PIA’S Seventy-year-long descent
“We will support it even if it loses money,” Jinnah was reported to have said when he was told about the dismal prospects for an airline. “My reason is different.”
The year was 1944 and independence was in sight. Sometime in February of that year, Jinnah told Habib Rahimtoola, the scion of a powerful Muslim family and Muslim Leaguer, that he wanted Muslims to launch companies including an airline.
The business landscape of the Indian subcontinent was dominated by Hindus and Parsis at the time. It seemed that JRD Tata, GD Birla and others were floating a new business every other day. Tata Airlines had already been operating since the early 1930s, even if it was mostly delivering airmail.
This was a time when airlines were still in their infancy, even in the United States. The first passengers had been put into improvised wicker chairs on Dakotas just 10 years prior. The first rule of airline economics, which dictated filling up that last seat in hopes of making some money, had not yet made it to the textbooks.
Under these circumstances, there were just a handful of wealthy Muslims who had the capital to commit to such a risky venture. So, it came down to Mirza Abol Hassan Ispahani, his brother Ahmad Ispahani and Adamjee Haji Dawood to contribute the seed money.
It was easy for these seasoned businessmen to see the airline was a loss-making proposition from the start. But none of them wanted to disappoint Jinnah and after a while of dilly-dallying on minor things, such as the question of whether to involve Marwaris, they went ahead with the mammoth task of setting up an airline.
The all-Muslim sponsored Orient Airways was floated later in 1944 against a share capital of Rs10 million, collected from all over India. Its first share went to Jinnah. Coincidentally, airline executives from around the world gathered to form the International Civil Aviation Organization the same year.
Orient was not a matter of prestige. Jinnah’s reason was to have a reserve force of pilots and engineers for the air force of the new country, according to Rahimtoola, who recorded these details in an interview some 40 years later. And as it will soon become obvious, the airline was not a luxury for Pakistan, but a necessity. It would be the only bridge between country’s two wings separated by 1,400 miles of hostile territory.
By the end of 1946, there were six airlines in undivided India; yet, Orient was still struggling to get the necessary approvals.
That same year, Ahmad Ispahani, who was the airline’s first chairman, acquired four Douglas Commercial (DC) 3s from the US, which was selling its excess aircraft after World War II. Also known as Dakotas, they were basically stripped-down C-47s. Around the same time, an order was also placed for three Convair 240s.
Orient started operating to Rangoon (now Yangon) in mid-1947 from its base in Calcutta (now Kolkata). By August, when Independence was declared, it was ferrying people to safety from both sides. Soon, the headquarters was moved to Karachi without a single day’s break in flight operation.
The initial years would be a challenge for the fledgling airline in every respect. There was a shortage of engineers and pilots, not enough good managers and the planes had to be sent to Hong Kong for overhauls.
But the newly-liberated people needed to travel for trade and to meet relatives. Passenger traffic doubled year after year. In 1949, Orient carried 56,000 passengers. The very next year, it flew 108,000 passengers – recording a growth of almost 100%.
Orient was a completely private airline with a vocal board of directors who would blast the government for allowing the British Overseas Airways Corporation (BOAC) to eat into its domestic market share and give ridiculously low mail rates, which was one of the main sources of earning for airlines in those days.
By 1951, the government had created Pakistan International Airlines Corporation (PIAC) on paper and started negotiations for the eventual acquisition of Orient’s assets. Finally, the green crescent and stars took to the skies in 1955.
The nationalised airline published its first financial statement the following year. And right from the onset, the directors stressed on the importance of linking the two wings, East and West Pakistan. They also talked about the importance of air transport in the East wing where despite the absence of airstrips something needed to be done.
As was the case even in the days of the Orient, the airline was used to meet the state’s requirements. The government will rely on the airline to lift 3,000 passengers during floods in Punjab, ask it to go in and extract Muslims during the Bengal riots of 1950 and drop food supplies in villages. Two of its greatest feats, however, will take place 10,000 feet above sea level in the mountains of the mighty Himalayas and in the marshes of Cox’s Bazaar in modern-day Bangladesh
When the first jeep rolled off a DC-3 in Skardu and water was sought to top-up its radiator, the locals brought along a bowl of milk and truss of hay, wrote Captain PJ Massey in the 1951 issue of Flight, a global aerospace weekly publication. They thought it was some kind of animal.
The war for Kashmir had cut off whatever little road connection Gilgit and Skardu had with the rest of the world. Food and medical supplies that used to be transported from India were no longer coming in. That meant possible starvation for half a million people residing in villages scattered along the scenic mountains.
On the directives of the Ministry of Defence, Orient launched what came to be known as Operation Gilgit Airlift in 1948. English, Polish, Australian and some American pilots were the daredevils to fly the DC-3s into the valley – at times wearing oxygen masks.
These flights, which could go up to 10 a day, were operated out of the base in Peshawar. More than anything else, it was the experience of these pilots that led them through the treacherous terrain. There were no navigational aids, or radio or refueling facility, and maps were not entirely correct. Pilots would follow the snaking Indus River below and land on air strips of dirt.
