Is it really possible to revive government-owned and managed airlines like PIA and Air India?

Published: April 16, 2017
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The problem of successive owner governments with these airlines—Air India and Pakistan International Airline (PIA)—has been political economy.

Both Indian and Pakistani successive governments seem to have been stuck in the same situation. Operating a government-owned airline profitably in a deregulated air transport environment is an unachievable target.

Had this been possible, British Airways, Lufthansa, KLM, Air France or, for that matter, all airlines in Europe, North/South America, Africa, Far East, and Australia would not have been privatised, following deregulation in 1978. The simple explanation is that government-owned entities cannot compete with private ones, in terms of price and quality, in a highly competitive market.

Gone are the days when national airlines used to be protected from competition, not only in the domestic markets but international ones as well — a situation that existed worldwide between 1944 and 1978. The problem with successive government-owned airlines, such as Air India and Pakistan International Airline (PIA), has been political economy. But I would like to discuss PIA’s specific issues in detail because of my personal experience as a ‘service provider’ (Air Traffic Controller and Airport Manager) as well as an ‘Air Transport Regulator’ (Bilateral Air Services Agreements, Economic Oversight and Consumer Protection).

Every political party in Pakistan has a union in PIA named after it. You could count at least five of them among the staff, just as active as their parent political parties. Pilots, engineers and other administrative groups also maintain pressure groups in the name of associations, extorting perks and privileges unimaginable in private organisations.

The beneficiaries of PIA are not limited to its’ employees alone, the politicians, whether in the sitting government or in opposition, receive full protocol and special treatment while at the airport and in the aircraft from their respective party workers in the airline itself. Senior government officials, some prominent journalists and TV anchors also enjoy the same privileges in return for making sure that any attempt by the sitting government to privatise this perpetual loss-making entity fails. Before making any further comments, let us first look at the financial performance of PIA over a period of the last eight years:

There has been an average loss of Rs29 billion per annum for the last eight years (a total of Rs232 billion since 2008). Had PIA been privatised in 2008, like other airlines in the world, this struggling nation would have saved Rs232 billion. It would be a fallacy to say that it was not privatised because it had to serve any larger national or public interest.

Yes, it did save about 18,000 jobs, even though about 5,000 jobs could have still been saved in its private form, without curtailing operations. Others could have been absorbed by existing private airlines or new start-up airlines, allowing Pakistani private airlines to grow to their full potential. Nevertheless, PIA is shrinking and crumbling under its own weight, and Pakistani private airlines are filling the gap in demand and supply. In fact, a third Pakistani private airline, Serene Air, is already in the air, and the fourth one, Air Sial, is likely to follow suit in 2018. Bhoja Air and Air Indus have also been given a green signal to recommence operations, should they be able to do so.

Interestingly, an excessive number of PIA employees (18,000) or the cost incurred to compensate them is not the real problem as is generally believed. On average, the employee cost as a percentage of total cost is just as much as other airlines in Asia Pacific (18%). It is, in fact, less than many airlines of Europe and North America (28-35%). But the losses being incurred by PIA are far more than the total employees cost, meaning thereby that PIA would still be at loss even if all of its employees worked for free the whole year. The table below shows the difference between the total annual losses and total labour cost:

The real problem with PIA is not employee cost but the ‘corporate governance’.

So what could the government have done in 2008 to privatise PIA without firing a single employee? The government could have sent all PIA staff and management on permanent leave with full pay and allowances until their retirement, saving Rs11.13 billion per annum or a total of about Rs90 billion over a period of eight years. Additional savings on account of crew layover and compensated absences would have increased this number to over Rs100 billion. That is not to say that PIA would have been a dead brand. It would have not only survived but thrived as a private entity re-employing PIA pilots, engineers, cabin crew and other essential staff.

The re-employed PIA employees would have performed happily, exactly the way their new employer wanted them to, for the fear of losing their jobs. This arrangement would have also allowed them to double their income — one drawn from the government until the age of 60 and the other for working with the new management.

