Pakistan International Airlines (PIA), Pakistan's national flagship airline, has been a pioneer since its inception in 1955. PIA provides air transport services. Other activities of the company include provision of engineering and other allied services.
PIA Cargo, the company's air freight division, delivers cargo shipments to over 38 international destinations and serves the rest of the world through interline carriage, in addition to its domestic network in Pakistan. Its flagship courier service, Speedex, delivers documents and parcels of any size, to the doorstep of its customers. PIA Engineering is an established aircraft maintenance and repair company that provides solutions to the aviation industry. PIA Engineering delivers maintenance and overhauling services for customers, as well as PIA's fleet of aircraft.
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COMPANY SNAPSHOT
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Name of company Pakistan International Airlines
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Nature of Business Airline service
Ticker PIAC
Net Revenue CY '08 Rs 89,201,257,000
Net Revenue CY '09 Rs 94,653,765,000
Share price (avg.) Rs 3.4
Market Capitalization Rs 5,903,033,000
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Aviation industry
Pakistan aviation industry has been suffering from a dearth of revenue and travellers dues to a number of reasons. These reasons include absence of a comprehensive aviation policy, economic slowdown, increased POL prices, worsening law and order situation, energy and power crises, a not-so-stable currency, financial and administrative issues and deterioration of security across the country. Moreover, the ratio of issuing visas to Pakistanis by the First World had also decreased alarmingly due to security concerns. Also, poor law and order situation has made Pakistan an un-favourable destination, which has impacted the non-Pakistani traveller number. These conditions have adversely affected the international business.
In 2009, passenger and cargo yields plummeted by 12% and 16% respectively. During 2009, passenger traffic shrunk by 3.4% globally. Industry Revenue Passenger Kilometres (RPKs) and Revenue Freight Tonne Kilometres (RFTKs) growths have been negative at -3.5% and -10.1% respectively.
Outgoing was yet another year of sharp swings in Oil prices. Prices for a barrel (bbl) of IPE Brent ranged from around USD 40/bbl (in February) to USD 80/bbl (in October) last year. The average price was around USD 62.53/bbl, 36% lower than the previous year. Over the remainder of 2009, the crude oil price rose sharply. This trend was driven by positive expectations for the economy and speculation of a similar magnitude to that seen in 2008.
Last quarter of 2009 showed consistent signs of improvement in the air freight business. Volumes and yields are now moving in the right direction - upwards - although there is still a long way to go before early 2008 levels are regained. Several years of growth have been lost in this extra ordinary downturn. Moreover, revival in the economic growth is very uneven - with a strong rebound in Asia and parts of South America but weak growth in developed markets - and is expected to remain that way for some time. But world trade is now picking up adding to the impetus given to air freight by the inventory cycle and mode switching. Yields are starting to turn up, as load factors recover, but low aircraft utilization and scheduled delivers imply that capacity remains a threat to restoring profitability.
Recent results (3Q10)
Net loss for the period stood at Rs 11.7 billion compared to Rs 10.7 billion, an increase of 8% over corresponding period last year. The increase is mainly attributable to a higher tax bill. Loss per share stood at Rs 4.79 compared to a loss of Rs 5.03 last year. Operational losses decreased by 8% over the nine-month period. This improvement was mostly due to a 16% increase in net revenue and a 60% decrease in exchange loss. Some gains were offset by a rise of 51% in fuel expenses and 14.6% in salaries of employees (two biggest expenses). Oil prices during the nine-month period were volatile, starting the year 2010 at US $ 76.01/barrel and reaching US $80.01 in October 2010.
The company currently has 450 employees per aircraft, which is the highest in the world. This is in contrast to the world average of 130 employees per aircraft. Recently, the management has announced new programmes for its employees including a housing scheme and employee stock ownership programme.
Gross profit margin and net profit margin for the period stood at 10% and -15.73% respectively. They highlight the significance of the challenge management faces in engineering a turnaround.
