Whats wrong with PIA?

Hassan Naqvi TFT Issue: 12 Feb 2016

The reason behind the national airlines nosedive

What is wrong with the PIA? Experts, former officers and analysts say there are three fundamental problems
that have brought Pakistans flag carrier to its knees lack of planning, lack of commitment, and lack of
finances. Amidst an emotionally charged debate on whether the governments new plan for the airline will
work, there is one fact everyone agrees on. There are is something fundamentally wrong with how PIA is
being run right now.
There are frequent reports of a flight narrowly avoiding an accident, delays of up to 24 hours, and cancelled
flights leaving the passengers stranded.
Flights get delayed because the crew and the staff arrive late, says Lt Col (r) Akhtar Lateef, a former
general manager at the national airline. Many of their planes are old and need regular repairs, and there is
no backup support at most airports, he says. If a plane needs a spare part, it is often transported from
Karachi. These delays also increased the operating costs.
There are concerns that the airline is overstaffed, and various governments in the past have given out jobs in
the organization for political leverage. The employee-to-aircraft ratio at PIA is 485, almost twice as much as
the standard followed by the worlds profit-making airlines. This figure has to be cut down to bring it to the
international and time-tested figure of 220-250, says Col Akhtar. The salaries, perks, and medical bills of the
extra staff add up to millions of rupees, he adds.

Turkish Airlines have less than 100 employees per plane

But a representative of the employees who were on strike for about a week says there are 13,900 staff in PIA
and 38 planes, which makes the ratio approximately 366. Dr Imran is the joint secretary of a joint action
committee of employees.
According to lawyer Yasser Latif Hamdani, the ratio depends largely on operational machines, and varies
from 390 to 780 as per various reports and depending on how many planes are in operation. Hamdani also
writes columns about political issues. The globally acceptable number for a productive airline is 190
employees to an operational aircraft, he told me. Emirates, known for its extravagance, has 220 to 230 per
plane. I believe the model is Turkish Airlines, which has less than 100 employees to a plane.
I also asked him about the conflicting claims about the airlines losses. Do they have something to do with
the international oil prices? Most airlines do not lower the fares right when the oil prices go down, Hamdani
says. The PIA did increase its revenue that way.
When oil prices go up, they dont hedge, and go into loss. That happened with the PIA in the past, adds the
former general manager.
In 2003, the government injected a capital of Rs 20 billion into the airline when fuel costs increased rapidly,
and the rupee depreciated against the dollar. The PIA was having a tough time paying back its loans and
maintaining its cash flows on its own, he says. This bailout kept the national airline floating. Then came a
profitable year in which PIA bought new planes and added new international routes, such as Chicago, Toronto
and London. But unfortunately, this success was short lived because the jet fuel price shot up from Rs 72 to
Rs 102.

In 2006, when a Fokker plane crashed in Multan, all other Fokker planes were grounded, and the PIA was
forced to arrange replacements. The very next year, the UN banned PIA from flying their B-747s and A-310s
to its member states, restricting the national flag carrier to its newly bought B-777s.
By 2008, global oil prices had risen once again, to almost $150 a barrel, because of the international
financial crisis, Col (r) Akhtar recalls.
When the PPP came to power in 2008, they inherited an airline on the verge of bankruptcy, with millions of
dollars of debt. At a time when airlines across the globe were cutting costs, downsizing, and shedding
aircraft weights, we were battling the unions, he says. PIA posted a loss of Rs 35.88 billion that year. Since
the airline did not opt for local financing, all its loans were in US dollars. As the rupee depreciated, interest
payments increased.
If there are so many factors at play, many beyond the managements control, I asked him how privatization
would help. He told me that the national flag carrier of Sri Lanka was having similar problems when they sold
it to another airline. It is now making a profit. But the most important thing is that Sri Lanka had shown
utmost honesty in assessing the worth of their airlines before they sold it, he says. That should also be
done for PIA.
Yasser Latif Hamdani advises caution. The PIA owns billions in terms of assets abroad, he says. It owns the
Roosevelt Hotel in New York, which has 1,026 rooms and 22 luxury suites for heads of states, the Scribe
Hotel in France, which has 600 rooms, and property in London, Milan and other places. But in a recent
auction, the highest bid received from a close Arab friend of a Pakistani leader was Rs 400 million. The
government should not sell off PIAs assets for peanuts.

