With fuel prices expected to be averaging below $60 per barrel, and plan in hand to streamline overheads, PIA has all the potential to successfully revive itself and rebound during the next 12 months. This was stated in a meeting of the airline's Board of Directors, which reviewed its operating performance and approved the 2006 audited accounts.
It was noted that he aviation market in Pakistan, throughout 2006, remained highly competitive and maintained open access to airlines both from within and outside the country. Overall, the passenger market increased by 3.3 percent, while PIA achieved a growth of 4.4 percent (from 5.44 million passengers in 2005 to 5.68 million in 2006).
The airline achieved a passenger seat factor of 71.4 percent on scheduled services whereas 'passenger yield' increased by 6.1 percent over the previous year. Cargo load factor increased to 61.9 percent in 2006 and 'cargo yield' grew by 12.1 percent. PIA retained its share in the international segment and increased its domestic market share to a healthy 69 percent.
The airline substantially modernised its fleet through acquisition of three wide-body state-of-the-art Boeing 777 and induction of three brand new ATR 42 Turbo aircraft to partly replace the Fokker fleet. With the acquisition of Boeing 777 LR, nonstop flights were introduced to Canada for the first time.
The Board was informed that for the year under review the airline's expenditure rose because of the fuel bill. This increased expenditure was essentially caused by the simultaneous occurrence of factors that were both extraneous and unavoidable.
The single key factor for increased operating expenditure in 2006 was the abnormal increase in fuel cost by Rs 6.9 billion, 26 percent higher than the previous year.
Since mid-2005, the crude oil prices in the world market have been witnessing abnormal increase, which reached its peak in late 2006 when crude was being sold at $78 per barrel. As a consequence, the aviation fuel prices also showed sharp increases.
Since PIA had not hedged its fuel prices, unlike some other airlines, all the cost increases were absorbed in the respective period accounts. For the year 2006, PIA fuel bill rose from Rs 26.5 billion in 2005 to Rs 33.4 billion in 2006, showing an increase of 26 percent over previous year.
PIA's fuel bill, as a percentage of sales (47 percent) was far higher than the industry average of 31 percent. Apart from unhedged fuel, it also significantly pointed to the high rate of burn-off of fuel on the ageing aircraft, as average age of PIA's fleet was 20 years at the beginning of 2006--much higher than the industry average.
In addition to fuel, the airline experienced substantial cost increases in the aircraft chartered for meeting scheduled and Haj traffic, engineering/maintenance, aeronautical and flight handling and selling and distribution cost.
Compared to 2005, the interest cost increased by an additional Rs 2 billion to Rs 4.8 billion--71percent increase over previous year-- primarily due to additional borrowing for the purchase of three Boeings 777 and three ATR aircraft, and increased short-term borrowings due to fuel price-led operating loss.
Moreover, increase in interest rates in the country also contributed to the increased financing cost. Despite grounding of 6 Fokker aircraft in July 2006 and some restrictions from European Union under their Safa Program in October 2006, PIA's revenues increased by 10 percent.
"If we are to measure PIA's performance by isolating the abnormal impact of fuel price increase, then the airline using 2004 fuel price level would have posted a profit of Rs 3.3 Billion in 2005 and another profit of Rs 1.5 Billion in 2006, after including increased financing costs", said PIA Chairman Tariq Kirmani, who chaired the Board meeting.
"This is so because all the indicators critical to evaluating an airline's performance have shown improvement in 2006, whether it is market share, number of passengers carried, aircraft utilisation, yield increase, or revenue improvement," he added. During the year under review many strategic and operational levels of initiatives were taken for improving the quality and productivity of the human resources, which eventually should also improve the morale among the 18,500 manpower, he said.
During the year, PIA inducted 42 newly qualified MBA Trainee Officers, 50 Trainee Engineers and 841 Cabin Crew for its expanding fleet. In the area of training, 293 newly inducted cabin crew were trained in 2006 including 55 from overseas, whereas 264 PIA employees were trained in various management disciplines by visiting trainers. Moreover, PIA Training Centre Instructors were trained under train-the-trainer program from Iata, European Union and aircraft manufacturers like Boeing and ATR. Performance Appraisal training was conducted for more than 3000 employees of supervisory/middle & senior management levels.
The airline is going through a challenging time with some new pressures like the March 7, 2007 EU restriction on part of PIA fleet, which is taking priority. It is expected that the airline will be able to resolve the EU issue within the first half year 2007. The management will continue its accelerated emphasis on high standards of safety and engineering maintenance. At the same time, the airline management and the Board have agreed on a plan to accelerate the modernisation of its fleet through cost effective means so as to aim for an average fleet age of around 10 years. PIA is already in the final stages of selecting replacement of aircraft for its narrow body Boeing 737 fleet. Moreover, the process to replace Boeing 747 fleet is also under review by the management.
New state-of-the-art technologies, like Sabre Revenue Management System, are currently under test-run, which would accurately predict future demand enabling PIA to proactively allocate fleet and related resources to be competitive in a complex market environment. This will also help maximise revenue, help enhance market share and keep a close watch on competitive pricing strategy. Additional 3-5 percent revenue is being forecast through this system.
Kirmani said the airline is constantly improving its systems and processes to improve productivity and control cost. In addition, our action in 2006 to expand the distribution network through participation in major GDRs is also expected to generate additional sales as PIA services are now available to a much larger distribution base," he concluded.
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