Plane truths: How costly is it to keep PIA flying?

When Pakistan International Airlines (PIA) began its operation in 1955 by taking over Orient Airlines with 13 airplanes, nobody could have foreseen a successful future for the national flag carrier. From such humble beginnings, PIA became one of the most sought-after airlines in the world within years.

A few months after it started, PIA flew its first international flight to London via Cairo and Rome and when (then) Air Commodore Nur Khan took charge of the airline in 1959, the sky literally was the limit. With historic firsts and milestones to its credit, such as being the first Asian airline to acquire a jet aircraft, a Boeing 707, opening new routes and providing top customer experience, PIA was truly a great airline to fly with.

This is a clichéd, but necessary, preamble to every story attempting to investigate what malaise has afflicted the airline — once the pride of the nation but now, known more as a money-bleeding, scorn-inducing white elephant, apparently destined to fade out from the skies.

The latest data of the airline’s financial status is anything but satisfactory. Its annual report for the year 2012 shows it to be in the red by 33 billion rupees (this loss was 26 billion rupees in 2011). During the first nine months of 2013, it incurred losses to the tune of 31.94 billion rupees.

A few months after it started, PIA flew its first international flightto London via Cairo and Rome and when (then) Air Commodore Nur Khantook charge of the airline in 1959, the sky literally was the limit

With only 25 serviceable planes out of a fleet of 34, PIA perhaps has the highest employee per plane ratio — standing at a staggering 780 employees per plane. Compared to this, Emirates, with a fleet of 212 aircrafts, has employee-plane ratio of 220 to one. For Turkish Airlines, another important regional carrier with 236 planes, it is far lower — at 81 employees per plane. Throw in the liabilities ledger and the situation looks even worse: PIA’s current liabilities stand at 192 billion rupees, according to the airline’s third quarterly report for 2013.

To understand the dismal state of affairs at PIA, some clues may be found in what was going on at the organisation at the turn of the century. Among other things, the introduction of an open sky policy by the government in the early 2000s could easily be seen as the beginning of a process that contributed significantly to the national carrier's fall from greatness, according to Chaudhry Ahmed Saeed, a former PIA chairman. This policy ended PIA's monopoly over the national skies and allowed Gulf-based airlines to invade the local market, he says. They took away PIA's market share and revenue, he adds.

The irony is that PIA was earning a profit in the first few years – from 2002 to 2004 – after the introduction of the open sky policy. Saeed was its chairman at the time. He could have done a few other things right in order to run PIA as a profitable enterprise. Insiders say what helped Saeed the most was the unstinting support he received from General (retd) Pervez Musharraf, who was ruling the country then. The Musharraf government suspended the workers’ union in PIA, pumped 20 billion rupees into it and approved plans to purchase nine Boeing 777 jets and six Airbus A310 planes.

After his departure in April 2005, the airline’s performance nosedived once again, resulting in back-to-back losses in subsequent years. It was also soon after he left PIA that one of its Fokker planes crashed in Multan, killing all 45 on board. This led to a ban on all Fokker flights.

Further misery arrived in the shape of a ban imposed by the European Union in June 2006 on PIA’s Airbus fleet. The planes were barred from operating on European routes for failing to meet necessary safety criteria. The ban was lifted in November, 2007, but the damage had already been done. The annual report that came out a month later showed stark numbers: PIA’s annual losses had swelled to 13 billion rupees, a jump of 188 per cent in just two years after Saeed’s departure.

After winning the general elections in 2008, the Pakistan Peoples Party (PPP) decided to bring the PIA’s house in order. The PPP government, for the first time in PIA’s history, chose a serving pilot, Captain Aijaz Haroon, as the managing director of the corporation. Haroon’s appointment, which initially raised eyebrows, considering his close ties with the then PPP co-chairperson Asif Ali Zardari, became the subject of more controversy when the year-end numbers were compiled. The airline’s losses ballooned to 39.73 billion rupees at the end of 2008 — its worst performance ever.

