PIA: Flag carrier of state-owned enterprise failings
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Pakistan International Airlines’ demise from being “great people to fly with” to its present state of having several countries restrict its flights is emblematic of the vulnerabilities of state-owned enterprises (SOEs). Quite apart from being buffeted by the recent scandal in which some of its pilots were alleged to have “dubious certification” and the tragic crash in Karachi in May, the airline has also been posting sizable losses for over a decade. The current accumulated losses of the company are over half a trillion rupees and there appears to be little prospect of a return to profitability.
Although PIA was once profitable and ranked highly among global peers, and a source of considerable pride for Pakistanis, its performance like many other SOEs in the country has steadily declined over the last two decades. It compares poorly with its competitors in terms of quality of service, operating efficiency and profitability. It is a burden on the state treasury, requiring regular capital injection without which it would be bankrupt, as would any company in the private sector that consistently posts large losses.
PIA has not been run as a business and many non-commercial goals have become the airline’s responsibility. For example, it is called upon to manage evacuation of stranded Pakistanis overseas, run Hajj and Umrah flights, and provide connectivity to remote locations. It has also been used as a means of providing employment and therefore has one of the highest employee-to-aircraft ratios among international airlines.
However, while there can be arguments made for the publicly owned airline pursuing social service objectives other than focusing on service quality and profitability, when the organization fails to satisfy international standards of safety and certification, then it is imperative to examine the viability of the business model.
PIA not only has to increase revenue, decrease costs, and restructure its balance sheet to be financially sustainable, but must also ensure that its quality of staffing and fleet airworthiness comply with safety standards and satisfy international regulators such as the International Civil Aviation Organization, the European Aviation Safety Agency (EASA) and the US Federal Aviation Administration (FAA).
Javed Hassan
PIA not only has to increase revenue, decrease costs, and restructure its balance sheet to be financially sustainable, but must also ensure that its quality of staffing and fleet airworthiness comply with safety standards and satisfy international regulators such as the International Civil Aviation Organization, the European Aviation Safety Agency (EASA) and the US Federal Aviation Administration (FAA). This will help restore confidence among potential customers, restart operations on routes presently closed and code-sharing arrangements with other airlines to enhance revenue.
Separately, if there are social objectives to be met, the government should consider awarding contracts for these to PIA or other airlines through a competitive bidding process, such that the element of subsidy being provided is transparent. Stakeholders also need to examine whether the reforms required within PIA will best be achieved by keeping it in the public sector, finding a strategic partner, or selling it off entirely. Any review of its future prospects should examine what national objectives a flag carrier should serve, and accordingly tailor a future strategy. A governance framework should be in place that ensures the airline operates at an arm’s length from the government, such that external interference, political or otherwise, is prevented.
PIA is not unique among Pakistani SOEs in being impaired by operational inefficiencies and a chronic lack of profitability. The malaise can be attributed to these enterprises having diffuse objectives with no clear operational or profitability targets, a lack of robust monitoring mechanism, and management comprising of civil servants whose incentives are not linked to performance. For instance, the state-owned Pakistan Steel Mills (PSM) has accumulated losses and liabilities of almost Rs230 billion. Despite PSM stopping production in 2015, Pakistani taxpayers spent Rs55 billion over the last five-and-half years on salaries of 9,350 workers — many of whom had reportedly secured other employment in the period. Recently the government finalized on a Rs19.66 billion redundancy package for these employees.
The government’s reform agenda is committed to reducing the fiscal deficit, but having to support loss-making SOEs exacerbates the challenge. Between June 2018 and March 2020, the total debt of SOEs increased from Rs 1,393 trillion to Rs1,980 trillion. This increasing liability limits fiscal space required to invest in high-priority social sector areas such as education and health. The government therefore needs to accelerate the process of extricating the state from loss-making corporates, especially where the private sector can do the job more efficiently and profitably.
With the global trend of increased participation by the private sector in economic activities that were previously public monopolies, the era of SOEs is ending. This has brought about not only intense competition in most industries, including the airline business, but has also stimulated innovation and improved service quality for consumers. Therefore, rather than applying more resources in continuing sclerotic SOEs, reforms should focus more on providing a conducive environment that ensures a level playing field, protect investor and consumer rights, mitigate against environmental externalities, and boost investments in businesses that create private sector employment.
*Javed Hassan is an investment banker who has worked in London, Hong Kong, and Karachi.
Twitter: @javedhassan
