Euphoria over Premier Class by PIA not substantiated by ground realities

For the PIA with total accumulated losses of Rs 247.403 billion as on 30 Sept 2015, ($2.356 billion) all this fanfare and euphoria about the start of premier service on its London route with four leased A330 aircrafts from Sri Lankan Airlines makes no commercial sense. Sri Lankan Airlines (SLA) with accumulated losses of $993 billion has embarked on an aggressive programme to cut back its debts, by leasing its operational A330 aircraft acquired in 2012 and A350 due for delivery in October to Pakistan and Iran. The PIA under former chairman Nasir Jaffer and Aviation Advisor Shujaat Azeem’s leadership hiked up total accumulated losses from Rs 226.833 billion as on 31 December 2014 to Rs 247.4 billion with revenues declining drastically, although fuel bill decreased by over 43%, from Rs 37.839 billion in Jan to Sept of 2014 to Rs 21.678 billion in corresponding period of 2015. As of 30 September 2015, the PIA’s total liabilities stand at Rs 309.17 billion, while total liabilities exceed its total assets by Rs 172.4 billion. The airline has not been able to pay interest on term finance and other borrowings, which basically means the government of Pakistan as sovereign guarantor will bear this burden. Corporate financial reports from October 2015 are not available on official website and a conservative rough estimate of further losses is between Rs 17 to 20 billion.

Fleet replacement, choice of aircraft and seat configuration are dictated by passenger profile and route structures, not on whims of management or of political leadership. Airlines all over world prefer to have uniform fleet from same manufacturer with similar engines installed to cut down maintenance cost, crew training and other teething problems. In case of PIA its long haul fleet is composed of Boeing 777. As for the choice of seat configuration, leg space and facilities offered to business class or first class passengers, this is dictated by passenger profile, fare structure and yields generated by both passenger and cargo on routes they fly. The most prominent objective of fleet replacement and modernization plan in 2002 was direct outbound flights from Pakistan to USA, which could not be achieved because of serious security concerns about existing airports. The sterile zone around periphery of all existing airports in Pakistan has been infringed by powerful real estate mafia in nexus with bureaucracy, establishment and political elite.

Unfortunately for the PIA, successive governments, susceptible to pressures from Gulf states, have succumbed by offering them exclusive traffic rights from Northern Hubs to sole disadvantage of national airline, while it singularly continues to bear burden of loss making socio-economic routes and catering to royal wishes of its ruling elite, preferring to exclusively fly on 300 seated aircraft re-configured to needs of 40 member entourage.

Sri Lankan Airlines decline started because of mismanagement by incompetent mediocrity with no commercial aviation experience or qualifications and appointment of cronies etc. It made a profit of Rs 4.4 billion in 2008 when it was being effectively run under management partnership agreement with Emirates holding 40% of their shares. However in 2007, CEO Peter Hill refused to downgrade confirmed business class passengers to economy for accommodating large entourage accompanying PM Mahinda Rajapaska on a foreign trip on grounds that this was breach of contract with citizens holding confirmed fully paid revenue seats.

In 2007, the Sri Lankan government cancelled work permit of Peter Hill, the Emirates appointed CEO, and Emirates pulled out selling their 40% shares to government, while PM Rajapaska appointed his brother-in-law with no commercial aviation experience nor any qualifications as CEO. Massive political interference in appointments, fleet induction, foreign postings and appointments of GSA and vendors etc started having its toll on revenues. By 2015, Sri Lankan Airlines accumulated losses stood at Rs 128 billion, debts of Rs76 billion and its liabilities exceeding Rs 74 billion, even after cash injections exceeding $100 million each year by government to cover losses. Its staff rose from 5,113 to 6,987 by 2015 with cronyism infecting debt-ridden Sri Lankan Airlines. Former president Rajapaske and several of his relatives, including his brother-in-law, are under investigation over alleged corruption in 2013 deal for A350 and A330. Sri Lanka is also in talks with Iran to lease out remaining A330 along with A350 which it is due to take delivery in October 2016. Cash starved Sri Lankan Airlines was forced to have its $15 million forfeited for cancelling one A350 and is negotiating with Iran to take its options on remaining A350.

SriLankan Airlines is reportedly paying installment of $ 450,000 per month for each of its A330 aircraft and has successfully managed to sign a wet lease according to reports for $8,000 per hour, which means that on a return flight from Pakistan to London with an average block time after engine start of 17 hours it will earn $136,000 each day making although daily installment payment comes to $15,000.

With average passenger seat factor of 75% the revenue will just be enough to pay for leasing cost on London sector, with almost bankrupt PIA paying for additional cost of fuel, overflying and navigation charges, passenger and baggage insurance, landing charges and lodging boarding of flight crew based in London. While the PIA has offered Premier Service it will continue to charge them fares of business class, with airline picking up the tab of extra frills like complimentary Limousine drop in London, which will entail a lot of extra cost. The PIA cannot attract foreign clientele unless it offers passenger choice of having drinks on board aircraft and till such time this airline is stuck with its present passenger profile. In 2002 when the PIA embarked upon fleet replacement plan, the in-house assessment by airline was choice of A330, but on intervention of Islamabad and under pressure from American administration, we ended up buying B777.

At end of year, the PIA losses would increase. In 2011-12, PIA former MD Yusafzai signed deal with Boeing for five more B777 with advance booking payment of $10-15 million. Huge financial losses and cash flow problems disabled the PIA from making additional payments in 2013 and 2014, resulting in forfeiture of advance payment. No airline in the world can afford to indulge in such professional incompetence and yet hope to survive. The PIA’s profitable routes are now confined to Middle East where seasonal loads of Umrah and Hajj offer it an assured confirmed revenue package. Boeing has not been able to market B787 Dreamliner because of numerous delays in manufacturing and teething problems, and is in process of offering this aircraft to PIA. One can only hope that commercial sense will prevail.