Rather than generating positive operating income, PIA relies on short-term borrowing and trade payables to pay its bills and keep it afloat. The current ratio (a measure of liquidity) stood at 0.25 as compared to 0.24 last year. On the brighter side, cash balance increased from Rs 0.74 billion last year to Rs 3 billion. Interest costs for the company decreased slightly because of lower interest rates globally and the fact that a significant portion of PIA's debt is linked to the LIBOR which has reached historic lows. The company's capital expenditure for the period decreased by 48% to Rs 1.1 billion compared to Rs 2.1 billion last year.
PIA currently has a negative equity of Rs 30 billion. The company benefited from a surplus on reevaluation of fixed assets during the period which increased equity by Rs 27 billion. Total accumulated losses amount to Rs 83 billion and are the main cause of the negative equity.
Recently, the management announced a 5-year turnaround plan and has asked the government to write off losses of $1.7 billion to prevent bankruptcy. The plan envisions cutting costs and buying new planes that are more fuel efficient. News items suggest the likelihood of government accepting the plan is low, and thus PIA will either have to resort to more borrowing or declare bankruptcy over the next few years.
The market capitalisation of the company is Rs 5,833 billion. Most of PIA's stock is owned by the government of Pakistan and state-institutions. Trading volumes in the stock is low and the company has a beta of 0.929, which means its share price is slightly less volatile than the overall KSE-100. PIA has paid no dividends during the nine-month period. The company last paid a dividend in 2004 of Rs 0.50 per share.
Financial performance FY05- FY09
Before accounting for debt servicing and exchange losses, the corporation becomes profitable at operating level after 4 years of operating at a loss on a similar basis. The revenue in 2009 went up by 6.4% year on year, whereas yield increased by 7.0% in 2009.
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2009 2008 Variance
Revenue PKR Million PKR Million %
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Passenger 84,510 79,479 6.3
Freight 4,982 5,459 (8.7)
Others 5,072 3,925 29.2
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Total 94,564 88.863 6.4
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Passenger 2009 2008 % Change
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ASK'S (Million) 19,859 19,528 1.70
RPK's (Million) 13,891 13,925 -0.24
Seat Factor (%) 70.00 71.00 -
Passenger Revenue (PKR Million) 84,510 19,479 6.33
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YIELD FACTOR 6.1 5.7 7.0%
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Passenger and Freight traffic showed significant decline during the CY09. This was inline with global recessionary trends reflecting a decrease in trade activities. PIA slashed its post-tax losses by 83% in the CY09 on the back of fuel cost reduction, a comparatively stable rupee, prudent financial management and higher revenues. The post-tax financial loss came down to PKR 5.82 billion in CY09 from PKR 36.12 billion in CY08. The drain caused the depreciation of rupee was limited to R 6.71 billion in CY09, 72% less than PKR 24.12 billion in the preceding year. The largest expense item for PIA is fuel. PIA has authorization to hedge 20% of its oil requirement in the CY09, which saved PKR 500 million in the CY09 and BoD has now increased the limit to 40% to capitalise on a potential to increase such savings in future.
A significant reduction of losses testifies that the management capitalized on the opportunities offered by a changing macroeconomic environment - both global and domestic and successfully tackled the challenges of CY09, closing at a much better result in comparison with the previous year. However, it fell far short of the profitability required to earn a return on capital and create value.
As far as the profitability of the company is concerned, the company has been facing a serious crisis, reporting financial losses for the past three years of 2005, 2006 and 2007, 2008. In CY09, the total turnover of the company stood at Rs 94.5 billion (CY08: Rs 89.2 billion), representing a 6% increase. Cost of services amounted to Rs 78.6 billion (CY08: Rs 85.6 billion) - a decrease of 8%. Consequently the gross profit grew significantly by 338% in the CY09 and stood at Rs 15.9 billion (CY07: Rs 3.64 billion).
The gross profit margin has increased from 4.08% in the CY08 to 16.85% in the CY09 due to a significant growth of 338% in the gross profit. The profit margin stood at -6.16% in the CY09 as compared to -40.22% in the CY08 showing a growth of 85%.
