The recent results released by Pakistan International Airline (PIA) and the jubilation around its profitability seems to have taken everyone by surprise. The profits announced for the year ended December 2024 show that operating profits registered around Rs9.4 billion while net profit was recorded at Rs26.2 billion. The earning per share of Rs5.01 per share seems to be a far cry from just a year ago when the company had a loss of Rs104 billion at the end of 2023 coming to around a loss of Rs20 per share.
The sudden turnaround in the fortunes can be attributed to certain efficiencies being put into place, however, a closer look at the consolidated accounts show that the company is still in need of further steps before it can be labelled as becoming profitable.
The recent history of the company dampens some of the optimism that surrounds the release of the accounts. The loss seen in 2023 was not a one time blip as the airline had been suffering losses for 21 years. The last time PIA was able to record a profit was back in 2004 when it recorded profit after tax of Rs2.3 billion. Since then, there has been a consistent slope downwards as losses of more than Rs600 billion were recorded from 2005 to 2024.The recent results show signs of a turnaround but these are just signs and the complete turnaround is yet to be seen.
So why all the confetti and commotion?
Reason to celebrate
The celebration around the results is a PR move that is being used by the ministers to amplify what they see as the revival of the company. The PR push is well warranted as there is a drive to sell the loss making State Owned Enterprise to the highest bidder. Just last year, the ruling government was left with egg on their face when they could not get the desired bid from the interested parties and had to go back to the drawing board to make things happen. With the profits being announced, it has given an opening to the ministers to tout the improvement in order to get a better price this time.
Having said that, there are metrics which point in the positive direction. Based on the latest available consolidated financial information, it can be seen that the company has been able to see improvement in its performance. These improvements can be attributed to workforce being laid off, cutting of loss making routes and carrying out efficiency based measures.
From January to September 2023, the company earned revenues of Rs186 billion which were seen to be around Rs183 billion for the same period this year. Through cost cutting measures, the gross profit almost doubled from Rs21 billion last year to Rs39 billion in the same period this year.
In terms of the operating profit, the company stood at Rs10 billion last year improving to Rs18 billion in 2024. The biggest expenses that were recorded last year were exchange losses of Rs26 billion and finance cost of Rs58 billion. Due to these costs, net loss fell to Rs76 billion for the year. In the current year, the finance costs decreased as restructuring was carried out, decreasing these expenses to only Rs21 billion. Exchange losses also decreased to Rs2 billion which meant net loss for the nine months ended September 2024 was Rs8 billion.
There were active efforts that were carried out by the management to negotiate better terms with the banks which reduced its financial burden while efficient uses of resources also meant that the airline was able to enjoy better profitability in the recent year. Some credit needs to be given to the management in carrying out these steps which did help the company overall to be able to cut down its losses by 90% and see better performance in the latest year. A better picture will emerge once the annual results are announced which will show the consolidated performance of the airline as a whole.
But now the question arises that if the consolidated earnings are showing operating profit of Rs18 billion and a net loss of Rs7.5 billion at September end, where are the figures that are being quoted in the media?
The mechanics of the restructuring
Well for that we need to go back to the time when the restructuring was being carried out. The government was well aware of the fact that PIA was suffering from losses on a consistent basis. As the losses began to pile up, the government stepped in at different stages to bail out the airline company and kept lending it additional liabilities to make sure the company could stay afloat. The losses kept on increasing as the company had internal inefficiencies which were not being addressed. Hiring additional employees, giving out free benefits to politicians and bureaucracy, lack of quality service and use of leased assets meant that the costs kept increasing while revenues were restricted.
The killer blow came when aviation authorities in Europe and UK decided to ban flights being flown by PIA which meant revenues streams started to become curtailed. Due to the airline suffering losses, the equity of the company had become negative and bailouts had to be given by the government to make sure the airline could stay afloat. With privatization becoming imminent, the solution was quite simple.
By June of 2023, the situation had deteriorated to such an extent that the company had assets of Rs160 billion while its losses alone had racked up to Rs712 billion. This meant that liabilities had to be used in order to fill this gap. In June of 2023, the total liabilities were Rs809 billion. The government realized that this situation was not sustainable and something had to give.
The government would cut out the best parts of the airline and leave the cancerous losses and debts parked on the books of another. The scalpel was taken out which sliced the corporation into two parts. The goal was to create a company that could be promoted to potential buyers. Such a sale would not only stop the bailout packages from being handed out on an yearly basis but will actually lead to generation of sales revenue which could boost the fiscal resources.
The privatization drive that the government is going through was imposed on it by the International Monetary Fund (IMF) which asked the government to restructure loss bearing state owned enterprises in an attempt to raise funds from these sales. The mandate of these sales was to limit the leakage of funds from the government in these financial blackholes and generate much needed revenues which could be used for other purposes.
This led to the creation of two new companies. One would hold all the core assets linked to the aviation business while the other would house most of the strategic investments carried out by PIA over the years. This would be the holding company which will hold these assets. The holding company was also burdened with the debt and the accrued markup that was due on PIA previously.
The non-core assets which were handed over to the holding company were made up of many investments that had been carried out. In addition to that, many of the immovable properties characterised by the sales office of PIA and land was transferred. In regards to the non-core liabilities, many of the loans taken from financial institutions and government were given to the holding company. The retirement benefits and accrued markup of the loans taken was completely transferred as the burden was shifted.
