A MUST FOR DOMESTIC AVIATION INDUSTRY TO COMPETE INTERNATIONALLY WITH RISING DEMAND

SAAD ANWAR HASHMI
(feedback@pgeconomist.com)

Dec 3 - 9, 2012

It is said "Until there planes, people will fly". The demand for air travel in Pakistan has perpetually remained high as more and more individuals from Pakistan seek job opportunities abroad and return with their families for vacation. In addition, leisure travel has also increased globally with countries with high inflow of tourists further investing in infrastructure and development as a mean to attract tourism which in turn translates into foreign exchange. Investments have drastically increased in construction of resorts and hotels to add entertainment value to a country. Air travel is a multibillion dollar business globally where each major airline with wide internal presence e.g. Emirates, Singapore, Malaysia to name a few are placing orders with Airbus and Boeing for expansion of their fleet. The demand for passenger aircrafts exceeds supply. Airlines placing orders are given extended waiting period before aircrafts are delivered. The two major airlines Boeing and Airbus are operating at 100 percent capacity to meet this rise in global demand.

Despite air fare being tagged to international oil prices, increase in the fares charged by airlines has not reduced the demand for air travel. Though regional airline including PIA, Airblue and Shaheen have increased their fares, flights are generally overbooked through advance booking for domestic as well as international travel. The success of the airline industry is directly perpetual to the law and order situation of the country which attracts foreign tourists. The tourism industry in Pakistan continues to be in despair with the impending political condition coupled with uncertain law and order conditions. Additionally, Pakistan does not provide avenues to attract international tourism which would increase arrival and routes for international carriers. PIA carried out an initiative to Brand Pakistan to attract travellers, however, the economy has not provided an enabling environment for the same.

PIA in Pakistan has 39 aircrafts and controls a majority share in international routes from Pakistan unless travelers choose to opt for other international airlines. PIA with its latest long range Airbus 777-200ER ( Extended Range ) and Airbus 777-200LR (Long range) aircrafts cover Europe and Western Destinations gives the airline a strategic and distinctive advantage over its competitors i.e. Shaheen and Airblue. PIA has been highlighted frequency for management competence, poor customer services, high airfares and significant delays in arrivals and departures. The airline is also pointed for poor tap on internal cost controls and overstaffing which erodes the bottom line in terms of profitability. Airblue based on general consumer opinion excel's where PIA lacks in terms of customer services, however, is constrained through budgeting and capacity to raise debt financing to further expand its fleet. Airblue with its fleet of 5 aircrafts primarily competes with PIA for Middle East destinations and domestic travel. Shaheen Air has a total fleet of 12 aircrafts and operates domestically also covering Middle East in competition with PIA and Airblue. Shaheen competes with PIA and Airblue primarily on cost factors. The airline is known for the lower rates as compared to its competition.

PIA faces financial constraints; however, being the oldest airline enjoys a market share 80 percent of all of domestic passengers and 45 percent of international passengers due to the fleet of aircrafts and key destinations. Intense competition from international airlines and domestic players continues puts pressure on margins and profitability of airlines in Pakistan. For any airline, the largest revenue driver is international and long range routes which guarantee margins over costs. According to International Air Transport Association (IATA) which monitors 180 airlines globally, the demand for air travel will increase between 6 percent and 8 percent over the next 5 years.

It was at first believed that the Euro Crisis and slow recovery through recession post the subprime crisis, international travel will reduce. On the contrary, European airlines have witnessed a demand of more than 7 percent. EBIT as percentage of revenue for airlines with membership of IATA is expected to remain between 6 percent to 9 percent through 2012 putting immense pressure on costs with possible upward revision in fares. Utilization for passenger load or capacity utilization is expected to remain at 79% through. Reduced margins are expected to reduce the profitability of the airlines with net margin for the global industry forecasted at 3 percent through 2012.

The fundamental challenge for the airline industry particularly in Pakistan is the level of customer service and satisfaction coupled with international reach and destinations to help grow the business. With the rail network in turmoil, a wide opportunity exists to start low cost domestic flights through small aircrafts covering various cities across Pakistan. Costs controls are key to ensure margins. Globally, the top three costs for an airline are Fuel, Labour and Maintenance. If fuel costs increase, this would result in the change in price of fares. Airline is considered a specialized field and those opting for a career in this industry tend to stay with a carrier for a significant portion for their career. With experience the average age of such employees pulling high wages to compensate for experience also puts pressure on costs. Maintenance expense is another major cost driver which includes stores and spares for replacement of parts. The ground time for an aircraft due to unavailability of spares creates unnecessary loss in revenue which has been a major concern for PIA. Rumors were in circulation of taking over PIA by a new company called Indus Air due where PIA management is deliberately pulling the performance if the airline down with an aim to reduce its price to book value. Though management competence maybe under question, privatization of the airline may just be the key to pull the carrier out of losses.

The success of the aviation industry is the strategic plan for each airline to expand their network globally. One of the reasons why Emirates, Malaysian Airlines and Singapore Airlines have been highly regarded is due to their geographic reach and over 100 destinations to serve the world market rather than limiting their focus to few countries. A more critical success part for each airline is the customer services and experience of travel which needs to be reviewed timely for corrective measures. Best practices are seen with the best airlines winning awards in aviation. At best what airlines in Pakistan can do is follow these best practices to uplift their standard. However, this cannot be reviewed in isolation unless the country itself is sound in terms of economic growth, political and law and order condition promoting air travel.