Sale offer of PIA shares

Encouraged by its recent successful offloading of shares of Oil and Gas Development Corporation and Sui Southern Gas Company at an attractive premium, the Privatisation Commission of Pakistan has sought the co-operation of the Karachi Stock Exchange to launch the sale of 57.536 million shares of Pakistan International Airlines to general investing public at a price which is likely to be 5 percent lower than the prevailing market price as of May 31st, 2004.
The proposed share offer, which is 5 percent of the existing paid-up capital of the corporation, would be increased to 10 percent in the form of a green-shoe option to the applicants in the event of over-subscription to the extent of 100 percent.
PIA has been exempted from seeking underwriting for this issue despite a premium being charged as it is a government owned company.
The Privatisation Commission has also announced that it will make an initial public sale offer of 10 percent shares of Kot Addo Power Company (KAPCO) along with a green-shoe option of additional 10 percent shares.
In this connection, EoIs have been received from seven lead managers, which indicates that the proposed share offer would be fully taken up by the lead managers in the event of a shortfall in the subscription from general investing public.
Unlike OGDC, which hardly carries any debt on its books, PIA is over-leveraged and in not a too distant past had been taking forex loans against future sales of tickets on some of the profitable routes. And also, unlike Southern Gas, PIA's track record of dividend pay-out has been quite dismal.
In fact, KSE had been threatening to place PIA stocks on the defaulters counter. Extension has been granted until June 30 on the commitment that the corporation intends to give some dividend while approving the half-yearly results.
In the circumstances, the government's attempt to offload PIA shares in the market cannot but be described as a bold move which may possibly meet with success, considering the fact that the stock trading below par some time back is now hovering around Rs 22 due to the prevailing optimistic outlook in the capital market.
Further, the profitability achieved by the corporation in its operations during the previous two years may serve as a favourable factor in the proposed sale of shares at an appreciated price level.
However, the corporation has still to come out of the woods. Its debt burden combined with overdue current liabilities continues to overshadow its financial position.
In view of its huge debts, the government decided to restructure the financials of the national carrier and the banks were made to purchased Term Finance Certificates amounting to Rs 15.14 billion. These TFCs would mature in 2008.
The interest payment would be reimbursed to PIA by the government. As a result the present paid-up would rise from Rs 11 billion to Rs 19 billion by 2008.
The capital of the airline must have some correlation with the size of its operations, otherwise the yield to the shareholder may be impacted.
It may be recalled that PIA was among the first wholly owned government corporation earmarked for privatisation. But the very first offering under the Benazir government flopped miserably and the big five banks, then owned by the government, had to purchase the shares.
To this day two directors from the banks sit on its board. PIA shares are already listed on the stock exchange and thus the market price is duly recorded. The Privatisation Commission's decision to offer the shares at 5 percent discount is a tested method followed in similar offerings earlier such as National Bank of Pakistan.
In the present situation, one may easily foresee that with the appearance of the proposed share offer in the market, the price of PIA shares would hardly be able to resist a decline to the extent of the price at which the share offer would be available.
The present appreciated level of the PIA shares may be attributed partly to the prevailing buoyant sentiment of the market as a whole and partly to limited floating supply of shares.
PIA is yet to go a long way to emerge as a fully commercial organisation by shunning all ideas to subsidise air travel on domestic routes such as the Northern Areas, particularly those where operations are based on considerations other than commercial.
This largely applies to Haj flights also in which the fares charged from Hajis are reportedly not usually profit-yielding due to government's policy not to overburden the pilgrims. When the PIA management had submitted the rescue and restructuring plan, the government had made a commitment to pick up the cost of operating on loss-making routes, external as well as domestic, which are considered a national imperative.
The government rescinded its commitment once PIA started showing operational profitability. PIA authorities also claim that the airline makes losses on account of Haj operations as the planes fly empty one way, prior to and after Haj, and fares are arbitrarily fixed by the Ministry of Religious Affairs.
The government needs to take into account that the airline has to cut back on its regular routes to make aircrafts available for 130,000 or so pilgrims. This loss thus incurred must be met by the government on yearly basis.
If PIA is to be restored to robust health it needs to be run purely on commercial lines. The cost of services for far flung areas, which are essential for national cohesion, must be met from the Federal Budget. Secondly, the work force in PIA needs to be drastically reduced.
The argument that PIA's personnel cost is 17 percent as against 25 percent in other airlines is fallacious.
If PIA can be run by one-fifth of the present work-force then we should reduce it to that level. The advantage of lower wages in Pakistan compared to the personnel cost of airlines in the developed world must accrue to PIA.
There may be other heads of expenditure such as import of spares, replacement of engines, subject to rupee-dollar parity changes where PIA is at a disadvantage versus the competitors. Now when even major airlines are facing the competition from low budget airlines, profitability of the national carrier must be maintained at all costs.
Those who were opposed to government help to keep the national carrier in the air need to recall the instances when other carriers stopped flying to this country as trouble flared up in our region.
As it is, our maritime fleet has been dwindling over the years. And now PIA is our main link with the outside world.
The Privatisation Commission needs to point out these drawbacks to the CCOP in order that it may consider charging a lower premium to make not only the subscription a success but also the green-shoe option to be exercised.