Turbulent times for PIA

Spearhead Analysis – 02.10.2014

By Saman Tariq
Research Analyst,
Spearhead Research

PIAAviation Secretary Mohammad Ali Gardezi while briefing National Assembly’s standing committee as well as a Senate body refuted claims of dividing PIA into core and non-core businesses and segments. While he termed it as an important step towards privatization of the airline, he further added that no such plan was currently under consideration. This came as a rebuttal to a story published by Reuters on September 25, with regards to a plausible spilt of Pakistan’s national flag carrier PIA into two companies, selling core business to Gulf airlines over the course of 18 months.

While one can argue the validity of these claims, no one can deny the fact that these are desperate times for the airline. What began as Orient Airways under the instructions of Muhammad Ali Jinnah, merged with other airlines later, paving way for a national flag carrier. The airline thrived in early years due to its excellent service and technical innovation; it was the first Asian airline to acquire a jet aircraft (Boeing 707). Once the pride of Pakistan, it was PIA which leased the first two aircrafts and their crews to Emirates-now a leading airline, when Dubai decided to launch an airline in 1980s. However the glory days were rather short lived, and the company soon nosedived into a pool of losses. The annual report for the year 2012 showed a loss of 33 billion rupees, preceded by a loss of 26 billion rupees in 2011. In 2013, the losses reached up to 31.94 billion rupees only during the first nine months. According to the third quarterly report of PIA for 2013, airline’s liabilities stand at 192 billion rupees.

From being the pride of the country and a successful airline, how did PIA manage to incur so much damage? While overall economic conditions prevailing in the country have directly impacted PIA; rising fuel prices and devaluation of Pakistani rupee are two such examples, the problem does not end here. Rampant financial corruption in the organization is an open secret to which state institutions have turned a blind eye and it continues to weaken PIA but other factors have also contributed their share. To start with the basics, with a fleet of 34 planes and only 25 working, PIA is highly overstaffed with a ratio of 780 employees per plane, compared to 220 employees per plane ratio of Emirates with 212 airplanes and 81 to one ratio for Turkish airline with 236 planes, according to a report by Herald.

A major contributing factor in this disparity has been the political influence on the airline where government officials have been accused of influencing the hiring process and allotting seats to their supporters. One such example is the recent complaint to acting Managing Director on the appointment of excess flight engineers for Boeing 747 on contract by the airline. Business recorder reports this as not only a case of nepotism under present government but also causing a loss of 25 million. The case in point is just one such example, all preceding governments have been operating along similar lines due to which any alleged attempt at downsizing by the government leads to a massive outcry by the opposition forces, this time Pakistan People’s Party in particular. It is also due to this politicization that any attempted reform develops into a greater political concern before it can materialize. Apart from paying salaries in an overstaffed organization, the other perks and privileges offered by the airline add a huge burden to the already ailing PIA. Chairman Civil Aviation, Shujaat Azeem quoted a number of 287,000 free tickets issues in the year 2013 alone by PIA.

With such excessive staff especially engineers, one can expect the airline to be technically sound and efficient which is far from the case. While the burden also lies on outdated machinery leading to technical issues in failure to meet the international standards, the negligence on the part of PIA to fly such aircrafts has been a source of great embarrassment globally, an airline which has not been short on technical shortcomings recently. Consequently, in 2007 EU imposed a ban on most of PIA’s planes due to safety concerns, although lifted after seven months, it was sufficient to cause a huge financial and reputational loss to the airline.

Moreover, there have been some serious disciplinary breaches by the PIA staff to further damage the reputation of the airline. Much to our dismay, one such case in 2013 which brought the organization under international spotlight for the wrong reasons was the arrest of a PIA pilot in England while he was about to fly an aircraft carrying 180 passengers under the influence of alcohol. Two other fairly recent cases involve an attempted smuggling of mobile phones and foreign currency by the PIA’s crew on a flight from London and violation of airline’s rules by the captain himself while trying to fly his two year old son on an international flight in the cockpit and posing him as an infant. Lack of accountability for such misconduct has done little to bring about any positive change in PIA.

Coming to the financial side of the problem, while the privatization commission’s approval of Dubai Islamic bank as the financial advisor this July for offloading 26 percent shares of PIA started a controversy over the deal and raised a lot of questions over nepotism, little has been said about the agreement between PIA and Sabre, world’s leading airline solutions provider. Against the interest of PIA, the five year agreement with the company with regards to ticketing and online booking was renewed for another seven years in 2010 by the PIA management. According to this agreement the company takes over the entire network of travel agencies and PIA booking outlets domestic and global, under Abacus GDS system. While the previous contract charged PIA per boarding and not per booking meaning PIA was charged for only those actually travelling by the airline, this new agreement now charges PIA for every booking. In addition, the booking fee of Abacus under the current agreement is three times more than the previous one meaning PIA now pays four times more to the company. With three years left in the contract, any attempt at canceling the contract will now put PIA in a difficult position where it would have to pay a fine according to the contract. However, what needs to be carefully calculated is the total cost paid by PIA per year and whether it would be more feasible to pay the penalty and look for alternative options.

Having said that, PIA losses have dropped to 44 percent in the first half of 2014, however, a decrease in losses is merely not enough to keep the airline running.  A report in Express Tribune confirms that PIA’s liabilities are twice as much as its assets and the revenues generated are significantly short of achieving break even. For this reason, the government has to bail out the airline by handing over billions of rupees every now and then. PML (N) has come to power with a clear mandate and it is time to make use of this strength. The first step the government should take is downsizing the staff which seems rather unlikely owing to the political influence on the organization which will bar any attempt at reforms.

Therefore, under current circumstances, the idea of privatization of PIA holds a lot of appeal and scope for improvement. K-electric is one such example where after transfer of 71 percent shares to a foreign consortium in 2008; profit was recorded in 2011-2012 for the first time in 17 years. As PIA remains to be a liability for the government, privatization would not only decrease the burden, but it would also decrease political pressures over the organization, which would lead to some tangible reforms. There is also a need to shift the headquarters from Karachi to a relatively stable city like Islamabad or Lahore to ensure smooth running of operations. Ultimately, one needs to question that for how long will the subsidies from the government (already handling an overburdened economy) keep running an overstaffed and ailing airline. Unless there are massive reforms, downsizing of staff and influx of funds, only a magic wand can turn the situation around in favor of PIA.