Only bankruptcy can end the PIA crisis

Updated 07 Jan 2019


The government can cut down annual losses of Pakistan International Airlines (PIA) by two-thirds — from about Rs60 billion to Rs20bn per annum — and secure jobs of the employees at the same time by taking the following two actions.

One, declare PIA bankrupt and raise another airline with a slightly different brand name in the private sector, with the government’s stake of no more than 26 per cent.

Two, send existing permanent employees home on leave with full pay until they attain the age of 60 and, thereafter, give them normal pension benefits.

Declaring the national airline bankrupt and raising another one with a slightly different brand name can save taxpayers billions of rupees every year

PIA is already bankrupt with over Rs360bn in negative equity. Therefore, doing so would be perfectly in line with legal and corporate practice. PIA’s losses for 2016 and 2017 were Rs45.4bn and Rs45bn, respectively.

Operating a government-owned airline profitably in a deregulated air transport environment is an unachievable target. Had this been possible, British Airways, Lufthansa, KLM, Air France or other airlines in Europe, North/South America, Africa, Far East and Australia would not have been privatised following the deregulation by the United States in 1978.

The simple explanation is that government-owned entities cannot compete with private ones on price and quality in a highly competitive market. Gone are the days when national airlines were protected from competition in not only the domestic but also international markets — a situation that existed worldwide between 1944 and 1978.

In Pakistan, the airline industry was deregulated in 1992. And that was the time PIA should have been privatised to save it from becoming a perpetually loss-making government entity.

The problem of successive governments has been the political economy. Every political party worth its salt has a union in PIA. You could count at least five of them, which are just as active as their parent political parties. Pilots, engineers and other administrative groups also maintain pressure groups in the name of associations, seeking perks and privileges unimaginable in private airlines.

It would be a fallacy to say that PIA could not be privatised because it had to serve some larger national or public interest except to save about 18,000 jobs. But jobs would have been saved by newly established private airlines as well, including PIA (Private) Limited.

It is often quoted that over-staffing is the reason for PIA’s continued losses. But the labour cost is not the real problem of PIA. It is just as much as in other airlines in Asia Pacific on average (18pc).

Despite this fact, PIA’s annual losses have shot up to over Rs60bn, which is about three times the labour cost. This means that PIA would still be in loss even if all employees worked for free for the whole year.

PIA’s losses would continue to grow unless the government shuts it down by declaring it bankrupt.

In such a scenario, the most severe blow will be to the Civil Aviation Authority (CAA) with over Rs80bn receivables from PIA, followed by Pakistan State Oil (PSO), Federal Board of Revenue (FBR) and some government financial institutions that have lent money to PIA. The ones with sovereign guarantees may be able to receive some or full compensation from the national kitty.

Being a government-owned entity, PIA would never be able to operate profitably in a competitive market no matter what measures the government takes, such as the induction of the best industry professionals from around the world.

PIA is shrinking and crumbling under its own weight. Corporate governance issues specific to state-owned enterprises (SOEs) and political compulsions cannot be overcome without privatising its majority shares in one form or the other. Should the idea of sending PIA employees on permanent leave with full pay and pension click the government, it may shut down the airline and raise another one with a different brand name, such as Air Pakistan, in the private sector. This will cost the government about Rs20bn per annum on account of salaries and pension, but it will save taxpayers about Rs40bn a year assuming that PIA would continue to make annual losses of over Rs60bn.

The government may like to hold minority shares in the newly established airline, but no more than 26pc. The new brand as a private entity may re-employ the required number of ex-PIA pilots, engineers, cabin crew and other essential staff on contract. This arrangement would also allow them to double their income — one drawn from the government until the age of 60 and the other for working with the newly established private airline.

The remaining ones may also seek employment in private airlines to enhance their monthly income being drawn from the national kitty.

Every successive government has tried to fix PIA, but left it in a bigger mess than the one it inherited. The present government may also be tempted to do the same without any success. The sooner the government realises it, the better will it be for the taxpayers.

The writer has served as additional director at the Civil Aviation Authority and is an expert in airline economics

Published in Dawn, The Business and Finance Weekly, January 7th, 2019