The restructuring goes off balance
The challenge that was in front of the government was to make a company look attractive which had liabilities of Rs809 billion while its assets were worth a fraction of these liabilities. The decision was taken to split the aviation business into one company while its fixed assets would be made part of a holding company. The aviation business would constitute all the core assets of the airline while the holding company would end up owning much of the non-core assets.
This was only part of the restructuring. The second part was to allot the liabilities in an equitable manner. If basic proportionality was used, the non core assets would be matched to the non core liabilities. This is where the restructuring went off script. The gangrenous boil on the balance sheet of PIA was its ever increasing liabilities and mark up payment that were accruing on these liabilities. The government allotted most of these liabilities to the holding company when it could have been proportionally divided between the two new companies.
The rationale used was simple. If the liabilities were going to be allotted on proportion of assets, the new aviation company would not have looked as attractive to new investors as one without them. Before the company was split up, the total assets stood at Rs171 billion. From this, Rs147 worth of fixed assets were given to PIA aviation while the remaining Rs24 billion were given to the holding company. This represented 86% of the assets being given to the aviation business.
On the other hand, total liabilities stood at Rs831 billion from which only Rs202 billion were given to the aviation business while the remaining Rs629 billion were handed over to the holding company. This meant that less than a quarter of the liabilities were handed over to the aviation business. This led to the aviation business having a negative equity of Rs55 billion while the holding company was left with a negative equity of Rs604 billion.
Been given a choice to invest in the new company or the old company, an investor would wish to invest in a company which has less baggage attached to it, pun intended. It would be easier to sell a company which has a higher amount of assets and less liabilities to pay off which was the purpose for the government all along.
The shareholders of PIA holding company are the people who have been left holding the short end of the stick. When the split was being carried out, the shares of PIA were listed on the stock exchange. Investors had bought the shares of the company expecting the government to carry a turnaround and make the aviation business profitable again. This never happened.
Once the restructuring plan was put into motion, the government made sure that none of the investors were able to get any shares in the aviation business as the shares of PIA corporation were converted into shares of the holding company alone. The asset carve out was carried out in such a way that the shareholders of the holding company were left carrying a larger chunk of the debt and could not be expected to get a huge share in the aviation company which would be sold in the future.
Impact on financial results
Bringing it back to the financial results being announced, it was seen that the aviation company ended up showing a profit in their results while the holding company was left languishing still. According to the latest results, PIA earned revenues of Rs204 billion while incurring costs of Rs175 billion. This led to the company earning operational profit of Rs9.4 billion and net profit of Rs2.62 billion.
Just a year earlier, the revenues of PIA had been Rs237 billion which was greater than 2024, however, the net loss suffered at the end was Rs104 billion.
While the aviation division was showing profits, the holding company was getting buried under greater losses. The latest accounts available for the holding company are from September 2024 which show that the holding company had no source of revenues. Administrative expenses suffered were Rs1.8 billion, other income generated was Rs185 million while the finance cost seen were a whopping Rs7.7 billion. Due to all this, the holding company suffered a loss of Rs9 billion.
The consolidated results show the true picture of what is going on. The aviation business ended up earning an operating profit of Rs9.4 billion, however, the consolidated company saw decreased operating profit due to the losses of the holding company. Similarly, the aviation business saw net profit of Rs26.2 billion which were losses on the consolidated account of Rs7.5 billion. The majority of these losses can be attributed to the holding company.
Trying to take credit for the turnaround seems to be a little premature and exaggerated. It seems like the government is taking out a leaf from the book of Dar and trying to window dress a situation which is still in dire need of change and reconciliation. The latest results will be able to show a rosy picture of the aviation business and might even yield a few good bids which can allow the company to be sold.
The truth is that the carving out of the new company has taken away the cancer that was plaguing the whole company. However, ignoring the results of the part that was cut out seems disingenuous and fails to take into account the reality that the problem still exists which needs to be resolved. The shareholders of PIA holding would expect a return on their investment, especially as they are being forced to bear the burden of a huge amount of cost and debt which needs to be paid off.
Confusion in the exchange
The surprise in the market that was seen after the release of the earnings was so drastic that a clarification had to be taken out by the holding company. When the news of the results was published, it erroneously stated that the holding company had declared the earnings even though no board meeting had taken place to approve the December accounts for the holding company. No such announcement has taken place till now.
Based on the news, the share price of the holding company started to see a rally and a clarification had to be published where it had to be made clear that the results announced were related to the aviation company and not the holding company itself.
There also seems to be something fishy about the net profit that has been announced. As there is no manner to verify it, the earnings have to be taken on the face. The news that has been circulated quotes the Defense Minister and no actual release of the accounts has taken place. The figure of Rs26.2 billion seems a little too high and does not sit right. Considering the consolidated accounts up to September 2024, it was seen that the company made a loss of Rs7.4 billion while the holding company made a loss of Rs9.3 billion. The gap between the two figures should be attributable to the aviation business.
By September 2024, this figure was around Rs1.8 billion which would be the profit accruing to the aviation department. How could it be that the business only had Rs1.8 billion by September and then jumped to a profit of Rs26.2 billion in a space of three months. There can be two justifications for this. Either the results that have been reported have been misquoted and the real figure was Rs2.62 billion profit. Or the aviation business was able to use the restructuring in order to boost its profits as any restructuring is considered as an addition to the profit. Without any access to the actual accounts, the reasoning for the jump will remain unclear.
