Introduction: With the government of Pakistan holding its majority shares, Pakistan International Airlines Corporation is the national carrier. The airline operates on both domestic and international routes, through a range of advanced aircraft from Boeing 777 to Airbus A-310. PIA operates on 23 domestic and 30 international routes.
The destinations in USA, Canada, UK and Europe are served through its Boeing 777 fleet. The airline's Boeing 747 fleet is mostly deployed to cater high density requirements like carrying pilgrims to and from Saudi Arabia. On the domestic, far east and regional routes, the airline has deployed its Airbus A-310 and Boeing-737 fleet. The history of PIA predates Pakistan's Independence Day. Originally Orient Airways Limited, PIA was established in 1955. PIA has had a chequered history, marked by historic firsts and depressing lows.
PIA earned the distinction of being the first airline from a non-communist country to fly to China in 1964. In late '60s, one colourful happening, that took the aviation world by storm and imprinted PIA's name in the international market, was the introduction of a new air-hostesses' uniform designed by none other than the renowned French designer, Pierre Cardin.
PIA is the same airline whose managers are credited with setting up the Emirates airline, one of the best modern aircraft passenger carriers today. However, PIA has been under constant criticism for quite some time now. The overriding reason lies in its disappointing operational and financial performances over the years.
Massive turbulence in PIA The times are not good for the only national flag carrier of the country. Criticism engulfs the corporation as Pakistan International Airlines continues to disappoint its stakeholders. The glory that the national carrier brought during Air Marshal Nur Khan and Asghar Khan's era remains a yearning of decades.
For years, the country has not seen any respite as every passing day sheds light on the poor performance, bad governance, mismanagement, corruption, overstaffing, delays and technical faults.
Though these factors have been an overtly unstable affect on the airline, still the economic environment weighed heavy on the organisation with derailing consequences. First, the economic slowdown in the developed economies in CY11 resulted in deteriorated consumer confidence and the international travel growth remained depressed. Also, escalating fuel prices and its extreme volatile nature, the unrest in the MENA region, global recession and hence low forecasts for profits by IATA made the future progressively weaker. Such international factors coupled with domestic circular debt crisis and depreciating rupee, brought massive turbulence to the PSE
Operational Performance During the year CY11, PIA introduced new international and domestic routes. These include Peshawar to Kuala Lumpur, Sialkot to Riyadh and Sialkot to Dammam. New destinations including Zahidan, Colombo and Madina also added a lift to the revenues. In the passenger business, the passenger seat factor deteriorated from 74 percent in CY10 to 72 percent in CY11. However, passenger revenues increased in CY11 by Rs 7.76 billion due to the increase in yield. In CY11, the airline experienced a slight increase in ASKs while RPKs did not witness a significant change as compared to the last year.
The cargo business also remained dull during CY11 where capacity increased by 4.3 percent but the load factor dwindled sharply from 76 percent in CY10 to 56 percent in CY11. While revenues from cargo business did not shine significantly; charter business showed a healthy improvement from Rs 461 million in CY10 to Rs 1,643 million in CY11 mainly due to Libya, Egypt charters and Hajj charters from Kathmandu, Dacca, Kinshasa and Rangoon.
Profitability at PIA After a staggering CY10 for Pakistan International Airlines in terms of turnover with revenues growing by 14 percent and the primary business segments showing remarkable growth, the much awaited annual results for CY11 announced on April 30th CY12 reflected the horrifying performance round the year.
Sale revenues inched up by 8 percent during CY11 versus CY10 primarily due the passenger business segment representing roughly 85-90 percent of the total revenues. However, these receipts were once again not enough to absorb the cost shock.
Cost of service shot up and this was mainly on account of a 41 percent jump in aircraft fuel expenses during CY11. Jet fuel prices for CY11 grew by almost 40 percent from the average price in CY10 of Rs 194.54 per US gallon to Rs 270.06 per US gallon in CY11.
