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.