Orient and later PIA, which continued to run the service, didn’t share much about the financial viability of this operation at the time but PIA executives say the sector has never been profitable – not even now. Many years later in 2016, when a strike will ground PIA aircraft for a week, Skardu will be the place worst affected, even with its modern-day infrastructure of roads.
Hundreds of miles away in East Pakistan, another operation was also taking off to become the lifeline for tens of thousands of people.
From the very start, social service routes became a centre point of PIA’s expansion policy. This was a time when airlines in other parts of the world were waking up to the benefit of flying passengers on long haul routes, which drastically increased their revenue per seat kilometre.
Major cities and towns in East Pakistan were separated by shifting rivers and marshy land. Travel by road was long, tiring and hampering economic growth. It took 21 hours to reach Khulna, the hub of jute factories, from Dhaka (then Dacca) by road. By air, that time could be cut down to just 37 minutes.
PIA began using two of its DC-3s between Dhaka and other cities in the East Wing, including Shamshernagar and Chittagong. In turn, these connections helped feed trade between Dhaka and Karachi. While chemicals and machinery were flown in from West Pakistan, Ishurdi, an industrial city of Bangladesh, met most of West Pakistan’s ginger root requirement.
Yet, the service failed to meet rising demand. It was just not possible to build airports in all the cities. And so, it was decided a helicopter service would be launched: a service so comprehensive that it will be termed the world’s largest commercial helicopter operation ever.
PIA bought 24-seat Sikorsky S61N choppers and put them in service in November 1963 between Dhaka and 15 other cities of the East Wing. This operation was bigger than that of the three US helicopter airliners combined – Chicago Helicopter Airways, New York Airlines and Los Angles Airways.
But the service came to an unhappy ending in 1966 following two separate helicopter accidents in which 24 people lost their lives. Even before that operation had begun, PIA knew it would be a loss-making venture. The same stood true for the flights to Gilgit or any other small town and city. “It was a natural requirement. Surface transportation was not sufficient,” said Khurshid Anwar, who joined PIA in 1960 and rose to become its director marketing from 1981 to 1989.
Insurance and maintenance costs were many times higher than fixed wing aircraft. It was supposed to bleed money. Yet, national priorities overrode all commercial considerations. That was just the beginning. PIA was destined for much more. A man was stepping in to make this airline the face of Pakistan around the world.
‘Please Inform Allah’ and ‘Perhaps I’ll Arrive’ were gibes at PIA’s initials that Air Commodore Nur Khan, who took over as the managing director in 1959, found offensive. In previous years, PIA had acquired McDonnell Douglas Constellations to run on its much-coveted Karachi to London route. The flight to London via Cairo, which started in 1955, was long and tiring in those days. Delays had become usual. The airline was constrained not just by lack of trained manpower, but infrastructure as well.
Constellations were a major leap over an earlier type of aircraft, Viscounts, in terms of efficiency, just like the latter gave four times better economy over DC-3s. But the planes came equipped with Wright Cyclone Turbo Compound engines, considered to be one of the worst-ever built. They broke down too often and the manufacturer struggled to produce spares in sufficient numbers.
It would be unfair to paint too gloomy a picture for the period up till 1958 for that was the time when the foundations were laid. The people who joined Orient and the early crop of PIA, which included the likes of general manager Zafarul Ahsan Lari, worked relentlessly to train pilots, cabin crew, engine mechanics and economists.
It was a massive undertaking. In retrospect, it is hard to grasp the enormity of that task. The engine test bed capable of overhauling part of the Turbo Compounds along with radio and airframe workshops in 1956 was like Pakistan having an Android phone manufacturing facility now.
That is what Nur Khan inherited. Now, it was time to grow like many other airlines around the world. And it so happened that this tall and slim man with a long face and a balding forehead will go on to leave a lasting legacy greater than the airline itself.
At 36 years of age, he was the youngest of the air commodores in Pakistan Air Force (PAF) when he was sent on deputation to PIA. He straddled with grace, but his actions moved at a lightening pace. He was for PIA what Juan Trippe had been for the Pan American Airways’ global domination.
First he created chaos, immediately sacking heads of personnel and public relations departments. That shock and awe therapy worked and people knew the man meant business. But from the very start, he also kept a close liaison with the employees’ union, going so far as to personally ensuring that firebrand leader Tufail Abbas is freed from jail.
Very early on, he gave priority to passenger satisfaction. Sealable comment cards were distributed on international flights. Every comment returned to Nur Khan, who would read and reply to each one of them with his signature.
Then came the jet age and the race to become the first operator in Asia. Air India had already ordered the new aircraft. So, PIA trip-leased a Boeing 707 from PanAm, pasted a small PIA sticker on its tail and flew it to Karachi one night in March 1960 amid a cheering crowd of hundreds, publicly becoming the first operator even though the crew was foreign.
It was Nur Khan’s directives that would make PIA operate helicopters in the East. Under him, PIA would fly European passengers to Moscow and open China to the rest of the world. Employees were sent abroad for training, and foreigners were imported to teach etiquettes to airhostesses and stewards. Wine tasting experts were engaged. Work started on establishing PIA’s brand. It had its own chicken breeding company that will eventually grow into a national asset. The airline built Intercontinental Hotels in collaboration with PanAm and engaged Swedish skiing experts to learn about the potential of tourism.
