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55412384 assignment-pia

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Contents
Executive Summary...................................................................................................
2
3.3.5. Rivalry.............................................................................................................
3
Executive Summary
Pakistan International Airlines Corporation (PIAC) was the national flag carrier of the
Islamic Republ...
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55412384 assignment-pia

  1. 1. Contents Executive Summary......................................................................................................................3 1. Introduction........................................................................................................................4 1.1. Mission Statement.............................................................................................................5 1.2. Vision Statement..............................................................................................................5 1.3. Subsidiaries......................................................................................................................5 1.4. Ownership composition of PIA ........................................................................................6 1.5. Fleet.................................................................................................................................6 1.6. Competitors......................................................................................................................7 2. PIA Strategy...........................................................................................................................8 2.1. Corporate Social Responsibility...........................................................................................8 3. Strategic Analysis....................................................................................................................9 3.1. PESTLE Analysis.................................................................................................................9 3.1.1. Political .................................................................................................................9 3.1.2. Economic.............................................................................................................10 3.1.3. Social...................................................................................................................10 3.1.4. Technological.......................................................................................................11 3.1.5. Legal....................................................................................................................11 3.1.6. Environmental.....................................................................................................11 3.2. Porter Generic Strategies.............................................................................................12 3.3. Five Forces..................................................................................................................12 3.3.1. Buyers.................................................................................................................12 3.3.2. Suppliers..............................................................................................................13 3.3.3. Entry to the market..............................................................................................13 3.3.4. Substitutes..........................................................................................................13
  2. 2. 2 3.3.5. Rivalry.................................................................................................................14 3.4. SWOT Analysis............................................................................................................14 3.4.1. Strengths.............................................................................................................14 3.4.2. Weakness............................................................................................................15 3.4.3. Opportunities......................................................................................................15 3.4.4. Threats................................................................................................................15 4. Conclusion..................................................................................................................16 Domestic Network of PIA..........................................................................................................17 References.................................................................................................................................19
  3. 3. 3 Executive Summary Pakistan International Airlines Corporation (PIAC) was the national flag carrier of the Islamic Republic of Pakistan, founded in 1955 through legislation and subsequent merger of private owned Orient Airline. PIA operated both scheduled passenger and cargo services. The firm is 87% state owned, with the remaining 13% held by private investors internal to Pakistan. PIA is the only national air line operating on both domestic and international routes. This report is an analytical view on the strategy of PIA through applying strategic analysis tools. I have tried to applying PESTEL Analysis, Porter’s Five Forces and SWOT analysis to identify market position, strengths, weaknesses, operating structure and brand recognition. The dependencies of PIA have also discussed along with the impact of economical situation of the country on its performance. The report also covers the influence of the government in management and strategic decision making of the organization. It also covers the competitive advantages PIA enjoys and the impact of inflation rate, interest rates and increased oil prices as well.
  4. 4. 4 1. Introduction At the time of formation of Pakistan only one airline ‘Orient Airlines’ was owned by Muslims of the Sub Continent. The Orient Airline was established in 1946 by Mr. M. A. Ispahani on the instructions of Qaid-e-Azam Muhammad Ali Jinnah. The Orient Airline initially started its operation from Calcutta with a skeleton fleet of just two DC-3s, three crew members, and twelve mechanics. After the formation of Pakistan, Orient Airlines shifted its base from Calcutta to Karachi. The birth of a new nation generated one of the largest transfers of population in the history of mankind. The Orient Airline took part in relief operations and transportation of people from Delhi to Karachi along with other means of transport after partition. PIA was formed in 1955 by the government of Pakistan through PIAC Ordinance 1955 merging the only private owned airline Orient Airlines operating in Pakistan after assessing that the Orient Airline could not be expected to grow and expand independently due to limited resources. Initially the national airline continued its operations on the routes the former airline used to serve but soon PIA started its International operation. It was greatly criticized, as the public could not realize or justify the need to operate an international route when, in their opinion, other projects which are very important for a developing country should have been given a higher priority. However, PIA's focus was, and continues to be, to serve the Pakistani community at large. The provision of transportation to expatriates has remained one of the major priorities of the national airline. After one year of its formation PIA started to expand its operations by increasing its fleet, hiring more Pilots and establishing their own repair and maintenance centre. In the year 1959 Government of Pakistan changed its top management and appointed new M.D. and under his visionary leadership, PIA 'took off' and within a short span of 6 years, gained the importance and status of one of the world's frontline carriers. In aviation circles, this period has often been referred to as the "golden years of PIA"(www.piac.com). Moreover, International Airlines is the only government owned airline serving both passenger and cargo nationally and internationally PIA earned substantial foreign exchange through international services, which it invested in the purchase of aircraft and spare parts, as
  5. 5. 5 fleet expansion was an important necessity for the airline. In its initial few years of operation, it struggled for becoming a financially strong institution of the country. 1.1. MissionStatement “As a symbol of national pride, we aspire to be a choice airline, operating profitably on modern commercial concepts and capable of competing with the best in the International as well as Domestic markets” (www.piac.com.pk/mission&vission) 1.2. Vision Statement “To be fiercely competitive, consistently exceeding customer expectations and be the choice employer that embraces modern technology in all spheres of its activities” (www.piac.com.pk/mission&vission). 1.3. Subsidiaries Along with passenger service and air cargo, PIA operates the following subsidiary services. 1. Speedex courier Service delivers documents and parcels of any size, to the doorstep of its customers. 2. Engineering Service, an established aircraft maintenance and repair company that provides solutions to the aviation industry.
