Pakistan opens air transport market

Society Pakistan & World Affairs
1

This is a good story; a sector with much room for growth. As long as the Babus leave it alone and allow proper competition.

Two new private airlines have been given permission to start domestic services in Pakistan to meet increasing demand for cargo and passenger traffic.
The new carriers will introduce competition into the passenger and cargo air transport market which is dominated by state-owed Pakistan International Airlines (PIA).

The licences were given to Royal Airline to provider passenger services and to Pioneer Air for cargo operations, Arshad Rashid Sethi, deputy director general of the Civil Aviation Authority (CAA) of Pakistan, told Reuters.

“The new airlines are showing interest in domestic operations as the markets (passenger and cargo) are improving in Pakistan,” Mr Sethi said.

“Both the two new carriers have indicated a wish to start their services in first half of the current year.”

More competition

Three private domestic airlines also offer passenger services in Pakistan but an number of others have shut down because of the difficult market conditions.

The tiny air cargo market, which Pakistan International Airlines controls, is expected to grow rapidly as the country’s economy improves.

Pakistan’s economy is expected to grow by 4.6% in the current financial year, compared to 3.6% last year, due to a mix of lower debt, booming stock markets and rising foreign exchange reserves.

Mr Sethi said the domestic air travel was showing signs of growth after a serious slump following the 11 September attacks in 2001 and the subsequent war against Afghanistan.

Pakistan’s airlines carried more than 1.75 million passengers domestically in 2002.

2

This could just be the start of a new and reformed Pakistan.

PAKISTAN ZINDABAD

3

So many private airlines have come and gone in Pakistan in the last few years, that it seems, they need to go back to the drawing board and figure out a proper business model. Its not as easy as leasing a few aging (Russian) airplanes from bankrupt ex-CAR airlines and start advertising Lahore to Karchi for half the PIA prices.

They need to figure out why, even with their air-crafts going at full capacity, are the local airlines going bust quicker than gandum ki fasal. They should invest in initial quality, maintenance, hiring good crews, and a viable business model to provide comfortable and yet cheap accomodations for their passengers. With the long waiting lists for PIA, during high season, it is surprising that high volume routes are still not keeping afloat these smaller airlines.

4

Agreed

5

Faisal: There is heavy taxation on so many sectors in the Airline sector locally that running a private airline is not as profitable as it should be. Neither are the related services any good. One reason is PIA, PIA does not allow private airline to operate on many of it's routes, by law. It's rules like that across the board that stifle competition and make people switch over to International airlines that provide better service.

6

Hi, my first post:)
Nice to see Pakistan opening up its sky's. But any chance of seeing these private companies cattering to the non domestic market? It would be nice to not have to depend solely on PIA fpr trips back to Pak.

7

[QUOTE]
*Originally posted by Zakk: *
Faisal: There is heavy taxation on so many sectors in the Airline sector locally that running a private airline is not as profitable as it should be. Neither are the related services any good. One reason is PIA, PIA does not allow private airline to operate on many of it's routes, by law. It's rules like that across the board that stifle competition and make people switch over to International airlines that provide better service.
[/QUOTE]

That may change..(I HOPE.) If and when PIA is privatized.

8

I am not sure which routes they will be. We all know that private airlines were flying between Karachi, Lahore, Islamabad and Peshawar... all of them are lucrative routes. And all private airlines would directly compete with PIA on schedules and fares. Still they go bust within a short time.

If anything, PIA is stuck with some lame routes bcz the government wants to gain political favors from people in far off places and forces PIA to fly there, regardless of passenger demands.

Taxation may be one issue. Or bad business managers another. Either of these will not be solved by merely announcing an "Open Skies" policy. More concrete measures need to be taken to get the initiative off the ground (literally).

US has the largest concentration of small private airlines, and that whole sector is plagued with problems, with even bigger airlines announcing bankruptcy. Southwest announced their first loss quarter this time. So no one is immune. The cut-throat price competition has taken its toll. I hope policy-makers in Islamabad take note of all these to come out with a winning formula for a real "open skies".