While still at PIA, Nur Khan was promoted to rank of air vice marshal. But he was not content with just PIA. He moved onto become commander in chief of PAF just before war broke out in 1965. He guided the jet fighters, often flying along with them, to dominate the air. One day during the conflict, he went on radio and ordered Captain Umer Farooq, who was on sortie in his F-104 over Kashmir, to head to Amritsar and break the sound barrier at a low height. “Has it been done?” Khan asked. “Yes sir.” “Okay. Go and do it again.” Moments later, Indians were sending out an SOS about 16 Pakistani jets bombarding Amritsar.
A war hero, he would go on to work as governor for West Pakistan, and join PIA again a few years later to fly it to even greater heights. And when a madman will hijack a PIA flight in 1978, Nur Khan would go in the aircraft himself and take a bullet while trying to overpower him.
Because of his standing, his personality and leadership quality, he enjoyed complete authority – something that none of the two dozen MDs to follow him would ever have. As a matter of fact, he himself wouldn’t have it in his second stint.
But he did enjoy wide decision-making authority between 1959 and 1964. The deal to have the first B707 was negotiated not in a board room in response to some long letter of expression, but on the sidelines of the International Air Transport Association’s meeting in Tokyo. Friendship Fokker 27s were bought after a month of negotiations. By 1962, PIA had grown into a bigger airline than Cathay Pacific both in terms of the passengers it was carrying and how far they were flying — a key barometre of an airline’s profitability.
When Nur Khan bid farewell to PIA for the final time in 1978, the airline would take pride in its service and he will be forever remembered for it.
From the very beginning, the trunk routes from Dhaka to Karachi and Lahore made up for much of PIA’s operational profit. Inter-wing traffic was not just a national priority; the service also fed passengers to much lucrative sectors like the one to London.
In terms of just traffic, the inter-wing service accounted for 20% of total passengers. This service, however, was heavily subsidised by the government. “It was enough to compensate for loss-making flights we undertook in East Pakistan and elsewhere,” says Khursheed Anwar.
During the high economic growth-era of the 60s, flight operation within East Pakistan and international flights to Dhaka expanded rapidly. By 1969, Dacca airport was the busiest in Pakistan, with 140 takeoffs and landings a day.
At the same time, tension was rising in East Pakistan where a revolt was under way. PIA, which had to discontinue helicopter services a few years earlier, was now scrambling to re-launch STOLs – short takeoff and landing aircraft. It even acquired five Twin Otters for the purpose. But, perhaps, it was too late.
Independence of Bangladesh cut PIA by half. Overnight, its operation was halved and nearly 50% of the traffic vanished. Aircraft were standing idle as insurance and interest costs started to pile up. Suddenly, the employees were too many and there was talk of layoffs. But unions would have none of it. Rafique Saigol, who had taken over as the managing director in 1972, also agreed with the unions. What followed was quite remarkable.
Five Boeing 707 jets, which were costing PIA around $25,000 a day in standing charges, were leased out. Two went to the British Caledonian and three to Yugoslavian airline JAT. Immediately, efforts were made to bring in whatever business the salespeople could get their hands on. Charter flights were operated for Hajj pilgrims from other countries. PIA was lifting 7,000 tonnes of vegetables from Southern Algeria to Marseilles. Libyan Arab was wet leased two of the three unused F27s with cabin and flight crew. Twin Otters were sold to Air Alpes, a small French airline.
Excess Trident pilots went to Ceylon, those for F27s to East Africa, cabin-crew instructors to Air Algerie and various other staff to Alyemda, Saudia, East African Airways, All Nippon and Alia.
“For the airline of a country which was cut in half six months ago, PIA deserves praise for the speed with which it has faced facts and turned disaster into opportunity,” Murray Bailey wrote in the May 25, 1972, issue of Flight.
Against all odds, PIA was on its way to see an era of phenomenal growth. Its passenger traffic would increase 224% between 1972 and 1980. During the same period, revenue surged 926%. And all this was happening amid the fallout of the Middle East oil shock that was being felt by airlines around the globe.
Perhaps, luck was on PIA’s side. As the oil price surged, so did demand for cheap labour in the auxiliary petroleum industry sprouting up across the Gulf region. Thousands of labourers began travelling to and fro. PIA was just ready to cash in all that with its spare capacity. And so came back the 707s to be put on flights to Dharan, Abu Dhabi and Doha.
As a matter of fact, so many people were travelling to the Gulf that PIA would brag in its financial statements for 1975 that it had crossed the traffic projection set for 1985. In 1973, passengers going to and coming from the Middle East made up just 28% of its traffic. By 1977, nearly 65% of its traffic would be coming from the region.
It would be unfair to credit the entire rise to the Gulf region. PIA’s flights out of Paris and Manchester, including the transatlantic service to New York, were gaining popularity as well. “We were not just one of the best on those European routes,” says Arif Ali Abbasi, who served as managing director three times, while adding, “In many instances, we were the best airline in the skies.”
