With close to two years under his belt, Air Vice Marshal Farooq Umar has now had far longer than many of his predecessors to make his mark as PIA's managing director. Umar was head-hunted from independent start-up Shaheen Air International and has brought a more commercially oriented approach to running the flag carrier, while meeting the range of social and strategic objectives demanded of a public sector company in a developing country.
Take the business of offsets. One of the strategic objectives set by the government for PIA has always been technology transfer - the carrier installed Pakistan's first computer in the mid-1960s. PIA's Precision Engineering Complex was set up to develop aircraft component manufacturing capability in Pakistan with work generated by offset agreements related to PIA's purchase of Airbus and Boeing aircraft. But with poor financial control and non-existent marketing, losses mounted. Soon after his appointment, Umar brought in Sardar Khan to run Precision Engineering as a commercial business and a substantial profit of PKR 148 million ($4.8 million) was declared in the financial year ending June 30, 1994. Contracts to date have been offset-related, but Khan hopes to win openly tendered work in the future.
There is also a new campaign to promote third party aircraft maintenance. 'We will go out into the market and be aggressive about selling ourselves,' says director engineering and maintenance M Sadiq Siddiqi, who is targeting Middle Eastern carriers. Third party work had previously been curtailed as PIA's own fleet expanded.
PIA has an unusually diverse portfolio of non-airline investments but these businesses are being pruned, with the poultry-farming business and one of the two hotels at Karachi airport due to be sold during the current financial year. The carrier's diversification strategy - interests range from a printing works through planetariums to fruit farms - reflects its need as a developing country carrier for self-sufficiency and an active role in technology transfer.
However, the performance of the core airline is the acid test for Umar, and falling profits at PIA Corporation over the last three years can be attributed largely to the airline. Non airline traffic and maintenance related businesses accounted for just 4.2 per cent of total revenues in the year to June 1994. PIA Corporation reported an 82 per cent fall in net profits in 1993/4 to $4.5 million on revenues of $770.1 million, down from $806.9 million in the year to June 1993.
Internationally, the carrier focuses on visiting friends and relatives (VFR) traffic generated by successive waves of emigration, as well as workers on short-term expatriate contracts. 'As a national carrier we have to serve the [overseas] ethnic communities and that generates good seat factors,' says Umar. 'But we have to develop a non-ethnic base as well and are taking the lead in developing tourism.'
This may seem wishful thinking for an airline based in a city wracked by crime and violence in which political battles lead to street gun fights. But unrest in Pakistan is concentrated in Karachi and the surrounding Sind province: the main areas with tourism potential are over 1,500 kilometres away in the Northwest Frontier province and northern areas.
Moreover, Pakistan has a low profile and events are under-reported in the international media. Prominent Pakistanis complain about this on the one hand, but on the other are thankful there is less negative publicity for PIA and the Pakistan Tourism Development Corporation (PTDC) to counter.
Promotion focuses on the attractions of the Hindu Kush, Pamir, Karakoram and Himalayan mountain ranges and aims to develop Pakistan as a gateway for multi-centre regional tours. There is good surface access to western China via the Khunjerab pass on the Karakoram highway, and PIA serves Beijing, Kathmandu in Nepal and Almaty, Ashkhabad and Tashkent in the Central Asian republics of the CIS. A route to Dushanbe is under evaluation.
The carrier also operates an aerial sightseeing tour called the Air Safari, which started on a fortnightly basis in August 1993 and was upped to a weekly frequency last year. This two-hour circuit from Islamabad caters for tourists lacking the time or stamina for trekking to view famous peaks like K2 and Nanga Parbat, as well as the world's highest lake. Window seats on the Boeing 737-300 flight cost PKR 6,225 ($208) and the remaining seats are sold at half price to accompanying passengers.
The Air Safari is particularly popular with Japanese tourists and a new Moonlit Air Safari is being trialled. PIA is also looking at setting up a charter helicopter unit to improve tourist access to the mountains.
Umar is forecasting 'minimum growth' of 10 per cent a year in tourist traffic, although this is from a small base. Pakistan's official tourist arrivals were 379,165 in 1993 with the bulk travelling by air. The top two origin markets were the UK (23.7 per cent of arrivals) and the USA (10.3 per cent). Tourism generated a foreign exchange income of $112 million or 1.64 per cent of export earnings. However, the official statistics count all foreign nationals as tourist arrivals though many of these are people of Pakistani origin on VFR trips. The proportion of 'pure' tourists is around one fifth.
PIA is also looking at ways to improve its premium class products. 'We feel we have an edge over other airlines in economy class,' declares director marketing Saleh Tarin, but he concedes that the carrier's first and business classes are not so competitive. A decision to fit personal video screens has been put on hold while the replacement of first and business with a single premium class is evaluated. But a frequent flyer programme (FFP) has been ruled out for the time being. 'Ethnic traffic is [still] our bread and butter,' says deputy managing director marketing, Aslam R Khan. 'We came to the conclusion that at this point it was not advantageous to enter into an FFP.'
As part of potential service improvements, the carrier is considering how to present its 'dry' status to non-Muslim passengers. Effective marketing could highlight the health benefits of not consuming alcohol on-board aircraft, while flight attendants could serve non-alcoholic drinks in a more attractive manner.
Umar's second expansion priority is cargo, whose share of the airline's revenues he aims to increase from 12 to 20 per cent within 18 months by improving volumes and yields. The cargo share of PIA's RTKs was 31.7 per cent in financial year 1993/4. Apart from belly hold capacity, PIA operates two Boeing 707-320 freighters and two Boeing 747-200 combis. The B707s will have to be retired this year and newer B707Fs or leased McDonnell Douglas DC-8-73Fs are being evaluated as an interim replacement. Pakistan has more outbound than inbound air freight and PIA has partially succeeded in redressing this imbalance by taking advantage of Dubai's open skies policy to route inbound flights via the Emirate.