Haroon, however, says the reasons behind such drastic increase in the losses were beyond his control. “Nobody could do anything about the rise in fuel price or the depreciation of the rupee, both of which happened simultaneously in 2008, causing an exponential increase in PIA’s losses,” he tells the Herald.

Numbers support his argument. In 2007, fuel and oil cost PIA 30.32 billion rupees, indeed showing a decrease from the year before. Due to the global upheaval in oil prices, the average per barrel oil price increased from 72 rupees in 2007 to 97 rupees in 2008; this resulted in PIA spending 45.84 billion rupees on fuel and oil, a jump by 51 per cent. Furthermore, as Haroon points out, the value of the Pakistani rupee depreciated considerably in the same period – from 60.82 rupees for one US dollar to 70.80 rupees per US dollar – necessitating more money to service debts in foreign currencies.

To understand the dismal state of affairs at PIA, some clues may befound in what was going on at the organisation at the turn of thecentury.

Haroon, however, was able to pull back losses considerably within a couple of years. The annual report for 2010 shows PIA making an annual operating profit of 720 million rupees, a first in five years. The airline, though, was still running in loss due to the money it required for debt-servicing and other non-operating costs.

Soon, his success was drowned in the din of another controversy. A route sharing deal that Haroon proposed with Turkish Airlines, proved to be his Waterloo. He had already riled members of the powerful Pakistan Airlines Pilot Association (Palpa) on many occasions, for example, with his strict instructions against delaying flights. As one senior PIA pilot, the captain of a Boeing 777, explains, “Aijaz Haroon was a smart and shrewd operator but lacked diplomatic skills.” The pilot further adds that Haroon was “proactive but unpopular because he overdid a few things” in his eagerness to put the airline back on track.

As soon as news of his negotiations with his Turkish counterparts became known, Palpa started a four-day-long go-slow in January, 2011, claiming that the route sharing agreement was akin to route selling. “We couldn’t afford to have PIA’s traditional routes shut down due to one man’s whims,” says a Palpa member, who actively participated in the protest.

The strike led to Haroon’s resignation. The government, then, appointed Captain Nadeem Yousufzai, another pilot, as the new managing director. He lasted only a year, leaving behind a trail of controversial deals, among them a contract for the supply of spare parts for 700 million dollars to a single vendor, Transworld Aviation. Many in PIA say that the money involved was far higher than the airline’s requirements.

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Mashood Tajwar, the PIA spokesperson, refuses to comment on the merits or demerits of the contract, saying the “matter is subjudice” — a case is being heard about it in a court of law. “As of now, however, there is no deal for spare parts with any third-party vendors. We only have deals with original equipment manufacturers,” he tells the Herald.

The third quarterly report for 2013, showing updated data for the first nine months of the previous year, is even gloomier: the losses stand at 31.5 billion rupees and liabilities at 192 billion rupees.

Many critics of the airline say it cannot be profitable without shedding a few thousand staff members. Though there has been a ban on new hiring for the last two years, the total PIA staff stands at approximately 19,500 (out of this, 3,000 are contractual and daily-wage staff who do not receive the perks and privileges enjoyed by the regular staff).

Paying salaries and providing other perks to such a huge staff is a burden that the airline, with its depleting fleet and decreasing earnings, cannot pay without incurring further losses and liabilities. In the face of such disconcerting data, the PIA management betrays a sense of false bravado when asked about the prospects of the airline. Tajwar, for instance, emphasises that the airline has begun to turn the corner. “Since the formation of the Aviation Division (a separate administrative department in the federal government), the PIA management is working closely with the government in order to revive the airline,” he says.

With only 25 serviceable planes out of a fleet of 34, PIA perhaps hasthe highest employee per plane ratio.

When the Pakistan Muslim League–Nawaz government took over in May 2013, one of the first the steps it took was to create an Aviation Division to look after PIA, the Civil Aviation Association and the Airport Security Force, all under the defence ministry until then.

As proof of imminent change in the organisation’s fortunes, Tajwar points to some additional planes that have been inducted since the middle of the last year. “We advertised for the wet lease of four airplanes in August, 2013, and since their delivery last November, the company has been able to produce positive results,” he says. “We have improved our schedule integrity (operating flights on time) to 97 per cent and our seat factor (seat occupancy) is now at 76 per cent.” Yunus, too, is happy with the results. The airline has earned 9.5 billion rupees in the first month of 2014 alone, he says.