Expansion on this scale warranted a significant increase in the number of seats available for sale. This meant the airline was in the run to buy bigger aircraft. But not everything was so clean in those glorious days. Big jets meant bigger kickbacks and PIA was about to be dragged into one of the biggest scandals to hit the airline industry.
And my future I hope will be
In the home of a brave and free male
Who’ll enjoy being a guy having a girl … like me”The melody of this famous number, I Enjoy Being a Girl, flowed through the cabin of the new Trident 1E on a March evening in 1966 as it took off for Karachi from the United Kingdom. Unfortunately, the airline that bought this plane and its passengers would not enjoy it much. This particular aircraft will become a major headache for the airline.Hawker Sidley, the struggling British aircraft manufacturer, was lucky to have bagged the orders for its three-engine Tridents with PIA, which was looking to replace the Viscounts with a bigger plane on domestic and inter-wing routes.Trident was in competition with Boeing 727, one of the most successful jets built for short to medium range flights. Yet, PIA bought three Tridents. As a matter of fact, PIA will be the biggest customer for this variant – 1E, which came replete with technical issues and an engine different to what engineers were used to handling.
Enver Jamall, who was director operations at the time, along with three others, was in the committee formed to choose between the two types. They recommended the B 727.
“Nur Khan rejected our recommendations and the file was returned to us with the note that the purchase of the Trident was to be put up for the Board’s approval,” Jamall later wrote in his biographic I Remember.
For the government and the PIA management, there were other aspects of the deal that needed to be considered. Pakistan’s close relations with China had irked the United States. In previous years, the US State Department had already raised objections to the delivery of a Boeing 720B to PIA. Financial aid for the construction of the new Dacca airport had also been cut off. What if the US stopped the supply of spares for 727 as well?
The Tridents would remain in service for less than four years before PIA sold them to China, which will ultimately become Trident’s biggest purchaser.
That wasn’t the only time PIA will have to give weight to political reasons over commercial viability.
In December 1977, PIA placed its first order from France-based aircraft manufacturer Airbus Industries. The Airbus 300 was not what the airline really needed at the time. In response to a surge in traffic to the Middle East, executives were looking to buy Boeing’s much larger 747 jumbo jet. It was already using two jumbos on lease. And now Boeing was working on building a short range version specifically for PIA.
At the time, director corporate planning Syed Ajaz Ali said in an interview that the Gulf market was not frequency sensitive and there was already enough traffic to fill a 450-seat 747, which meant passengers were okay with waiting for flight dates. “If A300 is operated on these routes, frequency would become unacceptably high,” claimed Ali.
Once again, it was national priority that would take preference. Around the same time when the A300 order was placed, Pakistan was trying to secure nuclear power reactors from France in a last ditch try. Just eight months later, France announced it wouldn’t sell nuclear reactors to Islamabad.
No documentary evidence, however, to this understanding is available (despite repeated requests, PIA’s Secretary didn’t allow The Express Tribune to see minutes to the meeting of the Board of Directors). But at least two senior executives confirmed that the A300 deal was in fact an attempt to appease the French.
However, all of this will pale in comparison to the infamous deal involving the purchase of the McDonnell Douglas DC-10. The DC-10s were wide-body aircraft, considered to be an alternate to B747. They made their way into the PIA fleet silently.
“It was a good aircraft. The first one for us was a customised product for PIA. It had Minar-e-Pakistan and other monuments painted on the green interior,” recalled former managing director Aijaz Haroon, who was a young cadet pilot at the time of its induction.
But something was not right. Even the Board of Directors and Nur Khan, who had become chairman by then, will not make any mention of the DC-10s in any of the financial statements during intervening years.
Whenever competition gets tough, aircraft manufactures rely on middlemen to make sales. These men are influential and well-connected in their respective countries. They know which palms would have to be greased to secure an order. So, when the DC-10s were touted as the next best product, an agent firm in Pakistan by the name of Sequeria Brothers came into the picture.
“Sequeria was a bloody photographer. God knows how they got into this business,” says Arif Abbasi.
PIA had forbidden middleman commission, insisting discounts – if any – should go to the airline. Sequeria received $1.6 million for the four DC-10s, which were delivered from 1974 onwards.
When US authorities began investigations into the prevalence of bribe culture in the run-up to the introduction of Foreign Corrupt Practices Act 1977, McDonnell Douglas also came under the spotlight.
The aircraft manufacturer was accused of paying bribes to politicians in half a dozen countries, including South Korea and Venezuela. But the indictment named sales made to PIA. An internal McDonnell Douglas memo later filed with the court will say that an executive had warned that the Pakistan deal could be “our own Watergate.”
Four executives of McDonnell Douglas, including its chairman James S McDonnell III, son of the company’s founder, were charged and forced to plead guilty. PIA will also file a suit in September 1979 and will eventually get a settlement.
But James S McDonnell didn’t go down without a fight. He defended his company vigorously. “Commissions were fully known to key officials of Prime Minister Zulfikar Ali Bhutto’s government in the early 1970s,” he said in a statement.
Political compulsions will come into play many more times in big deals and PIA will buy aircraft and engines against the advice of its engineers. There was, however, one extraordinary decision, which would become a pillar to support the debt-laden balance sheet of a bankrupt PIA years later.
