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Tuesday, October 1, 2013

PIA - Privatisation.

Looking for past glory

PIA chalks out plans to cut mounting losses as government moves forward to privatise the national flag carrier, writes Muzaffar Rizvi

Pakistan International Airlines, or PIA, is striving to get back in black as the new government has made its plan public to privatise the state-run carrier in a last ditch effort to restore its past glory. Pakistan’s Prime Minister Nawaz Sharif has directed the airline’s management to cut down its losses in the short term in order to make it a viable entity for privatisation.
It is an open secret that the airline has been put on the privatisation agenda under the recently concluded deal with the International Monetary Fund (IMF). The sell-off of 26 per cent stakes in the national flag carrier to strategic investors by June 2014 is part of the Pakistan-IMF agreement for $6.4 billion loan that will ultimately help the government to save Rs36 billion annually of the national exchequer.

The PML (N) government is more than serious to revive the privatisation plan to dispose of around 35 public corporations during the next three years. The privatisation process has been initiated with PIA and the details for other state-run ‘unprofitable entities’ including Pakistan Steel Mills and Pakistan Railways will be made available in due course of time. These ‘unprofitable entities’ are inflicting losses of up to Rs500 billion annually on the national exchequer.

Aviation circles and analysts say the government has strong and valid reasons to privatise the airline due to its inconsistent performance and mounting losses. According to PIA’s own report, the airline has suffered losses amounting to Rs119.84 billion over the past 10 years. Flight delays and cancellations have become a norm as only 26 planes out of PIA’s total fleet of 32 are airworthy and the employees-to-aircraft ratio stands at 600 plus compared to the global average of 120.

There are no second opinions about the government’s decision to revive the national airline to provide better service to travellers and improve its image nationally and internationally. It may be a good idea to involve the private sector to turnaround the struggling national flag carrier, but the aviation circles say it would be an uphill task to find a ‘strategic investor’ who can bet on PIA’s revival with present unimpressive numbers in terms of its shrinking fleet, decreasing network, dwindling revenues and high operational cost.

Also, there is a stiff opposition from the airline’s 16,600 regular and 2,700 contractual employees to privatise the airline while the management has also become very active to save the national pride through a comprehensive plan that was submitted to authorities concerned for approval last week.

Positive on break even
PIA managing director Junaid Yunus, at a news conference last week, expressed optimism that the national flag carrier would attain break even in a year’s time. He said the management would work in coordination with the airline’s employees to stem the losses, start new flights in the 2013 winter schedule, cut fuel bills and introduce certain cost-cutting measures to push the airline back in black.

Yunus also made it clear that the airline could become self-sustainable in a year if it has a fleet size of 38 to 40 aircraft, He said the airline would purchase 10 narrow-body aircraft next year, which would further improve its fleet and revenue generation.

Analysts have termed the management’s steps as welcome news but said a lot of other drastic measures need to be adopted at the earliest to turn around the airline’s fortunes. They said the airline has a lot of potential to survive on its own, but there is need to bring the employees-to-aircraft ratio close to global average of 120 and for this purpose the management has to take tough decisions in the short run to make the airline efficient.

As currently there is no retrenchment plan, the employees-to-aircraft ratio is expected to be reduced only after the retirement of approximately 4,000 staff members in the next couple of years [with no new induction] that will have little impact on the airline’s balance sheet.

Apart from this, the airline’s fuel cost bill amounts to more than 50 per cent of its revenue generation, and it may be reduced with the induction of latest fuel-efficient aircraft. There is also need to renegotiate the airline’s debt payment as it has been paying Rs1 billion interest rate per month on the loans and installments of Exim Bank of US.

“PIA’s biggest challenge is perhaps not so much getting investors or other airlines to invest — the real challenge is convincing these parties that the airline has the mettle to allow a wide-ranging restructuring of its operations that inevitably means culling jobs, waste and driving greater efficiencies into its business,” Saj Ahmad, chief analyst at London-based StrategicAero Research firm, told Khaleej Times.

“It is not clear at all that PIA has or is willing to signal such a drastic change to whet investor appetite.”

Ahmad said aside from a huge capital investment requirement needed for new airplanes, PIA simply has too many people working for it. “Like Air India, it is a de facto state jobs programme but as costs balloon, one has to wonder just how long the Pakistani government can carry the financial weight of the airline.”

He said PIA has to address its excess staff policy, curtail waste and improve efficiencies before it can ever hope to break even, let alone make a profit. “Until such time, the airline recognises that it is more than a government arm providing jobs. Like Air India, the carrier has little commercial value and will have even less commercial success — it is sad to say, but both PIA and Air India resemble two sides of a coin that no one wants to touch — and rightfully so!”

Potential customers
Ahmad said one could argue that Emirates may be a candidate, especially since it was PIA that actually assisted in getting Emirates started back in the early 1980s, but Emirates has not followed other Arab airlines in buying stakes. Therefore, it could well be that the likes of Etihad, which has its fingers in many airline pies, will be a lead candidate to buy into PIA, just as it has done in India with Jet Airways.

“Qatar Airways has had its fingers badly burned by the Cargolux affair, and it’s clear they will want to avoid that sort of mess that PIA brings — they are happy to focus their integration in the Oneworld alliance with better quality airlines rather than saddle themselves with the bureaucratic and political corruption that PIA seems to wallow in,” Ahmad said.

Another aviation analyst, who declined to be named, considers Turkish and Malaysian airlines as other potential contenders for 26 per cent PIA stake with management control. “It is too early to expect an interest from potential international airlines in PIA. Nothing is going to happen anytime soon,” he said.

Aviation sources also hinted another option by saying that the government might consider an employee buyout as they already hold about 12 per cent stakes in the airline, however, this would be the least likely choice the government would like to exercise.

Muhammad Mashhood Tajwar, general manager public affairs at PIA, told Khaleej Times that the matter of privatisation is yet to be decided by the federal government.

About the key measures being introduced to improve financial position of the airline, he said various cost-cutting measures, both long and short term, are already under way by the present management.

“The steps include fuel savings, route rationalisation, reducing the number of executive positions at top, among others, that will help the airline get back in positive columns in days ahead,” he said.

In reply to a question, he said so far Rs7 billion have been provided by the government in bailout packages to PIA.

Tajwar was firm that the PIA management has no plan to retrench staff at the moment.

“Well there is not going to be any layoffs in PIA. However, rationalisation or right sizing exercises keeping in view the State Labour Laws of Compensations, are being carried out at foreign stations but no employee has been laid off so far,” Tajwar concluded.

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