Helping PIA at CAA’s expense

Updated June 03, 2019

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The Civil Aviation Authority (CAA) is going to lose Rs4 billion per annum to three domestic airlines, especially Pakistan International Airlines (PIA). This will be in addition to over Rs100bn that our flag carrier owes to CAA.

About 10 years ago, PIA stopped paying CAA not only service charges but also passenger charges — sums it collects on behalf of CAA by selling tickets.

Owing to the partial closure of airspace to about 500 transit flights a day amidst tensions on the eastern border, the air navigation service provider is losing around $300,000 on a daily basis. But that is understandable given the national security situation.

What is not understandable, however, is the government’s decision on May 15 to eliminate all categories of airport and air navigation charges on domestic flights. These charges, already the lowest in the world, were about 23 per cent of the international rates.

How will we justify this unprecedented act to international organisations like the International Air Transport Association (IATA), which represents airlines globally, and the International Civil Aviation Organisation (ICAO), a subsidiary of the United Nations and the global aviation regulator? Does it not mean we overcharge international airlines to cross-subsidise our domestic airlines? In other words, aren’t we robbing Peter to pay Paul?

The revised National Aviation Policy (NAP) 2019 refers to ICAO guidelines that mandate a cost-based charging system. The government, while introducing a regime of zero domestic charges, has violated not just its own policy but also its commitments to the ICAO.

The apparent reason for this unparalleled act is to lower the prevailing excessive ticket prices on domestic routes. One is at a loss to comprehend how the government will be able to control ticket prices — determined by market forces — in a competitive market.

Bringing the fares down to a reasonable level is contingent upon the entry of another airline, which will restore the balance of supply and demand that prevailed before the exit of Shaheen Air

The average fare on the Karachi-Islamabad route was about Rs10,000 last year when four domestic airlines competed against each other on price. The fares shot up by about 150pc, when one of them, Shaheen Air, decided to quit. This is understandable as airlines make money when both capacity and competition decline.

Another reason for an extraordinary rise in the fares can be the possibility of price fixing or cartelisation. Its probability remains high in an oligopoly. It is up to the anti-trust bodies to prevent cartelisation in public interest. However, it is not easy to prove collusion.

Bringing the fares down to a reasonable level is contingent upon the entry of another airline, which will restore the balance of supply and demand that prevailed before the exit of Shaheen Air.

Cartelisation does not usually work in the airline industry when supply is more than demand. High fixed costs and low variable costs compel airlines to sell empty seats below the price to minimise losses. This is because an empty seat — being perishable — causes more loss than a passenger in it even if they are travelling on a cheaper ticket. Nevertheless, existing domestic operators will continue to maximise their profitability until the arrival of a fourth airline.

One also gets the feeling that our airlines have taken over CAA, albeit indirectly. This is evident from the way these operators have got different charges waived for themselves on domestic routes.

The text of NAP 2019, which is a mutilated version of NAP 2015, is yet another indication. The operators allegedly played a major role in distorting the text of NAP 2015. The hasty manner in which new clauses were inserted in the original text distorts paragraphs and hurts the very spirit of the policy.

This may not have happened if CAA had its own director general to oversee the finalisation of the new aviation policy draft. The Aviation Division somehow assumed the position of this semi-autonomous body 16 months ago as the last director general retired in January 2018.

CAA, which generates its own resources to ensure safe, efficient and economical air transport system, may soon plunge into a financial crisis. Taking advantage of its declining financial situation and eroding safety oversight authority, the operators may be tempted to assume self-regulation.

Being a state-owned business unit, PIA will never become a fully profitable entity in a competitive market. The administrative steps taken by the new management have indeed plugged many holes in the system. The measures taken so far may save a few billion rupees out of its expected losses of about Rs60bn in the current financial year. But how will the new administration motivate a large, inefficient and self-serving workforce with no interest in striving for profitability? For them, their jobs are secure and a bailout from the government is assured.

The government seems to have been duped into believing that eliminating CAA charges will lower ticket prices on the one hand and pull out PIA from the financial crunch on the other. PIA’s partial recovery is at the cost of CAA and the travelling public.

The situation reminds one of the words of Martin Luther King Jr.: Nothing in the world is more dangerous than sincere ignorance and conscientious stupidity.

The writer is an expert in airport and air navigation services

afsarmalik@yahoo.com

Published in Dawn, The Business and Finance Weekly, June 3rd, 2019