Cablegate: Sri Lanka: Mihin Lanka Loses Money, Suspends Operations,

VZCZCXRO4936
RR RUEHDE RUEHLMC
DE RUEHLM #0471/01 1360928
ZNR UUUUU ZZH
R 150928Z MAY 08
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 8122
INFO RUCPDOC/USDOC WASHDC
RUEHNE/AMEMBASSY NEW DELHI 2024
RUEHKA/AMEMBASSY DHAKA 0887
RUEHIL/AMEMBASSY ISLAMABAD 7880
RUEHKT/AMEMBASSY KATHMANDU 6061
RUEHGP/AMEMBASSY SINGAPORE 5729
RUEHBK/AMEMBASSY BANGKOK 3402
RUEHKP/AMCONSUL KARACHI 2347
RUEHCG/AMCONSUL CHENNAI 8484
RUEHDE/AMCONSUL DUBAI 0147
RUEHGV/USMISSION GENEVA 2762
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC

UNCLAS SECTION 01 OF 02 COLOMBO 000471

SENSITIVE

SIPDIS

STATE FOR SCA/INS AND EEB/TRA/OTP
SINGAPORE AND BANGKOK FOR FAA AND TSA
NEW DELHI FOR FAA

E.O 12958: N/A
TAGS: EAIR EINV EFIN CE
SUBJECT: SRI LANKA: MIHIN LANKA LOSES MONEY, SUSPENDS OPERATIONS,
BUT PLANS TO CONTINUE

REF: A) 07 COLOMBO 394 B) COLOMBO 346

1. (SBU) Summary: Mihin Lanka, a budget airline started by the
government of Sri Lanka a year ago, has been hemorrhaging public
money. The airline stopped flying on May 1 when the last of its two
wet-leased aircraft was reclaimed after Mihin was unable to make
lease payments, but plans to resume operations in June. The
company, named for President Mahinda Rajapaksa, and run by officials
close to him and his family, has been unsuccessful from the start.
The government and several state banks have so far sunk an estimated
3.5 billion Rupees (USD 32 million) into the venture. While Mihin
is losing money, it appears clear that officials involved with it
are being well paid despite their incompetence. Advocacy groups,
seeking accountability for the operation, are hoping to file
lawsuits against the Mihin Board and state banks which funded the
airline. Rumors persist that the government will merge Mihin with
the larger Sri Lankan Airlines, which recently reverted to
government management after its split with Emirates Airlines. End
Summary.

LOSING MONEY FAST -- AS EXPECTED
--------------------------------

2. (SBU) Mihin Lanka, a budget airline started by the government of
Sri Lanka in April 2007, had to temporarily stop flying May 1 when
the accompany was unable to pay the costs of its remaining
wet-leased plane. The company's operations from the start have been
marked by amateurish business decisions, mounting debts, and
negative income. Despite this, the airline says it intends to
resume operations on June 1, again using two aging leased planes.

3. (SBU) In ref A, post predicted that the venture would not go
well, as the government of Sri Lanka has a poor track record in
running any state-owned operations profitably, including Sri Lankan
Airlines prior to its partial privatization a decade ago. We noted
that the venture was to be run by friends and family of President
Mahinda Rajapaksa (for whom the airline is named -- Mihin is short
for Mihindu, which is the Pali name for Mahinda) and that a long
list of questionable actions in forming the airline suggested that
these people would probably gain personally from its operations,
however unprofitable. This all appears to have transpired.

4. (SBU) Local press reports have described numerous poor business
decisions made by Mihin management. To begin with, the airline
began operations by wet-leasing two planes -- a costly arrangement
in which the company paid not only for the planes but all crew and
maintenance. Further, the planes it leased were configured with
business class seating, despite the intended role of the airline as
a budget carrier that would cheaply transport migrant workers. More
recently, after months of operation, Mihin bought two new tarmac
buses and leased ground handling equipment including moveable
boarding stairways -- even though most flights out of Colombo are
boarded directly from the jetways of the renovated terminal.
Finally, though perhaps not the fault of management, the airline has
periodically had to cancel scheduled flights in order to carry
President Rajapaksa and his entourage on international trips.

