AVIATION: SKY IS NOT THE LIMIT...
Pakistani aviation industry is slowly coming out of the shadows
By Syed M. Aslam
Dec 16 - 22, 2002
The last fifteen months have unarguably taken the worst toll on the global aviation industry ever. It has witnessed an unparallel upheaval costing hundreds of thousands of people their jobs, closures of numerous airlines, reduction in frequency of flights, a drastic cut in passenger traffic fueled by a sudden fear of flying. The world's second top airline United has just filed for bankruptcy while its counterparts, both big and small, in the other parts of the world are still striving shake-off the impact of that ignominious September day last year.
Pakistani aviation industry primary comprises of three airlines- the state-owned Pakistan International Airline (PIA) and two private airlines- Shaheen Air and Aero Asia. The collective fleet strength of the three airlines total about 51 aircraft, about 42 of them alone with the PIA, including the ones it has inducted recently. Till the first quarter this year the PIA was facing serious cash flow problems and its fleet comprised aging aircraft: three unserviceable PIA aircraft, the premium wide-bodied long-haul Boeing 747s were 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 for lack of spares and costly maintenance works for want of funds. 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. It also has one cargo aircraft AN 12. Aero Asia, on the other hand, has a fleet of 4 aircraft, 3 Yak 42s and one Boeing 737.
The fleets of Shaheen and Aero Asia include mainly Russian-built aircraft on wet lease from Eastern European countries. Some 24 foreign airlines are also a part of Pakistan's aviation mosaic. Like elsewhere, the safety and security of the commercial air traffic is the responsibility of the Civil Aviation Authority (CAA) which is also the developer and manager of civilian airports in the country. There are 42 civilian airports, 32 of them commercial and four of them international- Karachi, Lahore, Islamabad and Peshawar. Operations at 10 other airports including Muzzaffarabad, Bannu, Parachinar, Rawla Kot have been scaled down due to closure of services by the PIA due mainly to economic reasons.
Despite facing immense challenges the Pakistani aviation industry is slowly coming out of the shadows: The Rs 10.5 billion Lahore Airport expansion project is expected to complete by early next year to help increase the passenger handling capacity from 2.5 million a year at present to 6.5 million- enough to meet the growing traffic over the next 15 years.
PIA'S FLEET-REPLACEMENT PROGRAMME
At a time when most of the airlines across the globe remain hard hit, the national flag carrier PIA has undertaken a fleet replacement plan, a move which is primarily encouraged by bargain prices.
In early August this year a meeting presided over by then Finance Minister Shaukat Aziz and attended by members of PIA's Board of Directors, including the Chairman and the Managing Director, approved a $ 1 billion financing plan to buy new and old planes. The federal government had agreed to finance the plan last year by providing $ 150 million in three installments, including $ 30 million this year and two installments of $ 60 million over the next two years The federal government had also agreed to provide sovereign guarantee for buying planes for the loan.
On October 1 the Export-Import Bank agreed to provide $125 million to Pakistan to help it buy passenger aircraft from the Boeing Company. It was the first time that the Bank financed a deal between Pakistan and a private US firm. The then Finance minister Shaukat Aziz hailed the decision saying that the money would help the airline to embark on the fleet replacement programme as the average age of PIA aircraft is 23 years. He also attributed the government's decision to contribute 15 per cent of the total money required to wrap-up the deal mainly on the airline's improved financial performance.
In early November the PIA awarded United Bank Limited (UBL), Citibank and Islamic Development Bank (IDB) the mandate to arrange $150 million to finance its fleet replacement programme. The facility was to be utilised to pay the first tranche of advance payment to Boeing towards purchase of 8 new 777 aircraft. The financing included one-year facility of $85 million which would be replaced by a three-year facility of $150m and the three-year facility would be in the form of an Ijra financing based on Islamic mode of financing. The UBL and Citibank/Saudi American Bank had underwritten $45 million and $40 million respectively while the IDB agreed to underwrite $70 m in the three-year facility. This was the first time that IDB has formed a partnership with a local and foreign bank in Pakistan to arrange such a facility. PIA has posted Rs 1.4 billion after-tax profit for 9 months ended September 30.
