PAKISTAN INTERNATIONAL AIRLINES

The financial losses of public sector corporations had been a big drain on the limited
financial resources of Pakistan and had resulted in the Government being subjected to
tremendous pressure to ‘reform’ such corporations. According to a newspaper report1,
five public sector entities had together caused Rs 393 billion in losses to the Exchequer
during the last four years2. This amount was extremely significant in the context of
Pakistan’s economy. These losses caused fiscal deficits and had a serious impact on
Federal Government spending on development3. This reduction in spending on
development was a major factor contributing to the slowdown of the economy.

In this context, in the latter half of the year 2011, Muhammad Ali, a Research Associate
at a private university was working on a research project. The objective of this research
was to ascertain the operational and financial challenges being faced by Pakistan
International Airlines (PIA). The analysis carried out in this research was important as it
would eventually lead to policy suggestions for reforming the national aviation giant. The
methodology used for the research involved comparing PIA with other financially

1
http://tribune.com.pk/story/368926/bleeding-the-country-dry-five-public-entities-lose-rs393b-over-four-
years/
2
These entities include Pakistan Railways (PR), Pakistan International Airlines (PIA), Pakistan Steel Mills
(PSM), Pakistan Agriculture Storage and Services Corporation (PASSCO), and the National Highway
Authority (NHA).
3
Federal Government’s development spending in the last few years never exceeded Rs 500 billion mark.

This case study was written by Research Associates M. Farhan Akhtar and Hina A. Uqaili under the
supervision of Dr Junaid Ashraf for ASP-LUMS to serve as a basis of class discussion rather than to
illustrate either effective or ineffective handling of an administrative situation. This material may not be
quoted, photocopied or reproduced in any form without the prior consent of Lahore University of
Management Sciences. This research was made possible through support provided by the United States
Agency for International Development. The opinions expressed herein are those of the author(s) and do not
necessarily reflect the views of the US Agency for International Development or the US Government.

© 2012 Lahore University of Management Sciences

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successful international airlines in order to determine the problems which were plaguing
the organization.

Background Information about PIA

PIA was established in 1951 by the Government of Pakistan. It flew its first domestic
flight in 1954 from Karachi to Decca and its first international flight in 1955 from
Karachi to London via Cairo. In 1955, it took over Orient Airways, another Pakistani
airline provider. Initially, it relied upon Super Constellation four engine airliners for all its
routes. Later on, it leased Boeings (707-321) from Pan American World Airways for
domestic routes, and dedicated Boeings (720-040B) for international routes. In 2010, its
fleet size was 40, including 9 Boeing 777s, 6 Boeing 737s, 12 Airbus 310s, 7 ATRs and 6
Boeing 747s4. It was interesting to note that PIA was the first airline in the world to
operate all three versions of the 777 model family, and the first airline in South Asia to
introduce an auto-ticketing facility. In 2010, PIA operated routes to 25 domestic and 36
international destinations.5 It had a 74% market share of Pakistani domestic airline routes,
and a 40% market share of international routes.

In the last few years, despite the preferential treatment given to PIA by the local aviation
regulator, PIA had suffered a significant drop in its profits (see Exhibit 4).

The Economics of the Aviation Industry

According to the International Air Transport Association (IATA) and the International
Civil Aviation Organization (ICAO), global airline cumulative revenues were Rs 47,090
billion in 20106 (see Exhibit 3). Although aviation was a global industry with players that
differed in their strategy, structure and size (see Exhibits 1 & 2), there were certain
operational measures which were closely monitored by all airlines. One such measure
was the load factor, which was the ratio of revenue passenger kilometers to available
passenger kilometers. ‘Available seat kilometers’ was the number of kilometers actually
clocked by a particular airline multiplied by the available seats. Revenue passenger

4
PIA Annual Report 2010, p.81
5
http://www.historyofpia.com/firsts.htm
6
Figures for the industry are converted from USD to PKR for comparison purposes, using a conversion rate
of USD 1 = PKR 61.55 for 2007 and USD 1 = PKR 78.9 for 2008 (Source: Business Recorder).

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kilometers (or actual seat kilometers) was the number of seats actually occupied
multiplied by the number of kilometers flown. Another important measure was the
number of hours each aircraft flew per day. This was calculated by dividing the total
flying hours by fleet size and the number of days in a year.

In terms of the cost structure, the biggest cost item for all airlines was fuel and salaries
(see Exhibit 3). Another important cost item were the aviation charges, which airlines
must pay to airspace regulators for the air distance travelled in their respective aerial
territories. Other important cost items included repair and maintenance. Many of these
costs were driven, to a large extent, by air passenger kilometers. In addition, there were
certain costs which were independent of air kilometers flown by the airlines. These
included salaries, aircraft rentals, depreciation and other such expenses.

