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Airline: Pakistan International Airlines - Analysis of Financial Statements C Year 2005 - 1H 2010

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Highlights - Corporate News

OVERVIEW : Pakistan International Airlines (PIA), Pakistan s national flagship airline, has been a pioneer since its inception in 1955.  PIA provides air transport services.

Other activities of the company include provision of engineering and other allied services.  PIA Cargo, the company s air freight division, delivers cargo shipments to over 38 international destinations and serves the rest of the world through interline carriage, in addition to its domestic network in Pakistan.

Its flagship courier service, Speedex, delivers documents and parcels of any size, to the doorstep.  PIA Engineering is an established aircraft maintenance and repair company that provides solutions to the aviation industry.  PIA Engineering delivers maintenance and overhauling services for customers, as well as PIA s fleet of aircraft.





Nature of Business           Airline service

Ticker                       PIAC

Net Revenue CY 08          Rs 89,201,257,000

Net Revenue CY 09          Rs 94,653,765,000

Share price                   Rs 2. 14


Pakistan s aviation industry has been suffering from a dearth of revenue and travelers dues to a number of reasons.  These reasons include absence of a comprehensive aviation policy, economic slowdown, fuel price volatility, worsening law and order situation, energy and power crises, a not-so-stable currency, financial and administrative issues and deterioration of security across the country.  Moreover, the ratio of issuing visas for Pakistanis by the first world had also decreased alarmingly due to security concerns.  Also, poor law and order situation has made Pakistan an unfavourable destination for non-Pakistani travellers.  These situations have adversely affected the international business.

In 2009, passenger and cargo yields plummeted by 12% and 16% respectively.  During 2009, passenger traffic shrunk by 3. 4% globally.  Industry Revenue Passenger Kilometers (RPKs) and Revenue Freight Tonne Kilometers (RFTKs) growths have been negative at -3. 5% and -10. 1% respectively.

Outgoing was yet another year of sharp swings in Oil prices.  Prices for a barrel (bbl) of IPE Brent ranged from around USD 40/bbl (in February) to USD 80/bbl (in October) last year.  The average price was around USD 62. 53/bbl, 36% lower than the previous year.  Over the remainder of 2009, the crude oil price rose sharply.  This trend was driven by positive expectations for the economy and speculation of a similar magnitude to that seen in 2008.

Last quarter of 2009 showed a consistent signs of improvement in the air freight business.  Volumes and yields are now moving in the right direction - upwards - although there is still a long way to go before early 2008 levels are regained.  Several years of growth have been lost in this extra ordinary downturn.  Moreover, revival in the economic growth is very uneven - with a strong rebound in
Asia and parts of South America but weak growth in developed markets - and is expected to remain that way for some time.  But world trade is now picking up adding to the impetus given to air freight by the inventory cycle and mode switching.  Yields are starting to turn up, as load factors recover, but low aircraft utilization and scheduled delivers imply that capacity remains a threat to restoring profitability.


Net revenue increased to Rs 49 billion from Rs 41 billion, while the fuel charges and other administrative expenses grew at a faster rate pushing the gross profit down to Rs 6. 2 billion from 7. 9 billion in 1H09.  The exchange loss was considerably lower at Rs 1. 5 billion as compared to Rs 2. 9 billion in the same period last year.  Despite this, the loss from operations increased to Rs 1. 7 billion from 1. 0 billion.  Financial charges decreased slightly to be Rs 4. 65 billion.  Loss for the period was recorded at Rs 6. 9 billion as compared to Rs 5. 4 billion in the same period last year.

Overall, the number of passengers increased to 2. 85 million as compared to 2. 63 million.  However charter revenue could not keep pace, as there has been a decline in the UN troop movement.  Despite improvement in fundamental numbers, like seat factor (76. 18%), number of passengers, etc the overall loss increased due to inflationary pressures, exchange losses and persistent financial charges.


Before accounting for debt servicing and exchange losses, the corporation becomes profitable at operating level after four years of operation at a loss on a similar basis.  The revenue in 2009 went up by 6. 4% year on year, whereas yield increased by 7. 0% in 2009.


              2009      2008   Variance


Revenue       PKR Million  PKR Million      %


Passenger         84,510     79. 479     6. 3

Freight          4,982     5. 459    (8. 7)

Others           5,072     3. 925     29. 2

Total           94,564     88. 863     6. 4


Passenger              2009   2008  % Change


ASK s (Million)          19. 859  19,528    1. 70

RPK s (Million)          13,891  13,925   -0. 24

Seat Factor (96)          70. 00  71. 00     -

Passenger Revenue (PKR Million)  84,510  79,479    6. 33

YIELD FACTOR             6. 1   5. 7    7. 0%

Passenger and freight traffic showed significant decline during the CY09.  This was inline with global recessionary trends reflecting a decrease in trade activities.  PIA slashed its post-tax losses by 83% in the CY09 on the back of fuel cost reduction, a comparatively stable Pak rupee, prudent financial management and higher revenues.  The post-tax financial loss came down to PKR 5. 82 billion in CY09 from PKR 36. 12 billion in CY08.

