The woes continue for loss-making Pakistan International Airlines

CAPA > Aviation Analysis > The woes continue for loss-making Pakistan International Airlines 9th November, 2011 PREMIUM
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The woes continue for Pakistan International Airlines (PIA) with ongoing losses amid allegations of mismanagement, deteriorating economic conditions and a worsening corporate image for the national carrier. Talk of bankruptcy has continued to surround the carrier. The carrier has generated losses amounting to PKR100 billion (USD1.15 billion) over the past three years alone, with losses continuing in 2011, including a USD59 million operating loss in the three months to Sep-2011. While majority owner, the Pakistan Government, has continued to assert its intention on making the national flag carrier a profitable state entity, even it is tiring of the continued losses and scandal surrounding the carrier. Pakistan's Finance Secretary Dr Waqar Masood this month stated the Pakistani Government has turned down a PKR20 billion (USD232 million) bailout package requested by the carrier to aid its recovery from its "financial crisis", stating it would not continue to provide finances without a clear roadmap for the national carrier's financial and administrative restructuring.

No bail-out without roadmap; business at national carrier is 'as usual unacceptable': Pakistan Prime Minister
Pakistan Prime Minister Syed Yusuf Raza Gilani also rejected a request to convert a PKR8 billion (USD92.7 million) government loan into equity for the carrier, according to local media reports, which noted the Prime Minister also rejected a roll over of Rs 19.6 billion Term Finance Certificate (TFC) and Sukuk for five year grace period and USD146 million bank loans. The Government does not have the capacity to provide cash support. We can help them in loan restructuring but they will have to meet performance indicators, the Finance Secretary said, as quoted byDawn. The PM added that business at the national carrier is "as usual unacceptable", with the Government seeing the current crisis at the carrier as linked to "mismanagement" and "bad governance". The PM has requested the national carrier improve corporate governance, services and finances. He added the restructuring efforts at the carrier would incorporate professionalism, autonomy for the board of directors and would be designed to remove bureaucratic impediments in decision-making processes.

Despite remaining the largest operator on Pakistan's international and domestic routes, the carrier is increasingly uncompetitive in the global market.

PIA was created out of private airline Orient Airways in 1955 just eight years after Pakistan became an independent nation. The carrier performed well until the 1970s when corruption and overstaffing negatively impacted the company. In the 1980s, the carrier's reputation was further hit due to poor maintenance practices. 1990 signalled further challenges for PIA with the liberalisation of the market.Despite remaining the largest operator on Pakistan's international and domestic routes, the carrier is increasingly uncompetitive in the global market.

Losses worsen in Sep-2011 quarter

Reporting its worsened USD59 million operating loss and USD95.2 million net loss in the Sep-2011 quarter (compared with losses of USD17.8 million and USD50.1 million, respectively, in the Sep-2010 quarter), PIA noted that its finances continue to be impacted by significant challenges in the domestic market due to "floods and a worsening law and order situation". Internationally, the carrier was also exposed to the political instability in the Middle East, its largest international market. The carrier's operating loss margin stood at a concerning -16.5% with a net loss margin of -26.6% in the quarter. Pakistan International Airlines profit/loss from operations margin and net profit/loss margin: 3Q2010 vs 3Q2011

Source: CAPA Centre for Aviation & company report

Overall profitability was also seriously impacted by increased fuel costs, which comprised 55% of total costs and increased 41.5% year-on-year in the quarter. Overall cost of service increased 16.4% in the quarter to USD335.8 million, outpacing the 11.3% increase in revenue to USD356.7 million. The carrier also noted future profitability will continue to be impacted by rising fuel costs, expected currency exchange rate volatility, deteriorating economic conditions and security situation concerns. Pakistan International Airlines consolidated financial highlights for the three months ended Sep2011:

Revenue*: USD356.7 million, +11.3% year-on-year; Cost of services: USD336.8 million, +16.4%; Profit/loss from operations: (USD59 million), compared to a loss of USD17.8 million in p-c-p; Net profit: (USD95.2 million), compared to a loss of USD50.1 million in p-c-p; Passenger traffic (RPKs): 3935 million, -1.0%; Passenger capacity (ASKs): 5314 million, -1.0%; Seat factor: 74.1%, +0.1 ppt; Cargo traffic (FTKs): 32 million, -14.9%; Cargo load factor: 65.2%, -12.5 ppts.

