PIA CASE STUDY

Pakistan International Airlines Corporation, more commonly known as PIA is the flag carrier airline of Pakistan, based in Karachi. It is the 31st largest airline in Asia, operating scheduled services to 37 destinations throughout Asia, the Middle East, Europe and North America, as well as a domestic network linking 24 destinations. The airline is owned by the Government of Pakistan (87%) and other shareholders (13%). It employed 18,043 people as of May 2009. PIA serves 35 international destinations in 24 countries which is more international destinations than any other South Asian airline is handling.

PIA was a huge success story till mid 80's and then things started turning bad. Top management with political connections and decisions based on personal gains and political motivation ruined the culture and financial position of the company. PIA has tremendous benefit of Hajj flights as all Pakistanis travel by PIA for performing Hajj. In year 2008-09 Hajj flights of PIA took 126,755 passengers to Saudi Arabia resulting in tremendous revenue generation for the company. PIA has 42 aircrafts in year 2009 with average age of 13 years. Total losses of PIA in year 2008 stood at RS. 36 billion. The loss trend and financial situation is very serious and grave.

High fuel prices and depreciation of Pakistani currency against dollar had a serious impact on the profitability of the company in year 2008. The situation got worse when dollar also declined against pound and euro having double impact on PIA in year 2008. The Board had discussed the financial position of the Corporation and wanted the financial destruction to stop. According to one management consultant the 3 reasons for the current bad financial position of PIA are:

- i) Costs have gone up because of higher fuel prices in 2008, higher wages and higher maintenance cost but revenues have not increased proportionately. Therefore, PIA had not been able to manage its costs.

ii) PIA is over staffed; the number of people per aircraft is very high: PIA has more than 430 employees per aircraft whereas the international standard is around 200 employees.

iii) The biggest problem in PIA is the governance structure. There have been compromises on merit, on commercial considerations and on complying with law. Decisions which compromised merit and professionalism by different Heads of PIA were never challenged by Board of Directors.

PIA has lost its international market share to airlines from Gulf countries like Emirates and Etihad. PIA is confronted with new competition from these cash rich young airlines. There are other serious issues like brand damage due to restrictions imposed by EU on PIA flights to the European Union in 2008 although now the ban has been lifted but a severe damage has been done to PIA reputation. Competition is another factor which is posing serious challenges to PIA. On domestic front Air blue market share is increasing at a very fast rate putting lot of stress on PIA. While infrastructure limitations and work culture are other factors hampering the growth of the Airline. Moreover, press coverage depicting PIA aircrafts as unsafe also add negatively to the above list. Earlier leaderships established good infrastructure but in the last few years meager investment had been made in that area. PIA required good workshops, trained mechanics and simulators for the newly acquired Boeing 777 and ATR's. Regarding work culture the decision making in PIA is exceedingly slow. There is still file culture in PIA wherein each file went through 15 different people while the other airlines are operating with paper less environment. BKAM3033 SEMINAR IN MANAGEMENT ACCOUNTING INDIVIDUAL ASSIGNMENT (5%) INSTRUCTION: HANDWRITTEN & SCAN PDF. NAME YOUR FILE WITH YOUR MATRIC NUMBER Disciplinary actions cannot be taken very easily while Sifarish culture is still prevalent and the lowest cadres had connections with influential people. Lot of MNA's and minister call the MD of PIA for promotion and allocation of international routes to air hostesses.

PIA needs to work on route rationalization and cost cutting. PIA Management had discussions with the European Air Safety Commission, who informed that they would make a second check, however 11 out of 20 planes had been allowed to fly to European destinations. The CAA should also check whether or not PIA planes are fit to fly to Europe. Aircrafts not allowed to Europe was not the end of the world rather it was the bad name which was to worry about. The Airline was working on the revenue and cost and had closed down loss making routes. Loans were due for repayment but the financial situation did not permit that. The new Management is creating a new debt profile through the market to bring the level of loans to a reasonable level. PIA would not lease aircrafts however A 310's may be taken back for Hajj which was a critical operation.

According to the recent survey 99 percent passengers on PIA were of Pakistani origin so PIA is enjoying tremendous brand loyalty from Pakistani citizens. PIA is over staffed but critical skills like pilots and mechanics are short. Some jobs had become redundant but still lot of over time is being claimed by employees, but retrenchment is not possible because of strong union. MD of PIA stated that before sacking workers his priority is to replace its aging aircrafts. The new aircraft are fuel efficient while the old ones are gas guzzlers and high on maintenance cost. Boeing 737's would be replaced with A 320 aircraft. Boeing 737 and Air Buses would have to be replaced. The financial problems are too deep and PIA may need financial help from the Government.