9

Faisal, declaring bankruptcy is perhaps (in certain situations) an ideal business strategy (I am not a business Guru like yourself and Chaltahai, but I know a little). The airlines in Pakistan you talk about going out of business are actually started to keep that in mind. The objective was merely to make a quick buck and get the hell out (I know two guys personally who started an airline in Pakistan). That’s what has happened. But these were all trial runs, and it was a positive sign. There are many ‘parties’ now interested to get onboard. Just like the telecom sector, opening up the transport sector will take us out of a cycle of monopoly business dependency syndrome. Just like the road transport sector is now not only being modernized, but also is creating a lot of headway.

In any venture, there's always initial pain. And that's good. Pain is good.

10

I agree that monopoly of PIA (just as for PTCL) is bad, overall. However bankruptcy is a bit different in Pakistan compared to US. Here it is treated as "a fresh start". Over there, thats the end of the road for the company. We don't have a Chapter 11 there, only something similar to Ch 7. Anyway, that was just to reiterate that, for viable competition to PIA, we need more than just announcing an "Open Skies" policy. That buzz word is buzzing in Pakistan for the last 13 years. We need more than that.

What is needed is to figure out (realistic) passenger loads and making sure that the newer airlines have good business managers leading them. What we also need is a rational tax structure for the newer airlines, even if it means giving them a tax holiday for a limited period to get them off the ground.

11

I don't know much about the Paki financial and banking regulatory system, but anytime PSU's are privatised, the valuations are usually done by thrid party entities. Do paki companies follow FASB type or USGAAP rules?

The best thing to do would be close down non-profitable routes, write off NPA's, change the licensing scheme in awarding rte's, airport gates etc. THen hire a investment bank to undewrite the offering..the valuation will definitely take ahit if all these are not considered. I am sure there are other variables as well. Where would they list it? With inflation the way it is, they should try listing PIA on a US exchange, I can do the ADR :)

12

CH, pbpr:

  1. PIA is a public company whose shares are traded in KSE. Its BOD is appointed by the Ministry of Transportation, including the Chairman and Managing Director (CEO).

  2. Pakistan does not follow US GAAP, but IAS as modified by the Companies Ordinance. No valuations are publicly announced.

  3. Civil Aviation Authority is responsible for traffic routes and managing almost all major airports. They are a public sector entity, whose source of income is airport fee charged from the airlines and passengers. There are no plans to privatize this entity.

13

[QUOTE]
*Originally posted by Faisal: *
CH, pbpr:

  1. PIA is a public company whose shares are traded in KSE. Its BOD is appointed by the Ministry of Transportation, including the Chairman and Managing Director (CEO). [/QUOTE]

Is the gov't a majority shareholder? That might have to change if the dreams are to deregulate the industry.

[QUOTE]
*Originally posted by Faisal: *
2. Pakistan does not follow US GAAP, but IAS as modified by the Companies Ordinance. No valuations are publicly announced.
[/QUOTE]

Hmmm...I know that a lot of Asian companies in order to attract invesment from US capital markets, primarily institutional investors follow US Gaap standards. Fund managers infact, look towards that as a qualifier for the sanctity of the books.

[QUOTE]
*Originally posted by Faisal: *
3. Civil Aviation Authority is responsible for traffic routes and managing almost all major airports. They are a public sector entity, whose source of income is airport fee charged from the airlines and passengers. There are no plans to privatize this entity.
[/QUOTE]

That is fine..my point was that once privatization and deruglation comes into play, airlines always want to capture the most profitable routes and lager number of gate options. As long as the allocation is fair, it is not an issue. But if (back to point #1) gov't is a majority shareholder in an entity competing with private enterprises, more often that not, in asia atleast, there is always room for playing favorites.

14

[QUOTE]
*Originally posted by Chaltahai: *

Is the gov't a majority shareholder? That might have to change if the dreams are to deregulate the industry.

[/QUOTE]

Yes. Only a small portion of shares are floating in the SE.

[QUOTE]
*Originally posted by Chaltahai: *
Hmmm...I know that a lot of Asian companies in order to attract invesment from US capital markets, primarily institutional investors follow US Gaap standards. Fund managers infact, look towards that as a qualifier for the sanctity of the books.