The problems are political, not economic

The government insists they are not privatizing the airline, and only looking for a strategic partner who
will buy 26 percent of PIAs shares and take over the management.
That is not true, says Dr Imran, the representative of the protesting employees who are negotiating with
the government as I write. Under section 2 of the Privatization Commission Ordinance of 2000, a change of
management is part of the definition of privatization, he says.
He is also suspicious of the governments claims that there will be no downsizing and nobody will be fired.
Will they guarantee that in writing? he asks. When the PTCL was privatized, he says it had 60,000
employees. Now it has about 16,000.
These concerns may be genuine, according to noted economist Dr Akmal Hussain. If the basic reason for
PIAs losses is overstaffing, then it is absurd for the government to claim no employee will be laid off, he
says. Such claims deepen the concerns of the staff.
He says complete transparency in the terms and conditions of privatization is vital. The most important part
is a legally binding commitment for a golden handshake to all employees laid off by the new owners.
Dr Akmal Hussain is especially unhappy with the way these concerns were handled. Two people died when
unidentified men fired at a protest by PIA employees in Karachi. It was a needless conflict, he says. Two
innocent people lost their lives for no reason, and it will also be a disincentive to potential investors.
Air France saw the worst strike of its kind, by their staff and pilots, two years ago he says. But the matter was
amicably. But they never compromised the comfort of their passengers and the government ensured the
passengers were picked up by other European Airlines in a timely and orderly manner.

Yasser Hamdani cites the privatization of Turkish Airlines as a model. Set up as a state airline in the 1930s, it
faced problems similar to the one being faced by PIA today.
In 2004, it began privatization by offering 25 percent shares to the public. Today, the Turkish government
owns less than 50 percent shares in an airline which has gone from strength to strength and is a proud
symbol of the Republic of Turkey. On the other hand, Air India is a loss-making state-owned enterprise an
example he says we should not follow.
But PIAs losses, even if they are caused by poor hiring practices of successive governments, cannot be
blamed on employees, says another representative of the employees, Obaidullah Khan. The poor decision
making or political interference at the top level cannot be blamed on the middle and lower management, he
says.
Regardless, Yasser Hamdani believes a strike is not justified. The airline should be considered an essential
service, he says, and the Pakistan Essential Services (Maintenance) Act of 1952 (not to be confused with its
provincial version, the 1958 Act) caters to precisely this issue. The law empowers the government to make
any union activity that hampers PIAs services illegal. But a law is only as good as its application. Does the
government have it in it to utilize the act now that it has been implemented? These are political decisions.
The problem with PIA is political and not economic, says Dr Qais Aslam, an economist. The losses are due to
corruption and embezzlement rather than due to market competition, he says. A lack of transparency and
bad governance seem to be the primary problem, not just with the PIA but with all state-owned enterprises.
With more honest management and structural transformation, the PIA can once again become a leading
airline, he believes. But according to him, those who lose from PIA remaining state-owned are supporting
the privatization, and those who gain from it are opposing it.

Dr. Asif Faiz

The employee to aircraft ratio depends on many factors including the fleet mix, the utilization of aircraft , and most importantly, the
degree of outsourcing of services, such as aircraft maintenance, catering, sales and marketing , and ground services. The wage
levels also have a bearing on the size of the workforce. Generally, lower the wages, higher the staff levels.
It is somewhat misleading to only use the employee to aircraft ratio to assess an airlines efficiency.
PIA is a full service, vertically integrated airline. Few airlines, for example, own and run poultry farms and hotels. But PIA does.
The first step in privatizing PIA should be to outsource all its non-core functions and services that can be better done by the private
sector and divest its assets such as hotels, poultry farms, etc, that have nothing to do with running an airline, then unbundle its
various units, such as aircraft maintenance, sales and marketing as autonomous cost accounting units. Once these steps are in
place, then comes the stage of privatization, which can take many forms, such as sale of shares to the public ( with preference
given to PIA employees), or sale of shares and transfer of management to a strategic partner, generally another airline ( e.g. the Sri
Lanka -Emirates deal; incidentally the Sri Lankan Govt has purchased back the shares from Emirates and the airlines is back in
Government hands and remains profitable). There are various other models of divestiture that can be looked into but IMF
conditionality may not allow a consideration of these options.
Right sizing of PIA, no matter whether it remains in the public or private sector , will result in staff redundancies. A majority of PIA
staff are competent and experienced professionals they will easily find alternative employment in a restructured or privatized PIA,
often with higher wages and better benefits. This is the global experience with privatization of infrastructure industries. A condition
of company restructuring can be that the new management/strategic partner will give first preference to existing PIA employees in
its staffing strategy, of course based on merit. Some PIA employees will lose their current jobs, mostly in the bloated management
ranks and among clerical/service staff. There are ways to handle these redundancies with care and sensitivity including golden
handshakes, retraining, early retirement and so on. The Government can draw upon the vast global experience and financial
assistance of the World Bank and IMF to manage such staff redundancies.
As the article rightly states, the problems of PIA are political, not economic.
But playing political football with PIA is contrary to national interest,