Nur Khan finally bid farewell to PIA in the late 1970s. But before doing so, he gave the airline a parting gift – Roosevelt Hotel. Built over an acre of land at a walking distance from the Grand Central Terminal in New York, this iconic hotel was worth over $300 million when PIA bought it for only $36.5 million.
How did that happen?
PIA created a subsidiary by the name of PIA Investments Limited in 1978. It was the brainchild of Nur Khan who took over as its head after handing over PIA’s chairmanship to Enver Jamall.
The subsidiary was created to make use of PIA’s excess cash. Besides Roosevelt, it would eventually buy Scribe Hotel in Paris and one more hotel each in Riyadh and Abu Dhabi.
Aslam R Khan, who served as the managing director of PIA Investments for 14 years, says Nur Khan initially wanted to use hotels as a training ground for the airline’s cabin crew. “He believed getting into the hospitality business would help us in the long run.”
PIA was not the only airline to go into the hotel business. PanAm had started the trend with Intercontinental Hotels. United Airlines had also bought the Western International chain.
The first challenge for Nur Khan was to get a partner. It wasn’t long before he got in touch with Dr Fazalur Rehman, who was the personal physician of King Khalid of Saudi Arabia. Through him, he wooed the King’s son Prince Faisal to become a 50% stakeholder in PIA Investments.
Around the same time, Penn Central Railroad, which owned the Roosevelt, had fallen on bad times. It had filed for bankruptcy and sold the hotel to Loews Corporation for $55 million in 1979.
Loews quickly resold the hotel to Paul Milstsein, a real estate tycoon, for less than $30 million.
Somehow Nur Khan got wind of that. He approached Milstein with a proposal: lease PIA Investments the Roosevelt against annual rental payments. Then, in a stroke of genius, Nur Khan inserted a small clause in the agreement that said in 20 years, PIA Investment would have the option to buy the property at a fixed price of $36.5 million. The deal was done.
Over the next 16 years, the hotel ran mostly at a loss and PIA had to pump in cash to support it. By the mid-90s, many rooms in Roosevelt were in dilapidated condition and in urgent need of renovation. Somehow, PIA Investments arranged the loans to carry out this work.
When the time came for PIA Investments to exercise the purchase option, Milstein backed out. He also demanded $59.5 million, instead of $36.5 million.
“We paid him the money, took ownership and simultaneously filed a case in court,” recalls Aslam. “No one really believed that we could win the deal. There were people who said ‘Oh, you can’t possibly win a case against them.'”
But Aslam and his team persisted. They hired Chadbourne & Parke, the same law firm which assisted PIA in its original deal with Milstein. PIA Investments ultimately won the case along with the $23 million it had paid extra.
The Scribe was also later acquired. In addition, PIA increased its stake in the subsidiary to 99% by exchanging the hotel in Riyadh for Prince Faisal’s shares.
Many years later, when the airline will be bogged down with long-term debt and negative equity, the one asset which will give its balance sheet leverage will be the Roosevelt Hotel.
But even this was not the greatest achievement of the airline and its people. That will come in the sports field, which is where PIA really shone.
Jahangir Khan is undoubtedly the greatest squash player of all time. And he owes a lot of his success to PIA. It was this organisation that took him under its wings when he was a teenager. It gave him a job in the officer cadre when he was only 15 years old and paid for his travel and boarding when he toured the world.
“Whatever PIA was doing in sports was basically Pakistan’s sports. I say this because this organisation has given some of the best players in the fields of cricket, hockey and squash,” says Jahangir Khan.
PIA Colts Team, an initiative of Nur Khan, was used to search for promising young players. They were paid a monthly stipend, along with coaching and training sessions to make them sportsmen. Jahangir Khan came from among the Colts.
The airline’s contribution towards sports was immense, says Khalid Hussain, Sports Editor of The News International. “I would say the performance of Pakistani sports started to go down as PIA’s patronage receded.”
There were just two major organisations which spent their resources on making sportsmen – the Pakistan Army and PIA, says Hussain. “Traveling has always been the biggest worry for players. PIA took care of it. But even more importantly, the airline paid for coaches.”
It was PIA that funded the construction of the state-of-the-art squash complex in Karachi – considered for a long time to be the best in the world.
Its contribution to hockey, the country’s national game, was also immense. Shahbaz Ahmed Senior, one of the best hockey players in Pakistan’s history, sums it up accurately. “In the 1990 Hockey World Cup, 11 players in the Pakistani camp were PIA employees. That’s how important the organisation was to the development of the game.”
Unlike cricket, which has been commercialised over the years with privately-sponsored leagues, hockey is still dependent on official support, says Ahmed. “Job security for players is a big thing. Hockey players don’t earn that much. It was PIA which hired us and then allowed us to focus just on the game.”
Another product of PIA was Wasim Bari, one of the finest wicketkeepers of his era. Bari is also one of those sportsmen who rose among the ranks over the years to become a director. “I joined PIA as a junior officer in January 1968. It was an excellent career for me. I could go to the field for training during off days. You see, tournaments came after every six months, so I had to do something during the intervening period. That is where support from PIA mattered so much. We were not worried about our future.”