THE INDUSTRY IN RETROSPECT
Being the sole state-owned national flag carrier, the PIA enjoyed a complete monopoly on the domestic sector and preferential treatment on the overseas sector. PIA's interests were protected by laws which made it mandatory for nationals travelling overseas to fly only with it- in case of several foreign trips a year a national was to fly the airline at least once. The airline enjoyed the monopoly and the protection till early 1990s when the then Nawaz Sharif government introduced the Open Sky policy.
The Policy not only attracted a number of foreign carriers to pick-and-drop passenger, and also cargo traffic, from Pakistan but also encouraged private sector investment in the aviation sector. The decade witnessed the emergence of six private airlines and despite the fact that only two of these airlines are still operating, the ensuing competition was a decisive factor to keep the fares in check, particularly on the domestic sector where PIA did not face any competition previously. A decade later, the majority of private airlines have wrapped up their business for one reason or the other. Only two private airlines are still operating- the Shaheen Air International (SAI) run by Shaheen Foundation of retired personnel of the Pakistan Air Force and Aero Asia which is a part of Tabani business group.
While the private airlines did instill a competition benefiting the domestic travelers in particular, their overall performance was marred by many problems. Almost all of the private airlines had to suspend their operations altogether, many of them more than once, for unavailability of aircraft due to lease problems. This resulted in suspension of services without any notice to the travelers and in many cases the duration of these suspensions lasted not only for days but also for weeks as well as months. It also resulted in sudden reduction in frequency of flights at the extreme financial and mental discomfort of the travelers.
Four private airlines- Raji, Hajvery, Saif, Bhoja- have wrapped up their operations over the years, many of them enjoying a brief on-again-off-again stint. Majority of them had closed their operations prior to 11.9 due primarily to lease-related problems. All of the defunct airlines used small Russian-built aircraft on wet-lease from a number of countries in the former Eastern Europe and at least one of these airlines also hired bigger aircraft on charter from a national airline in the Far East. At one or other all of these airlines were forced to reduce the frequency of their operations or even suspend it altogether for days, weeks or months due to non-payment of dues.
Should the failure of the private airlines be seen as the failure of the Open Sky policy? Or should it only be seen as the failure of the individual private airlines? However, one thing is certain that despite the less-than-satisfactory performance of the private airlines, the Open Sky policy has helped induct a competition for the first time for the benefit of the travelers. It also helped bring domestic airfares to an affordable level particularly if seen in the context of rising railway fares. It also helped create a new breed of economic passenger who were eager to cut the travel time even it means digging into their pockets a little deeper. Arguably, the emergence of private airlines provided a sizeable number of travelers an affordable alternative never dreamt possible previously to encourage traveling within the country.
The policy inducted a healthy competition by abolishing an absolute monopoly of the national flag carrier PIA not only in the domestic sector but also on the international sector where it enjoyed a preferential treatment, particularly in the Gulf area served by two remaining and one defunct private airlines. The private airlines owe their very existence to the Open Sky policy and, thus, in theory should be supportive of it they do have distinct reservations.
As stated above the SAI is one of the two remaining private airlines still operating. The Managing Director of Shaheen Air International (SAI), Air Vice Marshal (Retd) Syed Ataur Rahman said that the foreign airlines are lifting the lion's share of the passenger traffic. Shaheen Air has a fleet of 7 aircraft; one cargo and six passenger including three short-range Yak 42-D and three medium-range TU 154. Mr. Rahman feels that the policy deprives the private airlines of level playing fields particularly small ones like Shaheen which just does not have the means and resources to compete with big foreign airlines. "By its very nature the Open Sky policy is incapable of providing the domestic airlines, national flag carrier PIA included, with the slightest protection even if it's due to allow such foreign heavyweights as the Emirates airlines to lift the cream of the business from the country."