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Exhibit 1
PAKISTAN INTERNATIONAL AIRLINES
Summary Sheet: Basic Statistics for the Top 30 International Airlines

Load
Operating Fleet ASK RPK
Rank Name of the Airline Factor
Profit7 Size (million)5 (million)5
(%)8
1 Lufthansa Group 14,159.6 710 79.3 235,837.4 187,000.1
2 FedEx (Express Segment) 171,628.2 664 Information is not available
3 Qantas 21,732.7 254 81 124,717.0 100,727.0
4 Emirates Airline 83,385.3 142 67 161,756.0 108,053.0
5 Singapore Airlines 109,204.7 108 78 108,060.2 84,801.3
6 LAN Airlines 54,031.1 131 78 42,355.2 33,147.5
7 Turkish Airlines 26,851.2 153 74 65,100.0 47,950.0
8 Southwest Airlines 84,869.2 548 79 158,419.1 125,604.4
9 UPS Airlines 504,576.6 Information is not available
10 TAM Linhas Aereas Information is not available
11 Air New Zealand 12,970.9 99 82 26,854.0 22,096.0
12 Skywest Airlines 17,334.6 704 79 41,044.5 32,552.6
13 Chautauqua Airlines Information is not available
14 WestJet 21,257.8 91 78 8,081.0 6,343.5
15 COPA Airlines 24,876.6 47 77 17,622.3 13,544.2
16 Aeroflot Russian Airlines 42,898.5 143 77 50,803.0 39,172.0
17 Avianca Information is not available
18 Easy Jet 23,028.0 196 89 62,945.0 56,128.0
19 Ryanair 45,915.8 232 84 53,469.6 44,841.1
20 Comair N/A 815 83 374,468.6 310,875.4
21 Atlantic Southeast
Information is not available
Airlines
22 Republic Airlines 11,450.5 275 80 42,723.7 34,027.7
23 Kenya Airways 1,955.7 27 66 12,143.0 8,071.0
24 Middle East Airlines Information is not available
25 Jetstar Information is not available
26 Hawaiian Airlines 7,840.7 36 86 16,310.1 13,946.4
27 Shuttle America Information is not available
28 Malaysia Airlines 7,321.7 117 76 50,817.9 38,652.9
29 JetBlue Airways 28,604.7 160 81 55,915.1 45,510.6
30 Philippine Airlines Information is not available

Source: IATA & Annual Reports 2010 for Individual Airlines

* Note: The figures are taken from published accounts and refer to operating profits. There will be slight
differences in accounting policies across different countries.

7
Figures are in PKR (millions): 1$=85.9PKR , 1AED=23.39PKR, 1GBP=132.65PKR, 1CAD=85.89PKR,
1EUR=114.19PKR
8
ASK: Available Seat Kilometers, RPK: Revenue Passenger Kilometers, Load Factor: RPK/ASK
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Exhibit 2
PAKISTAN INTERNATIONAL AIRLINES
International Scheduled Operations Traffic Analysis
Worldwide Graph

Asia Pacific

Middle East

Source: IATA Economics 2011

Notes:
RPKs: Revenue Passenger Kilometers
ASKs: Available Seat Kilometers

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Exhibit 3

PAKISTAN INTERNATIONAL AIRLINES

Key Financial Data, Global Airlines Industry

Global Airlines Industry: Overall Financial Outlook, 2000-10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Revenues ($ billions) 329 307 306 322 379 413 465 510 564 482 554
Passenger growth (%) 8.6 (2.7) 1.0 2.3 14.9 7.0 5.0 6.4 1.5 (2.1) 7.3
Passenger numbers
1828 1793 1792 1849 2064 2211 2328 2497 2507 2479 2681
(millions)
Crude oil price
28.8 24.7 25.1 28.8 38.3 54.5 65.1 73.0 99.0 62.0 79.4
(Brent) ($/b)
126.
Jet fuel price ($/b) 36.7 30.5 29.1 34.7 49.7 71.0 81.9 90.0
7
71.1 91.4
(11. (16.
Net profit ($ billions) 3.7 (13.0)
3)
(7.5) (5.6) (4.1) 5.0 14.7
0)
(9.9) 18.0
Margin (%) 1.1 (4.2) (3.7) (2.3) (1.5) (1.0) 1.1 2.9 (2.8) (2.1) 3.2

Percentage Share of Airline Operating Costs, by Region of Airline Registration

All Major
North America Europe Asia Pacific
Airlines
2001 2008 2001 2008 2001 2008 2001 2008
Labor 36.2% 21.5% 27.2% 24.8% 17.2% 14.7% 28.3% 20.1%
Fuel 13.4% 34.2% 12.2% 25.3% 15.7% 36.7% 13.6% 32.3%
Aircraft
5.5% 3.0% 2.9% 2.5% 6.3% 4.5% 5.0% 3.5%
Rentals
Depreciation
and 6.0% 4.5% 7.1% 5.7% 7.4% 7.8% 6.7% 5.9%
Amortization
Other 38.9% 36.9% 50.7% 41.8% 53.4% 36.3% 46.4% 38.2%

