Airlines: PAKISTAN INTERNATIONAL AIRLINES - Analysis of the Financial Statements December 2003 - June 2008
Pakistan International Airlines (PIA) was established in 1955. The flagship carrier of Pakistan has a rich history of unbroken records, unique corporate culture, unparallel service levels and strong financial performance. Commercial airline industry of Pakistan is dominated by PIA as the company covers major routes locally and internationally.
Moreover, the company has a monopoly in Haj customer market as no other Pakistani airline apart from PIA of course, is allowed to carry out Haj operations from Pakistan to Saudi Arabia. Global recession and the security situation in the country have badly affected the tourism industry of Pakistan, which in turn has impacted negatively on the airline industry.
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2nd Quarter Half Year
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2008 2007 2008 2007
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Rupees in Million
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Turnover - net 19,736 17,207 37,562 14,881
Cost and Expenditure 22,469 19,018 42,270 39,199
Financing Cost 1,806 1,827 3,710 3,396
(Other Income) / Provision - 8,062 71 9,581 (139)
Lose before tax 12,601 3,709 17,999 7,575
Loss after tax 12,601 3,795 17,999 7,749
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The increase in the loss after tax is mainly due to the record high crude oil prices in world markets during the first half of 2008. Heavy losses sustained by the airline in 1Q08, which continued in 2Q08 because of Rs 8.8 billion foreign exchange translation losses on loans/lease obligations. As already discussed, the second factor was the steep rise in oil prices; the estimated impact is around Rs 8.3 billion.
The liquidity position of the airline fell slightly from 0.25 in 2007 to 0.24 in the 1st half of 2008. This decrease in the current ratio was due to an increase of 27.22% in liabilities against assets subject to finance leases during the period under review. Gross profit margin decreased significantly from 6.04% in 2007 to 0.15% during the first half of 2008.
Even though the airline achieved an overall revenue growth of 7.7% when we compare the turnovers of the 1st halves for the years 2007 and 2008 the airline was still faced with huge losses. This owed to the high fuel and currency depreciation costs with which the whole corporate sector was facing. Return on assets also decreased from -11.28% in 2007 to -14.47% in the 1stH08.
Total equity has reduced to a mammoth figure of -29.3 billion rupees as at 30th June 2008. This decrease mainly owes to the rise in accumulated losses by the airline. The operating cycle is at a high of 96.81 for the 1stQ08, but it is expected to decrease by the end of the year as turnover continues to increase. There was no significant change in the stores and spares position of the company, however trade debts did increase by 38.16% at the end of the 1stH08 as against the trade debt amount as at 31st December 2007.
This increase in trade debts caused the DSO (Days Sales Outstanding) to increase to 66.38 days at the end of 1stH08. The debt situation of PIA worsened slightly as debt to asset ratio increased from 1.09 as at 31st December 2007 to 1.23 as at 30th Jun 2008. This increase was due to the increase in liabilities against assets (discussed earlier) and because of the rise in short term borrowings of around 26% at the end of Jun 2008.
Times interest earned (TIE) ratio reduced from -0.83 at the end of December 2007 to -3.85 at the end of Jun 2008. This was mainly because of the increase in loss before tax. Secondly, the financial cost also increased by 10.8% during the 1st half of 2008 when compared against the 1st half of 2007 finance cost numbers. The earnings per share (EPS) dwindled for the period from Rs -6.61 in 2007 to Rs -8.60 in the 1stH08. The market price of the share has also been trading below the IPO price of Rs 10.
This is due to the loss position of the company and poor equity position. The stock price has poorly performed because of extremely difficult conditions at the Karachi stock market as foreign investors continued their panic selling. This was due to the global financial meltdown as financial houses and large investors were willing to sell their stocks at whatever price they could get to restore their liquidity positions.
FUTURE OUTLOOK
The airline continues to struggle as we head into a difficult 2009. The economic melt down worldwide will have its repercussions for commercial airlines all over and PIA is no exception. Even though the company has done remarkably well to upgrade its fleet position in recent years but it has failed to reverse its loss position.
