Case study of pakistan international airline(pia) downfalls


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Case study of pakistan international airline(pia) downfalls

  1. 1. Submitted to: Mr. Hassan Mujtaba Nawaz SaleemSubmitted by: Syed Awon Hussain Shah Roll No 226 Tauseef Raza Gillani Roll No 227 Talha Ali Ansari Roll NO 218 Session 2010 – 2014 Department of management science
  2. 2. Pakistan International Airline “Downfalls”A famous proverb is that, “A house is caught in fire from its own lamp.”HistoryAir transport has probably never been more important to the development of a newnation than in the case of Pakistan. In June 1946, when Pakistan was still in theoffing, Mr. Mohammad Ali Jinnah, the Founder of the upcoming nation, instructedMr. M.A. Ispahani, a leading industrialist, to set up a national airline, on a prioritybasis. With his singular vision and foresight, Mr. Jinnah realized that with theformation of the two wings of Pakistan, separated by 1100 miles, a swift andefficient mode of transport was imperative.On 23rd October 1946, a new airline was born. Initially registered as a pilot projectin Calcutta, Orient Airways Ltd. had at its helm Mr. M.A. Ispahani as Chairmanand Air vice Marshal O.K. Carter as General Manager. The new carriers baseremained in Calcutta and an operating license was obtained in May 1947.Four Douglas DC-3s were purchased from Tempo of Texas in February 1947 andoperations commenced on 4th June 1947. The designated route for Orient Airwayswas Calcutta-Akyab-Rangoon, which also happened to be the first post-warinternational sector to be flown by an airline registered in India. Within twomonths of Orient Airways operational beginnings, Pakistan was born. The birth ofa new nation generated one of the largest transfers of population in the history ofmankind.Orient Airways with a skeleton fleet of just two DC-3s, three crew members, andtwelve mechanics, launched its scheduled operations in a fairy-tale manner. Theinitial routes were Karachi-Lahore-Peshawar, Karachi-Quetta-Lahore and Karachi-Delhi Calcutta-Dacca. By the end of 1949, Orient Airways had acquired 10 DC-3sand 3 Convair 240s which were operated on these routes. In 1950, it had becomeincreasingly apparent that additional capacity would have to be inducted to cater tothe growing needs of the sub-continent.Orient Airways was a privately owned company, with limited capital andresources. It could not be expected to grow and expand independently. It was thenthat the Government of Pakistan decided to form a state-owned airline and invitedOrient Airways to merge with it. The outcome of the merger was the birth of a newairline, named Pakistan International Airlines (PIA) on 11 March, 1955.
  3. 3. When Pakistan was founded in 1947 it comprised two territories on either side ofthe expanse of India. It was in generally known as PIA; or PakistanInternational), is the national flag carrier and a state-owned enterprise of theGovernment of Pakistan. It is primarily owned by the Government of Pakistan andis regulated by the Ministry of Defence as an autonomous body Once regarded asAsias best airline, it is headquartered at Jinnah International Airport in Karachiand operates scheduled services to 24 domestic destinations and 38 internationaldestinations in 27 countries across Asia, Europe and North America. Its main basesare at Karachi, Lahore and Islamabad/Rawalpindi.Problem in PIAOn December 18, 2012, PIA flight Boeing- 777 had to takeoff from Lahore toFrankfurt at 8:00 am, when the time came, of loading the passengers, at 5:00 am ,it was inform to Airport authorities that boeing-777 is not ready for takeoff becauseleakage of fuel tank of the plane. It was announce that flight will take off at 11:00am. But it could not takeoff at 11:00 am and then announced again to fly at 12 butit failed to takeoff. So finally air port authority told the passengers at 2:30 pm, thatboeing-777 is not taking off today due to problems in planes. So 278 peoplesincluding men, women, children and old-age. They waited at least 10 hours atairport, but nobody told the right information to the innocent passengers. Somepeoples were booked for next day flights, but most of the passengers who theywere from out site cities, gone back to home. According to the recent report, 2540flights have been delayed due to weather, security, flaw of engines. Flight delaysand cancellations have become the norm rather than the exception. . Naturally thissituation cannot be tolerated for unlimited period. PIA will have to overpower itsweaknesses. It has failed to resolve issues of its organization.-------------------------------------------------------------------------------------------------This case was prepared by Tauseef Raza, Talha Ali, and Syed Awon (MBA 5th eve) and It was written as abasis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation.Department of Management Sciences, Islamia University of Bahawalpur.
