Pakistan International Airlines
April 11, 2013
RECORDER REPORT
The story of Pakistan International Airlines almost reflects the story of the Pakistan state. The country's flag carrier was conceptualised before the creation of the country itself when Quaid-e-Azam Mohammad Ali Jinnah advised M A Ispahani, a leading industrialist of the then times, to set up a national airline.
PIA was originally launched in 1946 as Orient Airways, a private airline based out of Calcutta. It got its operating licence in May 1947, and soon after partition it transferred its base to Pakistan and established the all important links between Karachi and Dacca.
The airline began operations with a fleet of just two DC-3s, three crewmembers, and 12 mechanics. The initial routes were Karachi-Lahore-Peshawar, Karachi-Quetta-Lahore and Karachi-Delhi Calcutta-Dacca. By the end of 1949, Orient Airways felt the need to acquire 10 DC-3s and three Convair 240s, which were operated on these routes. In order to facilitate further expansion, more capital was needed, and for this purpose the government of Pakistan stepped in. The result was a merger between Government of Pakistan and Orient Airways via the PIAC Ordinance 1955.
Over the next 10-15 years, PIA went through what is oft termed as the Golden Period of PIA, a period of designer uniforms, iconic air hostesses and historic firsts in aviation. The airline was being associated with words like development, expansion, and growth, so much as UAE-based Emirates Airline thought best to take learning cues from the PIA. However, just as that golden period swept into distant past for Pakistan, PIA's golden period also gradually caught rust over the ensuing decades.
Today, the same PIA is associated with inefficiency, corruption, mismanagement, nepotism and what not - almost just as the fate of Pakistani state that fell prey to similar vices. Add to that the triple whammy of jet fuel price risk, currency risk, and interest rate risk and we have a perfect recipe for continued losses.
RECENT FINANCIAL PERFORMANCE In the last nine years, PIA's story has become from bad to worse. Between 2004 and 2011, the airline's revenue grew by an average 11 percent. However, the firm's gross margins have remained weak. In the nine months ending September 2012, PIA's gross margins fell to 0.17 percent. This is not just the weakest margins in many years but also rather weak compared to the Great Recession of 2007-2008 that clipped business margins world-wide. The reason jet fuel price hike.
Jet fuel prices hovered around $3.05 per gallon in 2012, significantly higher from the average rates seen between 2004 and 2011. The next big hit came from depreciating rupee that fell to an average 93.28 against the USD in 2012 against the average of 59.74 in 2007. As a consequence of weakening rupees and the failure to efficiently hedge against the same, exchange losses have risen from Rs 720 million in 2007 to Rs 4.65 billion in the nine months ending September 2012.
The losses have been creating holes in the balance sheet, where two of the main key ratios, current ratio and debt to equity ratio have been worsening over the years. Moreover, given that the rupee weakened further in the last quarter of CY12, further erosion in PIA's profit and loss account and thereby further erosion in balance sheet is on the cards.
PERFORMANCE DURING THE PPP REGIME PIA's full year results of 2012 are not announced yet, but a comparison of its performance between 2008-2011 with the performance during preceding four years provides some clue. While the overall airline performance remains bad, the comparative operational and financial performance has been bad-to-mix and at the helm of jet fuel prices and weakening rupee.
The airline's revenue per passenger carried and by kilometres travelled by passengers improved marginally by an average four percent. It also improved its passenger load factor by 5.6 percent. PIA's revenue from hours flown also went a tad up. Similarly, the average number of employees reduced marginally by 4.4 percent over the years under comparison, while revenue per employee jumped substantially by nearly 62 percent.
However, these were only mildly positive factors - clearly not sufficient to offset the continued impact of rising jet fuel price, weakening currency, and the persistent inefficiency stemming from high number of employee that PIA continues to staff.
In US dollar terms, PIA's operating revenue per employee increased from an average $58,000 to $69,000. But the ratio, according to Air Transport World data, remains far below the peer average of $264,000, a list that includes the likes of Malaysia airlines, Emirates and Kenya airways. This is largely because PIA's average, staff per aircraft is around 450, while in peer airlines; this ratio is 150-200 per plane.
Similarly, the ratio of operating expenses to operating revenues worsened to 113 percent between 2008-2011 from 105 percent in the preceding four years. This too is far off from the peer average of 94 percent. The airline management has been trying to revamp the business by the implementation of a new business plan that includes the replacement of ageing fleet, the turning cost centres into strategic business units while keeping additional focus on customer service.
However, given the trend in jet fuel prices and rupee-dollar parity, the airline needs to cut its main cost centres ie the politically charged employees, while doing a better job at hedging fuel and exchange rate costs. With no major positive change in the previous regime, the bucket is now passed on to whosever takes the reins next.
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Average regime performance
=============================2004-2007 2008-2011
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Gross Margin 7% 9%
Jet Fuel Prices (Rs per US Gallon) 108 208
Admin cost (as a percentage of sales) 6.95% 7.24%
Finance Cost 4,222,686 9,248,570
Net Margin -10% -22%
Current ratio 0.59 0.20
Debt to equity 61% 75%
Revenue Passengers Carried (000) 5,442 5,661
Revenue Passengers Kilometers (000) 14,207,965 14,784,191
Available Seat Kilometers (000) 20,894,018 20,582,882
Passenger Load Factor (%) 67.9 71.75
Revenue Hours Flown 134,728 137,300
Average No of Employees 18,832 18,003
Revenue per Employee (Rs) 3,503,508 5,658,653
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Source: Company Accounts 2008-2011: PPP-regime
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