Pakistan's national carrier must reform radically to survive
Pakistan International Airlines (PIA) has embarked on an ambitious programme of reform to revitalise its finances, its fleet and its services in the face of mounting competition from rival carriers in the domestic and international markets. It is the most far-reaching overhaul of the state-run airline since it was founded 52 years ago.
Years of dithering and high-level mismanagement have made radical change of the carrier a life-or-death necessity. The days of operating in a monopolistic vacuum have gone, but a moribund PIA has been slow to adapt to liberal deregulation and, as a result, has rapidly lost ground to competing carriers over the past seven years.
Chairman Shahid Khaqan Abbasi recalls: "PIA's problem has been that it has not changed. It has been operating as a state bureaucracy, but the environment has changed. In 1992, the government opened up to private domestic carriers and allowed almost an open-skies policy into Karachi. The market share that went away was at PIA's expense and immediately we lost almost 35% of domestic share."
Relegated to number four at its principal Karachi hub, PIA shifted much of its operation to Pakistan's northern gateways, where - until the start of this year - it still enjoyed regulatory protection. The recent opening up of Islamabad, Lahore and Peshawar to wider access by Middle Eastern and European carriers has made a revamping of the national carrier a matter of urgency.
Abbasi's immediate priority has been to control costs, which have almost doubled over the course of six years because of rising personnel and infrastructural overheads. Simultaneously, revenue has stagnated. Through the combination of a voluntary redundancy scheme and mandatory retirement at the age of 57 years and six months, the company has shed 3,500 jobs and reduced its workforce to fewer than 17,300.
"We've cut the payroll by 20%, or over R1.2 billion [$26 million] per annum. The payback period on this is less than three years," says Abbasi. Other economy measures have included closing off-line offices, relinquishing high-rent premises, reducing overseas staff by 40% and outsourcing some of PIA's ancillary operations, such as ground transport. The carrier has been helped by fuel prices, which have been at their lowest in 20 years.
PIA has started to dispose of non-core activities, including selling the airline's advertising agency to its staff and liquidating a chicken farm. It has also decided to pull out its $130 million investment in three hotels in New York, Paris and Riyadh - but similar efforts at selling locally owned hotels and duty-free shops have been unsuccessful.
Having contained its costs, the carrier has begun more recently to turn its attention to raising revenue by addressing static load factors and low seat yields. This would have proved an impossible task, though, without first replacing the airline's mid-1970s-vintage information technology (IT) systems, which were simply no longer up to the task.
The solution has been a 15-year agreement to outsource all of the airline's IT functions to the AMR-owned Sabre Group from December last year. Under the $180 million deal, PIA will hand over responsibility for all computer reservations, revenue accounting, yield/revenue management, flight scheduling and frequent-flyer data processing systems to the US company, which will take over and manage the airline facilities.
Under a separate three-year agreement, Sabre has been acting as turnaround consultant to PIA since October. It seconded a team to Karachi and PIA's chief overseas offices and is involving itself in virtually all aspects of the airline's operations, be it flight scheduling, sales or customer service. The goal is to raise the current 2% profit margin to 5% by the end of this year, which would translate into a $40 million profit for the year.
To help measure improvements in revenue, as well as to ensure Year 2000 accounting compliance, PIA moved its financial year from July-June to January-December. Earnings have already begun to improve, with an operating profit of R700 million for the 18 months ending 31 December, most of which had been accrued since last July. In the previous year, the airline wrote off R4.6 billion of accumulated losses.
Initial funding for the carrier's long awaited fleet renewal hinges on achieving its R2 billion projected profit by the end of the year. "The financial numbers have to add up to sustain a fleet replacement," says Abbasi. "We did a whole study in 1997, but the numbers didn't add up. We had to cut costs and improve revenue. We're now confident that we're able to sustain this. A decision will be taken in the next two months."
PIA's most pressing requirement is to find a replacement for its six Pratt & Whitney JT9D-powered Boeing 747-200s, which have an average age of more than 24 years (Flight International, 13-19 January, P14). "The -200s have got to go. Economically they're just not a viable option any more," acknowledges Abbasi. "The debate we're having is whether to go for high volume, low frequency or low volume, high frequency aircraft."