  4. 4. Financial LossesPakistan international airline is struggling with financial losses from past fewyears. It is also facing of such breakdowns, delay of flights, routes problem andsome other issues.PIA was the most profitable in the starts decades. Basically PIAis under the ministry of Defense. But the government has changed many ofchairman and MD’s in the past 5 years. The Government keeps the people of itsown interest. It is also unlived that PIA, which made world record to cover thedistance from London to Karachi in 6 hr 43 minutes and five seconds, which stillworld record today. But what is the reason that this is going down and down, dayby day.PIA has, in all, 39 aircrafts in its fleet comprising of 4 Boeing 777-200 ER, 3Boeing 777-300 ER, 2 Boeing 777-200 LR, 6 Boeing 737-300, 5 Boeing 747-300,12 Airbus A310-300 and 7 ATR 42-500. A number of aircrafts have beengrounded due to shortage of spare parts or overhauling. These include Boeing747s, Boisiseing 737s and Airbus A 310. It is generally believed that PIA high-upsare responsible for the inconvenience of the passengers. The whole system needsoverhauling.PIA planes deprived of repairs, overhauling. The repair andoverhauling works of the aircrafts of national flag carrier have not been doneoverseas due to financial crisis in PIA. Foreign companies refused to provideengine to PIA due to non-payment of hundreds of thousands of dollars of dues.Sources said that over 15 planes of the national flag carrier still remain groundeddue to unavailability of engines and spares. This has badly affected the PIAs flightschedule both on domestic and international routes. The sources disclosed that PIAhas not been able to pay $ 25 million of dues due to its financial crisis.PIA has notpaid $ 6 million to Air France for engine repair; over $ 6 million remains unpaid toSingaporean company Eagle Service Asia for the repairs of two engines while over$ 4 million remains unpaid to a Jordanian company for repairs of five engines ofBoeing 747 aircraft.Political InvolvementPIA employed number of employees in last 3 years on the political basis. There isexcessive recruitment without advertisements. Even though Ministry of Defenseand Chairman PIA did not know that how many employees are working in PIA. Inthe question of media respondent, Naveed qamar told that 18000 employees areworking but the Chairman of PIA gave the answer of same question that, 20000
  5. 5. employees are working in PIA. But both of them were wrong. They do not evenknow how many employees working under them. According to fact:No. of employees; Approved Position = 19159 Employed = 1289 On daily wages = 3058 Total = 2360523605 employees are working in PIA and PIA has 40 aircrafts. And for one plane590 employees are working. Which is third time the international standard? Itmeans that on the basis of unnecessary recruitment, overstaffing issue is created bythe PIA. According to international standard 150-225 people are for only A plane.But in this firm situation is very worse the average ratio of staff should not exceed150-225 per aircraft while PIA enjoys more than 500 employees per aircraft. It isoverpopulated and needs to cut its coat according to its cloth. It needs some harddecisions by the administration to run the system smoothly. Pakistan InternationalAirlines should give primary importance to the safety of the passengers and makeefforts to avoid any untoward situation. Several untoward incidents occurred inPIA in the last decade. It is necessary to tackle with such incidents seriously tominimize the losses. The passengers should not suffer in its custody.Management IssuePakistan government is doing his job greatly to destabilize the firm and after thisshowing de-stable firm and to sell the PIA to private authorities and byprivatization, so as far government could corruption of billions of rupees again.The National Assemblys Standing Committee on Finance was informed here onTuesday that Pakistan International Airlines (PIA) losses had increased to Rs 142billion and gap between revenue and expenditure continued to widen. The PIAmanagement conceded before the National Assembly Standing Committee onFinance, which met with MNA Khawaja Sohail Mansoor in the chair, that thenumber of employees (18,000) on the national flag carrier was relatively higher ascompared to other organizations. Moreover, the member of the committee said that
  6. 6. PIA flights were operating on economically non-viable roots due to politicalpressure.Senior official of the Finance Ministry blamed the PIA management for the lossesand termed their non-serious attitude responsible for the crippling financialcondition of the organization. DG Debt Masroor Qureshi said that the FinanceMinistry has on and off requested management of PIA to bring everything in blackand white before the Cabinet Committee on Restructuring (CCoR) as well asbusiness plan but the response, however, appeared non-serious.Reason of FailureThe committee was briefed by the PIA deputy managing director regarding reasonfor the current state of affairs such as aging fleet, volatile fuel prices, exchangeloss, interest on non-fleet loans and aviation policies. He added that