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A sad story of PIA's degeneration

RECORDER REPORT

KARACHI: Facts speak louder than fiction and as these facts unfold, they tell a sad and sordid story of how national institutions were allowed to disintegrate.

One of the prime institutions which was made to degenerate was the national carrier. It appears that in a premeditated move the past management had decided to make Pakistan International Airlines a 'cipher' and fold its wings as drastically as it had spread them.

instead of bringing about a 'turn-around' as the former chairman, Shahid Khaqan Abbasi, and his cohorts would proudly claim, the national flag carrier was allowed to run "aground'. The drift to disaster was so swift that the airline which was the pride of the nation, claiming "Great People to Fly With' plummeted to such an extent that today, PIA is saddled with an overdraft/short term debts of Rs 10.8 billion. In addition, the airline has over due payments/arrear liabilities touching an appallingly high figure of around Rs 6 billion and it does not have cash to liquidate these.

According to official estimates made in October 1999, the cash losses were Rs 10 million per day. The mind boggling aspect of the story is that although the Government of Pakistan is the principal shareholder, its direct cash equity investment is minuscule.

The last cash equity induction by the government took place in 1981 and since then there has been no fresh cash injection by the owners. In 1994 the government had agreed to put in fresh equity in PIA and in this context an amount of Rs 2 billion was allocated in the national budget but due to some reason, this amount could not be disbursed to PIA at the time, resulting in the lapse of the allocation.

According to official estimates, PIA soon has to take a decision for the replacement of its 36-year-old Fokker fleet and B-747 aircraft. The replacement is required in the next 1-2 years at the latest. Pending a final evaluation and as an interim measure, PIA this year had obtained on two year's lease, five B-747-300 aircraft from Cathay Pacific to replace its sic aging B-747-200 aircraft.

To resolve part of its difficulties, financial restructuring through the government is required to the extent of cash equity injection Rs 5,000 million and another Rs 5,000 soft-loan for a 20 year period at six percent interest. This is not an unusual move because government in the past has provided similar assistance to banks, KESC, Wapda and Pakistan Steel Mills.

PIA's financial deterioration specially the liquidity crisis being faced in the last two years which has now assumed serious proportions has been accentuated by the following:

Ñ Disbursement of Rs 2.5 billion on account of implementation of early retirement schemes (mandatory and voluntary golden handshakes). The funding was arranged by bank borrowing at commercial rate of 20 percent prevailing at the time. PIA, unlike the other state owned enterprises was not provided any concessional financing by government for this purpose.

Ñ Advance 5.56 million (Rs 2.9 billion) to PIA Investments Limited PIA-II, (an associated company of PIA) for the purpose of renovation of the Roosevelt Hotel, New York arranged by PIA through short-term borrowing.

Ñ Hiring of expensive manpower in the form of consultants advisors which has costed the airline Rs 821 million without any benefit to the national carrier.

Ñ Opening of the Northern gateways and unrestricted access to foreign carriers without the principle of reciprocity. This has unleashed intense competition and provided non-level playing field. PIA's market share is being eroded affecting its revenue generation to the extent of Rs 2,000 million per year. It is not only hurting the national airline but the country as well in terms of increased outflow/repatriation of foreign exchange by foreign carriers through the State Bank of Pakistan.

With this unsavoury back-ground and in a situation where the airlines, in a desperate pitch for traffic, are offering an array of discount fares and come-ons, the present management has embarked on a plan to improve profitability mainly through higher revenues from improved seat factors and cash flew position by recoveries from non-core investments.

It has already made a remarkable recovery since October 1999 when the situation looked bleak and averted financial and institutional collapse by making operational all the eight grounded aircraft and eliminating leased aircraft requirement for Haj/Umrah Rs 340 million were paid as rental last year.

The task of making all system Y2K compliant by December 1999 was achieved without any outside help and extra cost. Sabre had demanded $2 million for this purpose without commitment to total compliance.

PIA has been operating a route structure unable to generate an operating surplus except in Saudi Arabia, Gulf and UK. To improve route economics, operations to Zurich, Amman, Damascus, Teheran, Male and Baku have been stopped while new points Birmingham, Hong Kong and Tripoli are being started. In summer 2000 schedule effective April, capacity increase has been achieved by route rationalisation, rescheduling and maximising aircraft utilisation.

Emphasis is being laid on improving upon existing seat factors as it is considered more achievable then increasing yields which is extremely difficult. One percent increase in seat factor is equal to Rs 500 million.

To further improve its position, it has been recommended to release Haj ticket proceeds to PIA within 15 days of its collection by the government and expeditious settlement of dues by government/related departments, which remain outstanding for 4-5 months at any time, (present unpaid dues total around Rs 1 billion).

Despite the resultant decline in PIA traffic in the Gulf and siphoning of valuable UK traffic by indirect carrier under this policy, an overall growth in international traffic of 7.5 percent during October 1999 to January 2000 over the same period of last year was achieved.

In the domestic market a growth of 3.1 percent was achieved during this period, resulting in an overall system traffic increase of 6.7 percent.

The measures already taken have enabled the airline to project a profit of Rs 514 million in year 2000.