*Based on the conversion rate at USD 1 = PKR86.13

In terms of traffic, PIA handled 4.5 million passengers in the first nine months of 2011, a 3.4% year-on-year increase. In the Sep-2011 quarter, the carrier reported small traffic and capacity declines of 1.0%, with load factors increasing marginally by 0.1 ppts to 74.1%. Freight load factors, however, slumped, by 12.5 ppts to 65.2%. Pakistan International Airlines passenger load factor: 3Q2010 vs 3Q2011

Source: CAPA Centre for Aviation & company report

Safety concerns, delays and cancellations result in deteriorating consumer confidence in PIA

...international aviation watchdogs are increasingly wary of the airworthiness of PIAs fleet...
Continued safety concerns, long flight delays, continuous cancellations, a number of emergency landings and technical faults with its ageing fleet are also destroying the image of the carrier, resulting in a deterioration of consumer confidence. This situation is of further concern, considering the International Civil Aviation Organisation (ICAO), European Aviation Safety Agency (EASA) and other international aviation watchdogs are increasingly wary of the airworthiness of PIAs fleet. The carrier also stated it felt the impact of strike action and "unforseeable incidents", such as bird strikes, which have "hampered operations" and resulted in aircraft shortages in the Sep-2011 quarter. Nine of the carriers 39-aircraft fleet were grounded during the quarter and over 148 services were cancelled in Oct-2011 alone due to technical reasons, 35 due to operational issues and 31 due to other reasons. This not only impacted regular passengers but also Hajj pilgrims who have heavily criticised PIAs management and have also urged the nations President and Prime Minister to take note of the ongoing crisis. Between 14-Aug-2011 and 20-Sep-2011, more than 190 services were either cancelled, delayed or rerouted due to mechanical problems with aircraft. Over 125 flights were reportedly delayed up to 21 hours, more than 15 rerouted and over 50 cancelled during the five weeks to the end of Sep-2011. PIA was also hit by strike action earlier this year, which forced operations to close for four consecutive days and resulted in the cancellation of a potentially useful codeshare and cooperation agreement with Turkish Airlines. Staffing costs are also increasing, with Pakistan Defence Minister Ahmed Mukhtar, in a reply to the Senate in Oct2011, stating that while the carrier suffered losses of PKR100 billion (USD1.15 billion) over the past three years, it had recruited 2171 staff members over this period, reportedly the highest level of hiring in the history of the carrier.

PIAs problem needs rightsizing. Reduction in non-operational areas will be done (through) normal attrition, the Minister said, adding there will be no reduction of manpower in operational staff, such as pilots, aircraft engineers and specialised professionals.

PIA has more employees per aircraft than any other airline in the world...
PIA recruited 237 people in 2011, 1179 in 2010, while 684 appointments were made in 2009 and 56 in 2008. Around 1854 regular appointments were made, while 317 employees were recruited on a contractual basis, between 2008 and Jul-2011. As many as 870 people were recruited as human resources assistants, junior instructors, cargo assistants and reservations ticket assistants. Around 357 air hostesses and 75 cadet pilots were also recruited by the airline over this period. According to the Defence Ministry, around 4407 of 8801 officers were also promoted within the airline. Mr Mukhtar added the carrier has an employee to aircraft ratio of 497:1, highlighting the overstaffing problem. According to a Jun-2011 report in The Express Tribune, PIA has more employees per aircraft than any other airline in the world at present. Job reductions are inevitable if the carrier wants to continue on the path to profitability, although this will not be without challenges, as industrial action earlier this year showed.