Source: IATA

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Exhibit 4

PAKISTAN INTERNATIONAL AIRLINES

PIA – Historical Financial Data (figures in millions)

2010 2009 2008 2007 2006 2005

Operating Revenue 107,531.5 94,563.7 89,201.6 70,480.7 70,587.2 64,074.5
Operating Expenses 106,811.5 98,628.8 120,499.4 76,415.8 79,164.4 67,075.6
Operating Profit/ (Loss) 720.1 (4,065.0) 31,636.1 5,935.1 8,577.2 (3,001.1)
Profit/ (Loss) before (13,309.8 (13,070.9 (8,577.2
(8,579.7) (39,729.3) (4,513.2)
Taxation ) ) )
150,528. 108,851.
Total Assets 113,125.0 130,162.8 97,415.8 64,132.9
1 9
105,418.
Long-Term Debt 98,533.0 96,926.2 78,284.8 62,650.9 38,099.2
2

2004 2003
Operating Revenue 57,788.1 47,951.8
Operating Expenses 55,872.1 42,574.2
Operating Profit/ (Loss) 1,916.0 5,377.6
Profit/ (Loss) before Taxation 837.3 3,700.1
Total Assets 69,320.7 52,125.3
Long Term Debt 42,517.8 22,033.7

Source: Annual Report (2010, 2008) ‘Pakistan International Airlines Corporation’

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Exhibit 5

PAKISTAN INTERNATIONAL AIRLINES

PIA – Explanation of the Cost Structure

Amount for
2010
Item Description
(PKR
millions)
Fixed Costs
Includes social security costs, retirement
Salaries 14,296.5
benefits and compensated absences.
Insurance 1,476.2
Depreciation 5,970.5
Finance costs 9,299.8
Administrative expenses 7,816.4
Includes crew layover, flight equipment
Other discretionary fixed
9,300.2 rental, legal charges, utilities, advertising
cost
expenses and other related costs.
Total 48,159.6
Variablei Costs
Amount for
2010
Item Description
(PKR
millions)
Aircraft fuel 44,707.0
Fee charged by aviation authorities based on
Aviation charges 11,921.7
air miles and landing/takeoffs.
Repairs and maintenance 7,630.3
Passenger services 3,693.9 On-board services.
Total 67,952.9

Total Costs 116,112.5

i
Based on the nature of the cost and the inflation adjusted figures for the last 10 years, the amount per
Passenger Kilometer is fairly constant; therefore we can assume these to be variable costs.

Source: Annual Report (2010) ‘Pakistan International Airlines Corporation’

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Exhibit 6

PAKISTAN INTERNATIONAL AIRLINES

Key Operating Data for PIA and Comparable Airlines

PIA Hawaii Emirates Easy Jet

Financial Data
Total Revenue 107,531.5 112,529.0 1,016,412.5 394,381.7
Variable Costs 67,952.9 48,679.5 435,428.2 227,415.2
Fixed Costs 48,159.6 56,805.7 495,259.9 146,538.5
Profit before tax (8,581.0) 7,043.8 85,724.4 20,428.0
Operating Data
Size of Fleet 40 36 142 196
Available
Passenger 21,219 16,240 161,756 62,945
Kilometers
Actual Revenue
Passenger 15,657 13,880 126,273 56,128
Kilometers
Load Factor 73.8 85.5 67.0 89.0
Hours of Flying
9.79 8.61 13.70 11.90
per aircraft per day
Number of
18,019 4,023 28,686 6,887
Employees

Source: Annual Report (2010) ‘Pakistan International Airlines Corporation’

Annual Report (2010) ‘Hawaiian Airlines Inc.’
Annual Report (2010) ‘The Emirates Group’
Annual Report (2010) ‘EasyJet plc’

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Exhibit 7

PAKISTAN INTERNATIONAL AIRLINES

Exercise

PIA Hawaii Emirates Easy Jet

Revenue/ Revenue Passenger
8.11 8.05 7.03
kilometers
Variable Cost/ Revenue Passenger
3.51 3.45 4.05
kilometers
Contribution Margin/ Revenue
4.60 4.60 2.97
Passenger kilometers
Total Contribution Margin (PKR
63,849 580,984 166,967
Millions)
Fixed Costs (PKR Millions) 56,806 495,260 146,538
Profit/(Loss) before tax (PKR Millions) 7,044 85,724 20,428

Notes:

Revenue hours flown for PIA for 2010 are 142,940.

The same cost classification scheme has been used for comparable airlines as is used for
PIA.

All figures have been converted to PKR for comparative analysis.

Exchange rates used:

$ to PKR 85.9
AED to PKR 23.39
GBP to PKR 132.65

Note: Exchange rates as of 31 December-2010.

Source: Business Recorder

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