AVIATION INDUSTRY THE CRUNCH

PIA, Private Airlines and CAA have to work together to find solution of various issues concerning the industry

By SYED M. ASLAM
June 10 - 16, 2002

The national flag carrier Pakistan International Airline (PIA) enjoyed a complete monopoly on domestic sector and guaranteed share on the foreign till the introduction of 'open sky policy' a decade ago. The policy aimed at deregulating the commercial aviation business to encourage private investment in the aviation sector has come a full circle without achieving the desired objectives.

Many blame the failure on the inability of the policy makers to draw a line between encouraging investment and opening the national and foreign air corridors to foreign airlines which used it as an opportunity to pick and drop passengers at the main hubs in the country. Also forgotten was the fact that the policy offered incentives to the foreign airlines at the expense of PIA and domestic airlines without registering their aircraft in the country. In short, observers say that it offered benefits to the foreign carriers without making any commitments whatsoever in total disregard of globally accepted rule of bilateral civil aviation agreements allowing a foreign airline a matching frequency against a domestic airline to protect local airlines.

The policy has failed to induct a single aircraft in the national aviation sector. The two private airlines still operating in the country are flying aircraft rented on 'wet lease' basis mostly from Eastern European countries. The term 'wet lease' means that the owner of the aircraft provide the pilots and bear the repair costs, if any, while the local operators provide the cabin crew at their own expense. Thus, these aircraft flying the skies under the colours of local airlines are neither registered in the country nor owned by the private domestic airlines.

Today, many private airlines have closed their operations barring two which share a negligible portion of the domestic traffic and even a lesser share of the foreign air traffic, and that too only in the Gulf Area. Meanwhile, the PIA is facing increased competition from foreign airlines, particularly on Middle East, Far East and Europe sectors. The situation has resulted in dependence on foreign airlines which are lifting increased international passenger traffic, both in and outbound, due to decreased capacity of the PIA and the other two domestic airlines combined.

Four private airlines; Raji, Hajviery, Safe and Bhoja, the last after six years of operations, have already wrapped up their operations. The remaining two — Aero Asia and Shaheen — are comprise 4 and 5 aircraft respectively, all of them rented on wet lease. The fleet of Shaheen Air International (SAI) comprises a total of 5 aircraft — 3 short-haul Russian made Yak 42 Ds leased from a Ukrainian company and 2 medium-haul Russian made TU 154s. Aero Asia, on the other hand, has a fleet of 4 aircraft, 3 Yak 42s and one Boeing 737.

PIA: THE STRUGGLE FOR SURVIVAL

While PIA is still lifting the highest number of domestic air travellers and also a large number of the overseas traffic years of financial mismanagement, excessive staff, and dilapidated fleet have taken a heavy toll on its performance. Though the airline, which has been in red for last couple of years, managed to earn a token operating profit of Rs 366 million in the year ended December 31, 2001 compared to an operating loss of Rs 3 billion in the previous year, it still kept on reeling from substantial pre- and post-tax losses. The accumulated losses touched Rs 12.8 billion, exceeding the paid-up capital of Rs 3.8 billion by Rs 9 billion posing a big question mark for its very survival. Pre-tax and post-tax losses were reduced but still stayed at high levels of Rs 1.9 billion and Rs 2.2 billion respectively.

As at March 31 this year, the airline managed to show an overall profitability for the first time in two years earning operating profit of Rs 1.7 billion in the first quarter ended compared to operating loss of Rs 196.4 billion in the comparative period last year. Similarly, PIA managed to earn pre-tax profit of Rs 1.1 billion over a loss of Rs 615 million and post-tax profit of Rs 1.04 billion compared to post-tax loss of Rs 671 million during the same period last year. While the improved performance helped the airline reduce its accumulated loss by Rs 1 billion to Rs 11.8 billion it still exceed its paid-up capital by a massive Rs 8 billion.

In addition, PIA is facing serious cash flow problems to keep its fleet operating which include many aging aircraft afloat to further erode an already declining passenger-lifting capacity. According to well placed industry sources three unserviceable PIA aircraft, the premium wide-bodied long-haul Boeing 747s, are idling as scarp at the tarmac of Karachi airport for years reducing the commercial fleet strength to about 38 aircraft including many which had to be grounded reportedly for lack of spares and costly maintenance works for want of funds. The carrying value of the three 747s mentioned above plus 2 Boeing 707, a Fokker F-27 aircraft grounded by the airline in 1998 and 1999 and airframe of three other 707s, estimated at Rs 236.6 million by the management of the airline, has been written down and is included in its current assets.

