The Plight of the Policy, & PIA’s Predicament

PIA’s situation is akin to the “Pull-up! Pull-up!” resounding warning signals from EGPWS, (the enhanced ground proximity warning system, or TAWS, the terrain awareness warning system), that most modern aircraft have on board. With Shaheen Air International literally slumbering and shrouded in rumors galore, Serene and Airblue sailing through and reaping the benefits of minimal competition, PIA struggling to stay airborne, new players facing multiple barriers to entry, General Aviation deteriorating by every passing day, while the grapevine in the aviation circle continues to portend that the doom’s day for Pakistan’s commercial aviation is closing in. In the aviation lingo, the flight path of the industry is said to be approaching CFIT (pronounced ceeFIT), a controlled flight into terrain. The question is: Is it really true, or is it just a perception?

Today, the politicians, the industry players, and the general public at large are all somewhat accustomed to hearing the doom and gloom scenario of the aviation industry in general and PIA in particular. A recent report by Auditor General of Pakistan (AGP) published in a national daily newspaper states that the flag career’s faulty business model is to be blamed. Accumulated losses of Rs. 360 billion in December 2017 and its rising trend of losses were attributed to a multitude of serious concerns. With PIA Corp Ltd placed on Pakistan Stock Exchange’s defaulter segment on October 10, 2018 the ground is appearing even closer.

Notwithstanding the accuracy and importance of AGP report, similar audits were also carried out (officially and unofficially) in the past, but little or no action was implemented seriously to avert the descending flight path. The results are a testimony of this fact. 

Now the question is, “Can PIA be turned around? Can the newly appointed Air Marshal yank back to pull the airline up from the disastrous descent? Operating near the stalling speed, piloting the airline certainly demands nimble handling, failing which, a stall and possibly a grave-yard spin is imminent. 

Also, interesting to note are remarks from the so-called industry gurus, stalwarts, as well as free-lance critics that the National Aviation Policy (NAP-2015) is the culprit and huge losses to the national air career should also be attributed to NAP-2015. A reality check, and analysis of the impact of the current policy on Pakistan’s commercial aviation is worth investigating.

To begin with, NAP-2015 was designed and intended to bring about a dramatic boost in the overall aviation activities, which in turn was expected to enhance the country’s economy. Ownership and market access liberalization, stringent adherence to international standards, subsidies, taxes and duty exemptions/reduction, emphasis on education, investor friendly environment, greater safety and security assurance, and above all, a travel and business friendly culture was the strategic direction that Pakistan's forward-looking National Aviation Policy anticipated to achieve.

While peace-meal and selective implementation of some aspects of NAP-2015 did take place; whole-hearted acceptance is, to date, far from realization. Well after three years of promulgation of the policy, poor internal and external stakeholder buy-in of the policy continues to mar the expectations of the industry’s stability, growth, and prosperity. A critical analysis of the stakeholder apprehensions reveals some alarming and serious concerns. These must be addressed, and an aggressive course correction adopted.

The first apprehension often brought to bear, is the claim that foreign airlines are given an unfair advantage and that the domestic market share that should have been picked up by the national air careers is given away in the name of Open Skies policy to Emirates and other foreign airlines. Little do we comprehend that all routing, passenger traffic, the frequency of flights, pricing restrictions and other pertinent limitations and access are the domain of bilateral agreements and not the policy.

Without bilateral (or multilateral) agreements, market access liberalization, simply cannot take place. Furthermore, the agreements are always planned to be based on the principle of reciprocity and not a one-way advantage to any partaker. More interesting is the fact that little do we also realize, that more than 90 bilateral agreements are signed before the policy came into existence and none after the promulgation of the policy. So, how is policy held responsible for being unfair to national airlines when there were no bilateral signed after NAP-2015. Even more pertinent is to understand that the policy is mostly a guideline for the operators and lawmakers, and certainly, it is not an agreement.