The drain caused the depreciation of Rupee was limited to PKR 6. 71 billion in the CY09, 72% less than PKR 24. 12 billion in the preceding year.  The largest expense item for PIA is fuel.  PIA has authorization to hedge 20% of its oil requirement in the CY09, which saved PKR 500 million in the CY09 and BoD has now increased the limit to 40% to capitalize on a potential to increase such savings in future.

A significant reduction of losses testifies that the management capitalized on the opportunities offered by a changing macroeconomic environment - both global and domestic and successfully tackled the challenges of CY09, closing at a much better result in comparison with the previous year.  However, it fell far short of the profitability required to earn a return on Capital and create value.

As far as the profitability of the company is concerned, the company has been facing a serious crisis, reporting financial losses for the past three years of 2005, 2006 and 2007, 2008.  In CY09, the total turnover of the company stood at Rs 94. 5 billion (CY08: Rs 89. 2 billion), representing a 6% increase.  Cost of services amounted to Rs 78. 6 billion (CY08: Rs 85. 6 billion) - a decrease of 8%.  Consequently the gross profit grew significantly by 338% in the CY09 and stood at Rs 15. 9 billion (CY07: Rs 3. 64 billion).  The composition of revenue is as follows:

The gross profit margin has increased from 4. 08% in the CY08 to 16. 85% in the CY09 due to a significant growth of 338% in the gross profit.  The profit margin stood at -6. 16% in the CY09 as compared to -40. 22% in the CY08 showing a growth of 85%.

The return on assets have grown from negative 25. 69% in the CY08 to negative 3. 64% in the CY09 showing an increase of 86%.  The return on equity has declined significantly from 76. 83% in CY08 to 11. 87% in CY09.  The ROE shows a dip for CY06 because in this year the equity slumped down by 99% from Rs 10. 44 billion in CY06 to Rs 138 million in CY07.  Since then the decline in equity has been higher than in net losses, illustrating the reason behind positive ROE in CY07 and CY08.

As for the liquidity of PIA, the corporation has faced a declining trend over the past couple of years but in the CY09, it has showed a little growth.  The declining trend can be primarily attributed to a sharp rise in the current liabilities of the company over the years.  Mainly, current liabilities have increased in the form of greater long-term financing and short-term borrowing.  The greater long-term borrowing had been facilitated for the purchase of three Boeing 777 and three ATR aircrafts.  In CY09, the current liabilities have dropped by 4% while the current assets showed a growth of 12%.  The current liabilities composition shows that short-term borrowings dropped by 21% in the CY09.  The current ratio stands at 0. 25 in CY09 as against 0. 21 in CY08.  The advances have increased by 57% due to advances extended to suppliers to the amount of Rs 1. 8 billion (CY08: Rs 0. 96 billion).  In CY09, the cash reserves stood at Rs 742. 9 million showing a decline of 6%.

As far as asset management of the company is concerned, inventory turnover (days) has shown an erratic trend, decreasing drastically in 2004 then rising in 2005 and 2006, and then again decreasing in 2007 and 2008 and rising in 2009.  The ratio has increased in CY09 and stood at 18 days.  Days sales outstanding (DSO) has increased to 31 days in the CY09.  In CY08, it was 24 days.  The overall operating cycle has declined lately from 38 to 49 days.  Rise in the days sales outstanding indicates that the creditors to the corporation have not been paying off their debts on time, thus placing the PIA at crossroads as far as asset management is concerned.

The total turnover of the company has been rising over the years, increasing by 17. 59% and 14. 57% over the years 2008 and 2009.  In fact if we are to measure PIA performance by isolating the abnormal impact of fuel price increases, then the airline, using the 2004 fuel price level, would ve posted a profit of Rs 3. 3 billion in 2005 and another profit of Rs 0. 8 billion in 2006.  Hence, we can say that the overall turnover performance of the company has been commendable.  The total asset turnover ratio for CY09 is 0. 59 (CY08: 0. 64).  This is due to higher increase in total assets (14. 57%) vis-a-vis revenue (6%).

As far as debt management by the company is concerned, PIA has had a very highly leveraged financial structure.  Its debt to assets ratio has been generally very high, above 0. 82 in all the five years under consideration.  This shows a highly unstable financial base, with most of the financing achieved through leveraging and a minimal equity base.  Liabilities against assets subject to finance lease, all of this, mainly to finance the purchase of three Boeing 77 aircrafts and three ATR aircrafts.  In CY09, the debt to asset ratio has dropped to 1. 13 from 1. 23 in CY08.  Long-term debt to equity has decreased from -2. 15 in CY08 to -2. 28 in CY09.  The debt to equity ratio has remained stable at -3. 69.  At 2006 the debt to equity ratios peaked as equity fell substantially by 99%.  Since 2007, the equity is negative.  This puts the company in a precarious situation, as it is dependent on borrowing only.  The credit risk and the default risk, in the event of net losses, are high.