In addition, the financially troubled airline was hit by many problems during the second half last year, including the unscheduled grounding of the fleet of Airbus A 300 and the increased fuel price in July and August.

And then came September 11 which resulted in extremely high war risk insurance premium both for the aircraft, crew and passengers and the closure of Afghan airspace which increased the average flying time by an average 2 hours on lucrative European and US routes. In addition, the restricted visa policies by the Western countries for Pakistanis and other people in many countries of the region in addition to a fear of flying turn an already bad situation much more worse. The increased costs of enhanced security requirements made the blow even stronger.

However, sources in the aviation industry insists that even without 11.9 the aviation industry worldwide was heading towards a recession after enjoying the peak for years. They further added that with or without 11.9 PIA was heading towards the disaster evident from its own financial reports in the recent years due primarily to mismanagement, politically motivated over staffing and lack of economic sense. To prove their point they said that PIA's complain of reduced business in the aftermath of 11.9, domestic as well on international routes, make hardly any sense due to airline's reduced passenger carrying capacity for grounding of a number of aircraft. They also shrug off PIA's claim of increased fuel price mid last year which was countered by the airline by constantly increasing its fares.

CHALLENGES AFTER CHALLENGES

As if 11.9 was not enough, the PIA faced fresh challenges with the closure of Indian air space from January 1 this year on the pretext of terrorist attack on the Parliament building in New Delhi. The move was particularly aimed at hurting the national flag carrier, the only domestic airline flying to Indian cities of Delhi and Mumbai, Kathmandu in Nepal, Dhaka in Bangladesh and Colombo in Sri Lanka. In addition, it was also meant to hurt the PIA which served destinations in the Far East including Bangkok, Hong Kong, Singapore, Manila/Tokyo by making these operations highly uneconomical due to increased flying times resulting in increased costs.

And finally, the suicide bombing on May 8 in Karachi further worsened an already bad situation due to substantial drop in number of foreign travellers into the country. The gory incident resulted in bringing the flow of foreign travellers to a trickle in the country due to apprehensions about the law and order situation and security and safety. In the later part of last month the cloud of war hanging over the subcontinent due to tensions between two nuclear-armed arch rivals — Pakistan and India — made the situation even worse to deliver a blow to the aviation industry, particularly the PIA and two private airlines as well as the Civil Aviation Authority (CAA) which depends heavily on aeronautical revenue — flyover rights; landing, parking and housing charges, and technical landing charges (landings to get the fuel).

PAGE's talks with the officials of CAA and private sector airlines strengthen the impression that the national aviation industry — which primarily comprises of some 47 aircraft of both the PIA and two private airlines, 42 airports only about half of which are operational and the regulatory body CAA — reeks of mistrust and absence of any concerted strategy to better address present challenges. Each of them seem to be facing problems which do not only sharply differ from each other but they also blame each other for the fiasco which is resulting in increased dominance of PIA on the domestic sector and foreign airlines on the overseas sector.

IS PIA TRYING TO REGAIN ITS MONOPOLY?

Talking to PAGE, the Managing Director of Shaheen Air International, Air Vice Marshal (Retd.) Syed Ataur Rahman accused PIA of resorting to fare-cutting tactics to deal a crushing blow to private airlines to regain its monopoly on the domestic sector. He also criticized the CAA for failing to regulate the air fares, not only that related to the PIA but all airlines, particularly those based in the Gulf, which has developed into a full-blown price war threatening the very survival of the remaining private airlines. "The Market Clean-Up Board of Pakistan is not regulating the airfares, one of its primary functions, to help avoid the looming disaster as both PIA and foreign airlines are increasingly offering heavily discounted fares to turn the entire business uneconomical for the private airlines including Shaheen.

"The cut-throat unethical competition is hurting the aviation industry like never before as not only the PIA but also the foreign airlines, particularly those based in the lucrative Middle East hub, are offering ridiculously low fares to fill in the seats — and they can afford to do so with their huge network — to make business uneconomical for the private airlines. For instance, PIA has slashed its Karachi-Lahore one-way fare by almost half to Rs 2,300, which is lower than ours by Rs 2,600. The price war has resulted in low yields making the business extremely uneconomical for us.

"It's surprising that the PIA which never before considered the private airlines worthy of competition, particularly on the domestic sector, has suddenly chosen to compete with the private airlines instead of competing with the foreign airlines for both in- and out-bound foreign business. However, PIA must realize that despite its orchestrated attempts to break the private airlines it would not be successful to break them. We enjoy an immense advantage as our employee to aircraft ratio compared is much lower than the PIA which puts us in much more convenient position. Compared to over 560 employees per aircraft for the PIA we have between 70-75 employees per aircraft which allows us to use our resources far more efficiently to limit our expenses."

