PIA privatisation has triggered the usual storm of outrage, suspicion, and conspiracy theories. Everyone has an opinion on whether the airline was sold too cheap, too late, or to the wrong party. Much of that noise ignores basic finance. This op-ed attempts to explain the transaction in simple words, so at least criticism can start from the numbers instead of from assumptions.
The valuation realised by the government today from the sale is around Rs55 billion, not just the Rs10 billion cash it is directly receiving.
The globally recognised recognised pre-money equity valuation model has been at play to determine this value. Under this, the total consideration of Rs135 billion has been committed by the buyer for a 75 percent stake. That implies a post-money equity value of Rs180 billion for PIA. Subtract the fresh capital that will go into the company, which is Rs125 billion out of the Rs180 billion.
The result is a pre-money equity value of roughly Rs55 billion that belongs to the existing shareholder which, in this case, is the state.
The second basic point is that one cannot compare any entity solely on the basis of its assets without incorporating liabilities. Financial accounting 101 says assets equal liabilities plus equity. Therefore equity equals assets minus liabilities.
In simple words, if a property is worth Rs1 billion but has a loan of Rs800 million against it, the equity should be Rs200 million, not Rs1 billion.
Many are making sweeping statements that one aircraft is worth tens of billions of rupees and that a fleet of 18 aircraft has been sold at a throw away price.
However, some of these aircraft are on lease and carry their own liabilities. Readers may recall the incident in 2021 when PIA’s Boeing 777 was impounded in Malaysia due to non-payment of lease instalments.
On top of that, the PIA fleet is ageing and cannot be compared with the price of new aircraft. These realities are reflected in the balance sheet. PIA’s equity was Rs9.1 billion as of 31 December 2024.
Even after marking all assets to market, equity remains below Rs40 billion. In that context, receiving Rs55 billion is not a bad outcome.
Another criticism is that privatisation is pointless if taxpayers still assume legacy debt of around Rs600 billion. However, no deal would have been possible without cleaning this legacy debt, which in economic terms is a sunk cost.
Even today, after this cleaning, the government is barely breaking even at an operational level.
In 2024, PIA reported a net profit of Rs26 billion due to the recognition of deferred tax assets worth Rs32 billion. Adjusting for this, the airline actually incurred a net loss of Rs6 billion on a clean balance sheet. In 2025, the revenue target is Rs270 billion, but at best PIA may reach Rs190 billion and be lucky to break even operationally.
The airline is not making money today. Without privatisation, further debt would likely accumulate and eventual closure would become the only realistic option. A new lease of life under private ownership is the better alternative.
Aviation globally is a tough business. It is highly competitive with multiple moving parts. It is not a rent seeking sector like fertiliser or IPPs, since there is no guaranteed free cash flow generation. Airlines require continuous investment to upgrade fleets and systems.
In that sense, the sector has more in common with telecom than with traditional rent seeking industries.
The bidding process itself shows that PIA is not being sold cheaply. There were two other bidders, one of which already owns an airline and submitted the lowest bid. If the asset were so obviously undervalued, why was Airblue’s offer a fraction of the winning bids.
In the second round, the losing party was led by the Lucky consortium, one of Pakistan’s largest and most sophisticated business groups. They have a strong balance sheet, capable management, experience of operating outside Pakistan, and powerful partners. They spent millions of dollars and countless hours in the pre bidding process, then walked away because they believed the valuation was already too rich.
PIA in its current condition is one of the least preferred airlines. Its only real attraction is a limited number of direct international routes. It is no longer “great people to fly with”. Critics in Pakistan often resemble the proverbial mother-in-law who insists that whatever the government sells is too cheap and whatever it buys is too expensive. Nothing ever satisfies them.
The debate should not centre on price alone. A high sale price does not guarantee success. PTCL is a case in point. It was sold at roughly double the going expectation at that time, yet subsequent under investment pushed the company downhill and one third of the privatisation proceeds never materialised.
In PIA’s case, Rs125 billion is being injected into the company, increasing the chances of a turnaround. The airline has an old fleet and needs massive capital expenditure. If managed well, PIA has the potential to improve the country’s image rather than damage it.
Pakistan, with a population of 250 million people, has barely 50 aircraft in its national fleet. That is why the majority of international air travel relies on foreign carriers. With PIA’s revival, some of this business can return to the country.
PIA is meant to compete with international players. It is in the national interest to wish the buying consortium success in bringing the airline back on to the global radar.
Copyright Business Recorder, 2025
Ali Khizar is the Director of Research at Business Recorder. His Twitter handle is @AliKhizar
Comments
Comments are closed for this article.