The other major complaint is that the Paid-Up capital has been increased many folds (to PKR500 million for RPT license) and is beyond the capability of most new entrants and may thus form a barrier to entry (for airlines in particular) to enter Pakistan’s aviation industry.

As an example, say a popular aircraft like Boeing 737-800, depending upon its age, maintenance condition, and market demand at the time, a broad ballpark figure on operating lease would cost in the range of $150–$350k per month. For ease of calculations, we can take a rather low average cost of $250k per month. Which comes to (12x250k) $3 million per aircraft per year. If one is starting an airline, the airline needs to have at least three aircraft so that the airline can provide adequate, reliable, and timely service to its customers. The cost of just the operating lease of aircraft fleet shall than be $9 million (3000kx3) per year. All new entrants in the airline business must anticipate at least a year before reaching break-even figures and must have the financial strength to bear the ensuing losses. With current conversion rate of $1 = PKR 130 plus, the Paid-Up capital of PKR 500 million (as per policy) is only $3.85 million, which is way less than half of what the lease payment amount would fall due to the lessor. With operating cost of approximately $5,000 per hour per aircraft, three aircraft flying around 1000 hours each per year (which is very low), shall exceed an expense of $15 million. The Paid-Up capital, which is an indicator of financial strength and acumen of a company, must be high enough to bear the shock of the initial set up losses including sunk costs. Indeed, if we look at the overall cost of operations, PKR 500 million is a meager amount. Of course, this Paid-Up capital money is a company asset within the company and is to be spent on the company by the company. Therefore, conclusively, the complaint about Paid-Up capital being high is not only illogical but it is also highly unreasonable.

Another common complaint is the minimum age requirement of twelve calendar years from the date of manufacture of the aircraft, for induction for a passenger airline.

The chronological age limitation to induct aircraft less than 12 years was introduced for the following reasons and logical assumptions:

An arbitrary twelve-year period was primarily based on two ‘D' checks (large commercial aircraft’s most expensive and extensive maintenance check) which are required to be completed on all aircraft (at approximately 6 years’ chronological age interval, although the new trend by manufacturers is now to increase the D check time limit to 9-12 years). It is also a fact that at most successful airlines, the average age of their fleet is less than 8 years. The limiting age also makes business sense for the following reasons:

a)      Most newer aircraft (≤ 12 years’ chronological age) are relatively more fuel efficient than their older counterparts.

b)     Most newer aircraft are relatively greener than older aircraft.

c)      Most newer aircraft have better navigation and safety equipment installed as compared with their older versions.   

d)     The maintenance cost of newer aircraft is generally less than their older counterparts.

e)     This also indicates that the aviation business entity that is buying or leasing the aircraft are financially stronger than those who look for relatively older and cheaper aircraft. Older and cheaper aircraft will, in all likelihood, have higher maintenance cost, higher fuel consumption rate and possibly be more prone to accidents.

While there are research studies that have indicated that there is no significant correlation between age of aircraft and fatal accidents up to 26 years of chronological age (Hansman 2012), there are a few studies that suggest that there is a positive correlation (Vasigh and Herrera, 2009) in their comprehensive study on “A Basic Analysis of Aging Aircraft, Regions of the World, and Accidents." Interestingly, the rate of accidents and the probability of incidents, occurrences, and accidents, drop significantly just after 6 years (i.e. after first ‘D' Check). The study was conducted on a global database of 549 aircraft accidents analyzed between 2000 and 2007.

With reference to the study stated above, it appears that statistically and historically, the safest period in the life of an aircraft is just after the first ‘D’ Check. Thus, when the policy states less than 12 years it is assumed that businesses desirous of inducting aircraft for RPT (Regular Public Transport) operations would like to induct aircraft just after the first ‘D’ Check. Induction of such aircraft would have the highest probability of safety (least accident probability).

