VZCZCXRO3224
RR RUEHDE RUEHLMC
DE RUEHLM #0346/01 0950654
ZNR UUUUU ZZH
R 040654Z APR 08
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 7964
INFO RUCPDOC/USDOC WASHDC
RUEHAD/AMEMBASSY ABU DHABI 0458
RUEHNE/AMEMBASSY NEW DELHI 1942
RUEHKA/AMEMBASSY DHAKA 0819
RUEHDO/AMEMBASSY DOHA 0236
RUEHIL/AMEMBASSY ISLAMABAD 7812
RUEHKT/AMEMBASSY KATHMANDU 5995
RUEHGP/AMEMBASSY SINGAPORE 5725
RUEHBK/AMEMBASSY BANGKOK 3390
RUEHKP/AMCONSUL KARACHI 2336
RUEHCG/AMCONSUL CHENNAI 8419
RUEHDE/AMCONSUL DUBAI 0140
RUEHGV/USMISSION GENEVA 2697
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION

UNCLAS SECTION 01 OF 03 COLOMBO 000346 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/INS AND EEB/TRA/OTP 
STATE PASS USTR, DOL/ILAB FOR TINA MCCARTER 
NEW DELHI, SINGAPORE AND BANGKOK FOR FAA AND TSA 
 
E.O. 12958: N/A 
TAGS: EAIR EINV CE
SUBJECT: SRI LANKA RESUMES MANAGEMENT OF NATIONAL CARRIER AND 
APPOINTS FINANCE SECRETARY AS BOARD CHAIRMAN 
 
REF: A. COLOMBO 47  B. 07 COLOMBO 394 
 
¶1. (SBU) Summary and comment:  The government of Sri Lanka resumed 
management control of the national carrier Sri Lankan Airlines on 
April 1.  The government has appointed Treasury Secretary (and 
mastermind of the Sri Lankan economy) P.B. Jayasundera to be 
chairman of the Sri Lankan Board of Directors.  Jayasundera replaces 
local tycoon Harry Jayawardena, who had clashed with Emirates 
management.  The appointment is intended to generate confidence that 
the airline will be managed in a financially prudent manner, and 
also to improve relations with Emirates, which still owns 44% of Sri 
Lankan shares and three of the seven seats on the board.  The 
Secretary of Ports and Aviation assured us that the airline will 
 
SIPDIS 
have "complete commercial flexibility without government 
interference" but President Rajapaksa's statement that the national 
carrier "must be used in a more dynamic and enterprising manner to 
further the goals of the country" suggests that the government won't 
be entirely hands-off. 
End summary and comment. 
 
SRI LANKA RESUMES CONTROL OF NATIONAL CARRIER, 
RESHUFFLES BOARD OF DIRECTORS 
--------------------------------------------- - 
 
¶2. (SBU) National carrier Sri Lankan Airlines reverted to Sri Lankan 
government management control on April 1, with the termination of a 
1998-2008 management contract held by Emirates Airlines (ref A). 
The government of Sri Lanka owns 51% of the airline's shares, 
Emirates owns 44%, and airline employees own the remaining 5% of 
shares.  On March 28, President Rajapaksa replaced three of the four 
Sri Lankans on the airline's seven-member board of directors, 
appointing Treasury Secretary P.B. Jayasundera as the new chairman. 
(Note: Jayasundera was treasury secretary and chairman of the Public 
Enterprise Reform Commission in 1998 when the government partially 
privatized the unprofitable airline with the share sale and 
management contract to Emirates.  The deal was regarded at the time 
as having been corrupt -- there was speculation that then-President 
Kumaratunga profited personally from steering the deal toward 
Emirates.)  A senior minister told Ambassador that the Jayasundera 
appointment was temporary until a suitable private sector figure 
could be selected.  He expected Jayasundera to mend relations with 
Emirates, after former chairman and local conglomerate tycoon Harry 
Jayawardena had had a personality clash with Emirates President Tim 
Clark. 
 
¶3. (SBU) The other new Sri Lankan board members are Lalith De Silva, 
a former telecom CEO whom the government had engaged as a consultant 
to work on the transition from Emirates; and Sunil Wijesinghe, a 
respected businessman and management consultant, currently chairman 
of Dankotuwa Porcelain Ltd., and brother-in-law of Central Bank 
Governor Nivard Cabraal.  Remaining on the board are Nishantha 
Wickremasinghe, appointed in 2006, brother-in-law of President 
Rajapaksa; and three senior Emirates managers based in Dubai. 
 
NO CEO; STAFF JUMPING SHIP 
-------------------------- 
 
¶4. (SBU) Sri Lankan lacks a CEO however.  When Emirates announced 
its pull-out, the airline elevated its communications director, 
Chandana de Silva, to temporarily fill the CEO slot.  However de 
Silva recently left the position to join Emirates.  The government 
is advertising the opening for the CEO position.  Thirty of the 
airline's 200-plus pilots have also left.  A group of senior pilots 
we spoke to emphasized that pilots were leaving simply because other 
airlines were offering them more money, not because they lacked 
confidence in Sri Lankan's business prospects. 
 