  6. 6. 6 1.4. Ownership compositionof PIA The firm is 87% state owned, with the remaining 13% held by private investors internal to Pakistan. 1.5. Fleet S.No Type No. of Crafts 1 Airbus A310-300 12 2 ATR 42-500 07 3 Boeing 737-300 06 4 Boeing 747-200 01 5 Boeing 747-300 05 6 Boeing 777-200 06 7 Boeing 777-300ER 03 Total 40 87% 13% Ownership Government Private Sector (Internal)
  7. 7. 7 1.6. Competitors At domestic level, PIA had been the only airline for over 40 years, but in 1993 Aero Asia International Ltd. was born and up to 1996, it had captured little of the domestic market. Presently the Air Blue and Shaheen Airline are the strong competitors of PIA at domestic level. PIA is struggling to stop the growing market share of Air Blue and Shaheen Airline by offering low fare operation in domestic operations and by expending the domestic new destinations. On the international routes there are several airline competitors of PIA, some of them are Emirates Airline, Lufthansa, Japan Airlines, Thai Airways, Saudi Airlines, Iran Air, Malaysian Airlines, Dragon airlines and many more that use the Pakistani airports as transit stations. 48% 35% 17% 0% 10% 20% 30% 40% 50% 60% PIA Airblue Shaheen Airlines Domestic Market Share PIA Airblue Shaheen Airlines
  8. 8. 8 2. PIA Strategy PIA’s objective is to firmly establish itself as Pakistan’s leading scheduled passenger and cargo airline through continued improvements and expanded offerings of its valuable service. Its strategy to achieve this is:  Competitive fares.  Industry-leading customer service.  Frequent flights on national and International routes.  Low operating costs, addressing aircraft and equipment, personnel productivity, customer service costs and airport access fees.  Taking advantage of the Information Technology.  Taking advantage of geographic importance and  Commitment to safety and quality maintenance (www.piac.com.pk) The company operates a policy of offering the reasonable fares available from the industry. The company has launched its electronic air ticketing system which makes passengers more comfortable and save their time. The system also helps the airline to reduce expenses incur from operation of booking offices in different locations and the cost of agents. PIA has changed almost all of its old crafts with new Boeing aircrafts which reduced the huge costs spend on maintenance of different types of old crafts. 2.1. Corporate SocialResponsibility PIA is driven by the highest standards of corporate governance and social responsibility. As a public sector organization and a business leader, PIA believes in building strong relationships with customers, partners, employees, and the communities in which it operates. The organization's values are exemplified in a range of corporate initiatives designed to impact positively on the lives of multiple stakeholders. PIA practices active corporate citizenship through social services, support for non-profit organizations, medical services for employees, the promotion of sports, and educational initiatives. PIA has institutionalized the practice of good governance by establishing a Corporate Social Responsibility Committee. (www.piac.com)
  9. 9. 9 3. Strategic Analysis Macro environment and internal environment of a firm play very important role in achieving competitive advantage by a firm. To identify and examine the strengths and weaknesses along with opportunities and threads and to analyze the strategies of PIA, I shall apply the following strategic analysis tools which we have already studied. 3.1. PESTLE Analysis This tool looks at macro environment of a firm. The macro environment affects the firms at major level therefore it is necessary to analyze the affect of political, economic, social, technological, legal and environmental factors on the firm. 3.1.1. Political The politics of South Asia and Middle East in general and politics of Pakistan in particular are very important for PIA as its major destinations are located in these regions. The political situation in Pakistan is not normal. In the history of Pakistan hardly one or two governments have completed their tenures. Political instability in the country is result of interference by non political forces. The frequently changing political environment suffer firms operations especially the government own organizations. The new governments change the top level management soon after taking the charge of the government and appoint people with political background on top level of organizations without testing the required educational qualification and relevant experience. PIA is the most politically affected organization as every new government appointed their own people who turned a profitable organization into a loss bearing one which stopped its growth and started journey towards decline. Any change in government regulations of a country affect the firms operating within boundaries of that country. In 1993, with the deregulation of aviation industry in Pakistan opened up opportunities, allowing airlines from private sector to compete with PIA on domestic and international routes. Since 1993, 4 private owned airlines have been established to compete the national airline at domestic as well as international routes and the share of PIA in domestic routes reduced to 48% from 100% in these seventeen years although the international market share was not affected too much.
