread over a 12-year period, he said

In a memorandum dated April 19, 2017. He said the “total cost of this arrangement was to be US$ 835.2 million.” The leasing deal was with AerCap, an aircraft leasing company. Since 2014, this company had acquired International Lease Finance Corporation (ILFC). The previous payments had in fact been made to AerCap.

It is important to note that the Purchase Agreement with Airbus deals only with the procurement of the “airframe” and “propulsion system.” Agreements have been entered into for other essential components of the aircraft with several other concerns including engines. Examples: Product Agreement and Total Care Service agreement with Rolls Royce PLC. Zodiac Seat France – an agreement to purchase new seats. Thales Avionics Inc. Supply of flight entertainment. Lukedesign of France for cabin design. Three different agreements with Airbus relating to A-350-900 aircraft. Payments for these had to be made separately.

Cabinet memoranda, SriLankan board papers, other documents and agreements seen by the Sunday Times lay bare a sordid tale of how the Airbus deal had been handled. There was no recourse to the Cabinet of Ministers, or the agreement being subjected to scrutiny by the Attorney General. The argument brought out was that SriLankan Airlines was a corporate entity and not a part of the government. Yet, it needed the taxpayers’ money to function and the Treasury was dumping money into a veritable bottomless pit.

A re-structuring plan, “to transform SriLankan into a profitable public enterprise,” was decided by the Cabinet of Ministers on June 24, 2015. Two consultant firms,

Nyras and Skyworks, consulted by the government, had advised that operation of the A 350–900 aircraft would cost an additional US$ 30 million per year and they were not recommending them. The government decided to cancel the contract, but Airbus declared, according to Kabir Hashim, Minister of Public Enterprise Development that “cancellation is not an option, neither can the order be changed completely to a narrow body, four wide body would be given with perhaps an additional narrow body.” Airbus also insisted that failure to pay the pre-delivery payments would amount to a “breach of the purchase agreement between SriLankan and Airbus. In the event of a breach, Airbus will have an opportunity to make claims against SLA.” The agreement was heavily loaded in Airbus’ favour.

This is when the government decided to terminate the Airbus deal. The CID was first called to investigate. Airbus in the meanwhile refused to continue further discussions on the purchase agreement until the findings of the CID investigations were made known to it. That led to a deadlock whilst the government was seeking various avenues to find out details.

The Sunday Times has seen the minutes of a meeting of the Board of Directors of SriLankan held on October 27, 2015 presided over by then Chairman, Ajit Dias. This is what it says:

7.3 Airbus being investigated by European Union on Bribery Charges:

“Mr Joseph M.S. Brito/Director informed the Board that the EU (European Union) was carrying out an investigation on Airbus on bribery charges on aircrafts delivered to UK and Switzerland. He added that he would appreciate if a letter is written to Airbus stating that the acquisitions of the Aircrafts were not done in the best interest of the Company and not carried out purely on commercial terms but also on various other monetary considerations and for Airbus to confirm if there were any facilitators in securing the deal. Mr Brito/Director pointed out that whilst the Aircraft leases for A 350s were obtained at USD 1.4 million, the market price was USD 1.2 million at the time the agreement was signed.

“Mr Brito/Director tabled draft of the letters to be written to (1) Airbus on the purchase of the Aircrafts, (2) Rolls Royce on the purchase of engines and (3) AerCap on the Lease of Aircraft. CEO (present on invitation) agreed to forward these letters to the relevant parties. Mr N. de Silva Deva Aditya/Director volunteered to forward the address of the President of the European Commission, to whom these letters were copied to. The draft letters form part of these minutes.”