PIA to add 30 new aircraft to fleet by 2020

Currently, PIAs fleet comprises 40 aircraft, of which at least 27 are over 22 years old while the remaining 12 are five to eight years old. Five types of aircraft are in the carriers fleet, including A310, ATR 42-500, B737, B747 and B77 equipment. Pakistan International Airlines fleet composition: Nov-2011

Source: CAPA Centre for Aviation

The carrier, at the end of Oct-2011, stated it plans to induct 30 new aircraft into its fleet over the next decade through 2020, acquiring aircraft through five-year leases with an option to purchase, and increasing its fleet to 70 aircraft. PIA general manager for public affairs, Syed Sultan Hasan, in an interview with APP stated that, most probably the first of the additions to the national carrier will be in 2012 and this may be aBoeing. He said an overall outline for the scheme has been approved by the Government and PIA was presently engaged in working out modalities to get the plan materialised. The aircraft will be acquired new from Airbus and Boeing, with funds raised via financial markets rather than budgetary allocations or special government grants. The carrier has stated the acquisition of new aircraft is "very much included in the airlines business plan which has already been submitted to the Government".

Increased competition on Gulf routes

In network news, the Gulf region has become increasingly competitive for PIA. PIA is the largest carrier by seats in the Pakistan-Middle East market with a 29% share of capacity at present, increasing to 32.5% capacity share from Dec-2011. Middle Eastern operators, Emirates and Saudi Arabian Airlines, are the next two largest carriers by capacity share in the market. Pakistan to Middle East capacity (seats per week, one way): 19-Sep-2011 to 28-Apr-2012

Source: CAPA Centre for Aviation & Innovata Schedules data is supplied by Innovata and is updated weekly.

Overall, 46% of the carriers international capacity is deployed to the Middle East, covering 12 destinations Abu Dhabi, Al Ain, Bahrain, Dammam,Doha, Dubai, Jeddah, Kuwait, Madinah, Muscat, Riyadh, Sharjah Airport and Zahedan. Pakistan International Airlines international capacity by region: 07-Nov-2011 to 13-Nov-2011

ORGANIZATIONAL BEHAVIOUR OF PIA AND AIRBLUE

RECOMMENDATIO NS
PAKISTAN INTERNATIONAL AIRLINES

DECENTRALIZATIONPIA should decentralize is its structure that would lead to the easy management,increased motivation, easy access to information and resolution of the conflicts (asthey would be resolved by the immediate manger time span would then reduced).S i n c e e m p l o y e e s i s s u e s r e g ar d in g t h e i r b e h a v io r wo u ld l e s se n , s o i t w o u ld u lt im a t e l y l e ad t o mo r e s at i sf i e d e m p l o y e e s t h a t w o u l d re s u l t in e n h a n c e d productivity of the organization. EMPLOYEE EMPOWERMENTPIA should make efforts towards empowering the employees that is going to leadto more employee participation in the decision making process and also result inmore employee satisfaction and enhanced motivation. Apart from this, employeeswould feel more independent to discuss the issues explicitly without hesitation.This would also enhance team work process at PIA as quality team and cross-functional teams. The employees will work with more commitment and dedicationand every employee would work to his/her fullest due to increased motivation.However, with empowerment comes accountability, so it is suggested that whilethey empower their employees, there should also be a controlled check on them29

