PIA's most pressing problems

The national flag carrier's many problems were bound to become part of the proceedings as the Supreme Court allowed Air Marshal Arshad Malik to function as PIA's (Pakistan International Airline's) Chief Executive Officer (CEO) with full authority on Wednesday. Interestingly, the Attorney General for Pakistan (AGP) as well as the three-member bench seemed to agree that perhaps the biggest drag on the airline's finances stemmed from inappropriate HR policies that allow over-staffing. Even the most conservative estimates put PIA's employee-to-aircraft ratio at around 400, making it one of the worst in the world. Indeed PIA, like all other public sector enterprises (PSEs), has traditionally been overloaded with political appointees by successive democratic administrations; a standard way, more or less, of rewarding political workers for services rendered in elections, etc. Little surprise, then, that three decades or so of putting wrong people in important places have reduced PIA from one of the finest airlines in the world and no doubt a matter of great pride for the nation to an almost bankrupt, broken down model of inefficiency and corruption.
Yet, central as the HR problem is, a look beneath the surface reveals that reducing the commercial viability of the airline might have played an even bigger role in its financial ruin. As Minister for Aviation Ghulam Sarwar Khan told the Upper House of Parliament recently, PIA's financial crisis actually began with the advent of the Open Skies policy in the 1990s, which granted liberal rights to foreign airlines, particularly from friendly Gulf countries, to operate inside Pakistan. These concessions were approved in blatant violation of the spirit of such policies, which need to be based on commercial reciprocity and organic market growth on all sides. Yet airlines representing Gulf city states were allowed to operate in multiple Pakistani cities in return for just one point of operations for PIA. As a result, PIA lost much of the passenger traffic, and revenue, from routes to the Gulf, Europe, the US and Canada. Surprisingly, nobody in PIA or the government seemed too troubled by these obviously skewed arrangements, even as they turned the once profitable airline into a financial black hole; one which the Supreme Court was told by the AGP could end up like Pakistan Steel Mills.
Also, even if PIA is able to somehow quickly right-size its employee bulge, it will continue to struggle with operating costs. Aviation is one of the most competitive industries in the world and profitability primarily hinges on adjustment of fuel prices. And most airlines that are in profit are doing well because they hedge successfully on fuel. Hedging is a very technical exercise, of course, and since the oil market is known to swing wildly from time to time, pricing models can sometimes fail. It is made all the more complicated in countries, like Pakistan, that are prone to sudden currency depreciation. Since PIA is in the public sector, it's no surprise really that nobody there is willing to hedge on anything out of fear of NAB (National Accountability Bureau) knocking on their doors in case of a loss. PIA is, therefore, put in a unique position where it is asked to perform a number of functions for the government that are not necessarily commercially viable and at the same time expected to compete with no protection on a level playing field. All things considered, the best way to restructure the national carrier is to create an environment for responsible, regulated privatisation, forcing it to make only commercially viable decisions. And as long as it must remain in government control, since it's unlikely to fetch a good price in its present state, it must be facilitated in hedging against price fluctuations or provided oil at a fixed price. Only if PIA's management can successfully handle the modern market's pricing requirements can the airline survive, even thrive, in the cutthroat competition of the aviation industry. The market's unforgiving nature is best explained by the instructive words of Sir Richard Branson, founder of Virgin Atlantic Airways, "The quickest way for a billionaire to become a millionaire is to be in the aviation industry."