Debt And Mismanagement Lead To The Decline Of Pakistan International Airlines

Pakistan's interim government is considering the sale of the financially struggling Pakistan International Airlines, with Ernst & Young suggesting a 51% stake sale providing full management control. The airline, once recognized by the tagline 'Great People to Fly With,' has faced escalating losses since the late 1990s.

Preceding next week's elections, Pakistan's caretaker government is formulating plans to sell the deficit-ridden Pakistan International Airlines, as stated by the minister overseeing the process and other officials.Privatisation Minister Fawad Hasan Fawad informed Reuters, "Our task is 98 percent complete." He clarified that the final two percent involves documentation after cabinet approval.

Image - Pakistan International Airlines (PIA) passenger plane at Lahore's Allama Iqbal International Airport

Historically, elected governments avoided unpopular reforms, including the sale of the national carrier. However, amidst a severe economic crisis, Pakistan, in June, committed to revamping loss-making state-owned enterprises as part of a $3 billion bailout deal with the International Monetary Fund (IMF).

Let's examine the decline of Pakistan's flagship airline -

The proceeds from the Pakistan International Airlines (PIA) sale will be utilized to cover principal payments, aligning with the budget agreement terms. As reported by the Express Tribune, banks are willing to accept a 10-year debt rollover with a 12 percent annual interest rate, receiving 32.2 billion Pakistani rupees (PKR) in annual interest payments.

Over the next decade, banks stand to accumulate interest payments amounting to PKR 322 billion, surpassing the outstanding stocks of PKR 268 billion. Seeking the International Monetary Fund's support, the Ministry of Finance intends to present the plan, crafted by Ernst and Young, to the cabinet for approval before the administration's term concludes after the election. The cabinet will decide on the method of stake sale, either through tender or a government-to-government deal.

Following the Finance Ministry's decision to cease interest payments on PIA debt in March 2023, the government and PIA management explored privatization. Concerns persist regarding the debt restructuring by banks and the transfer of PIA debt ownership, alleviating the airline's primary concern but removing a substantial monthly charge from its balance sheet.

Privatisation progress will be crucial if the incoming government revisits the IMF after the current bailout program expires in March. Two sources revealed to Reuters that a 51 percent stake, accompanied by full management control, will be offered to buyers after segregating the airline's debts in a separate entity, as outlined in Ernst & Young's comprehensive 1,100-page report.

PIA spokesman Abdullah Hafeez Khan expressed the airline's commitment to the privatization process, providing "full cooperation" to the transaction adviser.

Facing immense debt, Pakistan International Airlines (PIA) grapples with financial woes attributed to emerging regional competition, mismanagement, and insufficient funding for fleet expansion. As of June last year, PIA's liabilities stood at PKR 785 billion ($2.81 billion) with accumulated losses of PKR 713 billion. The aviation ministry reported a debt and liabilities figure of PKR 743 billion ($2.50 billion) by December 2022, surpassing asset value fivefold.

The airline's financial crisis prompted warnings of potential liabilities rising to PKR 1,977 billion ($6.65 billion) and annual losses reaching PKR 259 billion ($871 million) by 2030, as communicated by Pakistan's Ministry of Aviation. Concerns heightened with reports of PIA aircraft seizures due to non-payment, reflecting the airline's struggle for financial stability.

PIA's tagline, 'Great People to Fly With,' now echoes challenges such as fuel supply restrictions, leading to the cancellation of over 500 flights in October. Reports also surfaced about unpaid salaries for thousands of employees, reflecting the broader financial strain.

Governance and safety standards concerns add to PIA's troubles. Instances like a pilot error causing a flight deviation in 2020 and a fatal crash in Karachi the same year have raised questions. The European Union Aviation Safety Agency's 2020 ban on PIA's lucrative routes, citing safety concerns, remains in effect, resulting in significant revenue losses.

The proposed sale of PIA faces internal skepticism, with concerns about potential undervaluation and transparency without due diligence. Analysts, acknowledging PIA's dire situation, emphasize the necessity for deep restructuring and debt clearance for successful privatization.

Despite challenges, PIA's valuable assets include prime airport slots, air service agreements with over 150 countries, and annual revenues of PKR 280 billion. Notably, the airline owns key slots at Heathrow, Manchester, and Birmingham. PIA's physical assets, including aircraft and hotels in Paris and New York, are valued at PKR 105.6 billion ($375 million) by book value, with market estimates exceeding $1 billion. However, officials assert that hotels and other properties are not slated for sale.