PIA has takenalmost 66 percent businesses from narrow body aircrafts and fuel financial effecton different aircrafts is approximately 54 percent of the total cost.The committee was further informed by the deputy MD that PIA had paid Rs 59billion to Gulf Airlines under the aviation policies.The committee was told by the PIA chief financial officer that PIA has almost23000 employees, out of which 1,500 employees were drawing more than Rs100,000 salary. The committee was also informed by the deputy MD that PIA had14 consultants, however, former MD and chairman had reduced theseappointments and now they were seven. He further informed that about 45 generalmanagers were still working in PIA and PIA has planned in its transformationprocess to reduce non-operational areas, which will be done through normalattrition. He said that HR rationalization plan will result in a cost reduction ofapproximately Rs 3.8 billion over a period of five years. The committee has shownits reservation about the huge number of postings of general managers, thecommittee was told by the PIA representative that employees cost to PIA is 16percent of the budget.The PIA management informed the committee the reasons behind the losses to thenational carrier were aging fleet, volatile oil prices, exchange rate losses, intereston non-fleet loans, geo-political situation, and delay in aviation policy, inconsistentpolicies and services on commercially unviable routes. It was further informed that
  7. 7. PIAs fleet loans amount to Rs 54 billion and financing cost of these loans isaround Rs 1.5 billion and exchange rate loss has been worked out at Rs 4 billion.The non-fleet loans are estimated at Rs 98 billion and their financing cost is Rs 9.7billion and exchange rate losses have been worked out at Rs 2.1 billion annually. Itwas also informed that jet fuel price per US gallon was $123.5 in 2006, which hasshot up to $270.1 per gallon in 2011, projecting an increase of 119 percent.Similarly, exchange rate was Rs 61 a dollar in 2006, which has gone up to Rs 90 adollar in 2011. The revenues of the national carrier were Rs 43.6 billion in 2001,which have increased to Rs 116.6 billion by the end of 2011.Ministry of Finance (Debt) director general has informed the committee that PIAcould not prepare its proper business plan and PIA management was not lookingserious towards business. He proposed that PIA should make its strategic businessunit, said units should make separation of non-core business activities from airlinebusiness through speedex, flight kitchen and ground handling services etc.The committee was informed by the standing committee chairman that he came toknow through some reliable sources that a senior officer of PIA is involved incorruption of procurement in different parts of PIA aircraft. The StandingCommittee has shown its dissatisfaction on the presentation given by PIAmanagement and decided to call another meeting on the same agenda. Thecommittee was of the opinion that present team of P1A has no business vision andPIA is operating on the wishes of people, because they dont have any properadministration.The committee has recommended that details of the recruitment made in last fiveyears may be furnished to the standing committee, PIA chairman, MD and defensesecretary may be called in the next meeting of the committee.CompetitorsIt said Pakistan had become a lifeline for foreign carriers, mainly from the Gulfregion, which were sucking away the resources of Pakistan (Pakistani passengers).“Precious exchange is being drained and the airline of Pakistan is the ultimateloser.”The report regretted that foreign airlines had been increasing their capacityon Pakistan routes because of the facility of liberal traffic rights. Successivegovernments have allowed foreign airlines to fly to and out of the country withoutoffering any reciprocal rights to PIA to fly to their countries. As the rightful
  8. 8. revenues of PIA were taken away by the ambitious airlines of oil-rich countries,PIA was unable to invest in new aero planes, it said, adding that no aircraft wasinducted into its fleet from 1992 to 2002. This was the period when the airlinestarted incurring losses. The report said PIA had lost as many as seven millionpotential passengers to other airlines on the US and UK routes between 2009 and2012 because of the unilateral liberal traffic rights given to foreign carriers. Therights were given despite the fact that PIA was operating direct flights to the twodestinations. “This decision alone robbed PIA of more than Rs150 billion in threeyears.”External competitors: American Airline British Airways Sheehan Air InternationalInternal competitors: Aero Asia Air Blue Shaheen Air internationalRecommendationRecently, the management announced a 5-year turnaround plan and has asked thegovernment to write off losses of $1. 7 billion to prevent bankruptcy. The planenvisions cutting costs and buying new planes that are more fuel efficient. Newsitems suggest the likelihood of government accepting the plan is low, and thus PIAwill either have to resort to more borrowing or declare bankruptcy over the nextfew years.*Financial Statements of PIA are given at the end.