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on October 12 | in Encore, Special Report | by | with No Comments

 Privatization

The airline has to turn into a profit-making entity before the bidding opens

By Aoun Sahi

Prime Minister Nawaz Sharif directed the ministry of privatisation and civil aviation division to initiate the process of privatisation of 26 per cent shares of the national flag carrier on September 12, 2013. Sharif argued the government was not in a position to bear the monthly loss of Rs3.3 billion. The only way to put the PIA on the right track, he said, was to involve the private sector in its affairs.

He asked the airline to improve its balance sheet for the task ahead which would not be easy for an airline that has suffered losses worth Rs 119.84 billion in the last ten years.

Around 35 per cent of PIA’s flights were delayed or cancelled during the last year. Only 26 aircrafts (with an average age of 16 years) of PIA out of a fleet of 34 are currently operating with a staff of 16,600 regular and 2,800 contractual employees. This makes 746 employees per operational aircraft (the employee-to-aircraft ratio of PIA stands 570 compared to the global average of 120.)

PIA operates 24 domestic destinations and 34 international destinations. The overall market share of PIA — both in and out of Pakistan — is 48 per cent.

Experts believe PIA has been in trouble for years. Lack of professional management, poor planning, and interference by the respective government have all contributed to the present situation. The airline lost its business over the year but its fuel bills, labour force and their wage bills continued to swell.

In 2003, the PIA employees were consuming 19.3 per cent of revenues (Rs9.172 billion) while fuel accounted for 24.2 per cent (Rs17.9 billion). In 2012, the wage bill according to PIA figures has reached 22 per cent but in absolute terms it makes Rs 27.5 billion while fuel consumed 54 per cent (around Rs68 billion) of revenues. It would not be easy to privatise PIA in its current shape. Air Blue, a Pakistani private airline, spends around 45 per cent of its revenue on fuel.

It was in 2004 when PIA earned profit of Rs1billion when it had 48 operational carriers. The airline succeeded in making this profit after the government pumped in a hefty grant of Rs 32 billion. “There are serious issues in PIA but they do not justify privatisation at all,” says Shaukat Jamshed, president of the Society of Aircraft Engineers.

“It is true that our employee-to-aircraft ratio is very high but still the wage bill accounts for less than 22 per cent of the total revenues while most of the airlines have been spending between 25-35 per cent on salaries of their employees,” Shaukat adds.

“It was the management’s job to bring new airplanes and not employees,” he says, adding, “The induction of 10 new medium-sized aircraft will generate annual revenue of over Rs35 billion. The move would not need to hire even a single new employee.”

A senior official of PIA says on the condition of anonymity that the management has made up its mind for privatisation. “If some drastic steps are not taken, PIA would suffer an irreversible damage in a few months. It’s true that some percentage of PIA employees would lose their jobs in case of privatisation but if the management does not go for it, I fear everybody would lose their jobs like what happened to Punjab Urban Transport Corporation (PUTC),” he says.

Big aircrafts, like 777, are being used on short routes because the airline does not have small planes for domestic routes which increases fuel consumption and operational cost manifold. “Every month, PIA pays around Rs1.5 billion of interest of its local and international loans. At present, the airline’s total liabilities are around Rs250 billion while its assets are worth trillions of rupees,” he informs.

The employee-to-aircraft ratio of the airline would drop in the next couple of years as at least 4,000 workers of PIA retire by 2015. The fuel bill can also be reduced with the induction of new planes. The official believes there are several examples of successful privatisation of airlines.

“The government has been planning to follow the Kenyan airline’s model of privatisation. The Kenyan government also sold 26 per cent shares to a strategic partner. In less than 10 years after privatisation in 2003, Kenya Airways doubled the number of passengers and cargo. It is a profitable airline today, which proves that a national flag carrier can be privatised successfully. Still, most shares in Kenya Airways are held by Kenya’s government,” he says.

In Pakistan, we do have successful examples of privatisation like Al-Ghazi Tractor in 1991 and Millat Tractor in 1992. The two companies were producing around 5000 units per year and hardly making profits when they were privatised. Today, both the companies produce around 50,000 units of international standards every year.

Similarly, we have some examples in the banking sector. The Muslim Commercial Bank (MCB), according to reports, paid only Rs150 million income tax in 1991 when it was privatised. It paid Rs11.01 billion income tax in 2012. In the same way, the UBL paid only Rs1.39 billion as income tax in 2002 before it was privatised, while it paid Rs7.10 billion in 2012.

We also need to be cautious about privatisation of PIA. Pakistan has privatised 167 industrial units from 1991 to 2010 and most of them have been successful. No labour leaders (employees which are owner of 12 per cent shares of the organisation) were invited by the government in any decision-making process with respect to PIA’s privatisation.

The government has been planning to split the airline into two companies to make it a feasible organisation for privatisation. “In the next couple of months, PIA would be restructured as PIA-I and PIA-II,” informs Miftah Ismail, newly appointed member of Board of Directors of PIA and a member of the economic team of Mian Nawaz Sharif.

According to Ismail, PIA-I will retain airline business, routes, assets and around 6,000 employees to run the affairs of the national flag carrier. PIA-I will continue contracting leases on more efficient airplanes and rationalise its routes in order to attain efficiencies. PIA-II will have all the debt, it will grant a voluntary ‘handshake’ plan for the excess workforce and then liquidate it by June 2014.

“We hope that by disposing of the two hotels in New York and Paris owned by the PIA we will be able to pay for all liabilities of PIA,” he says, adding that privatisation of PIA would not be possible in its current shape. “PIA has very significant assets. It has seven landing rights on the Heathrow airport. It also has dedicated customers.”

He says the government has no problem if the PIA union wants to buy the 26 per cent shares. “It would be an open bidding and everybody would be welcomed there.”

Ismail agrees that political inductions and inefficiency are major issues with PIA. “Theoretically, PIA has bankrupted several times in the past. That was the reason different governments announced several relief packages for it and pumped billions of rupees into it. We have decided to make it a profitable entity,” he says.

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