'No reason why the number of air passengers in Pakistan cannot be doubled in less than 3 years', MD Bhoja Air

Arshad Jalil is the Managing Director of Bhoja Air. Following are the excerpts from his elaborate discussion with BR Research.
BR Research: What potential do you see in the domestic aviation industry in Pakistan?
Arshad Jalil: I have been involved with the aviation industry as either a shareholder, manager, director, chief executive or pilot for the past 28 years. I started Aero Asia way back in 1993 as managing director. Later on I acquired shares in Shaheen Air and served as that company's chief executive officer. Over the years I have been involved with these airlines as well as Pakistan International Airlines and of course, Bhoja Air.
To gauge the potential of Pakistan's aviation industry, let's consider the example of Indonesia. That country was quite comparable to ours in terms of population, GDP growth and industrial development back in 1993. At that time both countries also had about the same number of people traveling by air. Pakistan was serving about 10.5 million passengers while Indonesia had about 11 million passengers.
The market in Indonesia boomed after their government de-regularised the aviation industry and stopped supporting the two national airlines. As a result of this move, a few airlines entered that market. A couple of them even failed. But a major consequence was that the largest order for airplanes in the history of the world was placed from Indonesia worth $21.5 billion by Ryan Air.
Currently the Indonesian aviation market comprises about 113 million passengers compared to just 11 million or so, 15 years back. Over the same time span, the number of passengers in the Pakistani aviation industry has only risen to about 13 million passengers.
Also consider that global aviation industry contributes about eight percent of the total GDP of the world at about 2.9 trillion dollars, although the direct revenue of global aviation businesses as per IATA stands at about dollars 456-500 billion. The former tally includes the revenues of aircraft manufacturing industry, aviation and duty free businesses, ground handling, etc. In Pakistan, the contribution of the aviation industry to the country's GDP is dismal, being less than one percent. That should provide some insight to the potential of this industry.
Globally, it is considered that growth of the aviation industry of any country is generally about one and a half times the growth in that country's GDP. So considering that at present Pakistan's GDP growth is about four percent, we should expect at least six percent growth in revenues of the aviation industry. Similarly, it is considered that growth in the number of air travelers is about 1.7 times the growth in GDP. That would mean that the number of passengers in Pakistan should grow by at least 10 percent.
BRR: Why has growth in Pakistan's aviation industry remained stagnant over the past 15 years?
AJ: I believe that the major issue is like a chicken and egg debacle. We have very high taxes on this industry. If Bhoja Air charges Rs6,000 on a particular ticket, it pays about Rs2,000 to the government in the form of different taxes such as fuel surcharge and GST. There is a sales tax charge of 16 percent, then there is the airport tax which for domestic flights is Rs300, then there are additional surcharges that compound over and above the other taxes.
Now let us return to the example of the most successful low cost carrier in the world, which is also the airline boasting the highest number of passengers; Ryan Air. That airline carries about 67 million passengers each year and their average airfare is only €39. That is the same rate as Bhoja Air. Ryan Air's average stage length is about 1.7 hours which again is exactly the same as a flight between Karachi and Lahore. So you can see that Bhoja Air is based on a volume centric model, just as Ryan Air.
Now there are two possibilities of any air carrier. Firstly what PIA has been trying and Air Blue has been achieving very successfully is to achieve a very high seat factor of around 90 percent, while their break even is about 85-87 percent, so they make a net margin of 2-3 percent.
The business model for Bhoja Air is slightly different. We want to accommodate more capacity, more space for passengers and we also have a different fare tier. Initially we have launched with very low fares with aim at increasing the overall volume of air passengers. We want to bring in those people who are currently traveling by train or by road.
I personally feel that there is no reason why the air traffic in Pakistan cannot be doubled in less than three years. I have seen it happen in this country when we were operating seven flights between Karachi and Lahore. The number of passengers shot up from about 30,000 passengers to more than 55,000 passengers, which has sadly fallen back down to about 36,000 passengers at present.
In a nutshell, people want two things from an airline. Firstly they require punctuality and secondly they want a good fare. Our focus, just as the other airlines is that safety must always be a top priority.
BRR: What are the main priorities of Bhoja Air towards passengers?
AJ: Of course safety is a top priority and I must say that is the case with all other airlines. Punctuality is also crucial. We are committed to achieving door close, at least five minutes before the scheduled time of departure of all flights. In-flight service must be impeccable. When it comes to food, the low cost model does not apply! We realize that given the stringent security checks and long queues at the airports, travelers look forward to a full meal and we insist on surpassing expectations.
BRR: Tell us about your current capacity and what your plans for expansion are over the next five years.
AJ: We have acquired Boeing 737-400 aircraft which has a capacity of 170 seats in an all economy arrangement. We also have Boeing 737-200 aircraft in our fleet which has a capacity of about 118 seats. These aircraft can be configured to accommodate more seats as well but we are mindful that passengers should be provided ample space and comfortable seating. At the moment we have five aircraft on lease and we intend to increase the fleet size to seven aircrafts by mid-July.
Our total capacity is about 700 seats in all five aircraft. Considering we keep one standby aircraft, with the other four aircrafts we are aiming at a capacity of about 2,000 passengers per day given the frequency of flights.
By comparison, PIA is currently carrying about 5,000 domestic passengers per day. Air Blue is carrying about 1,100 domestic passengers while Shaheen Air is carrying about 600-700 passengers. The frequency of flights offered by the two private airlines is the same but Air Blue has higher capacity because of their bigger aircraft. Our target is to carry about as many passengers as Air Blue and Shaheen Air put together, within three months because we have the capacity and we want to provide fares at price points that encourage air travel among more people.
BRR: In your view, how low can airfares in domestic travel go?
AJ: The operating cost of a 737-400 is only about 10 percent higher than the operating cost of a 737-200 but the capacity of the former is about 30 percent higher. This means that given higher volumes of air passengers, we can offer lower fares and still be profitable. That said it is also pertinent to note that the cost of fuel is a major component of costs for airlines and fuel prices have gone up and stayed up in recent times.
We are not looking to start a fare war with any of the other players in the market or take away their share of passengers. So we are considering ways in which cheaper fares can be made available. For instance a passenger purchasing a ticket at least one week in advance or traveling without luggage may receive a lower fare. The basic philosophy is that no one should have to pay any more than the services they desire.