The Pakistani government has launched its search for a strategic equity partner to help recapitalise and restructure state-controlled Pakistan International Airlines.

The government's privatisation commission plans to appoint financial advisors, consisting of an investment bank, a law firm and consultants, on 20 July to oversee the sale of a 26 per cent stake in the airline, says Haroon Malik, consultant at the privatisation commission. The government hopes to raise funds from the sale, equating to between 50 and 100 per cent of PIA's current capital base, which will then be used to implement the airline's restructuring.

The commission has shortlisted 16 of the 21 consortia that replied to a tender in mid-March to advise in the divestiture. Consultants SH&E and banks Société Générale and PaineWebber are understood to be among the bidders. The World Bank's consulting arm, International Finance Corporation, brought in last December to advise on the airline's restructuring, cannot tender as it is not permitted to bid against the private sector.

The successful bidder for the 26 per cent stake will take over management control of the airline, as part of the first stage of the partial privatisation process. The second stage envisages the government floating a further 13 per cent of PIA some two years after the initial divestiture is complete, says Malik.

After the second phase the state will be left with a 51 per cent stake in the carrier. The state currently controls 84 per cent of PIA, including a 57 per cent direct holding, while 10 per cent is quoted on the Karachi stock exchange. A remaining 6 per cent is expected to return to state control. 'The government just wants a share in the profits,' says Malik. He adds that any strategic investor would have to be a foreign airline as no local investors satisfy the minimum net worth requirements.

The partial privatisation is aimed at raising funds for restructuring, which is dominated by a US$1 billion fleet replacement programme. PIA plans to finance 15 per cent of the cost of the aircraft directly.

The airline is looking to make a decision on replacing eight B747s and 13 F27s within the next 18-24 months, says PIA's director of corporate planning, Badshah Gul. PIA is in dire need of new aircraft - some are 35 years old and PIA is losing US$9.7 million annually on its Fokker operations alone.

Further restructuring goals include a reduction in personnel, a cut in unit costs by 15 per cent, an increase in load factors by 4 per cent to 71.5 per cent and a review of the carrier's network. PIAstarted new services to Chicago and Washington in November and Johannesburg is 'under consideration' while a couple of CIS routes will be dropped.


Source: Airline Business