ISLAMABAD: In the midst of a contentious privatisation process, Pakistan International Airlines has reported a loss of over Rs 75 billion for the year 2023. The total liabilities of the airline have ballooned to Rs 825 billion while total assets are valued at Rs 161 billion.
The loss comes at a time when a number of bidders are looking to acquire PIA. In the initial qualification statements, eight different consortiums stepped up to the plate. The leaders of these eight consortiums are Fly Jinnah, Air Blue, Arif Habib, Gerry’s International, Sardar Ashraf D Baluch Builders, Gerry’s International, YB Holdings, Pak Ethanol, and Blue World City. Of these eight, through the initial vetting process, Sardar Ashraf D Baluch Builders and Gerry’s International have been disqualified from the bidding process for different reasons. Of the remaining ones, the consortium led by Fly Jinnah, Pak Ethanol, and YB Holdings are the top runners, but Air Blue, Blue World City, and Arif Habib are still very much in the running.
What you have here for all intents and purposes is a battle between different Pakistani airlines vying to get control of PIA, with some secondary players in the background also throwing their hat in the ring. On the one hand you have Fly Jinnah, which has
Read more: PIA is up for sale, and there’s a six-way battle for who will take the prize
Is it still an attractive proposition?
So why exactly are all these bidders lining up to acquire an airline with so many liabilities? PIA is a negative equity company. Negative shareholder equity is a chilling scenario where a company’s liabilities to its investors eclipse the worth of its assets. In layman’s terms, when a company’s mountain of debt towers over the aggregate value of its assets, even after a complete liquidation, it is branded with the ominous label of negative equity. The fiscal abyss that PIA finds itself in has only yawned wider with time.
PIA’s losses are so staggering that it is hard to wrap one’s mind around them. PIA’s cash flows are in a state of chaos. A retrospective glance at PIA’s cash flows from 2017 to June 2023 paints a grim picture. PIA only managed to keep its head above water for a fleeting one and a half years. The remaining five years saw PIA grappling with negative cash flows from its operating activities. In layman’s terms, PIA was bleeding money from its core airline operations. So, how has it managed to stay afloat? The lifeline has been debt.
During the aforementioned period, it was only in the first six months of 2023 that PIA managed to repay more loans than it borrowed. That’s not to say it didn’t borrow. It did. This borrowing spree has been the lifeblood of its operations for the past six and a half years. Is this a sustainable model? Far from it. PIA’s finance costs for 2022 alone amounted to a staggering Rs 50 billion — a record high over the past six years. Yet, barely halfway into 2023, PIA has already incurred an alarming 74% of this cost. It is this escalating cost of finance that prompted PIA to engage the government in a dialogue for financial aid to alleviate its debt burden.
The government is trying its best to make PIA a very attractive proposition in the face of these challenges. For starters, PIA unfurls an unparalleled opportunity for any ambitious newcomer yearning to penetrate Pakistan’s airspace, or an incumbent aiming to fortify their position. While the buyer would need to brace for the depreciation of the rupee earnings, they stand to reap rich rewards from the dollar-denominated earnings accrued from Pakistanis embarking on overseas journeys. Moreover, they would not only carve out a niche in the country but also tap into the vast and untapped reservoir of the diaspora.
But perhaps the biggest factor in this which will be a boon for potential buyers of the airline is the decision to restructure PIA’s debt. In March this year, The Pakistan International Airline Holding Company approved the restructuring of the airline’s Rs 268 billion commercial debt, incorporating it into the public debt. The term sheet was finalised by the Ministry of Finance with commercial banks. The government’s decision to merge the airline’s debt into public debt means that taxpayers will bear the cost of PIA’s historic inefficiency and mismanagement. All of this has been done quite hastily and has been quickly agreed to by the banks that are owed by PIA. They agreed to extend their debt for ten years and reduce interest rates from the existing approximately 23.5% to a maximum of 12%. This has been done exclusively to appeal to potential buyers, and as part of the restructuring, a clause has been added to the restructuring in which banks will have the right to reopen the deal and demand an interest rate equal to prevailing rates in 2027 in case the government is unable to privatise PIA in three years.
Essentially, PIA will be split into two companies. That is why the government has created the PIA Holding Company. In May this year, the Competition Commission of Pakistan (CCP) approved the 100% acquisition of PIA by this company. Through this, the airline’s bad debts, including commercial loans, trade debts, and government borrowings, transferred to the holding company. Over Rs 650 billion of the Rs 825 billion PIA debt will be transferred to the holding company, leaving a clean PIA to be sold to investors. Essentially, the holding company will take over all of PIA’s bad assets leaving the rest to be sold off nice and easy.
NA Committee meeting
The National Assembly Standing Committee on Privatization emphasised the need to protect the rights of PIACL employees throughout the privatisation process.
The 3rd meeting of the Standing Committee on Privatization, chaired by MNA Muhammad Farooq Sattar, was convened on Monday.
The Committee was informed that, following directives from the Cabinet Committee on Privatization (CCoP), the Privatization Commission adhered strictly to the rules in selecting a Financial Adviser. M/s Jones Lang LaSalle Americas, Inc. (JLL) was appointed as the Financial Adviser for the privatization of the Roosevelt Hotel, and the firm has submitted the transaction structure report to the Privatization Commission.
Additionally, the Committee was briefed on the latest developments regarding the privatization of House Building Finance Company Limited (HBFCL). The Committee recommended a thorough review of the decision to privatize this profitable entity.
The meeting was attended by MNAs Anwar-ul-Haq Chaudhary, Abdul Qadir Khan, Asia Naz Tanoli, Saba Sadiq, Sehar Kamran, Sofia Saeed Shah, Moulana Abdul Ghafoor Haideri, and Mehboob Shah, along with officers from the Ministry of Privatization, HBFCL, and PIACL.
