AVIATION INDUSTRY CHALLENGES
SAAD ANWAR HASHMI
Jan 30 - Feb 5, 2012
The demand for air travel in Pakistan has perpetually remained high as more and more individuals seek job opportunities abroad and return with their families for vacation.
Leisure travel has also increased globally with countries with high inflow of tourists further investing in infrastructure development as a means to attract tourists, which in turn translates into foreign exchange.
Investments have significantly increased in construction of resorts and hotels. 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 fleets.
Increase in airfares has not reduced the demand for air travel. Though regional airlines including PIA, Airblue and Shaheen have increased their fares. Nonetheless, flights are generally overbooked through advance booking for domestic as well as international travels.
The success of the airline industry is directly related to the law and order situation of a country. The tourism industry is not growing due to political instability and uncertain law and order conditions. Additionally, Pakistan does not have much space for growth of tourism, which attracts foreign as well as local trippers.
Pakistan international airlines (PIA) has 39 aircrafts and controls a majority share in international routes from Pakistan. PIA with its latest long range Airbus 777-200ER (extended range) and Airbus 777-200LR (long range) aircrafts covering Europe and western destinations gives the airline a strategic and distinctive advantage over its competitors i.e. Shaheen and Airblue.
PIA has been highlighted frequently for management incompetence, poor customer services, high airfares, and significant delays in arrivals and departures.
Airblue excels where PIA lacks in terms of customer services. However, it has budgetary constrain and lacks capacity to raise debt financing to further expand its fleet. Airblue with its fleet of five 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 competitors.
In terms of market share, PIA handles 80 per cent of all of domestic passengers and 45 per cent of international passengers.
Intense competition from international airlines and domestic players continue to put pressure on margins and profitability of airlines in the country. For any airline, the largest revenue driver is international and long-range routes, which guarantee margins over costs.
According to the international air transport association (IATA), international air travel is expected to grow five per cent through 2012. Earnings before interest and taxes (EBIT) as percentage of revenue for airlines with membership of IATA is expected to remain between six to nine per cent to 2012 putting immense pressure on costs with possible upward revision or stability in fares. Utilization for passenger load or capacity utilization is expected to remain at 79 per cent. Despite sluggish growth, stability in fares without any upward price revision net of increase in fuel costs will tend to keep the revision in airfare to its minimum to attract passengers.
Reduced margins are expected to reduce the profitability of the airlines with pressure on margins with net margin for the global industry forecasted at three per cent in 2012. European airlines are expected to have negative growth.
The fundamental challenge for the local airline industry is to give value for money to passengers and gain international access.
With the rail network in shambles, a wide opportunity exists to start low cost domestic flights through small aircrafts covering various cities nationwide.
Controlling cost is a key to ensure margins for profitability. Globally, the top three costs for an airline are fuel, labor and maintenance. If fuel costs increase, this would result in the change in price of fares. However, if international demand for air travel remains sluggish, pressure on margins without an increase in airfare will reduce the profitability for the airlines.
Maintenance expense is another major cost driver. The ground time for an aircraft due to unavailability of spares creates unnecessary loss in revenue, which has been a major concern for PIA.
The success of the aviation industry lies in 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.
A more critical success factor is customer services and experience of travel. 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 viewed in isolation. The country needs to be blessed with sustainable economic growth, political stability, and stable law and order condition.