Another study (Vasigh & Herrera 2009) also clearly indicates that Pakistan falls in a region where the probability of accidents is one of the highest in the world. Thus, to mitigate other factors and reduce the probability of occurrence, all possible measures must be undertaken for ensuring greater safety. Therefore, it can be concluded that twelve-year chronological age limitation for induction of aircraft is a positive step and must be taken in the right spirit.

Notwithstanding all the logic and rationale for the age limit, policy is by no means a word from the holy scripture that cannot be changed and amended. It can be debated and corrected if the industry has a better logic for a better overall result.

Some non-aviation pseudo specialists even criticize the wet-lease limitation and ask for a limitless wet-leasing option in their fleet. ‘Wet-lease’ means giving jobs to foreigners at the cost of increasing the specific unemployment rate of our cabin and cockpit crew. Therefore, such an option must be restrictive to protect the trained and skilled human capital. However, this clause was relaxed in the National Aviation Policy-2015. The limit of the maximum number of wet leased aircraft was increased from 25% to 50% of the fleet capacity and from 90 days to 180 days. This has given the operators greater flexibility to enhance capacity during high seasons and shed the same during lean seasons. Almost all countries in the world follow similar restrictive wet lease option. Thus, the criticism on wet lease is baseless.

Therefore, it is proven beyond doubt that the policy is not the cause of aviation’s declining trend. Not implementing the laws and regulations in line with the policy could be a cause of hastening the downfall of Pakistan’s aviation to this lowest ebb ever.

PIA’s big predicament of privatization or turn-around, looms in the minds of the top hierarchy of the country. But with almost $3 billion in the red, takers for PIA is a far cry. Therefore, privatization is not an option. And with such deep-rooted problem areas and ingrained inefficiencies, turn-around too is not easy. One possible way out is to declare PIA bankrupt and raise another airline with a similar brand name but as an entirely new entity. Good assets of PIA may be transferred to the new airline along with the minimum required human resource, but on a contract basis rather than offering a permanent employee status. This will keep the unions and associations at bay, and they would not be able to manipulate the management in the proverbial ‘the tail wags the dog’ type scenario. Start afresh with thorough professionals and an honest managerial hierarchy. 

There is a famous management saying that ‘if you cannot measure, you cannot control.’ Performance audit and not sheer routine accounting audit of PIA and PCAA is what is needed to identify and measure all the pain points and specific bleeding areas that need to be fixed and plugged.

With appropriate of Terms of Reference, a think-tank of strategic and operational planners specifically in the realm of aviation, along with internationally renowned airline turn-around specialists be constituted to carry out a detailed and thorough ‘Performance Audit’ of PCAA and PIA, as both the organizations are critically interlinked and dependent on the overall aviation industry’s growth and performance. This Performance Audit must be followed by a clearly stated course-of-action for implementation of a sound strategy and operational actions to turn-around PIA, PCAA, and the aviation industry. 

After all, remaining in the same environment, Shaheen Air has made decent money in the past, and now Airblue and Serene are comfortably afloat; their load factors and revenue streams are certainly positive. While a number of pitfalls, some obvious and some subtle, are prevalent and pervasive, but the overall aviation’s performance still has the potential to bounce back and grow. 

Lessons from the brink-of-bankruptcy Malaysian Airlines’ dramatic turn-around by Idris Jala, and 100% government-owned Ethiopian Airlines’ sustained success and growth are just a few cases in point. The turn-around specialists are not only wary of the deficiencies and frailties in the system but also know how to plug the holes and stop the bleeding. 

‘We know it all’ attitude, with an ego higher than the aircraft’s absolute ceiling is a sure recipe for disaster; leaders and strategists must decide to leave the ego behind and team up with reputable, internationally known specialists to carry out a professionally sound Performance Audit, identify the weak areas, and implement a turn-around action-plan for PIA and the aviation industry. A note of advice for the decision makers: time is of the essence, and a bold action based on scientifically persuasive cogent arguments/ recommendations is in order.