KEY ISSUES HITTING PIA
June 23 - 29, 2008
The unexpected rise in fuel prices in second half of the outgoing fiscal year severely impacted the operating cost of Pakistan International Airlines (PIA). Resultantly, the planned recovery remained elusive and key financial targets were missed. Presently, the key issues hitting the airline in financial and administrative terms include the erosion of market position, high fuel price, organizational issues, and burdened balance sheets. The major reasons behind PIA's worsened financial position have been the ineffective marketing, open sky policy, increased competition, EU ban, 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.
PIA suffered a loss of Rs13.4 billion in 2007, which turned out to be an exceptionally difficult year for the national carrier. In 1991, PIA posted its first loss due to the spike in insurance premiums and fuel prices caused by the Gulf War. It lost an estimated $40 million on domestic service alone. In 1992, it however showed record profits of $41 million on revenues of $880 million. It lost Rs11 billion in the year 2000. By July 2001, PIA had received Rs.20 billion financial package from the government. Even by the end of 2001, the PIA management expected the company to break.
Political and security situation in the Asian region has also adversely affected the international operations of the PIA. In 2001, Islamabad's mounting tension with India curtailed PIA's extensive connections with the neighboring country. In January 2002, India banned PIA from its airspace. Owing to the restrictions, the Cathay Pacific stepped in to carry PIA traffic to Bangkok, Hong Kong, and Singapore. The political instability and military volatility in the Middle East and Central Asia continued to affect its operations. Similarly, the U.S.-led attacks against the Taliban in Afghanistan also forced the most of the foreign airlines to cancel their scheduled flights to Pakistan and 29 of them closed their offices in the country in September 2001. The air strike against Taliban also affected PIA, as seven of Pakistan's airports had been closed and its airspace was declared as a war zone. PIA lost Rs. 2.09 billion on sales of Rs. 47.11 billion in December 2001.
Last year, the European Union barred most of the planes of PIA from flying to the 27-nation bloc because of safety concerns. The ban affected 35 of the airline's fleet of 42 aircrafts, with just seven Boeing 777s exempted. The ban spelled further trouble for the airline once regarded as the best in Asia. The routes affected were some of the most lucrative for the airline and proved a blow for its revenues. PIA had to cut at least 15% to 20% of its European operations after the ban.
Many financial scams have also come to surface in PIA. Under the slain former Prime Minister Benazir Bhutto's second term (1993-1996), the corporation was overstaffed through illegal appointments. Under military set up of General Pervez Musharraf in 2001, PIA had to deal with a ticket sales scandal costing the airline $45 million a year.
Last year, a US$31 million financial scam came to surface with the alleged involvement of the general sales manager of the Hong Kong-based airline Cathay Pacific and two Pakistanis causing losses to the PIA in the purchase of six worn-out aircraft. Last June, the National Accountability Bureau (NAB) filed a reference against Cyrus Minwala, general sales manager of the Cathay Pacific, and two Pakistani nationals, Rasheed Hassan and Pervez Hassan, for their alleged involvement in $31 million scam. Rasheed Hassan was known to be the PIA's Ex-Director corporate planning and was accused of receiving about US$ 195,000 while Pervez Hassan was reported to have received about US$ 525,000.
According to the reference, PIA had signed a lease agreement on March 18, 1999 with the Cathay Pacific for five aircraft for two years. The inspection team, which included Rasheed Hassan, visited Hong Kong in February 1999 to evaluate the aircraft and the team gave a positive report for all B-747s despite having inspected only two aircraft. It was alleged that in a meeting of PIA's board of directors an approval, based on a comparison with B-747-300 Singapore Airlines' aircraft, was sought for acquiring used aircraft from the Cathay Pacific on grounds that PIA's existing Jumbo Jet fleet would be disposed of because of loss of passenger appeal and high maintenance cost. However, the grounded aircraft were made operational within a few months in 1999 and they remained operational till 2004.
PIA suffered a cumulative loss of $31 million through this financial scam. According to the reference, the Cathay Pacific deliberately engaged Mr Minwala to sell its discarded fleet to PIA at exorbitant rates. The PIA made a payment of $10.5 million to Mr Minwala who paid $525,000 to Pervaiz Hussain and $245,000 to Rashid Hassan. It was alleged that besides purchasing five aircraft at a cost of $55 million, PIA also purchased a sixth B-747-300 from the Cathay Pacific in 2002 for $7 million and the aircraft remained parked in a deserted area since 2000, devaluing the aircraft' market value to zero.
PIA has been striving for improving its customer service and performance for the last many years. Last year, it signed a US$522 million loan financing arrangement with ABN Amro to fund acquisition of three new Boeing 777-300 ER aircraft. The financing arrangement comprised 12-year term loan facilities of $470 million supported by the Export-Import Bank of US and Pakistan government guarantee and seven year commercial facilities of $62 million. The agreement signing ceremony had been arranged by the ABN Amro Bank in Amsterdam. The $522 million transaction was considered a remarkable achievement for PIA in fleet modernization through a very attractive financing package.
With regard to the fleet modernization plan, the PIA had inducted two more Boeing 777s during 2007, apart from the earlier induction of the six new Boeing 777 aircraft. The PIA also added four ATR-42 aircraft in the first half of 2007 increasing its ATR-42 fleet to seven. With these additions, the average age of the fleet has come down from 14 years in 2006 to 13 years in December 2007. This March, one more Boeing 777s joined PIA fleet. PIA also plans to induct seven new Airbus 320-200 aircraft in its fleet with deliveries starting from 2009 onwards. It is expected that the younger fleet would bring efficiency in fuel consumption, reduction in aircraft maintenance cost and improved customer comfort.