Therefore, is it too late for the government to think on these lines? What will be the situation after another eight years? The quantum of losses would continue to grow. The realisation of such a scenario had always been there in the finance ministry but it could never convince the sitting governments to do what the rest of the world had done already.

The story of Air India, in our neighbourhood, is exactly the same as PIA but with a difference. The losses being incurred by Air India are just a small fraction of their national economy because of its huge size in comparison to Pakistan.

The government of Pakistan has at least taken one good step in the recent past, after taking the Parliament into confidence; it changed PIA’s status to that of a public limited company. This means that the responsibility of the government is now limited only to the extent of its shareholding (equity) in PIA, which is already bankrupt. The government is perhaps waiting for the right time to declare it so.

What would happen to its creditors, you ask? Well, PIA’s accumulated losses are about Rs270 billion as against the equity of about Rs57 billion (PIA’s balance sheet 2015).

One may add another Rs30 to 40 billion loss for the year 2016, though the exact figure is not published yet. Its’ liabilities, as of December 31, 2015, exceed Rs324 billion. The most severe blow will come to the Pakistan Civil Aviation Authority (CAA) (over Rs50 billion), followed by Pakistan State Oil (PSO). Others with sovereign guarantees may be able to receive part or full compensation from the government’s kitty.

The essential point is that ‘government-owned unionised airlines’ will never be able to operate profitably in a competitive market, no matter what measures you take, including induction of the best industry professionals in the world such as Tim Clark (Emirates), James Hogan (Etihad Airways), Tony Fernandes (Air Asia) and Rich Branson (Virgin Atlantic). Should the idea of ‘sending airline employees on permanent leave’ and privatising the airline at the same time appeal to the government, it will save the country billions of Rupees every year and boost growth of the airline industry in the country.

This post originally appeared here.

Afsar Malik

Afsar Malik

The author retired from the Civil Aviation Authority, Pakistan as an additional director and is an expert in Airline economics. He currently runs an Aviation consultancy firm, and also teaches Aviation management in a local university.

The views expressed by the writer and the reader comments do not necessarily reflect the views and policies of The Express Tribune.

  • Ashraf Patel

    The title and the article image suggests that you have written about problems and solutions for both PIA and AI, while i could only find one small line about AI, very misleading title.Recommend

  • AllahDaBanda

    Do not compare yourself to air India….you guys have a fleet of 8-10 aeroplanes..Air India has a fleet if 100 plus…Private Indian Airlines like indigo, spicejet, jet airways combine have a fleet of 150 plus aircraft and air india is in profit…never compare..compare to bangladesh…Recommend

  • Ishtiaq Ahmed

    I fully agree with Mr Asfar Malik. No matter what you do, making PIA profitable while being a government entity is just not possible. The author has given the right examples from the airline industry, but so is it true in other industries such as banks. It is a question of political will and beating the vested interest. PIA own trade unions and associations will like to hold on to perks never mind they are coming from the tax-payers money.Recommend

  • Saad Tarek

    If they make me a CEO for a day I’ll do exactly just that. Traveled on PIA the other day the service is so pathetic the planes are in horrible condition.Recommend

  • Dipak Mehta

    PIA can not afford to run Government run airline. Too much corruption.
    Air India can afford to run Government run airline. Too much corruption but with Modi, every thing runs smooth. Recommend

  • numbersnumbers

    Successive Pakistani governments have used these state owned enterprises as hiring halls for loyal party operatives, and that will never change!
    The unions have members in all the major political parties to make sure nothing changes, so the national exchequer should just plan the loses into the budgets for the foreseeable future!
    Recommend

  • Raj

    always compare with India.Recommend

  • shaikh mustafa

    Mr. Malik don’t you think that the CAA as a regulator has the responsibility to ensure that the airlines industry in the country flourishes. People conveniently park all the blame at PIA’s doors and looks the other way. If only PIA was at fault, how is that despite the provision of multiple designation is almost all ASAs, no private airlines are operating to destinations in Far East, Europe, North america etc. Is PIA stopping them from operating on long haul routes?.