The choice is between ordering four to six 747-400s, or going for six to eight smaller-capacity Boeing 777-200ERs or Airbus A330/A340s. PIA came close to purchasing three deferred Philippine Airlines 747-400s in December, but Boeing could not commit to a delivery schedule or modification price, which varied between $600,000 and as much as $5.5 million, says Abbasi.
PIA is looking to lease used 747-300s or -400s as an interim, 12-18 month, solution and has included a provision for $6 million per aircraft in its 1999 budget. The carrier confirms it is considering a variety of options, including leasing surplus aircraft from Cathay Pacific Airways or Singapore Airlines.
Looking for replacements
Next in line for replacement are PIA's 13 Fokker F27 turboprops, which average 35 years old. The airline is initially looking for eight aircraft and, as with the new widebody jets, will probably end up leasing. "We've looked at regional jets, but they don't fit in with our requirements. We want a turboprop and, basically, there are two choices: the ATR 72 and Bombardier Dash 8-400," says Abbasi.
Further off is an eventual successor for PIA's Airbus A300B4s. The airline says it requires around 10 aircraft, but any decision is running at least 12 months behind that on the 747-200 replacement. The airline's six Boeing 737-300s will not need replacing before 2001-2, while its six Airbus A310-300s are still relatively young.
The introduction of new aircraft will herald the planned unveiling of a new corporate livery for PIA, while its aircraft interiors are being refurbished with "better and brighter colours." Other service enhancement initiatives include the recent introduction of a frequent-flyer programme and an executive club, improvements in in-flight catering and staff retraining.
"We're trying to instill a culture of responsibility and accountability. Consistency is a problem. You will have some excellent flights, better than anyone else's, and then ones which are totally indifferent," concedes Abbasi. The ultimate solution, suggest many observers, is the total privatisation of the carrier, but, aside from vague governmen t statements of intent to sell state-owned assets, there is little indication if or when this will occur.
PIA's more immediate focus is on countering the influx of foreign carriers into its traditional northern Pakistan preserve that has taken place since early January, and which the carrier estimates is going to cost it R3-3.5 billion in lost revenue. Swissair and KLM have launched services to Islamabad and Lahore, in addition to Karachi. Emirates Airlines, Gulf Air and Qatar Airways have also launched new services from the Middle East to the northern gateways, further intensifying competition in what is PIA's single most important market and which generates 32% of its revenue.
Rather than take on the Arab Gulf carriers directly, PIA has instead begun to focus on "sixth-freedom" services and expanding its share of non-ethnic Pakistan traffic. Sixth freedom means traffic that has neither its origin nor its ultimate destination in the home country of the carrying airline, but passes through, connects at, or stops for a limited period at a point in the home country of the carrying airline. PIA marketing director Haider Jalal says: "We going to be looking seriously at markets other than third and fourth freedoms because there is too much competition from the Gulf states and it is basically ethnic traffic, which is in decline."
PIA in particular is looking to pick up more European traffic by emphasising its fifth freedom (or beyond) services to Asia. The carrier offers connections to Bangkok, Bombay, Colombo, Jakarta, Kathmandu, Kaula Lumpur, the Maldives, New Delhi and Singapore. New destinations include Hong Kong from April, while Melbourne and Johannesburg are in the pipeline. PIA's tactics appear to be paying off, with load factors up from 67% in 1997 to 69.9% in the last six months of 1998. The mix of non-Pakistan traffic has increased from 18% to 30%. A good proportion of this, though, could be accounted for by the fall in domestic traffic over the past 12 months as the result of local economic difficulties and increased air fares.
Meanwhile, the airline is trying to maximise yields by dropping its under-used first class service for a two-class configuration. Says Jalal: "We need to put more effort into business class. If we're going to match the competition at the back, we need to have a better mix at the front to make our yields look more respectable. This is an area we're attacking seriously."
While the carrier is keen to boost traffic, it appears to be in no hurry to join an airline alliance, other than to state that "-the door is open to a certain extent" and that there is "potential in the future for a partner". The main benefit would be to give PIA a presence in markets that it is otherwise unable to sustain. Abbasi says: "What we really need is a partnership over the Atlantic to add more US destinations beyond New York and Washington."
His more immediate agenda is to "-see PIA financially stable, with sustained profits, a new aircraft fleet, better service levels and outsourcing whatever is possible. Change is the key to PIA and that is what the airline is all about today. Hopefully you'll see a better PIA sooner rather than later."
Source: Flight International