PIA must be allowed to reform itself: report


IPR says to hold PIA’s workforce responsible for its weak performance is misplaced

A factsheet issued on Thursday by the Institute for Policy Reforms (IPR) makes recommendations for the revival of PIA. It states that rather than dwelling on the binary of ‘to sell or not’, all parties must dispassionately help PIA reform and regain competitiveness. It urges government to make a well thought out decision about PIA’s future.

That PIA’s finances are in disarray is well known. As of September 2015, PIA had negative equity of Rs 167 billion and long-term debt of Rs 109 billion or more. Its current assets of Rs 24 billion are a mere 12% of current liabilities of Rs 197 billion, payable within twelve months. Furthermore, for years, the airline has generated negative cash flows.

Payroll cost, which seems to be at the centre of recent discussions, is 19% of total cost (17%, if we include finance cost). The equivalent number for Emirates, another public sector airline, is 14.3%. According to the airline’s Annual Report 2014, its average number of employees is 16,243. Consequently, each employee contributed Rs 6.1 million to the revenue. PIA’s available capacity per employee is 147,502 tonnes KM. The corresponding numbers for Emirates are Rs 55 million revenue per employee and 1.1 million tonnes KM. PIA does not do well in the critical indicator of capacity utilisation. Its passenger seat factor is an acceptable 72%, but overall capacity utilisation is a sub-par 59%. Corresponding numbers for Emirates is 80% and 67% with a breakeven point of 64%.

To hold PIA’s workforce responsible for its weak performance is misplaced. The key to PIA’s woes is that it is not run as a business. The government plays a major role in many operational decisions. Too many non-commercial considerations become PIA’s responsibility. The government also appoints senior management, and often intervenes in appointments of operations and support staff, sometimes beyond actual needs. The government also sets the policy framework in which PIA operates. The most obvious example of this is the open sky policy.

PIA needs reforms and a new business model. It is for the government to decide whether reforms required in PIA are best achieved by keeping it in the public sector or by finding a strategic partner. The factsheet states that even a strategic investor for 26% equity would expect the government to clean the balance sheet and assume PIA’s over Rs 190 billion long and short-term debt. As the majority owner, the government must bear this liability whether PIA remains in the public sector or not.

To revive its financial health, PIA needs a robust business model and must have the ability to increase revenue. For this, it must compete with other airlines that fly to Pakistan. There is yet no indication of the value of PIA so it is difficult to say if 26% new equity will be enough to upgrade equipment and enable the airline to compete on quality and safety. The airline’s landing rights at most major world airports are of considerable value. If presently these are not fully utilised, there is considerable potential for revenue increase here.

In addition to capital injection, PIA’s management must have full say in operational decisions. Its management should decide routes and flight schedule entirely on the effect they have on the bottom line. The government must enter into separate contracts for special operations such as for Hajj, Umra, and evacuation. The government must bear the cost of any subsidy that these entail. Similarly, VIP charters must be under contract that accounts for all costs and of revenue foregone.

In order to compete, PIA must have a workforce at par with other airlines. As this is a national issue, all political parties must assist management to establish a new contract with the employees to ensure performance based incentives. They must also revisit some of the employees’ benefits. PIA must increase manifolds its investment in employee training and in improved systems. It cannot compete with the present workforce and management systems. And it must show respect for its employees who are to bring PIA back on track. Employees too must cooperate to rebuild the company.

If the PIA remains in the public sector, the government must follow rigorously a policy of arm’s length with the airline and help PIA reform itself. It must set targets for the top management and hold them to account. It must also give management full autonomy in decision-making.

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