The financial woes of PIA emanate from 1) externally driven factors 2) inhouse incompetence.
Background
There were two periods of PIA going under; first in the 90s in the second half. However, during the years 2002-2004, PIA recovered with a bang and posted the highest ever pre-tax profit in its history in calendar 2003. Further, during 2004 to 2007 (4 years), PIA made an investment of approximately US$ 1.4 billion, the highest ever, in renewing the ageing fleet.
Despite the newer fleet, the decade starting from 2008 saw an unprecedented deterioration which continues unabated till date, owing to politicized decision making and poor management. There is also the perception that the airline is not immune from corruption either. Unfortunately, the advantage of new fleet was frittered away. PIA is beset with declining revenues and uncontrolled rise in expenditures leading to mounting losses as under:
1. The organization is highly politicized and bureaucratic interference in the management affairs is too evident.
2. Historically, the airline had performed better during the dictatorial regimes than under political governments. This is corroborated by the profitability and financial position during the past 5 decades.
3. The CEO of the airline is invariably nominated by the government in power which is always a political choice rather than merited appointment.
4. Application of quota system (which has also been misused) in PIA has damaged the HR. Presently, PIA’s HR is extremely poor and incapable of resurrecting the organisation.
5. The PIA Unions/Associations (presently 5 in number – for different categories of employees) are strong, have had the backing of the government in power and operate as parallel management. They act as a stumbling block in the airline’s improvement effort.
6. Appointments/transfers/postings/promotions are generally not made on merit. The promotions within the organization mostly take place on seniority basis rather than being purely performance based. Many of the personnel presently holding position of General Manager and Departmental Head do not qualify for the position. They have reached this position by virtue of seniority/length of service.
7. The members of PIA Board have not taken keen interest in the affairs of the airline. Many are moderately qualified and lack strong professional background while having no aviation experience. They are keen to come on Board to get privileges. They have failed to offer prudent guidance/advice to the management for turning around the airline and committed dereliction of duty by failure to seriously monitor the deteriorating affairs.
8. In the context of HR quality and quantity, PIA is overstaffed and many employees without professional degrees, also overpaid while less productive as compared with private Pakistani carriers. As an example, an unskilled employee like a peon with a 15-20 years length of service in the airline gets a salary as much as Rs 30,000-40,000 based on time scale promotion and periodical pay increases under Union agreement. Such an unskilled person in the private sector earns Rs 14,000-15,000 at the most.
9. The retirement age of cabin crew is 60 years also, which is a constraint in providing good inflight service.
10. Frequent changes in top management, to accommodate favourites, have been occurring in the organization. This leads to inconsistency in policy, lack of ownership, shifting of responsibility and start of blame game.
11.The principle of ‘right person for the right job’ is not the overriding criteria in the organization for senior management positions. A pilot can be placed in HR department, a marketing man in services Department, an engineer in marketing Department, an HR man in Procurement Department, for instance, at the pleasure of the top management.
12. Liberal traffic rights granted by the government to foreign carriers specially Gulf based state backed airlines from 90s onwards without raison de’tre. In other countries, traffic rights are given on the basis of quid pro quo but the successive governments here have not adhered to the principle of reciprocity. An analogy to this can be cited as the flawed FTAs signed by the government with foreign countries which have encouraged liberal imports but dampened exports causing imbalance in trade. There is need to revisit Air Services Agreements / Bilateral Agreements for rebalancing.
13. Over the past few years, the revenues of the airline, in rupee terms, have remained stagnant, while the business, market share and revenues of the private Pakistani carriers increased manifold. Why PIA has not been able to compete with its peers in the Pakistani industry, let alone been outflanked by foreign airlines, is a key question. Apart from other factors, the performance of Marketing Department of PIA has been very poor as it has always been shy of competition. Further, appointment of certain GSAs has not been without controversy. There has also been rumour mills about the nexus of marketing personnel and the unscrupulous agents, depriving airline of legitimate revenues:
14. Considering the rupee devaluation factor over time on PIA’s foreign currency sales, the overall real revenues (when translated into dollars) show significant reduction over the years.
15. Until the 90s, PIA’s foreign currency sales represented 65-70% of the total sales (Forex+Rupee combined). PIA was surplus in foreign exchange, repatriating dollars to Pakistan thru the State bank. With the advent of government’s open skies policy, for which the airline was unprepared, this started to decline. PIA’s current sales in foreign exchange have fallen to just 50 % of the aggregate in rupee terms, notwithstanding the devaluation element. It is deficient in foreign exchange and partially dependent on government for allocation of foreign exchange.
16. Over the years, while the revenue base has shrink, non operational/overhead costs like Distribution expenses and Administrative expenses have gone up. It shows that there is no concept of cost control in the organization. Like the water which flows from the mountain top to its bottom at its own velocity, the concept of austerity is always driven and proliferates from the top but in PIA, the airline bosses have given little emphasis to cost containment.
17. Over the past 10 years, PIA has been incurring huge losses every year but the pay package of the employees at all levels have been periodically increased. What justification exists for increasing salaries when the airline is in losses? Resultantly, the ratio of employees cost to Revenue today have drastically gone up as compared to a decade ago.
18. Some personnel in senior management position have been hired on contract on exorbitant emoluments. What justification exists for this benevolence when the airline is profusely bleeding and what have been the contribution of these so called ‘smart chaps’ in improving the revenues and reducing cost?
19. With the present dilapidated condition of the organization, there is no possibility of a turnaround by the management on its own without large government bailout package/financial assistance unless radical but painful measures are implemented. The present situation requires a deep surgery which may not be pliable to a political government.
