Clipped wings of Pakistan’s aviation

BR Research August 27, 2019

The Competition Commission of Pakistan’s (CCP) recent report on the market and regulatory assessment of the country’s air transport sector makes an educating read for those who are interested in finding out what’s wrong with aviation in Pakistan.

The aviation industry has various legs: supply of airport infrastructure; ground handling; ancillary services such as fuel and catering; airline passenger and cargo services to name the key areas. And if the CCP’s report is any guide, all these areas are rife with anti-competitive and market-limiting concerns that are preventing the country’s aviation industry from taking off.

For instance, the Civil Aviation Authority (CAA) is both the technical regulator of civil aviation activities, and also the owner and operator of all civilian airports (except Sialkot) and air navigation services in the country. This is contrary to international guidelines that advocate the separation of regulatory and operation functions in the sector ala how good corporate governance demands that ownership should be separate from the management.

“In its role of economic regulator, the CAA is mandated with the oversight of monopolistic services pricing. At the same time, CAA, as a ‘dominant undertaking’, is the provider of such services, setting charges to recover its costs (plus a return). This concentration of functions leaves users of infrastructure services unprotected (airlines and passengers) in the presence of such conflict of interest, in terms of prices charged and quality rendered,” the CCP’s report said.

The report states that the approval process and availability of foreign exchange to run airline operations prioritizes the national carrier PIA, “in detriment of private airlines that experience lengthy delays to access hard currency.”

The PIA is also given priority in the allocation of traffic rights, as per government’s policies. While PIA’s “diminished capabilities” currently do not necessarily allow the carrier to capitalise on this allotted priority, the CCP maintains that this practice can impair “the quality of services offered and the ability of other more efficient players to remain in the market, as they cannot access traffic rights.”

Then there are high barriers to entry that disallow smaller players to start operations in the country, of which high paid-up capital and minimum fleet size stand out as major issues. The regular passenger transport license in Pakistan costing Rs500 million, in addition to Rs100 million as security deposit and billing assurance equal to three billing cycles are comparatively very high considering that Pakistan which suffers from scarcity of capital.

The CCP notes that even in capital-abundant countries and regions like Australia, European Union, the US, and Saudi Arabia, equity requirements do not exist. “Instead, financial viability of the potential entrant is taken into consideration” and “potential market entrants must only provide information on the firms’ financial background”.

In the case of minimum fleet size too, Pakistan does not compare well with many other countries. Pakistan’s regulation requires a minimum fleet size of three airworthy aircraft for domestic operations and five for international operations. The CCP argues that other policy instruments to avoid disruption in services, which is a legitimate policy concern, should be pursued instead of demanding stringent fleet size requirements which has detrimental effects on potential entrants.

“In many countries, minimum fleet requirements do not exist, leaving this to the carrier to prove technical-economic aptitudes as per its business and operations’ plan submitted to the authorities during the certification stage,” the report said. In fact, it highlights that countries and regions like Australia, the EU and the US have very lax fleet requirement of only one aircraft. In addition, the CCP points out that stringent aircraft age restrictions, as is the case in Pakistan, do not commensurate with international practice since increases the financing needs of the operators, and therefore acts as barrier to entry.

The CCP’s report is rather comprehensive in terms of its analyses of the regulatory assessment of the country’s aviation sector. However, the absence of demand-side analyses, an important aspect of market dynamics, is a key missing element, along with an analyses of cross sectoral taxation policies that may be keeping the sector from taking off in favour of road transport.

The report informs that commercial air transport market in Pakistan mobilizes more than 22 million passengers, of which 7 million corresponds to domestic and the rest is international. What is the comparable share of domestic versus international transport in comparable economies and what could be the potential increase in domestic air travel in Pakistan if market-limiting regulatory and taxation policies didn’t exist? These are some of the aspects missing from CCP’s report.

Addressing such research gaps may not be CCP’s domain. But the World Bank, which facilitated this study, or Pakistan’s academic and policy research institutions ought to address such research gaps to give impetus to the currently dormant discourse on bringing aviation reforms in the country.

Copyright Business Recorder, 2019

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