[/QUOTE]

That might very well be. On the other hand, there is a strong movement in the accounting circles in US to move GAAP closer to IAS. In the long-term, it will be counter-productive for anyone to be moving towards US GAAP at this point. The recent accounting strategies and pronoucnements from SEC about expensing stock options is partly due to that movement. That aside, I believe, many European investors have no problems with IAS valuations, but since no valuations are done (or publicly announced) so this is kinda moot.

[QUOTE]
*Originally posted by Chaltahai: *
That is fine..my point was that once privatization and deruglation comes into play, airlines always want to capture the most profitable routes and lager number of gate options. As long as the allocation is fair, it is not an issue. But if (back to point #1) gov't is a majority shareholder in an entity competing with private enterprises, more often that not, in asia atleast, there is always room for playing favorites.
[/QUOTE]

Yes. This is always the case. Government (and PIA) may resort to arm-twisting on some key issues, which can be a potential negative for any foreign investor in that sector.

15

I don't agree with the idea of cutting back local flights to areas which don't show a profit. That shows a lack of understanding of the problems Pakistan faces. During the First Gulf War, it was PIA that evacuated stranded Pakistanis, because of the War situation no ordinary airline would touch them.

Another example is Chitral district and the Northern Areas, these areas are often cut of for much of the year and without an airlink they'd have no access to any emergency facilities. The same goes for places like Makran. The bulk of PIA's losses are incurred because of salaries and wastage. The organisation is overstaffed and the staff are underpaid.

Another bit of news that would surprise you to know is; the only routes that are showing a real profit are 3 , Peshawar, islamabad, and Karachi.

16

As far as PIA goes, I don't agree that they are in deep losses because of lack of passengers. Most of their flights are full. The problem is the top-heavy management and unbelievable over-staffing. Since 70's (Bhuto era), PIA has been used a a personal employment exchange to cultivate political favors. If statistics are checked, I am sure it will be amongst the highest employees/airplane in comparable airlines. This overhead brings the airline down. The airline tries to reverse the tide by increasing fares all the time. Last time, I checked Lhe-Khi was 8,000 rupees, one way. For 1.5 hrs of flight, u can get a fare of $59 one way. Just goes to show that the actual cost of flying passengers is not in sync with the fares charged. And still the airline is in loss.

Re: your second point, I completely disagree. PIA should be run like a commercial organization. It should be allowed to make decisions of commercially viable routes by its professional managers and not by political big wigs. War-like situations are something else. Lets not confuse the issue here.

To service far-off areas, the government should initiate something similar to a National Guard, as a service to the nation. It should be a non-profit and its basic aim should just be to serve people of far-off areas. This new organization should be carved out of PIA. That way PIA can not constantly hide behind such forced political routes to explain away their losses and raise fares all the time.

17

I still think there is a need to subside flights to areas like Chitral, Gilgit and Makran. and for that matter tourist areas like Swat, that have lost all their clientale after 9-11. Cutting back flights to those areas has a devastating effect to the locals. Whether the subsidies are provided to PIA or any other group, the need is still the same. This article may be of interest

PIA auditors find ‘irregularities’ in appointment of Army personnel
http://www.dailytimes.com.pk/default.asp?page=story_29-1-2003_pg7_16
By Farhan Reza

KARACHI: A PIA audit and inspection report, sent to its head office on December 10, has pointed out “irregularities” in the appointment of a director (who is a retired air-vice marshal) and some general managers (who are former colonels). It also notes expenditures of Rs 2.5 million in extra benefits to some army officers serving in the airline.

The audit report said that all these posts were filled when there was a formal ban on such things. The report objected to the appointment of a retired air vice marshal, Niaz Hussain, as the director of engineering on July 17, 2001, under a contract which will expire in October 2005. AVM Niaz was retired from the Air Force on Oct. 28, 2000, the report stated. “There was a complete ban on fresh recruitment by the government of Pakistan, as directed by the Cabinet Secretariat and the Establishment Division through letters issued on Nov. 23, 1996. However, the Cabinet Secretariat and the Establishment Division issued letters in June and July 2000, allowing contractual appointments to retired officers for a period not exceeding two years to posts not higher than the post on which the person was employed on a regular basis before retirement,” the audit report noted.