5. (SBU) It has been difficult to obtain a clear picture of how
badly the airline is doing financially. It appears to have burned
through approximately Rs 3.5 billion (USD 32 million), which equals
0.7% of 2007 government tax revenue of Rs 508 billion. This figure
comes from calculations the opposition United National Party (UNP)
reported to Parliament on May 6. The UNP alleged that the airline
has borrowed extensively from two state-owned financial
institutions, the Bank of Ceylon and Lankaputra Bank. The UNP also
reported that the airline owes millions of dollars to the
state-owned Ceylon Petroleum Corporation in unpaid fuel bills. The
government did not refute these charges. The government has
reported in budget documents direct Treasury funding to Mihin Lanka
of Rs 750 million from 2007 to 2008.

COLOMBO 00000471 002 OF 002

FAMILY MEMBERS AND FRIENDS RUN AND LEND TO MIHIN
--------------------------------------------- ---

6. (SBU) A major reason for Mihin Lanka's dismal performance is that
the company is run by Rajapaksa family members and friends with no
experience in the aviation industry. The airline was conceived by
Sajin Vaas Gunawardena, a Presidential aide and family friend with a
track record of involvement in shady procurement deals. He is the
company's CEO but has no aviation experience; he is paid Rs 450,000
($4,200) monthly -- quadruple the typical salary for a public
enterprise CEO. The board of directors includes the President's
brother, Defense Secretary Gothabaya Rajapaksa; the President's
trusted secretary, Lalith Weeratunga; and Air Force Commander Roshan
Goonetilake. Treasury Secretary P.B. Jayasundera, also close to the
president's family and involved in various Rajapaksa-driven state
ventures, was initially on the board but has since been placed as
chairman of the Sri Lankan Airlines board.

7. (SBU) As a state-owned enterprise, Mihin Lanka is overseen by the
Minister of Ports and Aviation, the President's elder brother,
Chamal. About half of the company's financing has come from two
state-owned banks headed by family friends. Bank of Ceylon Chairman
Gamini Wickramasinghe is a marriage relative. Lankaputra Bank until
last month was chaired by the father of Mihin CEO Sajin Vaas
Gunewardena. The senior Gunewardena resigned amidst criticism for
the bank's loans to the airline. Critics noted the Rajapaksa
administration had created and funded Lankaputra Bank to provide low
interest financing to small and medium private enterprises.

MEDIA AND WATCHDOGS OUTRAGED, BUT AIRLINE PROCEEDS
--------------------------------------------- -----

8. (SBU) According to the Sunday Leader newspaper of May 11, public
advocacy groups plan legal action against both Mihin Lanka and Bank
of Ceylon. The groups assert that both the airline and the bank are
violating the Companies Law of 2007, which holds corporate boards to
relatively high standards of business accountability. The cite, as
an example, the Mihin board's irresponsibility in giving a high
salary to a CEO with no aviation experience.

9. (SBU) Rohana Perera, Commercial Chief of Mihin Lanka, told Econ
FSN that the airline intends to resume operations in June. He
confirmed reports that the airline is in the process of dry leasing
two 19-year old Airbus A320s (without insurance, crew, ground staff,
supporting equipment, maintenance). In order to convert Mihin
operations from wet lease to dry lease, the airline has started
recruiting flying crew and maintenance staff.

10. (SBU) Comment: Having named Mihin Lanka for the president, its
management has too much face invested in it to allow it to fail.
The government has generally been silent in the face of all the
charges of mismanagement and crony capitalism. Rather than refuting
these, it continues to highlight to the public the benefits of the
airline providing cheap travel for low income Sri Lankans going to
work abroad. The government may also see an expedient way forward,
as rumors persist that it will merge Mihin with Sri Lankan Airlines,
which the government resumed managing in April (ref B). There are
even reports the government will add to its investment of face, by
giving the Mihin name to the combined venture.
BLAKE

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