PIA IN TAILSPIN

SHAMSUL GHANI
(feedback@pgeconomist.com)
June 21 - 27, 20
10

The Quaid, having envisioned the birth of a new country well before the others could sense it, asked MA Ispahani, a leading industrialist, to set up a national airline to handle the gigantic job of post-independence mass-scale air transportation. In October 1946, Orient Airways came into being with its head office at Calcutta now known as Kolkata. It got operating license in May 1947 and started operations in June 1947 with four Douglas DC-3s aircrafts. Immediately after independence, Orient Airways with the help of BOAC started relief operations between Delhi and Karachi. Subsequently, in 1955 the national airline PIA took birth and Orient Airways, a private limited company, opted for a merger with it. The same year PIA undertook its first international flight to London. During the tenure of its first three managing directors, Zafar-ul-Ahsan, Air Marshal Nur Khan and Air Marshal Asghar Khan, PIA rose to operational and managerial heights. The latest state-of-the-art aircrafts were added to the operational fleet on a regular basis and new air linkages were created with the capitals of leading world countries. The Nur Khan era is often described as 'golden years' of PIA.

The 1965 Indo-Pak war brought the best out of the national airliner which provided crucial logistic support during the war. PIA replicated its performance during the 1971 war, but it went through operational and financial hemorrhage later on. That was basically a turning point in the history of PIA.

The national airline thrived on its competent engineers, immaculate flight crews, skilled technicians and white-collar hardworking employees who rightly took pride in being the part of a fast growing national organisation. The subsequent years, however, saw a steady decline in the performance standards of PIA. There were a number of factors responsible for this slide.

PIA known for offering prestigious employment opportunities to the right type of persons caught the eye of politicians and parochial forces who burdened the PIA with merit-less appointments on political basis. The quota system as it proved harmful to the entire country also plagued PIA the same way. Overstaffing, inefficiency, corruption and unprofessional decision making at the top hamstrung PIA. The army and the politicians kept vying for the PIA top slots during their respective rules. The entry of sincere administrators like Nur Khan and Asghar Khan was blocked. Independent professional decision making was compromised to give way to the whims and fancies of the non-professionals.

Under the changed circumstances, PIA became a huge burden on public exchequer. Intermittently, with the help of government injection of funds, it showed signs of recovery but under the prevalent culture that was never intended to be changed it chalked its way back to the crisis it had temporarily managed to surmount. It is really hard to imagine a near-monopoly with overt and covert government support failing to dominate the market and operate profitably.

In 2008, it recorded a pre-tax loss of R.39.9 billion and attributed it on the unusually high costs of fuel. The argument on the face of it would appear plausible but one would like to know if PIA think tanks made timely use of the available market tools like forward trading, options etc. to minimise the fuel-cost-based losses.

KEY FINANCIAL INDICATORS PIAC (RS IN MN)

FINANCIAL INDICATOR MAR-10 DEC-09 DEC-08 JAN-08
Property, Plant and Equipment 132,562 133,556 115,010 95,497
Trade Debts 8,161 7,978 5,758 5,013
Current Assets 19,575 16,881 15,039 13,251
Total Assets 161,603 160,013 139,670 118,774
Share Capital 23,280 23,280 21,423 20,878
Accumulated Losses (74,763) (72,335) (68,945) (33,344)
Total Equity (51,483) (49,055) (47,522) (12,466)
Long Term Debt 105,587 105,418 97,926 74,285
Short Term Borrowing 30,634 23,982 30,500 18,106
Trade & Other Payables 27,345 28,685 27,947 20,617
Current Liabilities 72,269 68,818 72,528 52,612
Revenue 22,848 94,564 88,863 NA
Gross Profit 2,736 15,934 3,587 NA
Operating Loss 120 4,065 31,636 NA
Financial Charges 2,295 9,244 8,352 NA
Pre-tax Loss 2,415 13,309 39,888 NA
EPS 'A' class Rs10 shares (1.18) (2.72) (17.92) NA
EPS 'B' class Rs5 shares (0.59) (1.36) (8.96) NA
(Unconsolidated financial statements)

The equity erosion that took place over a period of time with the gradually mounting up of losses is the most disturbing aspect of PIA financials. This renders PIA ineligible for further debt support from the banking sector. It already has long term debts of the size of Rs105.6 billion; the short term borrowings of Rs30.6 billion add further to its overall debt size. There has been no significant increase in its fixed assets size during the last two years which reveals no worthwhile addition to its operating fleet. This aspect is further reflected in PIA's revenue size which appears range-bound as the annualised revenue for the year 2010 too falls within the range set by the financial results of 2008 and 2009. There is a wide variation in the gross margin which was 4 per cent in 2008, 16.4 percent in 2009, and a projected 12 percent on 2010. The reason behind this wide fluctuation could well be the performance during the most turbulent year 2008 when PIA recorded the historically highest loss of Rs39.9 billion. Financial charges which have been in the range of Rs8 to 9 billion during the under review three years are a substantial burden on PIA profitability. It is imperative that further government assistance should come in the shape of additional equity. This will not only reduce the size of negative equity but will also somewhat freeze the financial charges at their present size. Besides being a huge burden on company's exchequer and a drag on national economy, PIA has also failed to come up to the expectations of its shareholders who have been left high and dry in the face of persistently negative earnings per share EPS. PIA's 'A' class Rs10 share is being traded at Rs2.29. The financial mess of PIA has brought disappointments of different dimension. How to deal with the situation is one of the major challenges staring in the face of the newly inducted finance minister.