In an era of ever increasing competition in the commercial aviation market, airlines across the world have been endeavouring to lure customers with improved product offerings.
In this environment, PIA was finding it more and more difficult to compete, mainly due to its aging fleet. While efforts have been afoot since long to induct new aircraft, the accumulated losses of the last several years had adversely affected the airline's financial capabilities, making the task of fleet renewal impossible.
When the present management took over in April 2001, the airline was virtually on the brink of collapse. The first priority of the management, therefore, was to bring PIA out of its dire straits and make it a progressive and profitable organisation once again.
The management devised a two-pronged strategy, whereby it addressed the immediate issues through short-term measures and at the same time started working on a long-term vision and strategy. Various positive administrative steps, coupled with support from the government, yielded encouraging results for the long-term prospects, including modernisation of its aircraft fleet.
After evaluating its requirements, PIA decided to start with improvement in its product offering on the more competitive long-haul routes where it was facing stiff competition and losing market share.
Accordingly, a high level committee comprising of members from the PIAC board, senior government officials and professionals from PIA was constituted to evaluate and select the aircraft facilities. The committee held extensive discussions with the higher management and called for offers. Airbus proposed the A340 family of aircraft, whereas Boeing offered its 777 aircraft family. Subsequently, detailed negotiations were held with both manufacturers.
The committee presented its report to the Board, identifying the need for a comprehensive long-term business plan covering in detail the marketing, financial and operational aspects of the fleet renewal program.
Accordingly, PIA's Business Plan 2003-2011, incorporating the long-term fleet modernisation requirements, with both Airbus and Boeing aircraft options, was prepared and presented to the PIAC Board of Directors for its consideration.
The selection of type was deliberated upon at length during Board meetings.
After considering the technical/operational evaluations and the economics of the two options, the PIAC Board approved the selection of Boeing 777 aircraft over the Airbus A340.
The analysis carried out by the concerned departments of PIA revealed the following competitive advantages of the Boeing 777:
-- Boeing 777 is a new-design aircraft developed four years after the Airbus A340.
-- Despite the late entry, Boeing 777s outnumber the A340 in terms of aircraft in service.
-- The 777 has more capacity, which translates into higher revenue earning potential.
-- A wider cabin with improved cabin environment controls gives the 777 greater passenger appeal.
-- Boeing 777 is faster than the A340 yet fuel burn per seat is lower.
-- Industry operational reliability of the 777 is also better.
-- Although the project cost of the A340 plan was lower than the 777 plan, the overall economics of the 777 plan was better over the life of the project.
-- US Exim Bank had offered a loan guarantee to PIA to secure financing for 777 aircraft, whereas Airbus was unable to come up with a firm offer for any such arrangement through ECA.
In the light of the Board decision to acquire Boeing 777 aircraft and its directive to achieve further improvements in the financial package, all possible options including used aircraft were explored.
After detailed evaluation of the available options, the operational departments of PIA recommended the purchase of new aircraft because of the availability of latest development status, a choice of engines/equipment, an engine support package, training and vendor warranties.
In addition, both Boeing and General Electric had offered cost-offset programs, thus providing an opportunity for the local industry to manufacture aircraft and engine parts/components for Boeing and General Electric through transfer of technology.
Also, the events of 9/11 had turned the aircraft market into a buyer's market and therefore, PIA was able to obtain substantial concessions from the manufacturers for new aircraft.
The induction of new aircraft also presented other advantages to the airline. New aircraft would not only enhance the image of the airline in the industry and among the travelling public but also help in boosting the morale and confidence of its employees, which was at its lowest ebb after years of downslide and uncertainty.
Keeping all the above in view and the recommendations of the operational departments, the PIAC Board decided to place an order for eight of the new technology Boeing 777 aircraft family. In pursuance of PIA policy and the requirement of the Government of Pakistan, the agreement signed with Boeing contains a "no broker" clause, whereby Boeing has been contractually bound to neither give any commission nor to involve any intermediary in the deal. If violation of this clause is ever established, Boeing is liable to pay a penalty to PIA.
PIA's order comprised three 777-200ERs to be delivered in 2004, two 777-200LRs in 2006 and three 777-300ERs in 2008.
The three newly inducted 777-200ERs have been deployed in the highly competitive UK and North Atlantic markets to provide PIA's valued customers with a state-of-the-art product on these routes, whereas with the ultra-long haul 777-200LRs PIA will become the only airline to offer non-stop service between Pakistan and the USA.
PIA's decision to induct new aircraft has also been appreciated in the financial markets.
A testimony to PIA's credibility with lenders is the support and confidence reposed by the local and international financial institutions. US Exim Bank agreed to provide a loan guarantee, due to which PIA was able to avail a highly competitive financing package.
Exim Bank's guaranteed financing structure is a recognised mode of financing in the aviation industry. As a standard requirement of Exim Bank guaranteed financing, the transaction structure is always a "finance lease", which invariably requires the incorporation of a Special Purpose Vehicle (SPV) in a tax-free jurisdiction.
The Airbus A310 fleet acquired by PIA in the early 1990s was also based on an SPV structure.
For acquisition of the 777 aircraft, an SPV by the name of Taxila Limited was established in the Cayman Islands. Cayman Islands involvement is a normal practice in the aviation industry and has no adverse impact or effect on the Boeing deal.
Under the agreement, PIAC is required to pay rent in an amount at all times equal to payments made by Taxila Limited under the ExIm Bank guaranteed financing. Being a financing transaction, the three 777 aircraft are reflected in PIA's Balance Sheet as "assets".
The agreement clearly establishes that at the end of the term of the lease or prepayment by PIAC, title to the aircraft will automatically transfer to PIAC. PIA's acquisition of new Boeing 777 aircraft has been approved by the Government of Pakistan and entails a sovereign guarantee to ExIm Bank.
Failing to meet laid down conditions of Exim Bank would have deprived PIA of the Exim Bank loan guarantee. Alternatively, without the Exim Bank guarantee, PIA would have had to go for commercial borrowing at higher financing rates, thereby adversely affecting the viability of the project.
The induction of modern Boeing 777 aircraft, with their universally accepted passenger appeal, once again brings PIA into the same league as the leading airlines of the world. Through fleet modernisation and with various on-going administrative measures, PIA is set to achieve its true potential and once again become the airline of choice.
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