ORGANIZATIONAL BEHAVIOUR OF PIA AND AIRBLUE to ensue the correct usage of power delegated to every employees within their circumscribed limits. OVERHEAD COSTSPIA should also reduce its overhead costs that are it should mange its resources:labour more effectively, so that with less input, more out put can be achieved andt h e sa v e d re s o u r c e s c an b e u t i li z e d i n o t h e r a r e a s su c h a s i n t ro d u c in g m o r e training courses for the employees so that the quality of the workforce could beincreased. Hiring the services of expertise can improve the efficiency of their s e r v i c e s , s o b y s a v in g t h e o v e r h e ad c o st s , t h e y c a n u t i li z e t h at mo n e y f o r t h e expertise services. So by analyzing the various segments of the organization andm a k i n g t h e r ig h t c o r re c t i o n s , i t c an s u b st an t i a l l y i mp ro v e t h e st a n d a r d s o f Organizational behaviour. TWO-WAYCOMMUNICATIONThe suggestions of the employees can prove to be very effective in improving theo p e r a t i o n s a s t h e y a r e t h e o n e s w h o m a n a g e t h e m . T h e r e f o r e , a t o p - d o w n a p p r o a c h sh o u ld b e r e p l a ce d w i t h t wo w a y c o m mu n i c at i o n s . I n t h i s w a y , t h e e m p l o y e e s w o u l d f e e l m o t i v a t e d a n d v a l u e d a s t h e y w o u l d b e i n c l u d e d i n decision-making.30

ORGANIZATIONAL BEHAVIOUR OF PIA AND AIRBLUE AIRBLUE Consistent hiring policies should be administered and should not change fromtime to time. People should be encouraged to exercise expert power. New venture teams should be incorporated to develop new ideas based on thefeedback taken from customers and employees. T o t a l q u a l it y m an a ge m e n t sh o u l d b e c at e re d t o w i t h in t h e w o r k g r o u p s a n d i mplementation of various skill enhancement programs for quality an d productivity improvements such as Six Sigma should be provided to its executiveemployees.31

PIA vs AIRBLUE
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Source: CAPA Centre for Aviation & Innovata

However, PIA has stated it is expected to feel the impact on profitability of a reduced share in the Saudi market, its most profitable route, asNational Air Services (NAS) and Shaheen Airlines have been approved to operate on services. The carrier, the largest operator between Pakistan and Saudi Arabia, had targeted net revenue for 2011 on the route of PKR13.7 billion (USD159 million). Pakistan to Saudi Arabia (seats per week, one way): 19-Sep-2011 to 28-Apr-2012

Source: CAPA Centre for Aviation & Innovata Schedules data is supplied by Innovata and is updated weekly.

The airline carries more than 16,000 passengers per month on the sector. Between 100,000 and 125,000 Hajj passengers are transported to/from Pakistan to Jeddah p/a, with the carrier handling 111,000 pilgrims in Oct-2011 alone. The carriers post-Hajj operations will cover the 10-Nov-2011 to 10-Dec-2011 period and are expected to handle a similar amount of traffic.

Domestic capacity declines notable between 2006 and 2010

Meanwhile, domestic capacity in the country declined notably between 2006 and 2010, although growth has returned this year and capacity is now almost back to 2007 levels. International capacity, meanwhile has been growing since 2008 based on OAG FACTS data, predominantly supported by the growth of international airlines entering the market. Pakistan domestic capacity trends: 11 months to Nov-2002 to 11 months to Nov-2011

Source: OAG FACTS

Pakistan international capacity trends: 11 months to Nov-2002 to 11 months to Nov-2011

Source: OAG FACTS

Pakistan International Airlines in precarious situation as losses continue

Its survival is based solely on significant government support and protection...

PIA continues to be in a precarious situation, a situation to which it has become accustomed over the past decade, with its streak of losses continuing and worsening in 2011. Its survival is based solely on significant government support and protection, although the Government is laying down the law, frustrated with the carrier's operational and managerial shortcomings. The carrier's future, as envisaged in its revival plan, is predominantly centred around increased government borrowing and further investment to develop its ageing fleet. However, with the price of oil remaining high, the outlook for PIA will remain challenging, especially given the inefficient operations at the carrier.

PIA, while desperately in need of a HR overhaul, also needs to make better use of the profitable assets that it possesses, such as landing rights at international airports. This, too, will require overcoming union resistance.