There was no action taken on Brito’s request. He raised issue at a meeting of the Board of Directors on November 24, 2015. This is what the minutes of that meeting said: “Mr Brito reminded the Board that a request was made by him to write letters to both Airbus and Rolls Royce. Chairman stated that presently the company was in negotiation with both Airbus and Rolls Royce regarding the engine for A 350s which the company had committed to take and the other was regarding the A 330 due in 2020. Chairman informed that the Chief Officers namely the CEO, CTO and Manique Gunasekera/CCAO were of the view that by writing the said letters would sour the relationship with both Rolls Royce and Airbus, with whom the Company had binding contracts. Mayuka Ranasinghe/HGLA’s views were also obtained in this connection.

“Ms. Gunasekera explained that because of the fact that presently negotiations are under way with Rolls Royce and Airbus 2020 aircraft, it was not advisable now to write the said letters. This was agreed by the Board.

“Chairman stated that the investigations have taken a serious turn at the FCID and CID on the re-fleeting.”

Brito’s draft letter, incorporated in the board meeting minutes but not sent out, is revealing. It said:

“Dear Sirs,

“We refer to the purchase of eight A 350-900 due to be delivered to Sri Lankan Airlines from October 2016 to 2020.

“Two internationally renowned independent Airline Consultants have advised us that it is not in the best interest of the airline to act as the aircrafts, (sic) as vital decisions appear to have been made not only on purely commercial grounds, but also on various other monetary considerations. We have also been advised that the prices paid for these aircraft have been well above the market prices at that time.

“In connection with the above, we wish to know whether you dealt/transacted with any third-party Agent and/or consultants who have facilitated your company to sell any of these aircraft to SriLankan Airlines. If so, could we please have the full details of their names and addresses and what fees/commission/ remuneration were paid or repayable to them as a result of SriLankan Airlines committing to purchase any of these aircraft. In case these facilitators/Agents have transacted in the name of a Corporate or Limited Company, the specific names of all individuals representing the Corporate whom you dealt with for the sale of any of these aircraft purchases.

“As we are not at all satisfied at the manner these purchases were carried out, and as we have been informed that the European Commission has commenced an international probe on allegedly corrupt deals on Airbus’ aircraft sales, we are copying this to the President of the European Commission to follow up on this matter.

“We thank you for your assistance and look forward to your co-operation.

“Yours faithfully

“Chairman”

Minister Kabir Hashim said in a memorandum to the Cabinet on April 19, 2017 that the Termination Agreement in line with the terms agreed by the Ministry of Finance was as follows:

Termination Fee for Airbus a 350–900 aircraft--US$ 154.00 m

Reduced Termination Fee for three Airbus A 350-900 --US$ 98.00 m

Forfeit Security deposit (already paid) -- US$ 7.5 m

Cash payment from SriLankan Airlines—US$ 90.5 m

The arrangement was subject to SriLankan Airlines taking over the leases of two narrow bodied aircraft owned by AerCap and leased to Mihin Lanka.

According to an extract of the minutes of the Cabinet Committee on Economic Development (which gave approval) dated September 9, 2016 “after a detailed discussion SriLankan Airlines was authorised to negotiate a termination cost for the three aircraft within the range of USD 75-85 million in order to close the issue.”

However, a copy of the Agreement between SriLankan Airlines with International Finance Lease Corporation titled “Termination and Amendment Agreement” dated October 4, 2016 seen by the Sunday Times tells a different story. That agreement says “….Lessee hereby agrees to pay lessor an amount of US$ 146,500 payable in eight months.” Signing on behalf of SriLankn Airlines was Suren Ratwatte, then Chief Executive Officer. Sean Sullivan, CEO of International Lease Finance Corporation signed for his company.

How much exactly was paid as termination fee therefore remains a mystery like so many other issues that have clouded the Airbus deal.

All the money spent on the four Airbus A 350-900 vanished into thin air and neither Sri Lanka nor SriLankan Airlines received any benefit. It is deeply in contrast with a hospital watcher who is arrested for taking five rupees as a bribe to allow a visitor to see a patient outside visiting hours. He is first remanded for two weeks. The paradise service from SriLankan had been enjoyed only by a handful. The question is whether all of them will be known.