Dec 22 - 28, 2008

The cash-strapped Pakistan International Airlines (PIA) plans to raise $379 million by pledging its two hotels, Roosevelt Hotel in New York and Hotel Scribe in Paris worth more than Rs 60 billion, giving a guaranteed rate of return from the hotels to the investors. Under the hotel plan which awaits the government approval, the state-owned companies will be invited to invest in and the airline would pledge to buy them back in about five years. The money raised will be used to partly pay off the airline's short-term debts amounting to Rs 55 billion. The south Asian country owns the 1,013-room Roosevelt Hotel as PIA Investments in New York. Located in upscale Manhattan, the 20-storey Roosevelt Hotel is likely to be again in the spotlight if present coalition government approves the proposed hotel plan for raising cash or goes for its outright sale.

"The airline's Roosevelt Hotel in New York and Hotel Scribe in Paris will be put into a new business, as "We are an organization no one wants to invest in" quoted Bloomberg Mohammad Aijaz Haroon the managing director of PIA last month as saying. Nearly for the past three decades, the auspices of the PIA have been operating the historic Roosevelt hotel in New York. Presently, the key issues hitting the airline in financial and administrative terms are the erosion of market position, high fuel price, organizational issues and burdened balance sheets. PIA is 85 percent owned by the government. The country is in fact paying a heavy price for the prestige of having an international air carrier, which is actually living on bank borrowings. Today, it operates a range of advanced aircraft, ranging from the world's preferred Boeing 777 airplane to the super-quiet Airbus A-310. Its route network stretches to Asia, the Middle East, Africa, Europe, and North America.

Pakistan International Airlines Investment Limited (PIAIL), a subsidiary of PIA, owns and runs Roosevelt Hotel in New York and Scribe Hotel in Paris. Both these properties are managed by the PIAIL and are benefiting from a favorable business environment. In July 2007, the PIAIL declared first ever dividend of $6.2 million, at the rate of $7.7 per share, based on operating performance as of June 30th 2007. This was the first ever dividend payout from PIAIL since its formation in September 1977. Based on the accounts for the year 2006, PIAIL had made a profit of $9.7 million on revenue of $108.6 million. PIAIL has been opposing the sale of Roosevelt Hotel, which means losing a dependable revenue-generating asset. The hotel occupies nearly a full-acre block just north of Grand Central Terminal bounded by 45th and 46th Streets, Vanderbilt and Madison avenues.

"The government has decided to sell the famous PIA-owned Roosevelt Hotel to add some foreign exchange to the national exchequer and asked the Privatization Commission to arrange open bidding to this end, according to a report published in daily Post. The commission hopes to get a minimum offer of $800 million as compared to $200 million the former government of Prime Minister Shaukat Aziz had expected for the hotel located in the busiest commercial area of Manhattan in New York.

Presently, 99 per cent shares of Roosevelt are owned by the PIA and only one per cent share remains with the Saudi partner, Prince Faisal bin Khalid. Last year, Saudi Prince, who holds 7,200 shares in the PIAIL, had accused PIA of interfering with his attempt to sell most of his shares in its investment unit in his lawsuit in a New York court. Prince Faisal had wanted to sell his shares for $8.6 million to Alpha Capital MC Limited and intimated his intention to PIAIL in March last year, offering the stock at the same price to the airline's investment unit, following his shareholder agreement signed in 1979. Dismissing the lawsuit, the district court of the Southern District of New York had observed that the plaintiff was a citizen and resident of Saudi Arabia and had not demonstrated any connections to New York.

The PIA has been trying to sell Roosevelt Hotel, its prestigious New York property to get some much needed cash amid the credit crunch. In 2003, strong opposition from the country's political circles stopped the government from selling the hotel at a price of $225 million. Last year, the Shaukat Aziz-led government to buy new planes had again tried to sell the Roosevelt Hotel. The Citibank-led consortium, which was the government's financial advisers for the Roosevelt Hotel, had put the Roosevelt's value at about $400 million. Manhattan-based real estate developers had reportedly offered as much as $1billion for the valuable commercial property in the center of town. The PIAIL had also asked the former government not to go ahead with an outright sale of Roosvelt hotel because the hotel had improved considerably after renovation.

Today's ruling Pakistan People's Party (PPP) had warned the former government against the rushed sale of Roosevelt Hotel and demanded the government of calling off the plan until next government. The officials say that the previous government was in haste to sell off the hotel apparently to oblige some of its blue-eyed officials but shelved its plan following the Supreme Court's ruling in the Pakistan Steel privatization case.

Present PIA management plans to cut 28 percent of its work force, by shifting workers to outsourcing companies after failing to get a cash injection from the government. The PIA has lost international stature. It no longer remains a competitive choice for tourists or business travelers. There have also been complaints of inefficiency and poor customer service.

The airline's financial health has progressively deteriorated since 1991 when PIA posted its first loss due to the spike in insurance premiums and fuel prices caused by the first Gulf War. It lost an estimated $40 million on domestic service alone. PIA lost Rs11 billion in the year 2000. Presently, the situation has reached alarming proportions, as the airline posted a loss of Rs.38.4 billion in the first nine months of this year compared with Rs.10.9 billion a year earlier. The major reasons behind PIA's worsened financial position have been the ineffective marketing, open sky policy, increased competition, brand damage, inability to pass through high oil prices, failure in hedging oil prices, use of old planes, oversized establishment, leadership vacuum, ailing corporate culture, negative equity and huge debt servicing bill.

Given the high value and financial health of PIA-owned Roosevelt Hotel, present government like its predecessors believe that hotel option could give PIA the funds needed to replace its ageing fleet. The analysts however stress the need to address the real administrative and financial issues hitting the performance of the PIA, the national flag-carrier.