Fixing PIA

The government recently announced its intention to offload majority shares and management control of Pakistan International Airlines (PIA) to one of the sovereign states in the Gulf, leading to repetitive noise regarding family silver being divested at a discount.

However, it is important to keep things in context. During 2021, PIA recorded an annual loss of Rs50 billion. Similarly, for the first three months of the current year, it has already posted a loss of Rs14 billion, and any end to the same isn’t in sight. Over the last ten years, PIA has posted accumulated losses exceeding Rs580 billion. In effect, it has more than half a trillion rupees of losses, and only continues to fly due to numerous guarantees issued by the sovereign to secure incremental debt to sustain operations.

PIA operates with a negative equity base of Rs430 billion, which means that its liabilities are much greater than its assets. It has more than Rs400 billion in debt as of latest reporting, which keeps on increasing every quarter as losses are plugged through debt. Over the last many years, successive ggovernments have failed to turn around the national carrier, as things transitioned from bad to catastrophic. Taxpayers’ money continues to pay for the inefficient machinery, burning cash to sustain an airline which is decades past its prime and refuses to pivot to a completely different business model of aviation in the current century.

Although the workforce has been drastically cut down from more than 14,000 in 2017, to around 8,300 in 2021, the airline continues to maintain one of the higher employee-airplane ratios in the world, suggesting that the operating model is inefficient, and certainly not sustainable without taxpayer support. The global airline business works on razor-thin margins, high turnover, and is primarily driven by volume to cover fixed costs, wherein profitability is driven by premium services which are non-existent for PIA.

The national airline is a behemoth which needs to be broken down into more palatable businesses, each business having its own core function, and specialty. The airline needs to be split into four distinct business entities, with an independent Board, and management. The four divisions can be, Budget/Domestic Operations, International Operations, Handling & On-Ground Services, and finally Real Estate Management, considering how PIA has an extensive real-estate portfolio not only in Pakistan, but also in many of its legacy destinations.

Fixing PIA would necessitate splitting it into four distinct business units, with a core competence. Roughly 80 per cent of PIA’s revenue can be attributed to passengers, of which roughly half roughly half is due to domestic travel. During 2018-19 (latest data available from Civil Aviation Authority), PIA transported more than 3.6 million passengers in the domestic sector, having a market share of 50 per cent. It continues to lose market share as other airlines take up its share with better service at similar price levels. It may also be noted here that domestic air ticket prices in Pakistan are fairly high, compared to India, and other Asian and European markets where budget airlines have taken off. This can largely be attributed to an oligopolistic structure of the domestic aviation industry.

Creation of a budget airline would necessitate shifting towards a high-volume, low-margin business model, with the new outfit operating with a lean operating base. This will not only be a step in the right direction towards creating a self-sustaining outfit, but will also promote competition, thereby benefiting consumers. PIA in its current state does not have the wiggle room to increase revenue through higher prices, and the only way to sustainably increase volumes is through higher volumes, by transporting a greater number of passengers.

The second key distinct entity would be International Operations, whose primary objective would not only be to facilitate the Pakistani diaspora, but also to position Pakistan as an emerging destination for tourism. The Pakistani diaspora in the Middle East, Europe, and North America would prefer flying with PIA as long as service quality matches with that of competition, and pricing is competitive. Emirates transported more than 2.3 million passengers in 2018-19 – with multiple flights to and from Dubai, from all major cities of Pakistan.

This is the latent demand that can be captured by PIA. Similarly, consumers always prefer a direct long-haul flight to North American cities, or even Europe, enhancing capacity to improve service delivery on these routes can significantly boost PIA’s international operations. Service delivery improvement would not only require a complete overhaul of the existing fleet, but also of organizational culture.

Another key entity would be a real-estate company, which can be structured as a Real Estate Investment Trust – managing and controlling all real estate of PIA. The national carrier has prime real-estate holdings across the world, from the Roosevelt in New York, to La Scribe in Paris. Real-estate exposure in various European cities includes shops, and apartments in prime locations which are mostly lying dormant; these can be activated through efficient management. Similarly, PIA has prime real estate across major cities in Pakistan, the value of which is simply not recognized anywhere. Ring fencing real estate in a separate company, and potentially creating a REIT can unlock substantial value which can be used to shore up core operations.

All of this will just be a pipedream till efforts are made to create a nimbler, and cost-efficient structure. Operating an airline with a high turnover and service-oriented culture is the only way to create a profitable business, and to turnaround the airline. Inability to do this will ensure that if the entity isn’t hived off, it will continue to weigh heavily on taxpayer money, which can be allocated to more judicious use rather than operating loss-making flights, and subsidizing inefficiency.

The writer is an independent macroeconomist.