“The appointment was made until superannuation up to 2005,” the report stated. “The case of regularization of relaxation till the age of superannuation was sent to the Joint Secretary of the Ministry of Defence and was approved by the Defence Secretary, Ministry of Defence, without approval of the secretary of establishment of the cabinet secretariat, and the contract agreement was signed by using the power beyond the powers of the PIA management,” the report stated.

Raising objections to the appointment of the two general managers, the report stated that the appointment contracts of these general managers, who had served in the army as colonels, were signed through the use of powers beyond those of the PIA management.

The report observed in its report that Colonel Mehmood Ahmed was retired from the army on December 31, 2001, and then hired as general manager with the approval of the defence secretary on contract basis on May 17, 2002, the age of superannuation , i.e., October 31, 2013.

The report also pointed out that the retired army officer should have been appointed in Group IX (Grade 19) and not in Group X (Grade 20), as general manager. “The payment of Rs 158,272 to the officer was irregular and unjustified,” the audit report stated, recommending further investigation of the case by the head of the administration department.

PIA’s internal audit department raised similar objections on the appointment of Col ® Talat Omer as general manager projects. Mr Omer was hired on June 20, 2001, in Group X, or Grade 20, at a total amount of Rs 69,941 per month on contract basis up to the age of superannuation in 2009, while he was eligible for Group IX, or Grade 19. “The contract agreement was signed on June 25, 2001, through the use of powers beyond those of the PIA management,” the report stated. The report observed that the relaxation in the age was obtained from the defence secretary without approval of secretary establishment of the Cabinet Secretariat. “Thus the appointment of the officer was irregular and unjustified and the pay of Rs 865,880 with effect from June 20, 2001, to July 31, 2002, was unjustified,” the report stated.

The auditors also recommended investigation of allocation of funds to PIA’s Chief Operating Officer Khursheed Anwar beyond the limits approved by the Ministry of Finance. “The officer was reemployed from April 20, 2001, and was paid an amount of Rs 389,600 in excess up to August 2002,” the report said. “Apart from the above, he was also allowed Rs 900,000 for the furnishing of his house, to which he was also not entitled,” the report stated. “Thus PIA suffered a loss of Rs 1.28 million by allowing excess perquisites against the entitlement of the officer,” the report stated.

The report also raised objections to the extension of “undue favours” to the director administration, Brig. Nayyar Afzal. The report stated that Brig. Nayyar Afzal was posted on deputation as director administration dated Feb. 14, 2000, and he joined PIA on Feb. 11, 2000. He remained in PIA up to Jan. 3, 2002, but was transferred back to the military on Dec. 20, 2001. He was relieved from PIA on Jan. 4, 2002.

The notice stated that Mr Afzal was allowed to retain a PIA house for two months after his transfer back to military. “Thus he was allowed an undue benefit of Rs 44,000,” the report stated. “He was also allowed a sum of Rs 116,690 on account of balance amount of furnishing advance of Rs 300,000 which was recoverable in three years of deputation, but could not be recovered due to his early repatriation,” the report stated. The report also raised objections to the transfer of an official car which was purchased for Rs 699,000 in May 1996 and had a market value of Rs 550,000 at the time of the transfer. “Thus, PIA sustained a loss of Rs 505,092 by transferring the car to the officer who was not a permanent employee of PIA and thus, was not entitled,” the report stated. “PIA sustained a total loss of Rs 665,782, which could have been avoided had the undue favour not been given to the officer,” said the internal audit report, sent to director administration for further investigation.

The internal auditors also raised objections to the contract appointment after superannuation of a general manager, Iqbal Zafar Malik. The report stated that Mr Malik was reappointed as general manager after attaining the aged of superannuation for two years on May 15, 2002 with the approval of the Ministry of Defence. However, contrary to the orders, the salary of Mr Malik were fixed at Rs 4,230 per month more than his entitlement and an excess payment of Rs 14,805 was made up to August 2002. The auditors also raised objections to the condition of the agreement, which allowed the transfer of a car at the expiry of the contract. “The report stated that Mr Malik had availed the facility twice and the facility for the third time seems irregular and unjustified, and has caused a loss to PIA,” the report stated.

The report has been sent to the director administration for clarification and action. But said one source, “These are all military matters and no one will have the guts to do anything about it”.