x Abu Dhabi, UAE Thursday 20 July 2017

Bid to halt Pakistan carrier's fall

After years of mismanagement and huge losses, the country's new leader is determined to get the airline out of its tailspin and restore it to its former glory. But to be successful, serious hurdles need to be overcome first

Pakistan International Airlines has a fleet of 42 planes, 24 of which are operational and 18 of which have been grounded. Asif Hassan / AFP
Pakistan International Airlines has a fleet of 42 planes, 24 of which are operational and 18 of which have been grounded. Asif Hassan / AFP

In the midst of multimillion-dollar losses and accusations of large-scale corruption at Pakistan International Airlines (PIA), Pakistan's recently elected prime minister Nawaz Sharif has appointed a committee to restructure the country's once proud national carrier.

But the effort may not be enough.

Last year state-owned PIA netted a loss of US$340 million, 23 per cent worse than a year earlier, on revenues of $1.1 billion, which were down 4 per cent.

While PIA has been racking up losses for the past several years, this was the highest the company had incurred since 2008. The mounting deficit has also wiped out the shareholder capital and the airline currently has a negative equity of $1.6bn.

PIA, like the global airline sector, has been hurt by the global economic recession and high jet fuel prices. In addition, the company has to make do with a limited number of airworthy planes - of its fleet of 42 planes, only 24 are operational, and the rest are grounded because of technical problems, says Arif Habib, a board member of the airline and head of the Arif Habib Group, a Karachi-based conglomerate, who recently joined PIA's board.

While these are real problems, PIA's main troubles are deeper and go back in time. The airline, in which the government has an 87 per cent stake, has been buckling under losses for years, caused by mismanagement that included overstaffing, fewer flights, a decrease in revenue and market share, and it is plagued by allegations of corruption and nepotism.

"PIA has become a political football," says Ikram Sehgal, chairman of the Pathfinder Group, a security company, and a frequent commentator in Pakistani media.

"It paid well and was a lucrative place for a job" and was an easy way for the government of the day to reward its favourites. Apart from a limited fleet, PIA also has to make do with a mostly ageing fleet that guzzles fuel. As a result, last year the company spent 55 per cent of its revenue - or 47 per cent of its operating cost - on fuel, up from about 10 per cent in 2001, according to its annual report.

The company also has been hit by a sliding Pakistani rupee, which depreciated by about 8 per cent against the US dollar over the course of last year. The Pakistani rupee started the year at 90 rupees to the dollar and ended it at 97.23, the PIA said in its annual report.

Transparency International-Pakistan, a non-profit organisation that focuses on highlighting corruption, has filed several applications with Pakistan's Supreme Court, voicing apprehensions over the state of affairs and corruption at the airline.

Syed Gilani, an adviser at Transparency International-Pakistan says the government "has used PIA as a parking lot for jobs".

The numbers for employees per aircraft range from 400 to 520, several times the international standard of 150 workers per aircraft, say Mr Sehgal and Mr Gilani.

PIA did not respond to requests for an interview for this article.

Apart from overstaffing, the company also has been accused of sheer mismanagement of its resources.

One board appointee did not hedge for fuel, a mistake that cost the company dearly, says Mr Sehgal. Another's daughter designed new motifs for the PIA fleet's rear sections - replacing the distinctive green tail with different designs.

"She made every tail into a Banarasi sari," says Mr Sehgal, adding that the cost of the redesigns added up to many thousands of dollars. Banarasi saris are a luxurious form of womenswear in the region.

Another political appointee to the board used company funds to build a ramp to his apartment on the first floor of the building he lived in.

"You can't run an airline that way," says Mr Sehgal. "The fact that PIA is flying is a miracle."

Critics say one external factor that hit the airline was a policy of "open skies" that Pakistan introduced in the late 1990s. This allowed several Arabian Gulf airlines access to the market and today about 192 flights from Qatar, Bahrain and Kuwait among others fly to several cities in Pakistan every week, according to Mr Sehgal.

However, the policy did not include a provision that gave similar access to PIA to those countries and it did not include a revenue sharing deal either. As a result, PIA flies only a handful of flights to these destinations, losing out on market share and revenues.

But PIA did not start out like this.

In June 1946, when Pakistan was yet to be created, Mohammed Ali Jinnah, founder of the upcoming nation, instructed MA Ispahani, a leading industrialist, to set up a national airline. Since Pakistan was going to be split in to two parts - East Pakistan, which is present-day Bangladesh, and West Pakistan - Mr Jinnah realised it was imperative to have an airline to connect the two.

Orient Airways was created in October 1946 in Calcutta and it got an operating licence in May 1947. A few months later in August, Orient helped in relief operations, ferrying passengers between the Indian capital Delhi and Karachi in the newly created Pakistan. In 1955 it merged with a new national carrier proposed by the government to form PIA.

That was also the year PIA made its first international flight - to London via Rome and Cairo. Then followed the golden years of the airline as it expanded its fleet and set up new routes both domestically and internationally including to New York and China.

In the mid-1970s it started offering air freight and cargo services. It also became the airline to turn to for help for other countries getting ready to launch their own carriers. It reportedly provided technical and administrative assistance or leased aircraft to foreign airlines including Somali Airlines, Air Malta and Yemen Airlines.

In the mid-1980s, PIA also reportedly helped establish Emirates Airline by leasing two of its aircraft - an Airbus A300 and Boeing 737 - as well as providing technical and administrative assistance to the new carrier.

But a lack of timely contribution of required capital and the politicisation of the management of PIA caused the losses to add up, Mr Habib says.

PIA's board is now discussing various ideas to tackle these huge losses. Apart from the obvious solutions of the government pumping in money into the cash-strapped airline - or even reimbursing for a few years the financial costs of servicing its debt - the board is considering the option of bringing in private players, such as an international airline, to take an equity stake in the company, said Mr Habib.

"PIA requires large sums of money and that means an investor [such as a big international airline] that has deep pockets and has the space to incur some losses in the initial years and then streamline the operations over a period of time," Mr Habib says.

The board is also considering buying smaller aircraft that can cater to the domestic market. These could also be used for the relatively short hops to the Gulf region. Newer planes will also consume less fuel and help rein in those costs, Mr Habib says.

Management is planning to fine-tune these suggestions and run them by the committee appointed by Mr Sharif to restructure PIA.

"If the financial structuring of the company is right, it could be a profitable business," Mr Habib says.

"Then it depends on the commitment of the government to the airline to see how seriously it takes these suggestions."

 

business@thenational.ae