MD PIA is interested in knowing if the Board of Directors and Government will allow him to sell Roosevelt Hotel in Manhattan, New York owned by PIA and running on profit as PIA is facing extreme liquidity problem and his top management is interested in selling it off this hotel and using this money for buying fuel efficient planes. According to market survey in 2008 the market value of Roosevelt Hotel was around $ 1 billion.

In the first quarter of 2009, revenue of PIA has increased by 19 % which is against the world trend; the aviation industry has suffered 12% loss due to recession in the world. This proves Pakistanis are willing to travel on PIA if the flight is available on their travelling route.

MD of PIA Captain Aijaz Haroon also stated that decline in oil prices, backed by their new strategies has helped PIA to make operating profit of Rs. 2 billion in the first quarter of 2009.PIA has experienced this turn around after six years of course the corporation is still under pressure as the accumulated losses are very heavy. He mentioned that strategy of extra baggage facility of 10 KG to UK passengers of PIA has worked well against Emirates and Etihad. He also stated that reducing the margins of travel agents of PIA from 9% to 5% had positive impact on the profitability of the company. On line ticketing of PIA has been upgraded and customer services and complaints are being handled on priority basis.

PIA has added 8 new Boeings 777 in the last five years but it much less than our requirement was stated by Aijaz Haroon. MD also stated that we need to replace 50% of the old fleet as the maintenance cost and high fuel consumption of these planes is not economical for the company. PIA enhanced its product quality both in domestic as well as international traffic. The airline introduced a new European destination Barcelona, Southern Punjab connected with UAE and one additional frequency on Bradford sector will be added in the summer schedule of 2009 while Paris and Milan once in a week will be enhanced by upgrading the operations to Boeing 777-300.

PIA successfully met the IATA's deadline of May 31, 2008 to move to E-ticketing and now 98% of its network has been shifted to electronic ticketing from paper ticketing. PIA also implemented Interline eTicketing with 43 partner airlines. Online Web ticketing has been introduced for major domestic flights and major international flights to USA, Canada, UK, UAE, Saudi Arabia, Oslo and Copenhagen. Similar arrangements are underway for remaining locations.

"The PIA employees have to be motivated to make efforts to transform the national carrier in to a viable airline," he accepted the present motivation level is very low. To another question, he said terrorism has dented the business of PIA, as due to it tourism in the country is zero and foreign businessmen are not reluctant to travel to Pakistan resulting in loss of revenue.

On the recent comments of Ex- Advisor to the Prime Minister on Finance Shaukat Tarin, that both PIA and Pakistan Railways are 'white elephant' and should be privatized, he refused to comment on it, but he did say that the new management has been brought to make PIA a profitable organization and he has initiated the right moves.

Commenting on the PIA pilot go-slow protest in 2009 and 2010 which is resulting in sudden cancellation of flights and creating lot of resentment in passengers, he maintained that a certain section in the airline, referring to pilots, demanded an increase in salary, who incidentally are the highest paid staff of PIA, he is there to protect the interest of the entire employees not of Pilots.

Pakistan International Airlines (PIA) management has approved free of cost transportation of relief goods to Islamabad/Peshawar from all over the country and PIA foreign stations, in order to provide relief to the internally displaced persons in Swat. Even in tough times PIA is fulfilling its corporate social responsibility towards the society.

On his way back from office MD Aijaz Haroon while stuck in traffic was thinking that I will be able to navigate my car back home safely but taking PIA to safety will not be that easy. He was uncomfortable with the fact that in the past six years nobody has lasted in his position for more than 20 months and all attempts to turn around PIA have failed miserably. He was extremely conscious of the fact that recent air crash of Air blue in Islamabad may open new revenue opportunities for PIA as passengers may be willing to pay more for travelling in PIA for safety reasons. He was also concerned by the Government decision to provide full time job to 4500 contract employees as his team needs to decide and pick one path between good governance for the airline and welfare for the society. Free tickets to present and exemployees is also costing PIA a fortune.

Questions:

1. Critically analyses the above case and explain the root causes of PIA poor performance.

2. Identify and explain the issues related to business ethics and corporate governance.

3. How the 'white elephant' can turn into Cash cow? Suggest the strategies based on the understanding of the case and course Strategic Management Accounting.