The return on assets have grown from negative 25.69% in the CY08 to negative 3.64% in the CY09 showing an increase of 86%. The return on equity has declined significantly from 76.83% in CY08 to 11.87% in CY09. The ROE shows a dip for CY06 because in this year the equity slumped by 99% from Rs 10.44 billion in CY06 to Rs 138 million in CY07. Since then the decline in equity has been higher than in net losses, illustrating the reason behind positive ROE in CY07 and CY08.
As for the liquidity of PIA, the corporation has faced a declining trend over the past couple of years but in the CY09, it has showed a little growth. The declining trend can be primarily attributed to a sharp rise in the current liabilities of the company over the years. Mainly, current liabilities have increased in the form of greater long-term financing and short-term borrowing. The greater long term borrowing had been facilitated for the purchase of three Boeing 777 and three ATR aircrafts. In CY09, the current liabilities have dropped by 4% while the current assets showed a growth of 12%. The current liabilities' composition shows that short term borrowings dropped by 21% in CY09. The current ratio stands at 0.25 in CY09 as against 0.21 in CY08. The advances have increased by 57% due to advances extended to suppliers to the amount of Rs 1.8 billion (CY08: Rs 0.96 billion). In CY09, the cash reserves stood at Rs 742.9 million showing a decline of 6%.
As far as asset management of the company is concerned, inventory turnover (days) has shown an erratic trend, decreasing drastically in 2004 then rising in 2005 and 2006, and then again decreasing in 2007 and 2008 and rising in 2009. The ratio has increased in CY09 and stood at 18 days. Days sales outstanding (DSO) has increased to 31 days in the CY09. In CY08, it was 24 days. The overall operating cycle has declined lately from 38 to 49 days. Rise in the days sales outstanding indicates that the creditors to the corporation have not been paying off their debts on time, thus placing the PIA at crossroads as far as asset management is concerned.
The total turnover of the company has been rising over the years, increasing by 17.59% and 14.57% over the years 2008 and 2009. In fact, if we are to measure PIA performance by isolating the abnormal impact of fuel price increases, then the airline, using the 2004 fuel price level, would've posted a profit of Rs 3.3 billion in 2005 and another profit of Rs 0.8 billion in 2006. Hence, we can say that the overall turnover performance of the company has been commendable. The total asset turnover ratio for CY09 is 0.59 (CY08: 0.64). This is due to higher increase in total assets (14.57%) vis-a-vis revenue (6%).
As far as debt management is concerned, PIA has had a very high leveraged financial structure. Its debt to assets ratio has been generally very high, above 0.82 in all the five years under consideration. This shows a highly unstable financial base, with most of the financing achieved through leveraging and a minimal equity base. Liabilities against assets subject to finance lease, all of this, mainly to finance the purchase of three Boeing 77 aircrafts and three ATR aircrafts. In CY'09, the debt to asset ratio has dropped to 1.13 from 1.23 in CY08. Long-term debt to equity has decreased from -2.15 in CY08 to -2.28 in CY09. The debt to equity ratio has remained stable at -3.69. At 2006 the debt to equity ratios peaked as equity fell substantially by 99%. Since 2007, the equity is negative. This puts the company in a precarious situation as it is dependent on borrowing only. The credit risk and the default risk, in the event of net losses, are high.
Times interest earned (TIE) for the company has been generally low, remained below 0.00 for the last three years - 2007, 2008 and 2009. This is primarily because of high financial costs for the corporation over the years in the wake of greater dependency on debt financing. Finance cost has increased to Rs 9.24 billion in CY09, primarily due to increased mark-up on short-term borrowings. Moreover, increase in interest rates in the country also contributed to the increased financing cost. Consequently, the effect of rising financial costs, combined with a disturbingly fast decline in operating profits contributed to a quite low TIE. This indicates that the company needs to manage its marketing, distribution and administrative expenses well to achieve higher operating margins, and also needs to cut down its borrowing to keep its financial costs under control.
The market price of PIA shares has showed a growth of 7% in the CY09 and stood at Rs 3.4 per share (CY08: Rs 3.17 per share). This signifies that investors are gaining confidence again. The effect of a rise in equity has been mitigated by the rising number of weighted average number of outstanding shares. The EPS of the company is also very discouraging, standing negative level in last three years owing to the high level of losses as discussed earlier. PIA needs radical business restructuring to come out of the crisis and meet customers' expectations.