PIA used to have an entire Sports Department under a director to look after the development of players. The airline never gave any breakdown on how much it spent on such activities. There were just brief mentions of its “national duty towards sports” in some of the financial statements.
The list of the players PIA produced is quite lengthy. By the 1990s, with its financial performance sliding, the management stopped taking interest in sports. How did this change occur? The roots of the problems can be traced to a decision taken by the United States in 1978.
“Deregulating the airline business is a dangerous step. I say that because once the step is taken, there will be little opportunity to turn back. If deregulation doesn’t work, you will see the finest air transportation system in the world disintegrate before your eyes,” Albert Casey of American Airlines before the US Senate Aviation Subcommittee in 1977.
Up until the late 1980s, airlines around the world operated under a regulatory regime, which protected them from cut throat competition on international routes.
Jurisdiction over the number of passengers, how far they travelled, the kind of aircraft to be employed, seat capacity, number of flights to be operated and fares to be charged were clearly defined between major carriers. PIA was no exception.
“PIA executives sat across the table from their counterparts from Swissair to decide how money could be made,” recalled Khurshid Anwar. “And when PIA didn’t find it feasible to operate on the sector, it made Swissair pay a fix commission for every seat flying into and out of Pakistan.”
This protection from competition was accorded by the International Air Transport Association (IATA), which organised annual meetings where airline executives deliberated to find ways to keep making money.
For almost four decades, IATA not only encouraged an oligopolistic trend among airlines, but also played the watchdog. Its inspectors would discreetly fly on different routes and penalise airlines which undercut competition.
PIA was one of the rebellious ones back then. So much so that, in 1963, the US Civil Aeronautics Board (CAB) fined PIA $12,500 for cutting its fare on New York flights.
But if they weren’t allowed to compete on fares, the airline managers fought elsewhere, mostly with the service being provided to passengers. PIA hired French designer Pierre Cardin to design the uniform for its airhostesses, spent lavishly on advertisements and used Pakistani sportsmen as brand ambassador
Airlines were so cautious about controlling costs that, at times, they wouldn’t allow competitors to introduce any drastic onboard service. Here, again, it was PIA which played the bad boy of the industry: In the IATA conference of 1964, PIA and Trans World Airlines were the two carriers subject to criticism for showing inflight movies that for many others meant an unnecessary cost.
Except for perhaps the US, national airlines everywhere were also protected by their governments. Pakistani expats were required to travel on PIA. “It was okay to travel on another airline the first time you went abroad for a job,” recalls Nadeem Sharif, the ex-chairman of Travel Agents Association of Pakistan. “But every time after that, it was always PIA.”
This was done mainly through the P-Form, a cumbersome procedure of the central bank requiring its permission to move foreign exchange for payments to airlines in other countries.
Irshad Ghani, who served as director marketing between 2008 and 2011, says PIA used to do so well financially because there was no competition from Gulf carriers. “Let this P-Form requirement be introduced and you can tie a goat in the managing director’s office and we’ll still be making money.”
No one can say for sure when deregulation actually started. But almost all analysts trace its origins to the 1978 deregulation of the aviation industry in the US. Slowly, it would force markets everywhere to open up, and startups would rise to counter the hegemony of legacy carriers.
PIA, at the time, also sided with regulation. In a 1977 interview to Flight, Nur Khan said he believed that although fare structure was “undoubtedly more complicated”, air transport would be “far more chaotic without it”. He went on to say that IATA provides a framework for “airline law and order” in an industry that includes companies of all shapes and sizes.
The Air Services Agreements (ASA), bilaterally negotiated between countries with restrictive provisions, were beginning to appear too rigid. Winds of liberalisation had started to sweep the world of aviation.
Pakistanis were not oblivious. Years before, when many had not even heard of the term “open skies”, Air Marshal Waqar Azim, the managing director of PIA, sounded caution in 1985. “Any hastily-considered step regarding the open skies policy would result in excess capacity, which could very easily and very quickly weaken PIA,” he said in that year’s financial statements.
While, financially, the 80s would turn out to be the best ever for the airline, it had begun to feel the heat from Gulf Air, which at the time served as a joint carrier for UAE, Qatar, Bahrain and Oman.
As was the trend then, Pakistan’s ASAs allowed foreign airlines to come and pick passengers from one destination – Karachi. International airports in Islamabad, Lahore and Peshawar were off limits for most of the airlines.
Gulf Air wanted flights to Islamabad. It also wanted Fifth Freedom rights, which would allow it to fly Pakistani passengers to a third country. But Pakistan argued that it had signed separate ASAs with the Gulf Kingdoms that involved only one city from each side.
Pakistan’s refusal ensued what would become one of the dirtiest battles PIA ever fought with a foreign airline. Gulf Air threatened to not let PIA use their airspace in the Middle East region. It also stopped doing business with travel agents who were selling PIA tickets.
PIA retaliated with full might. It took up the matter with the International Civil Aviation Organization (ICAO) and used its influence over travel agents to stop booking seats on Gulf Air.