INCREASED OPERATING COSTS DECREASING PASSENGER LOAD
Mr. Rahman said that the absence of level playing fields has been peculiar cause of concern for the private airlines last 15 months have particularly been turbulent. "The passenger load has dropped substantially amidst the global recession which like elsewhere has also taken a heavy toll on our economy. The sluggish economic and industrial activities, the drying of foreign investment plus the bomb blasts have resulted in substantial reduction in foreign air traffic into the country have all taken a heavy toll on the domestic airlines. In addition, the aviation industry worldwide is also hurt by a drastic increase in jet fuel prices which has soared by 350 per cent in last three years. This has put an enormous pressure on the airlines, particularly small one like Shaheen, to remain profitable as according to global standard aircraft, crew, maintenance, insurance and fuel make up 68 per cent of an airline's operating costs. The massive increase in the international prices of jet fuel is taken a far heavier toll on small airlines which just don't have the resources and the business base to cushion the blow and Shaheen is no exception.
"In addition, like elsewhere the airlines have to absorb the rising insurance costs which has registered a three-fold increase since 11.9. The PIA was lucky to absorb the impact as being the state-owned entity the government allowed it to get the insurance locally from state-owned insurance companies. The private airlines like us. However, has not been not so lucky and have still to buy their insurance from foreign insurers. Besides the increased insurance tariffs we have to now pay $ 1.25 per passenger as War Risk insurance surcharge which was levied after 11.9."
The sluggish economy and the fierce competition has taken a heavy toll on Shaheen financially but has also delayed its plans of induction more planes into its fleet. "The dwindling revenues has forced us to delay plans to induct two Boeing aircraft in our fleet six months ago. We, however, are in the advanced stages of negotiation to induct two Boeing 737-400s by February next year.
"The cutthroat competition on the domestic sector is unethical as well as uneconomical and yet we have accepted it as part of the game. It has also helped us push the seat occupancy ratio to 95 per cent which is way over the globally accepted breakeven standard of 65 per cent." The primary beneficiary of the price war are the domestic travelers as the prices of domestic airfares are reduced substantially. For instance, one-way Karachi-Lahore fare can be had for as Rs 2,300."
Mr. Rahman said the absence of the level playing fields, the unethical competition and the rising costs of operations are all taking a heavy toll on the private sector airlines. He urged the government to allow private airlines duty free import of aircraft at par with the PIA instead of charging them 5 per cent duty presently.
BAN ON INDIAN OVER FLIGHTS: WITHDRAWAL CAN HELP THE PRIVATE AIRLINES
On January 1 this year India imposed a ban on all over flights originating from Pakistan. It had also cut air, bus and railway communication with Pakistan about a year ago. The move, as highlighted by PAGE in earlier stories, had hurt India more than Pakistan which used Indian airspace far less frequently to few destinations including Khatmadu, Nepal, Colombo and others in the Middle East. India, on the other hand has suffered greatly as the tit-for-tat move has pushed the operating costs of flights to Europe and Middle East to uneconomical levels. It has resulted in increased fuel costs and longer flying times. It has deprived India of shorter and economical routes to an extent where it has been cut off from Europe, the US and Afghanistan, where it is trying its best to have an influence.
India has since realized the folly of the abrupt decision and has unconditionally withdrawn it a few months ago. It has tried its best to make the move appear natural and also benevolent. However, the Pakistani government has acted coldly to the move reading India's designs correctly to let it clearly understand that if anybody can be benevolent it has to be Pakistan. Pakistan thus far has shown the least interest to reciprocate the lifting of the ban which was imposed by India as if in a frenzy.