    As for India, i have read their national aviation policy, they do not grant open skies to any country which is within a radius of 5000 kms of their territory. This is to protect their airlines on medium and short haul routes where the margin of profitably is at its lowest. In June 2016 last year Airblue ceased operations between KHI and Dubai citing over competition and predatory pricing as a reason, is that a fault of PIA too?

    In a country of more than 200 million people, at any given day or time there are n o more that 50-60 operational airplanes for all three airlines put together, (not including serene air as it is only domestic service provider at the moment). Most of these airplanes are narrowbody. Now is that a fault of PIA too?

    Had the problem only been with PIA, then the private sector airlines in Pakistan would have flourished. If you consider Shaheen Air and Airblue epitomes of success then i’m obviously speechless. In several ASA consultations wherein the authorities denied awarding even a single additional flight to PIA/Pakistan carriers only protect their own airlines.

    India on the other hand has a really huge private airline sector. They have huge truly world class private airlines, i’m sure you are aware of that.

    My question to you sir, how is that despite having the rights to fly long haul no private airlines in Pakistan are operating flights to USA/ Europe, Far East, etc.
    IS PIA stopping them?

    Yes PIA has some serious problems, but to say that it is only PIA’s fault, may be a little uncalled for.

    PeaceRecommend

  • khalid saeed

    Pakistan and India, both countries are lagging behind in adoption of requirements of modern business. This is not only limited to airline business but in many other sectors. Thanks to corrupt top brasses in every walk of life.Recommend

  • HUD HUD

    Air India turned profitable this year.Recommend

  • tanwir

    Fact is that air indias most planes are out of date which pia has retired so air India’s 100 plus fleet is equal to Pia’s 38 fleet and remember pia is buying brans new aircraftsRecommend

  • Rahul Patil

    Sorry to burst yr bubble but Air India turned profitable in 2016. . Google itRecommend

  • zoro

    The basic difference in PIA and Air India is …
    PIA has leased the planes from Sri Lanka …
    Air India has there own planes … will that make anything clear about the accounting process ???
    Well India is not a beggar state… just to clarify …Recommend

  • Asim Rehman

    Privatising PIA fr the reasons mentioned is like selling your property because the caretaker is corrupt!!!! Skewed logic!!!! “The simple explanation is that Government-owned enteties cannot compete with private ones…..” does not hold water when one looks at Emirates/Etihad/Qatar, these airlines are competing with world airline giants because Sheikh Mohammad and the other rulers do not interfere in the running of the airline, so the solution to PIAs ills is not privatisation but preventing Government interference.Recommend

  • HUD HUD

    oh retiring old planes leasing plane from srilankan airlines. what logic is thisRecommend

  • AN

    Hats off to the author for one of the best researched and written articles on the subject. Recommend

  • mja72

    Yes because no matter how much you might deny it or not want to be associated with it, Pakistan and India will always be compared side by side. It was one country at one time.The working and logistics of both Govts are almost identical. Even the laws are almost the same. Go into the office of any Pakistani lawyer and you will see a copy of the Constitution of India in their library. Indian laws are referred to and compared, Indian cases are used as precedents in the courts. There will always be a connection between Pakistan and India.Recommend

  • mja72

    Biman Airlines of Bangladesh at present operates a fleet of B737-800, B777-200, B777-300ER and has the B787-8 Dreamliner on order as well and has a foreign CEO running the airline. Still a much younger and more modern fleet than PIA.Recommend

  • mja72

    Sorry you are sadly mistaken. Air India has the B777-200LR, B777-300ER, B787-8, A319, A320, A321 and ATR’s, all of which are newer than PIA’s aircraft and AI has also recently placed an order with Boeing for the 787-9. AI also operates a small number of B747-400’s which they purchased brand new from Boeing, as compared to the second hand B747-300’s PIA leased/purchased from Cathay Pacific. Also when was the last time PIA actually purchased brand new aircraft? 10 years ago when they inducted the B777 and ATR’s into the fleet while AI continues to take delivery today of brand new B787’s.Recommend

  • mja72

    Its not PIA’s fault, its the fault of those who run it, interfere in its operations and exploit it for all that its worth.Recommend