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Fleet Position as on December 31, 2007 was:
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Aircraft Available Age
Type (Nos) (years)
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747-300 6 21
747-200 2 28
777-300 ER 2 1
777-200 LR 4 3
777-200 LR 2 3
A310-300 12 15
737-300 7 21
ATR 42-500 7 1
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Total 42 13
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The major problem with PIA is the hiring and firing of the employees and management on political grounds. The average number of employees per plane at PIA is extremely high as compared to the world averages. As labour cost forms a major chunk of any organizations cost, it is high time that PIA may downsize to improve profitability and productivity if it wants to remain competitive in the world market.
We also predict that there is a possibility that if PIA continues to have another difficult year and given the extremely worse balance of payment scenario of the country, it might be privatized. The privatisation will have its implications as PIA serves many unprofitable but important routes such as flights to Gilgit, Sukkur and different destinations of Balochistan. It will be difficult to privatize this symbolic airline with which a lot of expatriates attach emotional value and offers the expatriate community a lot of special benefits such as direct flights (Karachi to Toronto).
Because the airline has been marred by politics and infighting at present there seems to be no other way than the privatisation solution however many believe that a national carrier is extremely important for strategic reasons.
On the financial front we expect a difficult 2009 and 2010 because of higher labor costs and lower growth rates in revenues as tourism and businesses at large will face decline in operations and growth. On the positive side PIA can gain a lot from expected favorable stance from the European Union (EU) as major European countries have pledged support on all fronts. PIA should also venture into the South American market as relations with South American countries are expected to improve.
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2003 2004 2005 2006 2007 H08
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INCOME STATEMENT
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Turnover 47,951,816 57,788,078 64,074,470 70,587,146 70,480,734 37,562,143
Gross Profit 11,082,333 8,734,272 5,133,634 704,929 4,258,758 54,882
Operating Profit 6,041,739 4,103,387 -1,759,442 -7,648,148 -5,935,076 -14,289,144
Profit Before Tax 3,700,100 837,303 -4,513,236 -13,215,157 -13,070,921 -17,999,328
Net Profit 1,298,652 2,306,598 -4,411,657 -12,763,420 -13,398,706 -17,999,328
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BALANCE SHEET
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Total Equity 6,673,496 13,441,192 10,446,298 138,288 -11,903,558 -29,382,966
Current Liabilities 23,197,885 18,990,089 21,237,101 41,025,290 52,049,542 62,065,526
Non-current Liabilities 26,694,251 46,245,292 41,214,104 65,728,191 77,655,550 90,501,833
Current Assets 20,470,245 19,716,285 12,770,243 18,353,435 13,251,331 14,808,848
Non-current Assets 36,095,387 58,960,288 60,127,260 88,538,334 105,522,243 109,551,284
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LIQUIDITY
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Current Ratio 0.88 1.04 0.6 0.45 0.25 0.24
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ASSET MANAGEMENT
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Inventory Turnover (days) 35.25 15.05 15.68 17.19 16.61 30.43
Days Sales Outstanding 25.63 26.88 29.34 31.26 25.60 66.38
Operating Cycle 60.88 41.93 45.02 48.45 42.21 96.81
Total Asset Turnover 0.85 0.73 0.88 0.66 0.59 0.30
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DEBT MANAGEMENT
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Debt to Asset Ratio 0.88 0.83 0.86 1 1.09 1.23
Debt to Equity Ratio 7.48 4.85 5.98 771.96 -10.90 -5.19
Long Term Debt to Equity 4 3.44 3.95 475.3 -6.52 -3.08
Times Interest Earned 2.35 1.87 0.63 1.6 -0.83 -3.85
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PROFITABILITY
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Gross Profit Margin 23.11% 15.11% 8.01% 1.00% 6.04% 0.15%
Profit Margin 2.71% 3.99% -6.89% -18.08% -19.01% -47.92%
Return on Assets 2.00% 3.00% -6.00% -12.00% -11.28% -14.47%
Return on Equity 19.00% 17.00% -42.00% -9230.00% 112.56% 61.26%
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MARKET VALUE
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EPS 1.57 1.76 -2.55 -6.8 -6.61 -8.60
Average Market Price 20.27 13.37 11.6 7.74 11.30 6.17
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process.
[The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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