The carrier was less happy about Pakistan's international open skies policy, which attracted what Umar calls 'scavenger airlines' or carriers with questionable operating standards which flew fifth freedom sectors between Pakistan and the Gulf at cut prices. Facing a loss of passengers in its major market, PIA lobbied the government strongly. 'That was stopped early in 1994,' says Umar, adding that 'we [still] have open skies for cargo.'
The predominance of low yield ethnic VFR traffic makes the Pakistani market less attractive to major carriers. Air France pulled out at the end of last summer and Delta has so far opted not to use the rights acquired from Pan Am. Most carriers that operate have just two or three flights a week and only Gulf Air, Emirates and Saudia are putting significant capacity into the market. Gulf Air and Emirates are restricted to serving Karachi, although Emirates does have fifth freedom Karachi-Dhaka rights, and Saudia serves Karachi and Islamabad.
PIA has extensive regional services to the Gulf and Saudi Arabia with nonstop flights from Gwadar, Peshawar and Lahore as well as Karachi and Islamabad. In 1993/4 these accounted for roughly half of PIA's 2.4 million international passengers. Elsewhere, Umar says the carrier is seeking access to Hong Kong and evaluating Beirut and Johannesburg. Services to Athens, Cairo, Rome, Tehran and Mashad 'all require a fresh look in terms of equipment size and frequency.'
PIA has been exploring various codeshare possibilities, particularly in North America, while reducing the number of stops on its long-haul flights. The aim is for a maximum of two stops on flights to North America and one to Europe. Recently concluded bilateral negotiations with Canada now allow PIA to serve Toronto with one stop, rather than having to route flights via New York and Europe. But Pakistan's size and demographics rule out a single long-haul hub, says Tarin. Karachi is on the southern coast, while the capital Islamabad and the second biggest city, Lahore, are 1,500 kilometres to the north.
PIA's long-haul scheduling involves a trade-off between optimising end to end journey times and exploiting intermediate fifth freedom rights. This trade-off is also a factor in PIA's need to select a replacement for the ageing Boeing 747-200 fleet, as it means that ultra long range is not essential. Khan says PIA is simply not interested in operating nonstop between Pakistan and the North American east coast. However, the capacity of a B747-400 would suit the high volume medium haul services. 'On Jeddah I want to have the biggest aircraft,' declares Khan.
PIA's aircraft acquisitions require state approval but deputy managing director finance, Arshad Mahmud, says that the carrier has not used government debt guarantees for the last five years and generally obtains terms better than those available to the government. Pakistan's investment allowances and a 2.5 per cent tax on lease payments make it more advantageous to buy aircraft, he adds.
PIA's other pressing fleet requirement - a replacement for its domestic Fokker 27s - is tied to national policies. PIA carries some 3.3 million domestic passengers a year on a network which is divided into two categories.
On the trunk routes, fare levels and traffic volumes combined with low Pakistani costs allow profitable operations by PIA and competing independents Aero Asia and Shaheen Air International. The lifeline routes are mainly in the far north, and there the government sets low fares as a matter of social policy. A single Islamabad-Gilgit ticket costs locals around $10 and overseas visitors just $40. On some regulated routes coach travel is more costly.
PIA has to cross subsidise the lifeline routes internally, a burden that has grown over 13 years from $3 million to $50 million in the year to June 1994, exceeding net profits. Although the government recently approved a 12 per cent domestic fare increase, this has done nothing to change the huge differential between lifeline and trunk fares. Meanwhile the advent of domestic trunk route competition has drained some of the surpluses that are available for cross-subsidy.
When the government deregulated domestic aviation in 1992, there was a predictable rush of new entrants and a subsequent market shake-out. Bhoja Air, Hajvairy Airlines and Raji Aviation have all disappeared leaving Aero Asia, which operates three Rombac 111-500s, and Shaheen with two Boeing 737-200s. Shaheen has added a B737-400 on wet lease from Malaysia Airlines to serve its newly granted Peshawar-Dubai route. Both survivors have strong backing: Aero Asia is owned by the Tabani trading group and Shaheen by the Shaheen Foundation, which is a welfare organisation for retired air force personnel.
PIA has so far failed to convince the government to either force the independents to operate some lifeline routes, or to grant it a direct subsidy. Moreover, in PIA's view, the government has added insult to injury by granting the first international scheduled route authority to an independent - Shaheen's Dubai service - and imposing new import duties of 10 per cent on commercial aircraft and 15 per cent on spares. Umar says the duties will push PIA into the red in the year to June 1995 and is urging the government to think again. Consequently, while continuing to evaluate the ATR42, Fokker 50 and Ilyushin 114, PIA cannot make a final F27 replacement decision until the political waters are clearer.
Economic liberalisation in Pakistan has left PIA in a political state of flux. On the one hand, the carrier faces new home-grown competition, but on the other it still has to meet social objectives including the lifeline routes and a larger than necessary workforce, albeit one paid at low rates by international standards.
While other Pakistani state-owned enterprises are being privatised, PIA is not an immediate candidate for a sell-off. However, there has been a minority private sector stake in the carrier since it merged with Orient Airways in 1955, and the proportion of privately held shares is set to increase as some of the state-owned financial institutions which hold stock are privatised. The government's direct shareholding is 57.2 per cent.
No doubt Umar will be hoping that having more private shareholders will help PIA's management reach a new modus vivendi with the government, to allow the carrier to move forward in an environment which is less restrictive.
No doubt Umar will be hoping that having more private shareholders will help PIA's management reach a new modus vivendi with the government, to allow the carrier to move forward in an environment which is less restrictive.
Source: Airline Business
