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PIA’s predicament — to privatise or reorganise

Updated August 05, 2019

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Tax-payers’ waning confidence in the govt’s intent to recoup a sick airline is a serious concern. — Dawn/File
Tax-payers’ waning confidence in the govt’s intent to recoup a sick airline is a serious concern. — Dawn/File

The continuing burden on the national exchequer and tax-payers’ waning confidence in the government’s intent to recoup a sick airline is a serious concern. Malaysian Airlines, LOT Polish Airlines, Italy’s Alitalia, Pakistan International Airlines (PIA) and a host of other state-owned airlines, that are de facto the ‘flags of inconvenience’ (as economist refers to them) continue to get periodic life-saving financial injections as emotionally-charged protectionists at the helm of affairs disregard all logical arguments to consider otherwise. Charting a new route to arrest the incumbent national airline’s perennial sinking syndrome is a mission critical to national growth and success.

In the formative stages of global commercial aviation, almost all nations with established airlines had, in one form or the other, state-ownership and control of the airline that represented their respective nation. Today, there are about 147 government-owned airlines out of approximately 300 scheduled airlines in operation in the world. In the last 40 years, there is a continuing global trend of privatising state-owned airlines.

It is a well-known fact that despite preferential treatment that hurts competitors, many of these flagship carriers are performing poorly and are increasingly displaying less than desirable results in their operational efficiency and profitability.

Today, there are about 147 government-owned airlines out of approximately 300 scheduled airlines in operation in the world

The European Commission, for example, has had to address several contentious cases since the mid-1990s involving such ag-carriers as Sabena (Belgium), Air France, Alitalia and Olympic Airways (Greece). All of these have been accused of receiving overt or covert subsidies or of receiving preferential treatment by their governments. Emirates, Etihad and Qatar airlines face similar allegations from big global players in the aviation industry.

There are many examples where countries have contemplated privatisation of state-owned airlines but have hesitated to take a timely decision. The decision to privatise, not to privatise, and/or reorganise is procrastinated indefinitely. PIA is no exception.

One example is of Italy’s flag carrier Alitaliaairline which was losing $1.4 million-a-day when Etihad bought a 49 per cent share in the company and rescued the ailing airline by a commitment to inject $1.8 billion. In 2015, Etihad proposed to buy 75pc shares of the airline, leaving 25pc with Alitalia. There were some signs of recovery in 2016, but the airline again came on the verge of sliding into a possible bankruptcy in 2017.

In early 2019, China Eastern Airlines expressed interest in Alitalia’s rescue plan with an injection of €100 million in exchange for a 10pc stake. The vicissitude of fortunes and performance continues to haunt the cash crunched flag carrier. Despite visible signs of insolvency, there is hesitancy in the hierarchy to let go of the status of a flag-carrier airline.

Another example is of Malaysian Airlines. In 2014, Malaysian government’s sovereign wealth fund Khazanah Nasional, which then owned 69.37pc of the airline, publicly announced that it intends to purchase the remaining ownership from minority shareholders and de-list the airline from Malaysia’s stock exchange, thereby re-nationalising the airline. In 2019, it now plans to re-list the airline after it regains financial stability.

In May 2018, the accumulated losses of PIA stood at almost Rs312 billion. In May 2019, the losses had surged to Rs416bn. Based on a track record of continued losses and the government’s injection of substantial funds to keep the airline afloat, the previous government was inclined to privatise the airline.

Accordingly, the PIA Act of 1956 was amended in early 2016 which prevented the transfer of management control to private investors and converted the entity into a company. PIA was also on the active list of ‘privatisations’ that the previous government shared with the International Monetary Fund under the last three-year $6.2bn bailout package.

The most outstanding government owned successful airline is Ethiopian Airlines with 100pc state ownership. The airline has an aircraft to employee ratio of about 1:100. The airline has maintained a no-political interference policy and continues to remain profitable in its operations.

Few and far between are airlines that are state-owned and yet flourishing. Key success factors for state-owned airlines, derived from examples of Ethiopian Airlines and Singapore Airlines, are non-interference of political leadership in the airline’s business affairs, professional hiring, long-term planning and adoption of innovative and modern methods, practices and technologies.

Emphasis on fleet modernisation, revenue management, network analysis, optimal route selection/planning, and customer centricity, as well as liberalisation and fair playing field for all competitors, plays an important role in the success of a state-owned enterprise. Lastly, limited or no unionisation is vital for success as well.

Turkish Airlines CEO Dr Temel Kotil states “everything for us changed completely after Turkish Airlines was privatised in 2006.”

It is necessary for decision makers to consult globally renowned professionals and take a timely decision to privatise or continue to treat their hypoxic state-owned airline through experimentations.

The nationality mark of an aircraft or flying machine registered in Pakistan begins with prefix ‘AP’. To offer an even playing field for all operators, all AP registered airlines should be considered as flag carriers.

The author is an alumnus and regional representative of Embry-Riddle Aeronautical University, USA.

MughniW@erau.edu

Published in Dawn, The Business and Finance Weekly, August 5th, 2019