Aircraft fuel constitutes more than 50 percent of the total cost of service, and escalating oil prices during the year, especially the latter half dented the gross profit where gross margins fell from 13.9 percent in CY10 to 1.4 percent in CY11. Hence volatility in crude oil prices directly impacts the airline's operating costs.
The deterioration of Rupee versus the greenback wreaked havoc on the profitability of the Company during CY11, unlike CY10 which somewhat stable exchange rate. Every year, PIA suffers heavy losses on account of exchange rate translation. CY11 was no different, as the net exchange loss doubled from Rs 2.09 billion in CY10 to Rs 4.22 billion in CY11. As a result operating margins tumbled from the meagre 0.67 percent in CY10 to 15.38 percent in CY11.
Other operating income that increased 2 folds during CY10 on account of higher derivative income and reversal of the provision for CAA claims in CY10 and has remained a source of hope during times of disarray did no good to the profits at the year end. Hence, the profitability during CY11 was further axed by a dip in other income by 76 percent.
The net profit during CY11, consolidated and unconsolidated both, plunged by 29 percent with unconsolidated net margins deteriorating further into negative.
Performance 1QCY12 As expected, CY12 did not start off well for PIA as the results of 1QCY12 depict an even ghastly picture, where the revenues remained flat for the quarter versus 1QCY11 the costs surged to new heights. Volatility in the fuel market and the inefficiencies at the public sector organisation weighed heavy on the profitability. With some respite in the other income, loss after tax for 1QCY12 stood at Rs 7.8 billion, with profitability plummeting further by 84 percent.
Liquidity The current ratio of 0.16 speaks for itself. From a current ratio 0.24 in CY09 to 0.16 in CY11, the airline's working capital position is choking. Finance costs for the Company showed an increase of 9 percent in CY11, they remained really high at Rs 10 billion. These costs now represent around 9 percent of net revenues.
PIA's loan consists of a variety of loans, ie, against PIA assets, against GoP guarantee, Rupee denominated and Forex denominated. However, the real damage brought to the cash flows is through the short-term borrowings acquired for the working capital requirement. The short-term borrowings have increased from Rs 22.6 billion in CY10 to Rs 25.8 billion in CY11.
Outlook PIA's financial performance is extremely vulnerable to three major risks. One is the fuel price risk due to volatility in crude oil prices. The Company's gross margins and operating margins remain extremely sensitive to future fuel price movements.
Second is the currency risk especially when the rupee is expected to cede its ground further. Third, the company is exposed to interest-rate risk and given the situation in the eurozone, the financing linked to Libor are heavily strained.
Apart from these, the operational efficiency of PIA is debilitating its profitability. Factors that are crucial for an airlines survival like utilisation, technical maintenance, optimum staffing, scheduling, etc, are all at all-time lows. Speaking of government bailout, such acts might keep the Company going for a few years but the long-term viability rests on what the Company does to fix the loopholes and emerge from the crisis on its own.
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PAKISTAN INTERNATIONAL AIRLINES CY09 CY10 CY11
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PASSENGER OPERATIONS ('000)
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Passenger Load Factor 70 74 72
Capacity (available seat km) 19,859 21,219 21,725
Utilisation (revenue pasgr km) 13,891 15,657 15,664
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CARGO OPERATIONS
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Capacity (available tonne km) 2,933 3,091 2,972
Utilisation (revenue tonne km) 270 329 288
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PROFITABILITY
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Gross margin 17.39% 13.92% 1.36%
Operating margin -3.37% 0.67% -15.38%
Pre-tax margin -13.15% -7.98% -24.05%
Net margin -5.23% -19.33% -22.97%
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LIQUIDITY & EFFICIENCY
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Current ratio 0.24 0.22 0.16
Fixed asset turnover 0.71 1.11 1.21
Total asset turnover 0.58 0.85 0.92
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Source: Company accounts
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