PIA’s long dispute with airplane leasing company seems to have ended 

ECC approves Rs 8 bn financing for reaching settlement

The Economic Coordination Committee (ECC) of the Cabinet has approved a Rs 8 Billion bailout for Pakistan International Airlines (PIA) to meet emergent requirements related to overdue payments.

Since the last few years, the PIA has been the single-biggest loss making enterprise owned by the government of Pakistan and has been incrementally bleeding billions of rupees every passing year. It faced losses of Rs 97 billion during the calendar year 2022, which is 94% more than its losses in the previous year. The total accumulated losses of PIA have been rising and stand upwards of Rs 500 billion.

The Caretaker Federal Minister for Finance, Revenue, and Economic Affairs, Dr. Shamshad Akhtar presided over a meeting of the ECC of the Cabinet, today.

The meeting was held with the sole agenda of PIA, and throughout the meeting the primary topic of discussion were the two A320 aircrafts that the PIA leased from Asia Aviation Capital Limited (AACL) in 2015. 

The Story:

PIA obtained two A320 aircrafts Al -BLY (MSN 2926) and AP-BLZ (MSN 2944) on lease for six years from Asia Aviation Capital Limited (AACL) in 2015. 

As per a previous report by Profit, the planes were leased at a monthly rent of nearly $550,000 according to a spokesperson of the PIA – which includes rent for the plane, maintenance costs, as well as insurance. 

For the next six years, the planes flew as part of PIA’s fleet registered as planes AP-BLZ and AP-BLY. It is important to note here that most of the planes that are in the PIA’s fleet are older models that have been leased or bought from other airlines. These two A320s were flown for a while as part of AirAsia – the Malaysian multinational air carrier. 

In the case of airplane lease or rental, the airplane after the stipulated time, needs to be returned (redelivered) to the original owner in its original state. Meaning that any damages to its condition or parts are upon the person who borrowed it. 

However, in the case of these two aircrafts redelivery process was not a simple one especially with COVID 19 induced lockdowns and travel restrictions. The process can at times take up to a few months, and until it is complete the airline that leased the planes is expected to continue paying rent for the plane minus its maintenance cost since the plane is grounded. 

When it was time to return the plane, the PIA asked the company to come and inspect the A320s in Pakistan. Due to travel restrictions, they could not come to Pakistan so the AACL hired a third party company FL Technic for this job which is a global provider of aircraft maintenance, repair and overhaul services, headquartered in Vilnius, Lithuania.

The plane was taken to Jakarta, where it was thoroughly inspected. According to our source, the plane did not undergo a C Check before leaving – which is a vital inspection. When it got to Jakarta, it became clear that the plane would require repairs. The plane arrived in Jakarta via Kuala Lumpur on September 19th 2021 via ferry. 

It was planned that the aircraft will be redelivered in six to eight months after repairs. However, this schedule could not be followed. This led to exchange of claims and counterclaims between AACL and PIA as to the responsibility for the delay, actual amount of the lease rent, penalties and interest to be paid to AACL.

In fact, even till a year later, the plane was neither fixed, nor redelivered. “We had initially asked that the team come to Pakistan to inspect the plane but then because of travel restrictions and security concerns Jakarta was chosen. There is an engineering facility there and we have been paying the rent for the plane but nothing else – the parking fee is covered.” said PIA spokesperson while talking to Profit in June, 2022. So not only was PIA supposed to compensate for the delay, but was also paying the rent for the time that it was grounded in Jakarta.

The PIA bled upwards of $5 million just on paying the rent for two planes they were not even using.

What now?

The dispute in relation to the payment of lease rent led to litigation on two previous occasions, in 2019 and 2021, as a consequence of which PIA was forced to pay $12.058 million to AACL.

Since April 2022, PIA has extensively tried to reach out to AACL through inter alia visits by senior officials to their headquarters at Kuala Lumpur, but they remained largely unresponsive. 

However on 11, September, PIA received a Court Notice through AACL’s UK based counsels Herbert Smith Freehills for immediate payment of  $ 31.3 million against outstanding rent, redelivery rent, maintenance reserve and interest charges for the two aircrafts.

PIA acknowledged the court notice and on its instructions, PIA’s UK-based counsel Norton Rose & Fullbright sought time from High Court of Justice, England and Wales, London to reply to AACL’s claims. Accordingly, the next date of hearing is now for October 30, 2023.

At the same time, PIA’s counsels have categorically opined that PIA’s position in this matter is quite weak. They have recommended that PIA may find an out of court resolution with AACL not only with respect to the claimed amounts but also future liabilities with regard to rental payments and redelivery of the aircrafts. 

The envisaged settlement as revealed by the sources, could be one of the three modes i.e. payment of cash, maintenance buyout or purchase of one or both aircraft. The counsel further stated that since AACL’s claim does not involve factual controversy, it may be decided on a summary judgement for which the case could be heard in around six weeks.

It is self-evident that an adverse decision against PIA is likely to result in binding compulsion to pay the claimed amount and its failure to do so may lead to impounding of its aircraft or attachment of its properties. Moreover, the lease of two aircraft will not end and the rent and other redelivery related liabilities of the aircraft will continue, along with subsequent claims. 

Taking cognizance of the matter, the PIA board recommended that two board members and the Secretary Aviation should negotiate with AACL for an out of court settlement in the larger interest of the company. On submission of this recommendation, the Prime Minister had allowed the negotiation team to proceed to Kuala Lumpur on 9th October, 2023.

After having five rounds of negotiation with the Chief Executive Officer, Air Asia Aviation group and his team negotiation succeeded in convincing them to settle the matter at a consolidated amount of $26 million which includes transfer of titles of two aircraft in two instalments. 

Sources said that PM approved in principle to conclude the negotiation with the AACL on the loans and placed the case before the ECC for a provision of a grant of PKR 7.3 billion to PIA.

Letter of intent to settle the matter in the above terms agreed between PIA and AACL besides comments of Finance and Privatisation Divisions were invited on 13, October, 2023.

Both the divisions have supported financial support of Rs 7.3 billion to PIA. However, the finance division informed that a supplementary grant cannot be granted during the period of SBA with the IMF and advised to arrange financial facility from the market against the balance of guarantee ceiling i.e Rs 7.5 billion. 

According to the finance division, ECC decided to approve the proposal of Aviation Division for bridge financing through Civil Aviation Authority’s (CAA) resources amounting to Rs 8 Billion for PIA to meet emergent requirements related to overdue payments.

It is important to note here that bridge financing is a form of temporary financing intended to cover a company’s short-term costs until the moment when regular long-term financing is secured. This means that the bailout money, in one way or the other will puncture the national exchequer, even if it is not doing so now.

The ECC concluded by allowing the Aviation Division to proceed with the bilateral arrangement between the CAA and PIA.

Shahnawaz Ali
Shahnawaz Ali
The author is a Business and Finance journalist at Profit and can be reached via email at [email protected] and via twitter @shahnawaz_ali1

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