Times interest earned (TIE) for the company has been generally low, being below 0. 00 for the last three years of 2007, 2008 and 2009.  This is primarily because of high financial costs for the corporation over the years in the wake of greater dependency on debt financing.  Finance cost has increased to Rs 9. 24 billion in CY09, primarily due to increased mark-up on short-term borrowings.  Moreover, increase in interest rates in the country also contributed to the increased financing cost.  Consequently, the effect of rising financial costs, combined with a disturbingly fast decline in operating profits contributed to a quite low TIE.  This indicates that the company needs to manage its marketing, distribution and administrative expenses well to achieve higher operating margins, and also needs to cut down on its borrowing to keep its financial costs under control.

The market price of PIA shares has showed a growth of 7% in the CY09 and stood at Rs 3. 4 per share (CY08: Rs 3. 17 per share).  This signifies that investors are gaining confidence again.  The effect of a rise in equity has been mitigated by the rising number of weighted average number of outstanding shares.  The EPS of the company is also very discouraging, standing negative level in last three years owing to the high level of losses as discussed earlier.  PIA needs radical business restructuring to come out of the crisis and meet customers expectations.

The EPS stood at negative Rs 2. 72 per share in CY09 (CY08: Rs -17. 79 per share).  Overall, PIA has been facing a severe financial crisis in terms of profitability, asset and debt management, as well as liquidity and needs to bring up its financial results to a more positive level.  Heightened fuel prices and financial costs are a severe setback for the company and it needs to manage its distribution, administrative and marketing costs well in order to show better margins in the later years.


There is a forecast of reasonably robust growth in the emerging economies.  In the
US, Europe and Japan, growth will be held back for an extended period of time while problems of highly leveraged household and bank balance sheets are resolved.  The major challenges ahead of the corporation are to regain its market share and profitability through achievement of higher yield, focus on profitable routes, improved revenue management and cost-cutting measures.

For short-term sustainability, PIA shall restructure its business, its loans and liabilities, and further injection of equity/funds.  For long-term sustainability, brand building and organizational restructuring is being pursued.  In the pursuit of achieving improvement both in operational and financial efficiency, PIA is currently utilizing its existing human resources and infrastructure.  To achieve these objectives, management intends to convert its business activities (Speedex, Training Centre, engineering MRO, Technical Ground Support, Passenger Handling and Flight Kitchen) presently carried out under the umbrella of overall operations of PIA into Strategic Business Units (SBUs).


PIA - Financial Highlights


                   2005       2006       2007       2008       2009




Turnover          64,074,470,000  70,587,146,000  70,480,734,000  89,201,257,000  94,563,765,000

Gross Profit        5,133,634,000   704,929,000  3,924,239,000  3,639,290,000  15,934,338,000

Operating Profit      -1,759,442,000  -7,648,148,000  -5,935,076,000 -31,377,642,000  -4,064,996,000

Profit Before Tax     -4,513,236,000 -13,215,157,000 -13,070,921,000 -39,729,290,000 -13,308,764,000

Net Profit         -4,411,657,000 -12,763,420,000 -13,398,706,000 -35,880,157,000  -5,822,431,000




Total Equity        10,446,298,000   138,288,000 -11,903,558,000 -46,701,927,000 -49,054,745,000

Current Liabilities    21,237,101,000  41,025,290,000  52,049,542,000  71,707,905,000  68,817,616,000

Non-current Liabilities  41,214,104,000  65,728,191,000  77,655,550,000 100,471,189,000 111,968,404,000

Current Assets       12,770,243,000  18,353,435,000  13,251,331,000  15,039,282,000  16,880,558,000

Non-current Assets     60,127,260,000  88,538,334,000 105,522,243,000 124,630,585,000 143,132,620,000




Current Ratio             0. 6       0. 45       0. 25       0. 21       0. 25




Inventory Turnover (days)      15. 68      17. 19      16. 61      14. 89      17. 91

Days Sales Outstanding       29. 34      31. 26      25. 60      23. 56      30. 79

Operating Cycle           45. 02      48. 45      42. 21      38. 45      48. 70

Total Asset Turnover         0. 88       0. 66       0. 59       0. 64       0. 59




Debt to Asset Ratio         0. 86       1. 00       1. 09       1. 23       1. 13

Debt to Equity Ratio         5. 98      771. 96      -10. 90      -3. 69      -3. 69

Long Term Debt to Equity       3. 95      475. 30      -6. 52      -2. 15      -2. 28

Times Interest Earned        0. 63       1. 60      -0. 83      -3. 76      -0. 44




Gross Profit Margin         8. 01%      1. 00%      6. 04%      4. 08%      16. 85%

Profit Margin           -6. 89%     -18. 08%     -19. 01%     -40. 22%      -6. 16%

Return on Assets          -6. 00%     -12. 00%     -11. 28%     -25. 69%      -3. 64%

Return on Equity         -42. 00%    -9230. 00%     112. 56%      76. 83%      11. 87%




EPS                 -2. 55       -6. 8      -6. 61      -17. 79      -2. 72

Average Market Price         11. 6       7. 74       11. 3       3. 17       3. 40

COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.

DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision.  The [above information] is general in nature and has not been prepared for any specific decision making process.  [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past.  Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].


Courtesy: Business Recorder

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