A recent article on FlightGlobal has shed some light on the plight of state owned legacy carriers all over Southeast Asia – Flytewise takes a look at what it means for the Pakistani market.
Falling prices and falling yields continue to dominate the minds of the senior management of the airline industry all over the world. The rise of the budget or low-cost carrier (LCC) trend has put a continuous downward pressure on prices, forcing airlines into the red.
As FlightGlobal reported, Vietnam Airlines has seen an 11% fall in profit from the last year – although it’s still in profit.
Garuda Indonesia saw its losses grow to $222 million from $44 million last year. The carrier is battling severe yield pressure from strong competition and its fleet, comprising of five aircraft types, is also a drag on its finances.
Philippine Airlines and Thai Airways also posted losses, with Thai’s losses standing at $120 million as opposed to a profit last year.
The reasons, barring internal reasons are simple: Lion Air, VietJet Air, AirAsia, CebuPacific and others of the ilk.
The only bright star in this scenario is Singapore Airlines – and that too just barely. It posted a 30% increase in net profit but yields are continuing to fall. Singapore Airlines also indulge in fuel hedging, which protects them somewhat from the sudden movements in the fuel price – a practice no other carrier is replicating.They have also been aggressive about LCC, first holding a majority share in TigerAir and then launching Scoot, their own LCC. Interestingly, while Garuda followed suit by launching Citilink, their LCC nemesis LionAir did the unexpected by launching Batik Air, a full service carrier aimed at breaking Garuda’s monopoly.
What does this mean for the Pakistani market and PIA then?
The legacy carrier in Pakistan, PIA (Pakistan International Airlines) is going through a period of turmoil, and has been for some time now. Aviation is now more competitive than ever before and LCC, with cost structures that are generally 50% lower than legacy carriers, have totally changed the way the game is played. It’s like comparing test cricket with the new T20 format.
Shukor Yusof, founder of aviation advisory Endau Analytics, has harsh words for the old-timers. “Legacy carriers need to focus on what the market wants and appoint people who understand the industry to manage the business,” he says. “Airlines must operate on a fully commercial basis, not for national service. “Government interference must cease. LCCs have comprehensively changed the game and legacy airlines are no longer a necessity if they don’t serve what the market needs.”
For all legacy carriers, Shukor warns: “LCCs will continue to grab more of the market while legacy airlines will struggle in the face of intense pressure, overcapacity, lack of strategic clarity and inept management.”
Interestingly, while he was referring to airlines like Garuda and Thai Airways, he may as well have been talking about PIA. Government interference and bureaucracy are eating away at the airline from the inside while the local private airlines are hammering away at the outer shell. The current players, AirBlue, Shaheen and Serene Air are all getting a fair share of the market. Whether they’re making a profit or not is a completely separate issue and since they’re not required to publish their financials, there is no way to verify it. But are they making a dent in PIA’s share of business? They certainly are.
What’s more, there are new names coming up on the horizon. New private airlines are acquiring licenses and as many as four are said to be operational soon. All of this will put a further pressure on prices, bringing them down to a point where the yield per seat no longer matches the cost per seat. Some say that even today, many routes are sold at a loss-per-seat in Pakistan. The influx of so many new private airlines will certainly create a survival of the fittest scenario in Pakistan’s aviation industry and perhaps the falling prices will increase the size of the air travel market in Pakistan – but what good is a full aircraft if the low prices mean the seats are sold below cost?
There is also the competition from the Gulf carriers, particularly Emirates. With their modern fleets and excellent inflight services, they continue to lure Pakistani travellers away from the local airlines (on international routes). Then there is another threat which has yet to realize: Chinese carriers, which are already expanding aggressively into Europe and North America, and will soon become a very viable and economical option for Pakistanis to travel to Europe.
So what should PIA do?
PIA needs to be privatized and massively downsized – and that will just be the beginning of the fix. The incredible scale of over-staffing, thanks to years of government interference and pressure, has led to cost structures that are simply not viable.
The airline then needs to question itself about its strategic direction: where does it want to position itself? Perhaps it would make sense to spin off a low-cost extension like CitiLink or ThaiSmile to handle all the domestic traffic with the legacy carrier focusing on full service international routes.
The airline’s fleet management is also a mess, but perhaps a mess that needs to be tended to after other major issues are sorted out.
And those other major issues include the very serious issue of inept management. The operations of PIA are often very much like that of a head-less chicken. A new CEO every few months/years, with his own ideas of how to run things, a powerful union and old-timers who are not able to adapt to the way modern airlines function: all these factors are destroying the working of the airline. Once the airline is privatized, it’s time to bring in a proper industry professional – perhaps sourced internationally – to run the show and rescue the airline.
It can be done – but will it? That’s the $400 million question… $400 million being the loss posted annually by PIA, which is incidentally, more than all of the other airlines discussed in this article. PIA’s accumulated loss so far is $4 billion.