OIL PRICES ERODED $41 BILLION OUT OF EARNINGS OF AIRLINE INDUSTRY

PIA suggests fuel equalization fund to absorb oil price shocks

AMANULLAH BASHAR
Feb 12 - 18, 2007

High international oil prices have washed away the earnings of the airline industry around the world to the tune of $41 and PIA was also not an exception facing the music.

However, in order to combat the unpredictable oil prices, PIA has moved a plan for creation of a Fuel Equalization fund to protect the airline industry in Pakistani from future fuel price hike.

Talking to PAGE, Tariq Kirmani, Chairman of the national flag carrier said that under this proposed plan Rs.5 billion Fuel Equalization Fund is to be administered by the state bank of Pakistan. If crude oil prices go beyond $60 a barrel, PIA and other airlines operating in Pakistan will be able to draw money from the fund to meet the extra cost. Convincingly, if the price of crude oil falls below $50 a barrel, the airlines including PIA would pay money back into the Fund. The money will not be treated as a subsidy he clarified. PIA will be able to draw on the fund for an initial period of one year. At the end of that period, the situation will review and the government extends the facility for another year.

OVERALL DEVELOPMENT REVIEW - 2006

FUEL

Factually put, the impact of fuel cost has affected PIA, for there was a 74 per cent hike in fuel prices since 2004, the cost per barrel going up to an unprecedented USD 78. If the fuel prices are taken to be constant at the 2004 level, then PIA would have posted a profit of PKR 3.3 billion in 2005. Similarly, in 2006 PIA would have posted a profit of PKR 2 billion net, after including increased interest rates and financing cost.

FINANCE, SALES AND CARGO

PIA during the last two years 2005-2006 has recorded revenue increase of Rs. 12.5 billion which translates into a growth of 22% on 2004. Unfortunately, this impressive growth in overall business and revenue has been overtaken by the abnormal surge in fuel bill owing to 74% rise in the fuel price in 2006.

During the period January - September, 2006 the Corporation's operating .expenditure exceeded the revenue by Rs. 9,188 million, which primarily is attributable to increase in international fuel prices. The steep increase in fuel prices started from early 2005 and reached an unprecedented level of US$ 78 per barrel in September 2006. As a result PIA's fuel cost increased from Rs. 18 .billion in 2004 to approximately Rs. 34 billion for whole of 2006. With an additional financing cost on it, the total impact because of fuel touches Rs. 18 billion. To mitigate the impact of fuel and to improve operating results of the Corporation, management has initiated corrective measures, introducing various operational restructuring steps adequately put in place.

PIAC therefore has also approached GOP for its financial restructuring and the Ministry of Finance approval is in process.

REVENUE & PASSENGERS

In 2006 PIA carried a system total of 5.7 million passengers, achieving a growth of 5.1%, while the total market had grown only by 3.6%. Over all seat utilization was 72%. PIA carried 3.4 million International Passengers, a growth of 5.5% over last year, with a market share of 48%. On the domestic operation, PIA carried 2.3 million passengers, a growth of 5% with a market share of 69.5% despite the fact that total domestic passenger market declined by 2.7%.

A review of PIA's performance during 2006 reveals that the airline's business continued to grow in 2006. System revenue reflects a healthy growth of 10% and increased to Rs. 70 Billion, from Rs. 64 Billion in 2005; this included a passenger revenue of Rs. 55 Billion, which increased by 11.8% over last year, despite cut throat competition from the private domestic and foreign airlines. As of December 2006, more than 5800 travel agents across the globe have access to PIA inventory as against less than 2000 last year. Promotional packages introduced in 2006 included Standby fares on domestic routes, Special discounts for senior citizens, students, groups, Advance Purchase fares. Value added services included complimentary pick and drop service for Business Class passengers as well as their fast track processing at airports, E-ticketing and improved In-flight entertainment.

CARGO-OPERATIONS

PIA's Cargo Division is functioning as a profit center, with a net contribution of Rs. 3 Billion to its operations after meeting operational and establishment costs, including the costs of freighter operation. Currently, PIA's market share out of Pakistan is 51% despite competition with fifteen other carriers in Pakistan. PIA's market share to Pakistan has increased to 42% and at present Cargo's contribution to PIA's over al-I revenue is 9%. In 2006, Cargo traffic increased by 4.4% whereas Cargo revenue increased by 11.4% due to improved product through Freighter operation resulting in a higher yield.

FINANCIAL RESTRUCTURING PLAN

Ministry of Finance is in the process of recommending to GOP a financial restructuring package for PIA which includes re-profiling of some of the existing debts/loan for which it will provide guarantees.

The plan proposes issuance of Term Finance Certificates (TFCs), equity injection by Government, sale of non-core assets besides some internal steps to improve the working of the airline.

PIA is going for outsourcing of certain areas in order to raise quality of service, the fleet replacement is also part of the restructuring plan and Government will provide guarantees for raising the finances from the market.

The restructuring plan would start yielding results after its implementation in 2007 - 2008. PIA would induct new planes in its fleet, thus reducing the average age from 21 years to less than 10 years.