Debt and mismanagement: How the fortunes of Pakistan International Airlines nosedived

Ahead of elections next week, Pakistan’s caretaker government is making plans to sell loss-making Pakistan International Airlines, according to the minister in charge of the process and other officials. “Our job is 98 per cent done,” Privatisation Minister Fawad Hasan Fawad told Reuters when asked about the plan to sell the airline. “The remaining two per cent is just to bring it on an excel sheet after the cabinet approves it.” In the past, elected governments have shied away from undertaking unpopular reforms, including the sale of the flag carrier. But Pakistan, in a deep economic crisis, agreed in June to overhaul loss-making state-owned enterprises under a deal with the International Monetary Fund (IMF) for a $3 billion bailout. Here’s a look at the fall of Pakistan’s national airline. Pakistan seals plan to sell PIA The government would use the money from the sale of PIA to cover principal payments as per the terms of the budget agreement. According to the Pakistan-based Express Tribune, banks will accept a 10-year debt rollover with a 12 per cent annual interest rate in exchange for 32.2 billion Pakistani rupees (PKR) in interest payments each year. As a result, banks will receive interest payments totaling PKR 322 billion over a decade, which will exceed the PKR 268 billion in outstanding stocks. According to ANI, PKR 572 billion will be paid out to banks overall over ten years at a 12 percent interest rate. The International Monetary Fund’s support will be sought by the Ministry of Finance. The sources claim that banks will ask their boards of directors for approval. Following the Pakistan Finance Ministry’s decision to stop paying interest on the PIA debt in March 2023, the government and PIA management began to explore privatisation. However, concerns remain that the banks’ debt restructuring and transfer of PIA debt ownership by the finance ministry eased the airline’s primary concern, eliminating its largest monthly charge from the balance sheet. Fawad said the plan, drawn up by transaction adviser Ernst and Young, will be presented to the cabinet for approval before the tenure of the administration ends following the election. The cabinet will also decide whether to sell the stake by tender or through a government-to-government deal, Fawad said. “What we have done in just four months is what past governments have been trying to do for over a decade,” Fawad said. “There is no looking back.”  Details of the privatisation process have not been previously reported. Progress on privatisation will be a key issue if the incoming government goes back to the IMF once the current bailout programme expires in March. Caretaker Finance Minister Shamshad Akhtar told reporters last year that Pakistan would have to remain in IMF programmes after their expiry. Two sources close to the process told Reuters that a 51 per cent stake with full management control would be offered to buyers after parking the airline’s debts in a separate entity, under the 1,100 page report from Ernst & Young. PIA spokesman Abdullah Hafeez Khan said the airline was assisting the privatisation process, extending “full cooperation” to the transaction adviser. Airline’s immense debt The airline’s financial difficulties have been attributed to competition from emerging regional airlines, mismanagement, and insufficient funding for fleet expansion. PIA had liabilities of PKR 785 billion ($2.81 billion) and accumulated losses of PKR 713 billion as of June last year. Its CEO has said losses in 2023 were likely to be PKR 112 billion, according to Reuters. As of 31 December 2022, the national airline’s debt and liabilities stood at PKR 743 billion ($2.50 billion), five times more than the total value of its assets. Its losses for the last financial year (2022-23) stood at PKR 86.5 billion ($291 million) said the aviation ministry. The airline has been facing a serious financial flow crisis, the federal government was informed by Pakistan’s Ministry of Aviation in a dire warning sent out last year, according to Pakistan-based news outlet Dawn. The ministry claimed that, as a result, there were debts due to lenders, fuel suppliers, insurers, operators of both domestic and international airports, and even the International Air Transport Association (IATA). “If the situation continues as such, PIA’s debt and liabilities will rise to PKR 1,977 billion ($6.65 billion) and its annual losses will rise to PKR 259 billion ($871 million) per annum by 2030,” it added. The ministry also warned that the government of Pakistan, being the 92 per cent owner, was responsible for the outstanding payables, with PKR 383 billion ($1.29 billion) of PIA’s existing debt liability insured by it. Numerous times, there have also been reports of the airline declaring bankruptcy and shutting down. A 2020 Bloomberg News analysis reported that PIA was the most likely airline in the world to go bankrupt. Pakistan’s financial crisis has also led to the seizure of PIA aircraft by creditors in recent months, according to the airline. One aircraft was taken at Kuala Lumpur airport for non-payment of lease fees, and another in Toronto for non-payment of ground handling, PIA said. While the airline awaits the government’s decision on a sale, it continues to need financial support: 23.7 billion rupees are required to keep it afloat for another five to six months before control is given to a new buyer, three government and PIA sources said. Cancelled flights, unpaid salaries, and loans Once recognised for its tagline, “Great People to Fly With,” PIA has seen increasing losses since the late 1990s. Due to a restricted fuel supply from Pakistan State Oil (PSO), the financially troubled airline was forced to cancel over 500 domestic and international flights in October of last year, causing thousands of customers to be inconvenienced, according to The Express Tribune. According to ANI, there were reports that about 7,000 Pakistan International Airlines (PIA) employees had not received their salaries for November. The national flag carrier is struggling with a lack of funding while the government fights a balance of payments problem brought on by massive debt repayments. Airlines’ governance and safety standards also questioned Besides its losses and debt, PIA’s governance and safety standards have been questioned by global aviation authorities for some years. In early 2020, Czech and Hungarian air force jets were scrambled to intercept a PIA flight with 300 people on board as it went astray due to an “avoidable human error” by its pilot, according to a previously unreported confidential report by a PIA inquiry board, which was reviewed by Reuters. In May that year, the crash of a PIA plane in Karachi killed nearly 100 people and a fake pilot licence scandal erupted later in 2020. The scandal led to the European Union Aviation Safety Agency (EASA) banning the airline from flying to its most lucrative routes in Europe and the UK.  The 2020 ban is still in place and has cost the airline nearly 40 billion rupees in revenue annually, according to government records presented in parliament.  The airline has been pleading with EASA to lift the ban even provisionally, but to no avail, according to correspondence between it and PIA reviewed by Reuters. It is going to be a challenging sale Accelerating the sale is not a unified opinion. A quick sale might reduce the airline’s value, according to three senior airline officials who spoke to Reuters under the condition of anonymity. They also stated that a deal without due diligence would not be transparent. “We are not against its privatisation, and all we want is that you don’t just throw it away,” said one of the officials. Singapore-based aviation analyst Brendan Sobie said PIA is in dire straits: the plan submitted to the government was “essentially the only option to save the airline.” “The privatisation will be challenging and a sale is likely not possible unless it first undergoes a deep restructuring and the debts are cleared,” he added. PIA’s assets include key slots at the world’s busiest airports and air routes to top European destinations, the Middle East and North America. PIA has air service agreements with more than 150 countries and generates about PKR 280 billion annually in revenues despite the EU ban, airline records show. It has 10 slots at Heathrow, which, according to two PIA officials, are currently worth PKR 70 billion annually. It has a further nine slots at Manchester and four at Birmingham. Turkish and Kuwaiti airlines have been operating 70 per cent of the slots under a business arrangement with PIA that also allows the airline to retain them, the PIA officials said. Separately, PIA’s physical assets, which include aircraft, hotels in Paris and New York and other properties, are worth PKR 105.6 billion ($375 million) as per book value, according to the airline’s annual report for 2023. PIA officials, however, said the market value of the assets could be above $1 billion. In any case, the hotels and other properties would not be up for sale, they said. With inputs from agencies