20. The Engineering Department, which is the backbone of any airline, has been neglected over the years with little or no investment. As a result, most of the repair/maintenance work on aircraft/engines is outsourced abroad causing high cost burden and expenditure in precious foreign exchange.
21. Such cosmetic things like change in logo/livery on aircraft or uniform change do not augment revenues or attract more passengers. It only adds to sunken cost.
22. Flawed fleet induction in the past has also taken its toll but I would not like to further dilate on this as it can become a topic of much debate and discussion and digress us from the issue on hand. Needless to say, certain fleet decisions have had political tinge.
23.The management even failed to take advantage of the drastic fall in oil prices from 2015 onwards and continued posting huge losses thereafter while other airlines took full benefit of the drop and improved their margins.
1. The Aviation Division was previously under Ministry of Defence. The creation of a separate Aviation Division during this government has not been helpful. The autonomy and authority of Civil Aviation Authority (the Regulator) has been gradually eroded with the Regulator just becoming a post office.
2. The Board members and the CEO should be appointed by a Committee consisting of nationally acclaimed professionals of impeccable integrity.
3. The Board should have full authority to administer PIA affairs without interference from government functionaries. The government’s role should restrict to monitoring the performance.
4. Drastic revamping of PIA’s HR is needed.
5. Induction of personnel should be purely on merit to provide level playing field with its peers.
6. All promotions should be performance based rather than seniority. The service rules need to be redrawn.
7. Freeze on Unions/Associations and putting PIA under ‘Essential Services Act’ until it regains its rightful place in the industry.
8. Retirement age of cabin crew to be lowered to 40-45 years so that young, educated, smart and well groomed faces become the face of PIA’s service culture inside aircraft cabin.
9. Hire and fire authority should be available to PIA management. Presently, the procedure to remove a delinquent employee is cumbersome and usually ends up in court with the decision mostly in favour of the employee.
Economic & financial
10. Not only freeze on future wage increases but recommend a cut of 15-20% in salaries. During the past
10 years, there has been sizeable increase in emoluments under Union/Association’s pressure while the productivity has gone down.
11. The government should be persuaded to seriously take up with the US government at a higher level for allowing direct flights (without stopover) from Pakistan to the US destinations (like Canada) so that the route becomes viable to operate. The induction of two Boeing 777-200 LR aircraft bought from the Boeing Company in 2006 were meant for deployment for this very purpose.
12. Additional flights should not be granted to any foreign carrier going forward including at new Islamabad airport. Further, convenient slots on Pakistan airports should be reserved for PIA/Pakistani carriers as is done in other countries.
13. Higher tax (FED) be imposed and collected on tickets issued by foreign airlines for sector beyond their home base (6th freedom traffic which rightfully belongs to Pakistani carriers) as a means to maintain some level of leverage as it may be difficult to roll back the excessive flights already granted to them.
14. No wet leasing of aircraft should be allowed except for short period in case of exigency.
15. PIA’s Engineering Department should be upgraded so that all repair/maintenance work is done inhouse to reduce operating cost. The Engineering department can become a lucrative source of additional revenue as well as a source for assimilating newer technology if reorganized, disciplined and manned with competent personnel. It can be transformed into a regional hub for repair and maintenance work on aircraft due to available demand.
16. Top most priority be given for generation of revenues in hard currencies to offset the adverse impact of weaker rupee on PIA’s balance sheet.
17. Strict instructions be issued that travel of government officials abroad (Including those of SOEs) and inland travel to be on PIA except where PIA does not operate. This directive already exists but not followed.
18. The airline should have right aircraft mix to optimize seat occupancy – right size of aircraft for the right sector. Deployment of long range aircraft on short /medium range sectors is unviable.
Responsibility
The responsibility for ruining PIA from 2008 onwards should be shared as follows:
* The governments in power at the time
* PIA Board
* CEOs
* The concerned Ministry
* Civil Aviation Authority
Conclusion
The airline is technically bankrupt, facing huge challenges, but can be recovered with sincere, upright
and strong leadership which is empowered to carry out deep surgery and implement painful though unavoidable measures. This is a political decision which has to be taken at the highest level.
Unbundling certain services
There has been occasional talk at times of divesting PIA of some of its functions like Engineering, Ramp Handling, Traffic Handling, Flight Kitchen etc. and outsourcing these by protagonists of privatization as well by media and by those who have little knowledge of aviation business, on the ground that these are not principal functions of an airline and PIA management should concentrate on its key business. The fact is that these functions are core in an airline, but misconstrued as superfluous, and provide huge support to its operations while subsidising the costs of operation. It will be a great mistake to outsource them.
There is another view that airline may be broken up by setting up separate and independent entities to carry out the above functions. This will however make the organization top heavy and result in loose coordination/liaison. Another view is that PIA be bifurcated into two, domestic and international airlines. This is purely a stupid idea. Lean and thin PIA, with all functions intact, can provide competitive edge.
Loss to country
The downfall of PIA and the meteoric rise of foreign carriers in Pakistani market has resulted in huge increase in remittances/outflow of their earnings from Pakistan, out of our scarce foreign exchange resources, burdening our external account. This is corroborated by the increasing figure under ‘profit repatriation’ issued by the State Bank.
Privatisation of PIA, whole or partial, will be a disaster for the country. There is nothing inherently wrong with the airline. It is the persons who drive it make it good or bad. Privatisation will turn PIA into a backyard of foreign carriers and shrink its already reduced network.
The writer is a former CFO of the airline
Published in Daily Times, May 8th 2018.
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