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Airlines Company: PAKISTAN INTERNATIONAL AIRLINES - Analysis of the Financial Statements CY 03-3Q 09

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Highlights - Corporate News

OVERVIEW  : Pakistan International Airlines, Pakistan s national flagship airline, has been a pioneer since its inception in 1955. PIA was the first Pakistani airline from a non-communist country to fly into the People s Republic of China and, in 1962 PIA set out to break the record for the fastest flight between London and Karachi.

PIA continues to soar, ever committed to innovation and rich customer experience. With a fleet of young airplanes, a crew dedicated to providing the highest standards of in-house service, and stellar management, POA is a flight that is going places. However, recently, the profitability of PIA has been witnessing a downside.

Year 2008 did not bring any significant improvement in the financial performance of PIA. The problems of the past years recurred and compounded to give the company a higher net loss for the year. The company is in a dire situation to salvage itself from further crises. A brief recap of year 2007 reveals that during the year, the company experienced a series of financial, operational and marketing problems. In the early part of the year, imposition of operating restrictions by EU caused considerable disruption in the PIA schedule as well as significant curtailment in capacity.

With the airline brand severely dented, PIA lost market share as well as growth in business, which made the situation still more difficult. The unprecedented hike in oil prices adversely impacted PIA s bottom line. PIA, the late starter was unable to hedge the risk against the high oil prices and thus had to absorb the burden of expensive fuel. Apart from the fuel cost, increases in pay to certain categories of personnel and depreciation of the rupee vis-a-vis the US dollar towards the end of the year also adversely affected the financial results.

The airline could not remain immune to ever-increasing competition due to an over supplied capacity environment including entry of new operators in certain key markets. PIA managed to increase the yields despite competition. However, this improvement was offset by reduced level of traffic. PIA s revenues, thus, remained static for the year. The cash position of the company remained under strain throughout the year and was managed by short/medium term borrowings from the market based on GoP guarantees. However, a positive development during the last quarter of 2007 was the withdrawal of EU operating restrictions, as PIA was able to satisfactorily address the issues highlighted by the EU Air Safety Committee.

The continuation of high level of losses necessitated a re-look at the route structure and, therefore, a route rationalization plan was implemented in the second half, whereby services on some of the non-performing sectors were discontinued while capacity on other routes was realigned with available traffic. PIA management took several initiatives to drive down the cost and increase the revenue in the wake of a difficult business environment. However, the efforts made did not yield the desired results though it helped to reduce the quantum of operational losses. Despite its financial difficulties, the airline remained on track on its fleet modernization plan and by December 2007, the average age of PIA s fleet was reduced to 13 years.



Name of company     Pakistan International Airlines

Nature of Business   Airline service

Ticker         PIAC

Net Premium CY 07   Rs 70,480,734,000

Net Premium CY 08   Rs 89,201,257.000

Share price (avg.)   Rs 3.17

Market Capitalization  6,703,472,884

Recent results 3Q09: 

PIA s loss after tax reduced from Rs 38.4 billion to Rs 10.8 billion. The main reason was a decline in the oil prices and a marginal increase in the revenues of Rs 3.5 billion (5.9%). In the previous year, PIA was plagued by losses due to foreign exchange losses resulting from the depreciation of currency. In the 9M09, foreign exchange losses have been reduced by Rs 17.5 billion, while the financial charges have increased by Rs 1.3 billion.

Passenger traffic has decreased with global recession and domestic downturn along with increased competition in difficult times. The third quarter showed signs of weakness in terms of decline revenue. The main areas like passenger tariff, freight business and MRO business went down respectively by 3.2%, 17.8% and Rs 145 million. However, this was made up by improvement in other segments like Excess baggage, mail and charter revenue segments.

Hospitality business has been affected world wide, due to which we see that PIAL has reported revenues of Rs 75 million as compared to Rs 102 million the last year.

PIA needs to improve its services and reduce costs, as the fuel expense s downward trend was thwarted by an increase of Rs 5.5 billion in the non-fuel expenses. While economic downturn persists, passenger traffic shall be a difficult target to achieve, however, cost cutting measures need to be priority of this organization plagued with so many problems. Having said that, this target also seems to be unattaintable in the current set-up.