  10. 10. 10 War on terror is another political issue which seriously affected the organization’s profitability. Tourists and businessmen changed their minds and selected other countries for travel and invest and PIA lost a large number of their international passengers resulting in decreased seat reservation and the organization suffered with considerable losses on international operations 3.1.2. Economic The economic condition of Pakistan is in a critical position. Economic growth is very low as compare to other countries. The inflation rate is very high. Foreign investment is also unsatisfactory. As PIA is operating from Pakistan, its international operations are affected by exchange rates. Oil prices are an issue for all airlines. A huge amount is being paid as fuel cost. Increase in oil prices affected the income of PIA as well. Fuel is the main component of airline operations. The oil prices are increasing at a higher rate affecting the PIA’s profitability. These all economic drawbacks seriously affect the performance of PIA. 3.1.3. Social Pakistan is ranked among lower-middle income countries. The Pakistani model for economic growth since independence was described above as restricted growth. Social development has lagged behind economic growth, resulting in unequal social development and notable deficiencies in education, health services, sanitation, and gender equality (Khan, Omar 2004). The society of Pakistan is moderate in accepting changes. The social changes in Pakistan are gradually taking place. Due to globalization and advancement in information technology, the people accept social changes occurring throughout the globe. There are two standards in our society, one is the upper class society and the other is lower level society which is in majority. The majority prefers to use alternate low cost means for traveling which affects the growth of the organization. Pakistan is an agriculture base country and a huge population is involved in agricultural activities and they do not get too many opportunities for travelling. The business class is very limited in size so PIA has limited chances to expand its operations at domestic level.
  11. 11. 11 3.1.4. Technological The internet has enabled PIA to keep costs low by allowing customers to book through its website rather than through an agent. However, the web is less attractive for PIA expansion in east domestic, as access to information technology is limited to certain areas and facility providing activities lower the other developing countries in the region. This situation is likely to change in the longer term. PIA wholly depends on other agencies for exchange of their older crafts to new ones. It also requires a huge financing system which is very difficult to it because of the economic condition of the country as well as its own financial position. PIA is unable to buy new technology as it costs too much. For this purpose the organization approaches to financial institution that provide funds on their own conditions which reduces the profitability as the organization spends a huge amount on paying interest. 3.1.5. Legal The involvement of government in PIA is backed by legislation. The government uses these powers delegated by legislation in their own interest which affects the performance of the airline. Another drawback is its centralized system which is a time consuming practice and the important actions cannot be taken immediately. Delays due to this centralized system create problems for smooth operation of the airline and it causes huge losses and the organization also loses available opportunities due to long decision making process. As PIA operates internationally, the laws of different countries also affect the organization’s performance. The laws restrict the PIA’s operations to some destinations and it also pays different taxes at international airports imposed by those governments which reduce the profit margin of the organization. 3.1.6. Environmental The main environmental issue facing PIA is that of policies formulated by legislation about greenhouse emissions. The airline industry affects the environment negatively by increasing air pollution and noise pollution. PIA uses regional airports to reduce the environmental effects on busy airports situated in main cities of the country. Furthermore PIA has also introduced waste disposal plan which helps in reducing pollution in the country. PIA has
