Pakistan International Airlines Corporation is the national airline of Pakistan, with the government of Pakistan holding its majority shares. The airline operates on both domestic and international routes, through a range of advanced aircraft, from Boeing 777 to Airbus A-310.
PIAC operates on 23 domestic and 30 international routes. The destinations in the US, Canada, the UK and Europe are served through its Boeing-777 fleet. The airline's Boeing-747 fleet is mostly deployed to cater high density requirements like carrying pilgrims to and from Saudi Arabia. On the domestic, far east and regional routes, the airline has deployed its Airbus A-310 and Boeing-737 fleet.
The history of PIAC predates Pakistan's independence days. Originally Orient Airways Limited, PIAC was established in 1955 when the government of Pakistan decided to form a state-owned airline and invited Orient Airways to merge with it. PIAC has had a chequered history, marked by historic firsts and depressing lows. PIAC earned the distinction of being the first airline from a non-communist country to fly to China in 1964. In the late sixties, one colourful happening, that took the aviation world by storm and imprinted PIAC's name in the international market, was the introduction of a new air-hostesses' uniform designed by none other than the renowned French designer, Pierre Cardin.
PIAC is the same airline whose managers are credited with setting up the Emirates airline, one of the best modern aircraft passenger carriers today. However, PIAC has remained under constant criticism from nearly all quarters, since quite some time now. The overriding reason lies in its disappointing operational and financial performances over the years.
Recent Financial performance
Revenues The CY10 turned out to be an exceptional year for PIAC in terms of top-line growth. The net revenues reached Rs 107.5 billion, showing a 14 percent growth over CY09. The primary business segments showed remarkable growth. The passenger business segment grossed Rs 95.7 billion to the revenues, compared to Rs 84.5 billion in CY09; contributing roughly 89 percent to the net revenues.
The airline's cargo business generated Rs 6.4 billion in revenues, compared to Rs 4.9 billion in CY09, constituting 6 percent of net revenues. Rest of the revenues came from the baggage, engineering, charter and mail services. Available seat kilometres increased to 21.2 billion in CY10, from 19.6 billion in CY09, manifesting increased capacity within existing fleet.
Cost of services However, the cost of services shot up by a more-than-proportionate 18.5 percent during the year. As a result, it consumed 87 percent of net revenues, compared to 82 percent in CY09. This was mainly on account of a 42 percent jump in aircraft fuel expenses during the year. Roughly 42 percent of revenues were eaten up by fuel expenses in CY10; hence volatility in crude oil prices directly impacts the airline's operating costs.
Gross profit during the year stood at Rs 14.9 billion, dropping by nearly 9 percent over CY09. Gross margin also dropped to 14 percent in CY10, lower than the 17 percent in CY09, but higher than the 4 percent in CY08.
Operating expenditures Distribution expenses declined and represented 5 percent of net revenues during CY10, compared to 6 percent in both CY09 and CY08. Administrative expenses, however, increased by roughly 9 percent, owing to higher expenses on salaries and employee welfare payments. As percentage of revenue, they have come down to 7 percent in CY10, from 8 percent in CY09 and 7 percent in CY08.
Every year, PIA suffers heavy losses on account of exchange rate translation. CY10 was no different, as the company registered a loss of Rs 2.09 billion, though it seems small compared to colossal exchange losses of Rs 6.5 billion in CY09 and Rs 24.1 billion in CY08. Mainly, a relatively stable exchange rate contributed to decline in exchange rate losses during the year.
The 'other operating income' for the company increased to Rs 2.26 billion in CY10, showing a growth of 252.3 percent over CY09. This occurred due to higher derivative income and reversal of the provision for CAA claims in CY10.
Operating profit The airline recorded an operating profit for the first time in last three years - Rs 720 million. There were operating losses of Rs 3.1 billion in CY09 and Rs 31.6 billion in CY08. The operating margin came out positive at 1 percent in CY10, compared to negative margins of 3 percent and 36 percent in CY09 and CY08 respectively.
Finance costs and taxation
Finance costs for the company showed a marginal increase of 0.6 percent in CY10; however, they remained really high at Rs 9.2 billion. These costs now represent 9 percent of net revenues compared to the figure 10 percent in CY09. Finance costs remained under control at previous year's level as the increase in working capital loans was partially offset by decrease in liabilities relating to fleet loans, and the decrease in average LIBOR and average KIBOR in 2010.
PIAC accumulated a pre-tax loss of Rs 8.579 billion in CY10. Despite the loss, the company had to pay over Rs 1 billion in corporate taxes, along with Rs 11.1 billion in deferred tax charge. Pre-tax margin was negative for all previous three years.
Net Profit
The frail operating margin couldn't keep up with mammoth non-operating expenditures. High finance charges, along with exceptional deferred tax charges ate up 20 percent of net revenues, thereby eroding the flimsy gain in operating profits by a long shot.
Hence, the PIAC experienced yet another year of net loss, amounting to a whopping Rs 20.78 billion, and the net margins stood at negative 19 percent. Previously, the company also threw up losses worth Rs 4.9 billion in CY09 and Rs 36.1 billion in CY08.
Future Outlook PIAC's financial performance is extremely vulnerable to three major risks. One is the fuel price risk, which heightens with the volatility in crude oil prices. As roughly half of PIA's working capital expenditure is on jet fuel, it's gross and operating margin would remain extremely sensitive to future fuel price movements.
Second is the currency risk. Though PIAC curtailed its exchange losses owing to Rupee's stability in CY10, CY11 has already seen the depreciation of Rupee against the greenback. As pressure piles up on country's foreign reserves, Rupee is expected to cede its ground further.
Thirdly, the company is exposed to interest-rate risk. Although, the KIBOR-linked financing would see financial charges drop following SBP's recent 150bps discount rate cut, the airline's international financing arrangements, those linked with LIBOR for instance, might come under pressure should the central banks in the Euro-zone decide to tighten their monetary policies.
Besides, airline's operational inefficiency is debilitating its operational profitability. Factors like aircraft utilisation, fleet maintenance, turn-around intervals, flights' frequency, punctuality, and optimum human resource are crucial to the airline's survival. While government bailouts might keep the airline afloat for another few months, for long-term viability of the enterprise, it is essential for the PIAC management to turn things around on their own. There is no other way!
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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