Around the same time, Dubai was looking to launch an airline of its own, free from the influence of Gulf Air. But the new airline, Emirates, which took to the skies in 1985, had a hard time convincing neighbours to grant landing rights. This is where PIA stepped in, technically helping the Dubai-based airline to get on its feet with Pakistani engineers and trainers.
The first B-737 used by Emirates was leased from PIA. It even used PIA’s departure control facility. And Karachi was the first international destination for Emirates. PIA had just helped create its main competitor.
With the new phase of liberalisation taking hold of airways around the world, Pakistan also adopted the Open Skies policy, issuing licenses to domestic carriers and giving broader rights to foreign airlines. PIA felt the pinch immediately – its profit margin started to squeeze as other airlines ate into its market share.
But the national flag carrier still had a firm hold over international passengers using so-called northern gateways of Lahore, Islamabad and Peshawar airports. While Karachi would continue to retain its position as the biggest airport, most of the growth in international passenger traffic was coming from northern gateways.
In the late 90s, the government introduced a new aviation policy and opened up the northern parts to Gulf carriers. “That was the major setback,” says Irshad Ghani. “All that time when Karachi was opened for foreign airlines, passengers from other cities still had to travel on PIA. So, at least we were getting something out it.”
Gradually, after a gap of a few years, successive governments would continue to allow Gulf carriers to add more and more flights. And all of that would be done despite PIA’s protests.
Pakistan’s Civil Aviation Authority (CAA) had all along maintained that it would give weightage to convenience of passengers over PIA’s woes. But officials say the decisions to grant more rights to Gulf carriers had always been taken at the very top.
From under 100 flights a week in 2005, foreign airlines had now been given permission to run over 390 flights. Most of these additional flights were allocated in the past five years, which have been financially worse for PIA.
During the same period, PIA’s market share continued to decline. From a high of 60% in 1990s, its share in international traffic dropped to just 19% in 2015. Whatever traffic PIA lost, Gulf carriers gained. “They have made it very difficult for PIA. No country does this to its national airline,” laments Arif Abbasi.
All of this will take its toll on the corporation’s financials.
Why do airlines lose money? This question has boggled people from the industry for years. Tonnes of research papers, books and articles have been written to explore the various reasons. Yet, none have been able to draw any conclusive results. However, there is consensus on one thing: running an airline is one of the least profitable businesses.
PIA’s behaviour has not been different from the global industry. It has gone through similar cyclic ups and downs, which have made this business so dreadful for investors. But historically, PIA has done better than the global average.
In the 54 years since 1962, the airline had posted profits for 33 years. In the same period, its average net margin for all those positive years has been 5.1%, which again is above the industry average.
It would be futile to look at PIA’s financials without taking into consideration inherent problems afflicting commercial aviation worldwide.
Oligopolies exist in the entire airline supply chain. There are two aircraft manufacturers, Boeing and Airbus, two main aircraft lessors, ILFC and GECAS, four major computer reservation systems like Sabre, a handful of ground handling firms just like Pakistan’s market is dominated by Royal Airport Services, a few catering companies and normally a single airport in a city. And all these players earn a net profit margin more than the airlines.
“Imagine, PIA is hardly able to squeeze 4.5% for its self but travel agents get a fixed 5% commission. How do you expect us to make money?” complained Irshad Ghani.
The 60s and 70s were marked by high double-digit growth in the number of passengers PIA was flying. This trend was in line with other countries where air transportation was becoming the primary means for travelling.
Though the secession of Bangladesh did deliver a jolt, the airline was quick to regain lost traffic as mentioned earlier. That was also the time PIA was increasing its global footprint with catchy advertisements and good service on transatlantic flights and in the east between cities like Tokyo and Manila.
The fallout of the first oil shock is apparent in the financial statements of PIA. The fuel bill, which up till then had remained stable, started to climb from 1974 when it jumped to Rs188 million from the previous year’s Rs89 million. The following year it was Rs354 million and then hit Rs450 million in the year after that. By 1980, PIA was paying Rs1.8 billion to fuel suppliers.
Something else also happened during this period. PIA’s salary expense used to be over 30% of its revenue. In 1971, the salaries bill was 33% of revenue. This proportion declined over the next few years as oil prices rose. Then, in 1979, the fuel bill was more than the salaries expense for the first time in PIA’s history.
For managements, airline workers are a difficult lot to handle. Eccentric, with a manic drive to excel, an overwhelming love for planes and overtly ambitious – these individuals come together to form formidable unions.
The associations of pilots, engine mechanics and cabin crew in PIA have always been hard negotiators. They would have airtight agreements covering their salaries and perks. But while employee-related expenses remain a matter of life and death for many western carriers, to say the same about PIA would be far from the truth.
As a matter of fact, PIA has been ranked one of the cheapest because of its low labour costs. In March 1975, Flight ran an efficiency comparison, which included 10 airlines, among which were British Airways, KLM, Lufthansa, Pan Am and also PIA. At $2.32 per tonne-kilometre performed, PIA had the lowest operational cost.
PIA has maintained that advantage of cheap labour. Today, still, the average cost of PIA’s engineer comes to around $8 per hour. And when PIA outsources the same job, which its own engineers could have performed, it pays $37 per hour.
So, what happened to PIA financially? Well, many things.
