-Photo by Mohammed Sadique

Pakistan International Airlines (PIA) is yet another example of state patronage of a bankrupt business model at the tax payers’ expense. PIA lost $320 million in last year alone. The losses could have been much higher if the government had not pumped in millions in an attempt to sustain the failed airline. Prime Minister Nawaz Sharif wants to sell 26 per cent stake in PIA and has asked the airline to improve its balance sheet to appear attractive to possible suitors. This is easier said than done in Pakistan where labour movements and superior courts often block attempts to privatise faltering state-run enterprises.

Privatising state-owned airlines has largely been beneficial for the state, commuters, and the airline itself. Many airlines have operated profitably after privatisation, while the airfares have dropped on the routes where the state-owned airlines’ monopoly was eliminated. What matters though is the process: A transparent process handled by a competent agency is likely to deliver successful privatisation. Otherwise, the tax payers may have to endure more financial pains for an ill-planned privatization drive.

PIA has been in trouble for years. Poor planning, interference by the state, and lack of professional management have all contributed to the slow yet steady demise of the national flag carrier. The advent of competition initially on select domestic, and later on international, routes further took business away from PIA. While the airlines’ revenue shrank, the wage bill and the labour force continued to swell, thus making PIA inefficient and impossible to manage.

It is hard to imagine that an airline with merely 26 operational aircrafts supports a staff of 16,600 regular and 2,700 contractual employees. With 742 employees per operational aircraft, PIA is perhaps the world’s least efficient airline. No wonder the airline was running losses up to 3 billion rupees each month. In comparison, Air India with 27,000 employees for a fleet of 122 aircrafts carried 221 employees per aircraft. Several western airlines have fewer than 20 employees per operational aircraft.

Numerous examples of successful airline privatisation do exist. Kenya Airways privatisation is one such example of successful transition that the Nawaz government should review carefully. Similar to the government’s announcement of selling 26 per cent stake in PIA, the Kenyan government in 1994 announced plans to sell 26 per cent equity in Kenya Airways to a strategic partner. The Kenyan government retained International Finance Corporation (IFC), a sister organisation of the World Bank, to assist with privatisation.

Within six years after privatisation, Kenya Airways’ fight frequency grew by 61 per cent. Between 1995 and 2003, Kenya Airways doubled the number of passengers and cargo. The Kenyan government received US$70 million from the sales and as the airline became profitable, the value of the government’s remaining 23 per cent stake in the airline increased considerably. Kenyan Airways improved its service standards and reliability and has remained profitable.

The privatisation of Kenya Airways included two distinct steps. First, IFC facilitated KLM Royal Dutch Airlines (KLM) to purchase 26 per cent (minority) stake. In the second stage, IFC managed public offering of the remaining 51 per cent equity such that non-Kenyans were restricted to no more than 49 per cent of the total equity. The government maintained 23 per cent stake in the airlines.

The privatisation of Kenyan Airways demonstrates that a national flag carrier can be privatised successfully by offering a sizeable, yet minority, stake to a competent entity while the majority stake in the airline remained in the hands of Kenyans. Once privatised, ordinary Kenyan investors bought 22 per cent of the shares, Kenyan financial institutions bought 12 per cent, international financial investors purchased 14 per cent, and the employees of Kenyan Airways acquired 3 per cent equity in the airline. In fact, there are several successful examples of airline employees acquiring shares at favourable prices to maintain their involvement in the privatised airline.

The superior courts in Pakistan may be tempted to thwart an attempt to privatise PIA. Labour unions often plead with the courts for their members’ right to earn a living, which the unions believe is threatened by privatisation. The courts should know that eventually a poor performing state enterprise will collapse with all, and not just a few, workers losing their livelihoods. The failed Punjab Urban Transport Corporation (PUTC) is one example of labour-led suicide of a public corporation whose workforce remained unchanged while the operational fleet size reduced from several hundred to fewer than 20 busses. Ultimately, PUTC was disbanded in 1998.

And while the labour unions may still oppose the idea, the support for PIA’s privatisation is more widespread than one would assume. A recent (non-scientific) poll of 8,778 readers of Dawn’s digital edition revealed that 67 per cent supported the plans to privatise PIA.

Devising a privatisation plan for PIA is no small feat. A thorough analysis of PIA’s operations and management structure will be the first step followed by a review of government’s plans and constraints. Scrutiny of possible suitors, determining financial, legal, and regulatory frameworks, devising an equity structure, evaluating the bids, and designing the initial public offering are some of the tasks involved in privatising PIA.

To assist with PIA’s privatisation, the government needs to retain an advisor who has a track record for successful privatisation of airlines. This may require some time and due diligence. Doing it in haste will only make matters worse for PIA’s staff, customers, and Pakistan’s tax payers.