  12. 12. 12 acquired comparatively low noise new models of Boeing aircrafts (737,747 & 777) to reduce the noise pollution. 3.2. Porter Generic Strategies There are three main types of strategy identified by Porter in this model: differentiation, cost- focused and niche. A differentiation strategy involves charging higher prices for features that add value to a product. Cost-focused strategies involve reducing the features of a product to a minimum to keep costs low so prices are minimized. A niche strategy involves providing a highly-specialized product to a narrow market, possibly with the addition of cost or differentiation elements. PIA has applied two of these three strategy one is cost-focused and the other is differentiation strategy. To introduce a concern for the business environment would involve incorporating a feature to the product that does not reduce costs but differentiates it, potentially adding value and enabling PIA to charge higher fares products. It is notable that, in contrast, airlines with several ranges have struggled to achieve success with all of them. PIA has attempted to introduce elements of differentiation on several occasions, with a Business Class and the element of low cost with economy class as well as special packages on different occasions. 3.3. Five Forces Porter's Five Forces theory is useful in a discussion of PIA because it looks at how influences affect competing companies within an industry. 3.3.1. Buyers Before 1993 the PIA was only airline at domestic level. The customers had no alternate choices at that time. PIA offers their products to a large number of individual customers. This kind of market will not have powerful individual buyers, allowing PIA to dictate its terms. As customers' purchase decisions are made on the basis of price, rather than features, the possibility of failing to provide an acceptable product is minimized. After 1993 the scenario changed as government allowed private sector to enter the airline industry which introduced an environment of competition. PIA’s figures for punctuality and flight completion are not too much better than competitors especially on international routes. it is unclear whether it is still performing better than competitors operationally. The figures are helped by its strategy of utilization small local airports with less air traffic, hence minimizing the chance of delays.
  13. 13. 13 The cost-focus strategy means that introducing features for a minority group is not conducive to making profit; the business model depends on a standard product. 3.3.2. Suppliers PIA is a service providing organization and mostly depends on other organizations to fulfill its needs. All airlines are subject to changes in oil prices: competitive advantage is gained through how they approach this change. PIA's other key suppliers are airports and aircraft makers like Boeing. It has the advantage over competitors that the government struggles to settle issues with these suppliers and negotiates with the suppliers. 3.3.3. Entry to the market Entering the airline market is dependent on having the finances to set up an operation, possibly requiring investor support. However, operations can be grown gradually, through initially leasing or buying a small plane. In the case of PIA it is quite different because it was initially initiated be Mr. Ispahani in the name of Orient Airlines decades ago. PIA was established with full financial support of government. It is harder for airlines to gain a grip in certain routes that are particularly competitive. PIA’s financial difficulties were caused largely by aggressive competitive strategies from other international airlines existing in the market for decades. Undercutting competitors to force them out is common in the low-cost carrier market. While lower prices may boost passenger numbers, the accompanying decrease in profit is not sustainable long-term. This limits a very competitive approach to the largest companies who can afford the impact of short-term losses to establish new routes. PIA is not in a condition to formulate this type of strategy. It cannot bear even short term losses made to expend the customer base because it is suffering already huge losses. 3.3.4. Substitutes PIA is facing a strong competitive environment in domestic and in international routes. Products (airfares) offered by the competitors are substitutes of PIA products. Price sensitive customers shift from PIA and use alternate means of transport. At domestic level the
  14. 14. 14 competitors prices are low then PIA. The other alternate means include Pakistan Railways and a huge network of inter-city coach service which enjoy from their low cost services. 3.3.5. Rivalry PIA is in a particularly strong position in the market due to strong support of government. The slight differences between PIA’s strategy and those of competitors provide them with advantages, particularly in domestic operation. PIA can take advantage of government support by providing competitive prices to domestic passenger by avoiding frills on short haul routes and by reducing delays as well. Furthermore the competitors in domestic operation are not too much strong but the policies of PIA help them survive in the market. PIA has lost its market share to rivals on cost basis. There is no any proper system to control operating costs which are higher than those of competitors. 