PIA has been continuously suffering losses for the past 11 years. A cyclic downturn caused by abnormally high fuel prices has become a sinkhole for the airline. Never before has it seen such a long stretch of financial losses. The last longest spell was for three years following the 1971 war.
Starting from the 1960s, most of PIA’s revenue came from international passenger traffic. By the 1990s, 70% of its revenue was coming from flights to foreign destinations.
This is because the further you travel, the more an airline makes you pay. The costs, spread over a long haul flight, tend to go down. The best way to understand this is to look at the time before an overhaul of a Boeing 777 engine becomes due. That overhaul depends on a cycle, which is one takeoff and landing. “So, the overhaul cost would be same if we operate the jet between Karachi and Lahore or Karachi and Manchester,” says Society of Aircraft Engineers of Pakistan President Zakir Farooq.
On January 1, 1998, the government lifted restrictions on access to northern gateways. Immediately, Swissair, KLM, Emirates, Gulf Air and Qatar Airways added flights to Islamabad, Lahore and Peshawar. PIA, thus, lost its last major advantage.
PIA posted losses over the next three years and was rescued only after a government bailout. Then president Pervez Musharraf heard PIA executives and imposed a temporary restriction on issuing more flights to Gulf carriers.
One particular problem, which beset all airlines, is related to the mismatch between when revenue is recorded and costs paid.
For instance, PIA starts booking for a flight 10 to 11 months in advance. So bookings for a flight to London set to takeoff in January 2017 have already started. But the cost of fuel will be recorded when the flight actually takes off. And if there has been any abnormal surge in the fuel price then the flight is bound to operate at a loss.
With already thin margins being squeezed by competitors, PIA was pushed further into the red. Once the first hefty loss of Rs4.4 billion in 2005 had burned into its cash reserve, PIA was stuck in a quagmire. Year after year, successive managements borrowed money from banks to settle day-to-day expenses and pay previous liabilities, worsening the balance sheet.
This kind of situation was not unusual for an airline. This is when the sponsor, which in the case of PIA was the government, steps in. Contrary to the white-elephant-eating-all-the-taxes label, PIA has received help from government akin to chicken feed.
Between January 2003 and September 2015, the total cash injection into PIA by the government stood at Rs45.67 billion. Spread over 13 years, that’s only Rs3.5 billion a year.
Another part of the profit and loss equation not talked about is tax revenue from ticket sales made by PIA. The tax on a recent return flight between Karachi and Islamabad was 42.65% of the total fare. This tax was 39% on the return flight between Karachi and Abu Dhabi. Thus, the government earns much more than what it gives to PIA.
All along, PIA has been losing its market share. More importantly, it has lost a major chunk of its profitable North American market.
In 2008, PIA had 28.9% of the US-Pakistan average daily bookings while Gulf carriers had 38.9%, according to Partnership for Open and Fair Skies, a coalition of various US airlines and industry unions.
“The Gulf carriers’ massive subsidies have allowed airlines to expand and dominate the US-Pakistan routes, with 73.8% of the average daily bookings in 2015, while bookings on the same route on PIA have dropped to just 11.4%,” it said in an emailed response to The Express Tribune.
Jill Zuckman, the chief spokesperson for Partnership, said: “For years, Gulf carriers have hidden their financial records and only after a two-year forensic investigation did we discover the more than $42 billion in subsidies. We’ve provided the US government incontrovertible evidence that subsidised Gulf carriers are undercutting US carriers and costing American jobs.”
It goes to the credit of PIA that it was able to withstand the onslaught of Gulf carriers for so long and still retain some of the market. But it’s very unlikely that any other airline including a privatised PIA could really become a major carrier in the face of open skies.
On February 2, 2016, two PIA employees were killed during a protest demonstration. Unions had been agitating for days against the proposed privatisation of the airline. They took out a rally and were on their way to the airport when someone fired shots at the crowd during a confrontation with police and rangers. That was the first time blood had spilled at a PIA rally.
Employees went on a week-long strike, resulting in the cancellation of hundreds of flights. But the government didn’t relent either. Ultimately, the unions had to call off the strike and slowly it is becoming obvious that the government will hand over management control to a private investor – albeit after cleaning the books.
A lot was said during this time on television channels, in newspapers and in public statements. Employees were blamed for recurring financial loss. PIA’s inability to maintain its market share was attributed to its poor service. Political interference and corruption also played its part, they say.
What has not been talked about is the fact that the battered PIA still flies around 120 flights a day; that this company is among a handful in Pakistan that has annual revenue exceeding $500 million; and the fact that the airline has not been a big drain on the national budget.
In more than two dozen interviews conducted for this story, The Express Tribune did not encounter any employee or executive who did not believe PIA could once again regain its ‘past glory’. Their loyalty is unflinching when they talk about PIA. They still do not agree that it’s over for the airline as they knew it. “Just some more time,” one employee said; “Give us a few more aircraft,” said another; “If we could have the right person at the top” and so on.
Times have changed since Jinnah promised the airline of the state’s assistance. Now, the government says the point has come where it can no longer foot the bill. Things will have to change, it says. But how much of it will really change? Only time will tell.