In January this year, the airline released an advertisement inviting bids for eight narrow body aircraft, also on wet lease. One month later, more bids were invited for 10 narrow body planes, four wide body planes and four ATR Turboprops on dry lease. One PIA official, in a wave of exuberance, claims to the Herald that the airline will easily register a profit at the end of 2014 if the planes being leased are delivered as per schedule. The management insists that it will resume flights on all suspended routes as well as increase the frequency of flights on profitable routes, once fleet targets are met.

Aviation experts and PIA insiders are unanimous that, in order to drag the airline out of the doldrums, the first and foremost requirement is to induct a new generation of fuel efficient, modern aircraft. But the problem here lies with the lease deals that the PIA is embarking on.

A ‘wet lease’ is an agreement that takes place between one airline (which provides aircraft, crew, management and insurance) and another (which offers routes to fly on). Such a lease lasts not more than two to four months and the money involved is calculated on the basis of flying hours. Such rates may vary between 2,500 US dollars to 3,000 US dollars per flying hour. A ‘dry lease’, on the other hand involves leasing agencies which lease aircraft to the airline. The cost per plane, depending on the type and age of the plane, can be around two million dollars a year. A dry lease deal usually lasts five to six years.

While details about the duration of the wet lease deals being offered by PIA are not available, Tajwar believes these will greatly help the airline produce positive results in the short term. “At 56 per cent of all our expenses, fuel expense eats the largest chunk of our revenue. If we get newer aircrafts which are far more economical in terms of fuel usage, this can help us bring down our fuel expense by six to eight per cent,” he says. Wet-leased planes will also help engineering expenses drop from 12 per cent to eight per cent, he adds.

One serving PIA pilot with over 30 years of experience, however, does not see wet lease as a good solution. “Wet lease is adopted by those airlines which don’t have any system or structure,” he says. Why did PIA get planes on such a lease when it has both, he asks.

But Tajwar defends these deals. “Airlines the world over now rely on leasing planes instead of buying them,” he says, “This allows them to recover money quickly and, once the lease is over, they can always get a fresh batch of aircraft on a new lease.” While most of these deals are yet to take effect, there are news reports on an almost daily basis about the privatisation of PIA. It was in September, 2013 that the government decided in principle to partially privatise the national carrier, selling 26 per cent of its shares, and to privatise its management.

When the Pakistan Muslim League–Nawaz government took over in May2013, one of the first the steps it took was to create an AviationDivision to look after PIA.

The airline management, on the other hand, continues to deny the news. “There will be no privatisation, only restructuring,” says Tajwar. When the Herald contacted Special Assistant to the Prime Minister for Aviation Shujaat Azeem, to learn his position on the subject of PIA’s privatisation, his staff officer Sher Ali Khan responded by emphasising that there would be no privatisation. “The company right now needs acquisition of new generation, fuel efficient aircraft. We don’t have any plans to privatise it or lay off any employee,” Khan said.

New planes, however, cannot resolve PIA’s management problems. The airline is a top-heavy organisation, with over 11 directors, 40 general managers, and over 300 deputy general managers, all of whom cost huge amounts of money in their salaries and perks and privileges, making it a difficult task to justify why the PIA should continue getting bailout packages at the taxpayers’ expense.

Last year in September, Muhammad Ali Gardezi, who holds the office of PIA chairman by virtue of being Federal Secretary Aviation Division, set up what he called a Way Forward Committee, to look into management-related problems with the airline. Captain Suhail Baloch, who was Palpa’s president until recently, was made head of the committee, which has the mandate to make recommendations to improve the performance of the airline. The committee has been given a free hand to not just recommend but also implement the required changes.

For Baloch, it is an opportunity to serve the airline better. “We made a presentation to the chairman in September, 2013, and, being a proactive decision-taker, he asked us to be part of the committee. Our mandate is solely to highlight the problems and recommend improvements, not run as a parallel management body,” he says.

