The profits of fuel intensive industries, such as airline where fuel cost accounts for nearly half of operating expense, are highly sensitive to oil prices movement. To mitigate this vulnerability at the helm of unpredictable oil price movements, many airlines around the world have been forced to incorporate cost cutting measures for survival.
As a result, many of them made profits even in 2008 - such as Ethiopian Airline and Malaysia Airline -- when global crude oil prices were skyrocketing. Yet its a persistent irony that despite lower oil prices in the year to date, Pakistan International Airlines continues losing money. The state-run firm lost Rs 10 billion during the nine months ending September, compared with a loss of Rs 38 billion in same period last year.
A victim of sheer inefficiency, PIAs cost of services other than fuel charges rose 18 percent during the period, whereas administration costs soared by 20 percent. If this increase was an anomaly one could attribute it to high inflationary environment, but thats not the case.
Data compiled by Air Transport World - a globally renowned aviation magazine - shows that the ratio of PIAs operating expenses to revenues was undeniably higher (135 percent) even in 2008, compared with an average 96 percent of a random sample.
Even the firms revenue per employee is way low compared to other airlines, implying that firm is over burdened with large number of employees. An earlier ATW report ranked the national flag carrier as eighteenth biggest in the world in terms of the number of employees.
So while at one end PIA has to right size itself to make efficiency gains, at the other it has to come with better service offerings as well. Lately, the influx of international airlines and excessive advertisement has created quality consciousness among passengers who are being wooed with value added services - something which PIA clearly lacks. In this context, to increase revenue, it is pertinent for PIA to increase the load factor, which stood at 71 percent in 2008 against an average 82 percent.
With global oil prices relatively stable for now, PIAs restructuring must come soon as the weather ahead turns foul. The stormy clouds of global commodity price hike are gathering slowly and it will not be long before they start pouring yet again, possibly after the next few quarters. Whether or not, they will do so is a tricky question. From the looks of it, the chances are dismal considering its recent decision to handing over permanent jobs to contractual employees at a time when all its peers are cutting costs.
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