PIA needs a paradigm shift

The airline industry has seen tough times through the global recession. Amidst high fuel costs and plunging passenger volume, airlines around the world have struggled to keep afloat. Carriers in Japan, India and Pakistan are examples of the ones badly hit by the crisis.
PIA has been able to reduce its losses for the year ended December 2009 by a whopping 84 percent. However, much of the ground was gained due to factors that were beyond the control of the national carrier.
Fuel prices plunged, in relative comparison to the highs of 2008. Reduced jet fuel prices and lower volatility enabled the company to reduce its expense on aircraft fuel by about 32 percent this year.
Another major area of "savings" for the ailing national carrier was the slowdown in the sliding of rupee against the dollar. In comparison to 2008, which saw a sharp rupee weakening of 30 percent, the exchange rate depreciated only 7 percent in 2009. As a result, exchange rate losses were reduced by a significant 72 percent this year.
But, factors that can be directly attributed to managements efforts depict a lacklustre performance. Two areas where the management could have exercised restraint, given the precarious financial position of the company and the country, were administrative and distribution costs. Both continued to weigh on the companys bottom-line.
Restructuring the white elephants of the economy has been a hot topic off late. PIA is among public sector enterprises that badly need an overhaul if it is to remain a viable entity. Lessons, in that regard, can be drawn from the debacle of Japan Airlines.
Aviation analysts describe the issues of the Japanese airline - which eventually filed for bankruptcy earlier this year as the legacy of flag carrier mentality.
High labour costs, less efficient fleet, reluctance to drop inefficient routes and a suffocating bureaucratic culture; eerily familiar to problems of dear old PIA.
A trend towards letting the private sector run national carriers has been followed by KLM, Lufthansa, British Airways and now even Japan Air. Designating the airline as a national carrier is the norm now for governments, not running it.
Perhaps, an altogether new approach of low-cost business can be tried at home - something which is fast becoming a popular business model in the airline industry.
No frills airlines, such as Ryan Air and Air Asia have been busy posting profits in an industry where the losses were widely accepted as normal.
This airline model cuts costs in terms of ticketing, flight meals and entertainment, coupled with fewer staff per plane. What they offer to the consumer in return is surprisingly lower fares. It is time for a paradigm shift at PIA.

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PIA P&L

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Rs (mn)                       2009       2008   ()%

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Revenue                     94,564     88,863       6%

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Cost of services

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Aircraft Fuel              (31,372)   (45,854)    -32%

Others                     (47,258)   (39,421)     20%

Gross Profit/Loss           15,934      3,587     344%

Distribution Costs          (5,912)    (5,310)     11%

Administrative Expenses     (7,181)    (5,818)     23%

Exchange loss               (6,711)   (24,119)    -72%

Loss from Operations       (19,999)   (35,224)    -43%

Finance Costs               (9,244)    (8,352)     11%

Loss for the period         (5,822)   (36,139)    -84%

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Source: Company Announcement