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Cablegate: Sri Lanka: Emirates Airlines Terminates Management Of

VZCZCXRO8662
RR RUEHDE RUEHLMC
DE RUEHLM #0047/01 0101140
ZNR UUUUU ZZH
R 101140Z JAN 08
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 7479
INFO RUCPDOC/USDOC WASHDC
RUEHAD/AMEMBASSY ABU DHABI 0448
RUEHNE/AMEMBASSY NEW DELHI 1705
RUEHKA/AMEMBASSY DHAKA 0626
RUEHDO/AMEMBASSY DOHA 0228
RUEHIL/AMEMBASSY ISLAMABAD 7614
RUEHKT/AMEMBASSY KATHMANDU 5794
RUEHGP/AMEMBASSY SINGAPORE 5713
RUEHBK/AMEMBASSY BANGKOK 3360
RUEHKP/AMCONSUL KARACHI 2267
RUEHCG/AMCONSUL CHENNAI 8220
RUEHDE/AMCONSUL DUBAI 0137
RUEHGV/USMISSION GENEVA 2531
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION

UNCLAS SECTION 01 OF 02 COLOMBO 000047

SIPDIS

SENSITIVE

SIPDIS

STATE FOR SCA/INS AND EEB/TRA/OTP
STATE PASS USTR, DOL/ILAB FOR TINA MCCARTER
SINGAPORE AND BANGKOK FOR FAA AND TSA

E.O. 12958: N/A
TAGS: EAIR EINV CE
SUBJECT: SRI LANKA: EMIRATES AIRLINES TERMINATES MANAGEMENT OF
NATIONAL CARRIER CITING EXCESSIVE INTERFERENCE

REF: 07 COLOMBO 394

1. (SBU) Summary and comment: Emirates Airlines announced on
January 7 that it would not seek to renew its management contract
with national carrier Sri Lankan Airlines, of which it owns 44
percent. Emirates' decision followed poor progress in negotiations
with the government of Sri Lanka on renewal of the 1998 ten-year
contract. Emirates cited the government's desire to have greater
control over day-to-day management of the airline as the reason for
its withdrawal. However, a major contributing factor was the
government's expulsion of the Emirates-appointed Sri Lankan Airlines
CEO following the airline's refusal to offload passengers and delay
a flight to accommodate a last-minute request for President
Rajapaksa and his entourage to be given seats from London to
Colombo. Emirates told the press it is willing to sell all or part
of its stake in Sri Lankan. Potential buyers will be wary, however,
because return of the airline to government control portends the
same kind of political interference and unprofessional management
that has driven other state-owned enterprises -- including the new
budget airline Mihin Air -- into debt. Emirates' pullout will be a
loss for Sri Lanka, as it had the cash and the management expertise
to significantly improve the national carrier's service and
standards and thereby help boost tourism. End summary and comment.

2. (U) On January 7, Emirates Airlines announced that it does not
intend to renew its ten-year management contract of Sri Lankan
Airlines, which expires at the end of March. Dubai-based Emirates
took over management of the unprofitable former Air Lanka when it
bought a 44 percent equity stake in the flag carrier for $70 million
in 1998. The Government of Sri Lanka (GSL), which owns 51 percent
of the airline, will apparently resume management as a result of
Emirates' departure. Emirates has stated that it is willing to sell
all or part of its stake in Sri Lankan, and has valued its shares at
$150 million. Under Emirates management, the airline expanded its
fleet from nine to fourteen planes, more than doubled its passenger
and cargo loads, and became the largest foreign carrier into India.


EMIRATES RESISTED POLITICAL INTERFERENCE
----------------------------------------

3. (SBU) The split comes after months of increasingly acrimonious
negotiations over renewal of Emirates' ten-year management contract,
punctuated by instances of government displeasure over Emirates'
resistance to interference in Sri Lankan's operations. For example,
last week, Sri Lankan briefly suspended provision of ground handling
services to state-owned budget airline Mihin Air (reftel), which had
accumulated over a million dollars in unpaid bills for the services.
(Mihin Air has also run up debts for jet fuel purchases from the
state-owned Ceylon Petroleum Corporation. Almost a year old, Mihin
Air has steadily operated at a loss and recently stopped flying one
of its two planes because it could not afford to make lease
payments). Sri Lankan resumed the services without being paid after
the chairman of its board interceded with Emirates management.

4. (SBU) In an even more high profile incident, in December 2007,
Sri Lankan Airlines refused to offload thirty passengers and delay a
flight in order to accommodate a last-minute request to fly
President Rajapaksa and his entourage from London to Colombo. (The
President, who was attending his son's graduation from the UK Royal
Naval College at Dartmouth, decided to rush back to Colombo in time
for the Parliamentary budget vote. The President ultimately ordered
Mihin Air to send one of its two planes to pick him up and bring him
back.) Citing "failure to accommodate the request of the majority
shareholder," Sri Lanka hit back by revoking the resident visa of
Sri Lankan CEO Peter Hill, an Emirates employee.

NO POTENTIAL BUYERS IN SIGHT; AIRLINE BARELY PROFITABLE
--------------------------------------------- ----------

COLOMBO 00000047 002 OF 002

5. (SBU) There is no early indication of a likely buyer for
Emirates' stake in Sri Lankan. Qatar Airlines denied rumors that it
would be interested. Sri Lankan's airline operations currently
produce little profit due to the decline in tourists that are
deterred by Sri Lanka's ethnic separatist conflict. Most of Sri
Lankan's revenue comes from its catering and ground handling
services, which operate as separate business units, serving both Sri
Lankan and other carriers operating to and from Colombo. Sri Lankan
and Emirates have integrated code shares, mileage programs, business
class lounges, and computer and distribution systems. However,
these are under separate commercial agreements between the two
companies, so they will not be dissolved with the Emirates
management pullout.

SRI LANKAN STAFF WORRIED
------------------------

6. (SBU) In the wake of Emirates' departure, Sri Lankan Airlines
employees, who collectively own the remaining five percent of the
airline's shares, are reportedly trying to get out too. Some are
seeking employment with Emirates or other reputable carriers, in the
hopes of gaining both higher wages and better job security. While
it managed Sri Lankan, Emirates maintained a policy against hiring
staff away from the national carrier; it lifted that ban shortly
before announcing its pullout, and has reportedly invited senior Sri
Lankan pilots and engineers to apply for Emirates positions.
Reflecting staff anxiety over the management shift, Sri Lankan
Airlines unions wrote to the Ministry of Ports and Aviation and
demanded to see a business plan from the government before it takes
over the airline in April.

COMMENT: ANOTHER SIGN OF SRI LANKA'S
DETERIORATING INVESTMENT CLIMATE
------------------------------------

7. (SBU) Emirates' pullout will be a loss for Sri Lanka, as it had
the cash and the management expertise to significantly improve the
national carrier's service and standards and thereby help boost
tourism. Potential buyers have much to be wary of, however, because
return of the airline to government control portends the same kind
of political interference and unprofessional management that has
driven other state-owned enterprises -- including Mihin Air -- into
debt. Moreover, with Sri Lanka's tourism industry increasingly
undermined by violence related to the ethnic conflict, potential
investors are unlikely to see near-term growth potential for Sri
Lankan. Most significantly, the Emirates departure demonstrates
that the Rajapaksa government is steadily turning Sri Lanka from one
of South Asia's most attractive investment destinations to one of
its least by breaching contracts, imposing high taxes, arbitrarily
changing and applying regulations, and, in cases like this,
interfering in business operations.
BLAKE

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