Shaheen, he said, has a fleet of 5 aircraft — 3 short-haul Yak-42 D serving domestic sector on Karachi, Lahore, Islamabad and Peshawar routes and 2 medium haul TU 154 serving six overseas stations — all in the Gulf, Dubai, Abu Dhabi, Al Ain, Muscat, Doha and Kuwait. "However, the suicide bombing last month and the ongoing tension arising from jingoist rhetorics from India has already resulted in reducing the civilian air traffic into the country from the hub in Dubai. In addition, the constantly declining purchasing power, fear of flying and visa restrictions are all taking a heavy toll on the aviation industry, the biggest sufferer of which are the private airlines.

"There is only limited domestic business which has to be shared between the PIA and private airlines and the price-war started by the former is aimed at luring the domestic travellers away from the private airline which have been offering affordable fares all along. With the volume of domestic air travel remaining the same — a daily average of 1,500 passengers to Islamabad and average 1,400 to Lahore — the price war is intentionally aimed at breaking the private airlines. Is the focusing of attention of the PIA on the domestic sector is an indication that it has thrown up the towel against the foreign airlines by tacitly accepting that it can not compete with them anymore?"

HIGH INSURANCE COSTS

Ataur Rahman said not only the revenue is on a constant decline but the operating costs have also been increased substantially at the great financial discomfort of the private airlines. "Insurance costs for the private airlines has been doubled after 11.9. While state-owned Pakistan Insurance Corporation come to the rescue of the PIA offering it the cushion to absorb the increased insurance costs by the private airlines enjoy no such facility remaining dependent on foreign insurers to absorb the increased insurance costs. The war insurance surcharge imposed on the private airlines should be abolish because the pretext of risk factor on which the insurance costs were increased ended with the end of war in Afghanistan.

"The particular once again highlights the absence of level playing field for the private airlines vis-a-vis the PIA in addition to the already mentioned failure of the relevant body to regulate the fares depriving the former loss of substantial business on the domestic sector to the later and on overseas Gulf sector to the giant foreign airlines. The open sky policy has been successful as despite many flaws it has brought domestic fares to an affordable levels for the travellers. However, it would have been more successful if it had been based on the globally accepted bilateral basis to discourage foreign airlines to pick and drop passengers from and to the country without offering any real benefit to the economy.

"The decreasing revenue and the soaring expenditure, the absence of level playing field added with sharp decline in passenger traffic due to fear of flying, visa restrictions, declining purchasing power and the raging price war have taken a heavy toll on the private airlines. Whhile the standard seat occupancy ratio of 65 per cent and above is the standard breakeven bench mark for the aviation industry worldwide, the private airlines in Pakistan are facing extremely uneconomical competition both on the domestic and overseas sectors without any action from the relevant quarters."

Ataur Rahman also stressed for reduction in import duty on aircraft from 10 per cent to at least 5 per cent if not altogether slashing of it as the total impact is very high to encourage induction of aircraft in the private airlines. He informed PAGE that Shaheen Air has plans to replace its fleet of all Eastern European made aircraft by proper Western aircraft starting with the induction of a Boeing 737-400 aircraft soon.

CAA

The civil aviation authority plays an important role in the growth of aviation industry in any country and the same also is true for Pakistan. The primary responsibility of the authority is to provide safe and secure air space for commercial aviation as well as to serve as a regulator to oversee issues related to civil aviation be it efficient management of the airports, aircraft registration, make by-laws governing the conduct of the management and associated professionals such as pilots, bilateral agreements with foreign carriers, etc., etc. In short, it is responsible for ensuring safe and secure civil aviation operations within the airspace of a country and in turn to encourage the growth of it. In fact, civil aviation authority is viewed as one of the most important indicator of the status of any aviation industry as its performance is directly related to the commercial air traffic within any country.

The Deputy Director General of CAA, Air Vice Marshal Arshad Rasheed Sethi, told PAGE that the organization is losing an average of $ 3 million a month in the aftermath of 11.9. "Upto late August 30 foreign airlines were operating in the country. Just prior to 11.9 two of them closed their operations — Sri Lanka due to terrorist attack at the Colombo Airport which destroyed a number of aircraft and Russian airline Aerofloat for other reasons. The closure of Afghan airspace by the then government on September 16 dealt a severe blow to the CAA as it resulted in all overhead traffic by depriving it a substantial amount of revenue from route navigation fee from foreign airlines flying over the national air space. The fall out of 11.9 resulting in decreased passenger load further worsened when the coalition operation started in the Afghanistan and the number of foreign airlines was reduced to 14 from 28. However, due credit should be given to the CAA for keeping the national air corridors safe and secure for commercial operations despite usage of the air space by the coalition forces."