The EPS stood at negative Rs 2.72 per share in CY09 (CY08: Rs -17.79 per share). Overall, PIA has been facing a severe financial crisis in terms of profitability, asset and debt management, as well as liquidity and needs to bring up its financial results to a more positive level. Heightened fuel prices and financial costs are a severe setback for the company and it needs to manage its distribution, administrative and marketing costs well in order to show better margins in the later years.
Future outlook
There is a forecast of reasonably robust growth in the emerging economies. In the US, Europe and Japan, growth will be held back for an extended period of time while problems of highly leveraged household and bank balance sheets are resolved. The major challenges ahead of the corporation are to regain its market share and profitability through achievement of higher yield, focus on profitable routes, improved revenue management and cost-cutting measures.
For short-term sustainability, PIA shall restructure its business, its loans and liabilities, and further injection of equity/funds. For long-term sustainability, brand building and organisational restructuring is being pursued. In the pursuit of achieving improvement both in operational and financial efficiency, PIA is currently utilizing its existing human resources and infrastructure. To achieve these objectives, management intends to convert its business activities (Speedex, Training Centre, engineering MRO, Technical Ground Support, Passenger Handling and Flight Kitchen) presently carried out under the umbrella of overall operations of PIA into Strategic Business Units (SBUs).
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PIA - Financial Highlights
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2005 2006 2007 2008 2009
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INCOME STATEMENT
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Turnover 64,074,470,000 70,587,146,000 70,480,734,000 89,201,257,000 94,563,765,000
Gross Profit 5,133,634,000 704,929,000 3,924,239,000 3,639,290,000 15,934,338,000
Operating Profit -1,759,442,000 -7,648,148,000 -5,935,076,000 -31,377,642,000 -4,064,996,000
Profit Before Tax -4,513,236,000 -13,215,157,000 -13,070,921,000 -39,729,290,000 -13,308,764,000
Net Profit -4,411,657,000 -12,763,420,000 -13,398,706,000 -35,880,157,000 -5,822,431,000
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BALANCE SHEET
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Total Equity 10,446,298,000 138,288,000 -11,903,558,000 -46,701,927,000 -49,054,745,000
Current Liabilities 21,237,101,000 41,025,290,000 52,049,542,000 71,707,905,000 68,817,616,000
Non-current Liabilities 41,214,104,000 65,728,191,000 77,655,550,000 100,471,189,000 111,968,404,000
Current Assets 12,770,243,000 18,353,435,000 13,251,331,000 15,039,282,000 16,880,558,000
Non-current Assets 60,127,260,000 88,538,334,000 105,522,243,000 124,630,585,000 143,132,620,000
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LIQUIDITY
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Current Ratio 0.6 0.45 0.25 0.21 0.25
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ASSET MANAGEMENT
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Inventory Turnover (days) 15.68 17.19 16.61 14.89 17.91
Days Sales Outstanding 29.34 31.26 25.60 23.56 30.79
Operating Cycle 45.02 48.45 42.21 38.45 48.70
Total Asset Turnover 0.88 0.66 0.59 0.64 0.59
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DEBT MANAGEMENT
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Debt to Asset Ratio 0.86 1.00 1.09 1.23 1.13
Debt to Equity Ratio 5.98 771.96 -10.90 -3.69 -3.69
Long Term Debt to Equity 3.95 475.30 -6.52 -2.15 -2.28
Times Interest Earned 0.63 1.60 -0.83 -3.76 -0.44
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PROFITABILITY
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Gross Profit Margin 8.01% 1.00% 6.04% 4.08% 16.85%
Profit Margin -6.89% -18.08% -19.01% -40.22% -6.16%
Return on Assets -6.00% -12.00% -11.28% -25.69% -3.64%
Return on Equity -42.00% -9230.00% 112.56% 76.83% 11.87%
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MARKET VALUE
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-2.55 -6.8 -6.61 -17.79 -2.72
Average Market Price 11.6 7.74 11.3 3.17 3.40
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