3.4. SWOT Analysis SWOT Analysis help in determining the strengths and weaknesses as well as the threads and opportunities of a firm. 3.4.1. Strengths PIA is the largest airline in Pakistan with more the 800 daily flights. It has developed a fast online ticketing system which enables customers to reserve their seats without visiting the airlines booking offices. This has helped the customer in saving their time and the passengers prefer to travel with PIA. PIA has also successfully included latest technology in all systems. PIA is the national airline and has brand recognition throughout the country. People feel pride by flying with PIA. PIA also has a superior operational structure with talented crew and modern high technology aircrafts and access to all government owned airports. The government fully supports during financial crisis which is a competitive advantage of PIA over its competitors. PIA has a vast network in domestic and international destinations which helps in growing its operation domestically and internationally and now PIA operates globally, covering the entire domestic landscape and international destinations spread over 4 continents. PIA has established its own training center. The PIA Training Center is a leading airline training institution that delivers the highest standards of aviation instruction. The PIA Training Center provides quality training to PIA's pilots, engineers, air hostesses, and to
  15. 15. 15 employees of other associated PIA divisions which helps the organization to reduce training costs. Furthermore the government has allowed only PIA to operate Hajj flights through which PIA earns a considerable revenue. 3.4.2. Weakness PIA totally depends on the government for formulation of its policies. The strategies are designed at top level. With the change of governments, its policies are also changed which makes it unable to sustain long term competitive advantage. Another weakness of PIA is its centralized system. In this system all decision are taken at top level and the middle management does not take part in decision making. As result the decisions sometimes fail to address the problems or due to delays in decision making the organization suffers huge losses. the high amounts of debt are also a weakness of PIA which makes the organization unable to make additional investment in the business and it is a big obstacle in expansion of its business which reduces its growth rate compare to the competitors. Changes in oil prices also directly affect on the revenue of PIA 3.4.3. Opportunities PIA has a vast network of destinations in Pakistan and outside the Pakistan. It is an opportunity for it to serve all destinations and utilize its modern aircrafts to generate revenue for the country. . In the country there is a growing demand of low fare air transport and PIA has opportunity to fulfill this demand by mobilizing its resources. The globalization has changed the taste of people and they prefer to travel by air to save time. By taking right decision PIA may expand its operation network and generate revenues. Free trade agreement has enhanced the mobilization of goods between countries. PIA can take advantage of this opportunity by expanding its cargo service. PIA also enjoys customer loyalty. The organization may build stronger loyalty by introducing packages for frequent travelers. 3.4.4. Threats As PIA is currently bearing financial losses, it manages its financial requirements through receiving long term loans from financial institution. The high interest rates are critical for
  16. 16. 16 PIA as it pays already a large amount as interest. Increase in interest rate results in financial crisis. Another threat is high inflation rate which may result in reduced number of passengers. The increasing oil rates may suffer the airlines operations and its revenue because the airlines totally depend on oil to continue their operations. The cost of fuel is an essential expense for all airlines. Rise in oil prices may suffer PIA’s operations in resulting huge decline in revenues. 4. Conclusion From the discussion above, it is clear that PIA is then only national airline of Pakistan. It has developed a strategy different from those of its competitors, and that these differences directly and indirectly contribute to its competitive advantage. PIA has reasonable opportunities along with threats. But the frequent involvement of every government in top management of PIA resulted in discontinuation of its strategic policies. An organization earning average profits five years ago is now bearing huge loses.
  17. 17. 17 Domestic Network of PIA Courtesy: www.piac.com.pk
  18. 18. 18 Courtesy: www.piac.com.pk
  19. 19. 19 References 1. Annual Report of PIA 2007 2. Omar J. Khan, Lyn S. Amine (2004) New International Business Perspectives on Pakistan. Thunderbird International Business Review, Vol. 46(5). 493–519 Published in 2001 by John Wiley & Sons, Inc. Retrieved on January 06, 2011 from www.wiley.com 3. Michael H. Moffett (2001) Thunderbird International Business Review, Vol. 43(2) 303– 313, Published in 2001 by John Wiley & Sons, Inc. Retrieved on December 12, 2010 from www.wiley.com 3. www.piac.com 4. Business Recorder, 2011 5. Half yearly Report of PIA 2010 6. PIA Annual Report 2004 (Directors Report) Retrieved on January 06, 2011 from www.piac.com

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