While the India move to slap the ban was abrupt and highly uninformed, Pakistan is in a position to benefit from the situation. SAI's MD Mr. Rahman feels that the situation offers Pakistan a unique opportunity to withdraw the ban on its own terms to protect the interests of national airlines. "For instance, the ban should be lifted on the condition that not only the national flag carrier PIA resume its Bombay and Delhi operations but the private airlines should also be allowed to operate flights to the same cities."
Does Shaheen has plans to expand its operations? You bet. We have applied to the CAA to expand our operations on a number of international routes including Tashkent, Bombay, Jeddah, Dhaka, and any airport in the UK where PIA is already serving three cities- London, Manchester and Birmingham. We have also applied for an extra flight to Dubai from Karachi in addition to the one already in operation from Peshawar.
Over 100,000 believers from Pakistan perform Hajj every year. At present only two airlines- PIA and Saudi Air- are allowed to pick up the pilgrims from the country. Mr. Rahman says that the huge load make it possible for the two airlines to share it with the private sector airlines. "It would help ease out the heavy load on the two airlines for the benefit of the pilgrims which presently are discomforted by incessant delays during this peak period. It would also help the private airlines to better their finances for the overall growth of aviation in the country."
On January 1 this year India slapped a ban on the use of its airspace by Pakistan. Pakistan responded in kind and the move resulted in closure of all air, railway and road links between the two countries. The abrupt move hurt India more than Pakistan as Air India and Indian Airlines made greater use of the Pakistani airspace- 200 over flights by Air India and 70 by Indian Airlines per month.
On the other hand the move resulted in the closure of 12 weekly PIA flights to India, six each to Bombay and Delhi. It has made PIA to find alternative routes to 12 destinations in the Far East, many of them not lucrative. In short, the Indian-prompted closure of national airspace hurt India more than Pakistan which also effectively cut it off to have access to Afghanistan over the most economic corridor.
However, the ban has taken a heavy financial toll on the CAA. It was, and losing, around Rs 7 million a month alone in route navigation charges due to closure of over flights of Air India and Indian Airlines. It was a great setback for the CAA initially which was already troubled by drastic reduction in over flights from around 170 a day prior to 11.9 to just 50-60 the day after Afghanistan closed its airspace on September 14, 2001.
Prior to 11.9 some 18 foreign carriers were arriving into the country which reduced to 12 after 11.9. The suicide bombing on May 8 on French technicians and in June at US Consulate in Karachi further worsened an already bad situation resulting substantial drop in number of foreign travelers into the country and closure of operations by a number of foreign carriers. During the same period the cloud of war hanging aver 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 for refueling).
The situation, however, has as 24 foreign airlines are now operating in the country. However, the three national carriers still owes over 2.5 billion dues to the CAA the bulk of which belongs to PIA while SAI and Aero Asia owe Rs 345 million and 325 million respectively.
Talking to PAGE the Deputy Managing Director of the CAA, Air Vice Marshal Arshad Rasheed Sethi, said that defunct airlines also owes millions in dues to the CAA including Bhoja which owes Rs 73 million for which it had filed a suit in September.
Like PIA and Aero Asia, SAI owes millions of dues to the Civil Aviation Authority. Mr. Rahman feels that the "CAA dues should have to be rationalised in a manner that private airlines are able to pay them. Certainly the dues should be paid the CAA is charging higher parking charges from the private airlines compared to the PIA: We are subjected to international rates which are on the very high side making it all the more necessary to negotiate and rationalise the dues. We are only asking for equitable treatment at par with the PIA."
Air Vice Marshal Arshad Rasheed Sethi told PAGE that though the CAA is losing substantial revenue due to the ban the decision to withdrawal the ban of the use of national airspace by India is more than a matter of economics. "It was India initiated the ban and it was her who is suffering more from it. It is matter of national interests and the lifting of the ban by Pakistan should be conditional to resuming normalization of relations prior to the ban- like railway and road links. Opening up the airspace is only a part of the whole issue."