One of PIA’s senior most pilots, who also held a senior management position, is shocked at the development. “Who is truly calling the shots at PIA?” he asks. “You have some extravagantly-paid professional managers in the organisation, who are overruled by eight hand-picked members of the committee, none of whom are trained as managers. Where in the world does this happen?”

The management, meanwhile, seems comfortable with the committee’s involvement in operational decisions. Officials in the management, in fact, say that the committee’s recommendations, such as the Fly Smart programme for fuel conservation, have helped cut some costs. Sher Ali Khan, staff officer to special adviser Azeem, says that the committee’s involvement is an encouraging sign that employees are willing to participate in the improvement of PIA and are ready to own their responsibilities in this regard.

A recent development, however, may throw a spanner in the working of the committee. Baloch lost the Palpa elections, held last month. When asked about the future of the committee and his role in it, he says, “I spoke to the chairman and asked about giving the committee an official capacity so that it can continue its good work.” This may not be acceptable to others in the organisation, especially those who have defeated him in the Palpa election.

“Pilots are an extremely valuable commodity and ideally we prefer if they are not part of the management,” says Aamir Hashmi, the recently elected Palpa chairman. “If a pilot still wants to be part of the management, he can do so with Palpa’s consent only and maintain strict professionalism.”

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Secondly, in an official capacity that Baloch is looking to demand for the committee, it runs the risk of becoming an officially recognised parallel management body, which he so far denies it is not.

This makes one wonder if uncertain leadership is the cause behind PIA’s drift. Consider this:

In January this year, ads appeared in newspapers asking for suitable candidates to apply for the position of chairman/managing director along with a few other key posts. Sher Ali Khan, when asked, confirms to the Herald that the candidates for the post of both chairman and managing director have been shortlisted and names will be finalised within days.

It may not be as easy or as fast as he suggests. While walking through the corridors of the PIA headquarters at Karachi’s Jinnah International Airport, the overriding feeling one gets is that of uncertainty. The staff, even at senior positions, seems extremely cautious while responding to even the smallest of queries.

It is not surprising that such lack of clarity is reflected in the performance of the airline. A PIA source warily admits that decision-making in the organisation is severely lacking. The managing director has been nearly sidelined, while most other senior staff members are waiting and watching. What is evident is that the organisational structure has been disturbed, allowing insecurity to creep in and affect performance.

Another senior PIA pilot, with 36 years of flying experience, is highly critical of this state of affairs. “With such a top-heavy management structure, why can’t they make even a single economically viable decision; how can you expect the airline to survive?”

While walking through the corridors of the PIA headquarters atKarachi’s Jinnah International Airport, the overriding feeling onegets is that of uncertainty.

In 2010, the management prepared a 164-page comprehensive restructuring plan (a copy of which has been seen by the Herald), which performed extensively detailed fleet and route analysis and made realistic assumptions based on these analyses. Some of the key recommendations in this plan included the removal of non-core functions from the PIA structure, giving them an autonomous identity and forcing them to sustain themselves. These functions included the flight kitchen, maintenance repair and overhaul and the Speedex courier service. The plan also recommended the elimination of 4,300 staff positions.

The new business plan presented to the government has copied parts of the 2010 plan but some elements in the new plan are completely off the mark. For instance, it projects a seat factor of 85 per cent to 87 per cent when even Emirates – the world’s top airline with a fleet of 212 planes, all of which are wide body – can achieve a seat factor of 80 per cent to 82 per cent.

One of the problems with the new plan is that the management does not share its details beyond 2014. Is the plan indirectly suggesting that the current management does not need to plan beyond the end of this year since, by then, the airline would already be in private hands? No one in the management wants to answer this question.

It is obvious that any plans for PIA’s survival must rest on two main pillars — increasing revenue and cutting costs. So far, it appears both pillars are getting a short shrift. Just as one example: Every PIA flight abroad carries much more food than its passengers can consume. “Carrying extra food, without rationalising the requirement for a long-haul flight, consumes extra fuel. On the return leg of the journey, the same food – which is by now stale – flies back, leaving an odious smell in the cabin and causing great discomfort to passengers,” says one Boeing 777 pilot.

