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PIA in pursuit of profitability

July 30, 2012

WHILE considering the defence ministry’s proposals to improve PIA’s performance, the Economic Committee of the Cabinet observed that it would be a daunting task, but hoped the new management would make the airline profitable.

The PIA has already submitted a business plan which is being scrutinised by the Cabinet Committee on Restructuring (CCOR) and will be later submitted to the Prime Minister for approval.

The airline is one of the eight public sector enterprises (PSEs), which the government had selected for restructuring in January 2010.

The word ‘profitable’ has been inserted recently in the PIA’s Vision Statement. This is a sort of resolve by the PIA Board and senior management to improve airline’s performance.

PIA’s operating performance is not very encouraging for the past many years including the quarter ending March 31, 2012.

During this quarter, fuel cost is at 57.3 per cent of net revenue, whereas ‘other cost’ of services is 47.73 per cent, both of which are exceptionally high. The ‘other cost’ of services does not include distribution and administration expenses and financing costs.

Summarised data on PIA’s performance for this quarter along with data for the corresponding quarter of last year is given in Table-1 below: Factors quoted by the PIA for adversely affecting its performance include challenging economic conditions, deteriorating law and order, double-digit inflation, global recession and visa restrictions by many countries on Pakistani passport holders. Bottom line also suffered due to rising fuel prices and lower seat factor. Flight delays and cancellations were more than usual due mostly to maintenance challenges, poor weather conditions and PIA’s focus on safety.

Financial summary (Table -2) has been prepared from PIA’s un-audited balance sheet as on March 31, 2012. Its financial position is depressing, equity is negative with huge accumulated losses. Current liabilities are nearly five times of its current assets. Debt is very high. It also has a total debt of Rs33.50 billion guaranteed by the government and has not been able to repay these loans. But for the government’s support to the airline, conditions indicate existence of a material uncertainty.

The PIA is majority-owned by the state. The finance division through its letter dated September 2, 2008 had affirmed that the government would extend maximum support to ensure that the airline survives in the long-term as a viable business entity: (i) reimbursement of financial charges on term-finance and Sukuk certificates payable by the PIA, for which Rs16.2 billion have been provided towards equity during the years ended December 31, 2008 to 2011 (ii) during the years ended December 31, 2009 and 2010, the government has provided long-term financing of Rs8 billion to meet working capital requirements and (iii) issuance/renewal of guarantees to local and foreign financial institutions to enable their airline to raise funds.

PIA’s business plan, with amended guideline and approved by the Economic Reforms Unit of the ministry of finance includes the government’s funding for recapitalisation, restructuring of existing loans and issuing government guarantees as and when required. The plan among other measures, includes improvement in governance structure and operational efficiency through upgrading of aircraft fleet, enhancing revenues and controlling costs.

The PIA Board and senior management are said to have initiated improvement measures including: (i) curtailment of expenditure at cost centres (ii) participation in new avenues and closure of non-profitable segments (iii) signing of a co-branding agreement with Telenor for ticket sales through 12,000 Easy Paisa outlets; (iv) introducing prepaid cards for ticketing through PIA offices; (v) signing definite purchase agreement of five Boeings 777; (vi) plans for induction of 13 new narrow-body aircraft to raise capacity and to bring efficiency; and (vii) starting fuel price pass-on mechanism.

Flight delays deal a severe blow to the reputation and business of any airline. The ministry of defence, in a recent written reply to the national assembly, reportedly provided the flight delay ratio of PIA at about 36 per cent. Its customers routinely complain of delays, often lasting for several hours. Passengers also suffer due to flight cancellation and mismanagement. Owing to London Olympics, the UK airport authorities have warned airlines touching Heathrow Airport to be punctual as otherwise they will be fined very heavily. PIA better watch out.

National Assembly’s Sanding Committee on Defence had last June reportedly expressed concern that the present government had got recruited thousands of employees in the airline. It directed PIA to particularly rationalise the senior management team.

The committee was informed that the PIA has planned to acquire new aircraft on rent to meet the growing passenger traffic demand. The airline hief claimed that the PIA would reach the breakeven stage in one year.

Revenue enhancement, cost cutting, shedding of business other than core are common to most restructuring. PIA needs to increase its revenue through the rationalisation of tariff structure. Policy of offering free-ticketing and reduced tariffs to certain categories of passengers may be reconsidered. Fuel cost is exceptionally high and needs to be brought down considerably.

As compared to revenue, fuel cost of Air India was 43 per cent and 38 per cent for 2011 and 2010 respectively. In case of PIA, it was 54 per cent and 42 per cent during the same period. Like fuel, other costs need to be controlled across the board.

Of a fleet of 39 aircraft, around 8-10 of them remain in hangers for maintenance while the airline chief says 13 grounded aircraft would be made operational by mid-August.

According to its annual report 2011, PIA’s average number of employees is at 18,014. That comes to 462 persons per aircraft.

During 2011, KLM Group fleet had 211 aircraft and average number of employees at 33,442 persons, using only 158 persons per aircraft. Without rationalisation of the number of employees in PIA, no restructuring is likely to yield the desired results.

The decision to restructure eight PSEs including the PIA was made in January 2010. The progress in terms of actual restructuring and operational improvement is rather slow. There is no change in the old pattern.