Sethi said that CAA faced a serious revenue crunch as overflight charges, which contributes substantial revenue to its revenue, dried up from an average of 270 overflights a day to just about 60 a day. "CAA being a purely autonomous body which gets no grants or funds from the government manages to earn enough revenue to meet its day to day expenses but the drying up of the revenue by as much as $ 3 million a month is affected its development plans.

"The substantial reduction in commercial air traffic with the closure of operations by 14 airlines, many of which have restarted the operations albeit with lower frequency than before, the fear of flying, the strict visa restriction slapped on travellers from the region including Pakistan, have taken a heavy toll on the CAA. The situation is getting better with time as 24 foreign airlines are operating in the country. However, the May 8 incident proved to be another disaster as it resulted in the suspension of operations by the Singapore Airline.

"The slowing down of the economic activities still use to take a heavy toll on the aviation industry here like elsewhere in the world and so the air travel keeps of suffering, more so as we don't have a tourist industry in the real sense of the world. In other words, whatever little foreign traffic — be it business or personal — was coming into the country has come to an almost full stoppage and under the present tension between India and Pakistan the present situation is just not good for the aviation industry of the country.

'What poses even more problems for the CAA is that the PIA as well as the remaining two private airlines as well as all of that who have closed their operations owe CAA huge sums of money. PIA owes CAA over Rs 6 billion while Aero Asia and Shaheen Air owe us Rs 300 million each in dues which are outstanding for years. As of January 1 this year, the CAA has slashed its landing, parking and housing charges by 90 per cent on the domestic sector for the convenience of the three airlines till end this month and its very likely that we will extend it. The reduced charges has helped PIA to save Rs 22 million alone in the first six month of this year and will also provide a welcome relief to the other two private airlines."

Rejecting the reports perpetually appearing in the media that CAA's aeronautical charges are high, Sethi said that it is just not so. "Don't compare Karachi Airport with other counterparts in the region, for instance Dubai which is the only international airport of the country and where the civil aviation authority owns not only the cargo handling company Dnata but is allowed to own and operate duty free shops and the head of the national flag carrier is also the head of the authority. Not a single foreign airline has ever asked the CAA to reduce its tariffs."

He also rejected the reports that high jet fuel prices is one of the major reason for reduction in operations of foreign airlines in the country. "Jet fuel prices in Pakistan is the cheapest in the region, even lower than that in Dubai, and that's why despite the prevalent situation jet fuel sales at Karachi Airport has more than doubled during the first six months of this year — $ 5.4 million compared to $ 2.5 million compared to the same period last year. As fuel makes up the largest single expense of any airline — almost one-third of the total expenditure — the low jet fuel prices have resulted in increased technical landings, landings neither for cargo nor passenger pick-up but to get only the fuel, by the foreign airlines into the country. The CAA's decision to slash its technical landing charges by 50 per cent in September 2000 is finally paying a dividend — for instance Air France which was having technical landings of an average 10 flights a week increased its frequency to 40 flights per week. Though Air France stopped its operations later, technical landings by many other foreign airlines have registered a substantial increase."

Sethi said that unlike the rest of the world the CAA is still heavily dependent on its aeronautical revenue which make up about 85 per cent of its revenue from all sources. Globally the ratio between aeronautical and non-aeronautical revenue in the rest of the world is almost equal but various factors hamper the growth of the non-aeronautical revenue for the CAA here."

COMPENSATION FOR LOSS

Sethi informed PAGE that the authority has approached the Ministry of Defence to approach the relevant US authorities to compensate for an average $ 3 month loss the CAA is suffering since September last year. He also informed PAGE that CAA has received the ISO 9002 certification on the 4th of this month. "This is our commitment for quality and our contribution to operational safety, quality flying standards, air worthiness and licensing procedures."

DENOUEMENT

The major problems faced by aviation industry of Pakistan revolve round reduced volume of air passenger, undeclared price war on both the domestic and foreign sectors, extremely poor financial health of the PIA, absence of level playing field, and drastic increase in insurance costs.

The various players; PIA, private airlines and CAA, have to work together to find solutions of the above issues which can make or break the industry. The role of foreign operators and the continuation of open sky policy in the absence of bilateral agreements would keep on favouring the foreign operators at the cost of the domestic operators.

Much has been done but much still remains to be done to develop the national aviation industry on sound footing for the ultimate of the national economy and to provide travellers with real choice in terms of fare as well as facilities.