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Thursday March 28, 2024

PIA likely to save Rs26 billion

Falling fuel prices

By Salman Siddiqui
January 11, 2015
KARACHI: The freefall in oil prices is likely to help the national flag carrier Pakistan International Airlines save more than Rs25 billion this year, a company’s top official said.
“The tumbling oil prices may help the loss-making PIA turn into a profit-making company and save Rs26 billion in 2015,” the airline’s ex-director said.
Usman Taufiq Ahmed, AVP Capital Market Arif Habib Limited, said an average annual fuel cost to PIA is over Rs50 billion. “The 50 percent decline in crude oil prices would help the airlines to cut its losses by colossal Rs25 billion in 2015.”
The collapsed crude oil price – by over 50 percent in the last one year at five-year low below $50/barrel – has provided a golden opportunity for the oil importing countries, like Pakistan to fix many of its economic sector, and revive sick and loss making entities, experts said.
The decline in jet fuel to $1.8/US Gallon from the recent high at $3.25/US Gallon would increase cash flows of the company, and should lower its dependence on government bailout packages.
Reportedly, PIA in it half yearly results reported an accumulated loss of Rs207 billion.
The airliner’s current liabilities exceeded current assets by Rs174 billion. The losses for first six months of 2014, alone, remained at Rs10.13 billions.
The former director at PIA added the decline in fuel cost should offset other serious issues like over employment at PIA and help the airline to recover financial losses this year.
IPPs – MAJOR BENEFICIARIES
Besides, independent power producers and car assemblers will also be among major beneficiary companies of the low crude oil price at world markets.
Pakistan produces 35 to 40 percent electricity through oil-fired power plants. The decrease in furnace oil in local markets is to lower cost of electricity production for the firms, including Kot Addu Power Company, Hub Power Company and K-Electric, an expert said.
AUTO MAKERS MULLING EXPANSION
Similarly, the fall in oil price is favorable for car assemblers and importers in Pakistan, including Honda, Toyota and Suzuki Motor.
This, together with a significant lower rate of inflation at 4.38 percent for December 2014 may convince many to buy a new car and help the assemblers to increase production.
“A few car manufacturers in the west are seriously considering spending their production amid falling oil prices,” he said.
Moreover, the drop in oil price has increased car-owners’ purchasing power for the fuel and helped many of them to have switched to petrol from comparatively cheaper CNG (compressed natural gas).
Some 20 to 25 percent car owners are believed to have switched to petrol since its price has dropped by 23 to 24 percent in the last three-month against no change in CNG price in the same period. The trend well reflects in the shortened car-owners queues for CNG fuel and an increase of 10 percent in sales of petrol in the year ended December 31.
More importantly, the assemblers were restricted to produce and sell CNG fitted cars. Lowering oil price should be taken positive for car assemblers in Pakistan as well, he said.
However, another expert said, the decreased oil price is negative for local oil production companies and refineries, including Oil and Gas Development Company, Pakistan Petroleum Limited, Pakistan Oilfields, Attock Refinery, Pak Refinery, and Byco Petroleum.
SALES TAX BITES
Industrialists, including Muhammad Adrees, president of Federation of Pakistan Chambers of Commerce and Industry, told reporters last week that local industries may not take benefit of falling oil price after the government increased sales tax on petroleum products by five percent to 22 percent, and surged gas tariff for captive power plants by 53 percent.
He said some 40 percent industrial units have become sick because of chronic energy crisis and law and order situation. And, increase in tax rates will not allow sick units to be revived.
The industrialists urged the government to withdraw the increase in sales tax and the gas tariff in the greater interest of industries.
Ahmed said the low inflationary numbers amid historically low oil price have also stirred expectation for a cut in 50 to 100 basis points in the interest rate by the central bank next week.
RATE CUT
The expected cut would also be positive for the firms carrying heavy banks’ loan on their balance-sheet, including value-added textile mills, fertiliser manufacturers, construction industry, cement manufacturers and car manufacturers.
“Engro Corporation (a group of seven companies) would be the biggest beneficiary of the likely rate cut, as majority of its associated companies are running on loans,” Ahmed said.
The expected slash in the interest rate would be negative for commercial banks, and they have to expand their consumers’ market operations by offering more loans to industrialists and individuals instead of continuing to invest in fixed income investment instruments, like treasury bills and Pakistan Investment Bond.
The rate of return on such fixed income investment instruments has already decreased significantly ahead of the next monetary policy announcement by the central bank.
The low interest rate regime may encourage more banks to offer car and home financing products.