GOVERNMENT SAYS IT WON'T INTERFERE IN MANAGEMENT... 
--------------------------------------------- ------ 
 
COLOMBO 00000346  002 OF 003 
 
 
 
¶5. (SBU) Secretary of Ports and Aviation Tilak Collure told EconOffs 
and visiting Federal Aviation Administration representative from 
Embassy New Delhi that, back under national management, the airline 
will have "complete commercial flexibility without government 
interference."  The pilots we spoke to likewise said they did not 
expect the new management to enact any big changes in the short 
term.  Collure said it was possible the government would at some 
point allocate funds to the airline to support its operations. 
(Note: Sri Lankan as a whole is currently barely profitable, having 
made $7.8 million in 2007 with revenue from ground handling and 
ancillary operations covering losses in flight operations.)  The 
pilots pointed out that the airline needs additional planes in order 
to expand routes, but lacks the cash to purchase any. 
 
¶6. (SBU) Collure and others we talked to also downplayed widespread 
speculation that Sri Lankan Airlines would come to the rescue of 
ailing national budget airline Mihin Air (ref B).  Collure told us 
the government's position was that "Mihin will have to stand on its 
own," but that "if there are ways to cooperate, so be it"  According 
to news reports, the airline has been losing a few million dollars 
each month as a result of using expensive wet-leased planes and 
inefficient overall operations.  Mihin's head of flight operations 
told Econoff that "60-70% of media reporting" is incorrect, but did 
not contend that the airline is making money.  He admitted that a 
merger had been discussed but rejected by the former Sri Lankan 
board, but might again be considered by the new board. 
 
... BUT PRESIDENT SAYS AIRLINE MUST 
"FURTHER THE GOALS OF THE COUTNRY" 
----------------------------------- 
 
¶7. (SBU) Collure's assertions of Sri Lankan's independence 
notwithstanding, President Rajapaksa stated in a paid advertisement 
in local newspapers that the national carrier "must be used in a 
more dynamic and enterprising manner to further the goals of the 
country."  Sri Lankan's new marketing campaign reflects the kind of 
inward-looking approach common to other state-owned enterprises 
under the Rajapaksa government.  The airline is serving Sri Lankan 
national food to celebrate the new domestic management control.  It 
is seeking to drum up business by offering discount fares to Sri 
Lankans traveling abroad to visit relatives and Sri Lankans abroad 
returning to visit relatives.  The government also announced that it 
will 
use Sri Lankan Airlines for all official travel abroad of both 
working level government officials and government VIPs. 
 
¶8. (SBU) The government has also indicated that the separation 
between Sri Lankan and Mihin won't be as complete as Collure stated. 
 Presidential Secretary Lalith Weeratunga told the government-run 
Daily News that there would be not a merger but a "partnership" 
between the airlines.  The Daily News reported that "a corporate 
plan was being drawn out between the two airlines with the proposal 
of drawing out the operational synergies and how both could be 
maintained in tandem with each other as a partnership in terms of 
Human Resources and Finances." 
 
COMMENT: NEW CHAIRMAN IS A MIXED BLESSING; 
PRESIDENT BRACING FOR FAILURE? 
------------------------------------------ 
 
¶9. (SBU) P.B. Jayasundera is the fiscal mastermind keeping Sri 
Lanka's sprawling and wasteful government from going broke.  With 
his fiscal management skills, he will likely be more capable than 
most other political appointees would be at holding down Sri Lankan 
Airlines' expenses.  On the other hand, he shares President 
Rajapaksa's vision of a paternalistic government whose state 
enterprises advance populist, but costly, economic policies.  So he 
will not likely resist give-aways like the reduced fares for Sri 
 
COLOMBO 00000346  003 OF 003 
 
 
Lankans flying the national carrier.  In this sense he is far from 
the professional manager the airline needs.  He has other 
liabilities as well.  He is extremely busy running the Treasury and 
Finance Ministry, so will not be able to devote full-time attention 
to the airline.  His proximity to various deals alleged to have been 
corrupt also raises concerns. 
 
¶10. (SBU) The Rajapaksa government is trying to put a positive 
nationalist face on the airline's reversion to Sri Lankan 
management.  Indeed, critics contend that the original deal with 
Emirates had been too generous and that Emirates had exploited more 
than enhanced Sri Lankan Airlines.  It is true that Emirates did not 
invest in Sri Lankan the way it has in its own brand, but it 
definitely managed the airline more effectively than the government 
had.  Government management of state enterprises has long been poor 
in Sri Lanka, so the country appears likely to lose from Emirates' 
departure.  President Rajapaksa himself sounded pessimistic when he 
told Sri Lankan Airlines employees April 3: "If the company fails in 
today's fiercely competitive airline business of the world and the 
region in particular, especially at a time there is a global 
economic recession, you ought to blame yourselves for it." 
BLAKE