Another missing element in cost-cutting operations is abandoning unprofitable domestic routes. The airline continues to fly on such routes due to political reasons and geographical needs of far-flung areas as the “national airline,” which, indeed, makes it very difficult for PIA to come out of its slump.

Outsiders say the answer to the question of PIA’s survival lies in privatisation. There is, indeed, plenty of support for the idea of privatisation and former chairman Saeed is one of its many supporters. They all seem to believe that the airline can only be saved by making smart decisions through a strong leadership, which is not available in the government. They give the examples of Idris Jala, the former chief executive officer of Malaysia Airlines, and Kazuo Inamori, who revived Japan Airlines, both of whom came from the private sector and did not even have any experience of aviation. But both are known to have enough leadership qualities to implement their strategies to turn around the firms under their charge.

Yet, Jala, in an interview with McKinsey & Company, said something that those concerned with the fate of PIA must pay heed to. He said, when he took over the Malaysian airline, he sought to find out what was wrong with the company’s profit and loss accounts. “It’s crucially important to frame the problem in the context of the profit and loss rather than something nebulous, like the culture, the structure, the processes,” he is quoted as saying.

For that to be replicated in PIA, it is imperative to bring in the expertise of those who can take a microscopic view to determine at what cost the airline, can, or should, be saved. Instead of continuously feeding the airline with piecemeal government loans, that only add to its liability burden, they need to find out what works and what can be made to work, avoiding to do all that is not working despite efforts to the contrary. There has to be a clearly defined business plan and an unambiguous procedure to implement it, rather than the existing confusion and lack of a well thought out way forward.

Another missing element in cost-cutting operations is abandoningunprofitable domestic routes.

Independent analyst Mosharraf Zaidi believes the most important step PIA could take right now is to hire “the best airline CEO that money can buy.” Citing the example of Jala and those running Gulf airlines, Zaidi says, “There’s nothing stopping Pakistan from hiring a foreigner to do this job.”

Jala, in his own words, believes that,

Pakistan’s own man with similar traits was Nur Khan, who, as the head of PIA, took it to giddying heights.

One of the biggest challenges that a future leader of PIA will face is getting rid of staff that the airline does not necessarily require. Consider this: With a functional fleet of only 25 planes, PIA has nearly 600 pilots. Other sections are similarly overstaffed. But anyone trying to bring these numbers down to a reasonable level will have to face stiff resistance from the workers’ unions as well as myriad staff associations at the airline. This is much easier said than done.

So far, the management shies away from mentioning words like lay-off, retrenchment and so on, and is at pains to point out that staff is not where the problem lies. “Salaries make up only 17 per cent of our total expenditure whereas the world average is between 22 per cent and 25 per cent,” Tajwar says.

Figures from the PIA’s human resources department show that around 6,000 people have retired from PIA during the last six years but not as many have been hired in their place. This could be a backhanded way of rationalising staff strength, though the airline’s annual reports don’t show whether there has been any considerable reduction in the number of staff over the last six years. The total number of PIA staff, in fact, has increased from 18,036 in 2008 to 19,500 in 2013.

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If retirements are indeed retrenchments, they can show their impact only in the very long term and those retiring may not be leaving those positions open which are surplus. They may be retiring from posts that are essential to the working of the airline. In that situation, not hiring new people to replace those retiring will only hurt the airline.

In the ultimate analysis, all the various failures of the PIA’s management and the airline’s inability to match revenues with increases in expense over things such as fuel is leading to an additional burden on the already beleaguered national exchequer. Every now and then, the government has to bail out the airline with handouts of billions of rupees. Subsidising air travel for the few is unsustainable for a state that is failing to provide basic services, such as sanitation and clean drinking water to many.

How long will such subsidies continue to sustain the unsustainable operations of an overstaffed, underutilised airline? Only those in the government have the answer. The rest of us can only expect it to end sooner rather than later.

The writer is a staffer at the Herald.