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. In CY08, the total turnover of the company stood at Rs 89.2 billion (CY07: Rs 70.5 billion), representing a 27% increase. The passenger revenue is the driver behind this increase. Considering the huge amount of cost of services and operating expenses this increase is marginal and does not cover the expenses. Cost of services amounted to Rs 85.6 billion (CY07: Rs 66.6 billion) - an increase of 29%. Consequently the gross profit showed a decline of 7% and stood at Rs 3.64 billion (CY07: Rs 3.92 billion). The composition of revenue is as follows:

Overall, the profitability of the company has declined to a disturbing level over the past couple of years. The major culprit has been the fuel prices. In CY08, the crude oil prices had escalated to Rs 147/barrel, resulting in huge losses for the company. The distribution costs have increased by 21%. This year the company made a huge foreign exchange loss of 20% (CY07: 1%) due to rapid depreciation of the national currency. The finance cost has increased by 17% and stands at Rs 8.35 billion. The net loss for the year was Rs 35.8 billion (CY07: Rs 12.7 billion) - an increase of 182%.

The gross profit margin ratio has declined from 6.04% in CY07 to 4.08% in CY08 due to decline in gross profit by 7% and increase in total turnover by 27%. The profit margin has declined from negative 19.01% in CY07 to negative 40.22% in CY08. The company has incurred a huge net loss of Rs 35.8 billion causing this steep decline in profitability. The return on assets have declined from negative 11.28% in CY07 to negative 25.69% in CY08. The return on equity has declined from 112.56% in CY07 to 76.83% in CY08. 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. This 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 aircraft. In CY08, the current liabilities have increased by 38% while the current assets have increased by 13%. The current liabilities composition shows that short-term borrowings mainly triggered rise in current liabilities as these rose by 68%.

The current maturity of financial lease was the second significant attribute, registering an increase of 54%. The current maturity of TFC has declined to nil balance. Yet the liquidity of the company has worsened. The current ratio stands at 0.21 in CY08 as against 0.25 in CY07. The advances have increased by 136% due to advances extended to Civil Aviation Authority to the amount of Rs 1.43 million (CY07: nil advances). The increased short-term borrowings had to be undertaken due to fuel price-led operating loss. In 2005, the cash reserves of the corporation also declined significantly, but in 2006, the overall current assets increased relative to the previous year. In CY08, the cash reserves have again dipped down by 60%.

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. The ratio has decreased in 2007 though only marginally. In CY08, the inventory turnover is 15 days. Days sales outstanding (DSO) has declined recently after remaining at a higher side previously. In CY08, it was 24 days. The overall operating cycle has declined lately from 42 to 38 days. An obvious rise in the days sales outstanding from 2003-2006 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 20.5%, 11% and 10% respectively over the years 2004, 2005 and 2006. 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 CY08 is 0.64 (CY07: 0.59). This is due to higher increase in revenue (27%) vis-a-vis total assets (18%).

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 aircraft and three ATR aircraft. In CY08, the debt to asset ratio has further worsened to 1.23 from 1.09 in CY07. Long-term debt to equity has increased from -6.52 in CY07 to -2.15 in CY08. The debt to equity ratio has increased from -10.69 in CY07 to -3.69 in CY08. 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 2.00 for the last three years of 2004, 2005 and 2006 and then became negative in 2007and 2008. 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 8.35 billion in CY08, primarily due to additional borrowing for the purchase of three additional Boeing 777s and three ATR aircraft as mentioned before. Short-term borrowings also increased due to fuel price led operating losses and consequently, overall financial costs increased despite declining operating profits. 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 been facing a steady decline, rising only marginally in CY07. This should ring alarm bells for the company as it indicates a declining market value for the corporation with reduced investor confidence. Further, the book value of the company has also been falling. 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, decreasing to a negative level in last three years owing to the high level of losses as discussed earlier. The investor expectations have hit rock bottom. PIA needs radical business restructuring to come out of the crisis.

The EPS has touched an all time low of negative Rs 17.79 per share. The share price is Rs 3.17 per share (CY07: Rs 11.3 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.

FUTURE OUTLOOK Looking at the current financial position of the company, the future financial performance of the company seems dismal. It has performed poorly in all areas from profitability, debt management, liquidity which has eventually affected investor expectations. PIA, being a government entity, has a recurrent set of operating expenses in the form of high wages and salaries, employee perks, keeping up of uneconomical aircraft and having an economically irrational route plan. In 2007. PIA grappled with high fuel prices and high interest rates in the tight monetary situation of the country.

In 2010, PIA faces challenge of economic recession. People have generally faced a significant lowering of their disposable incomes. The company is right now at the brink of a major downturn and crisis. A highly qualified and efficient management is required to take the right decisions to get the company out of the turmoil. Presently, PIA is expanding its network. Non-stop flights between New York and Pakistan have been started, biweekly flights have been started from Pakistan to Leeds/Bradford, Sialkot airport has weekly flights to Dubai, Abu Dhabi and Muscat, 2 weekly flights from Istanbul to Amsterdam have been arranged, frequency of trips between Karachi and Sialkot were increased and more changes were done. This will help PIA to customize its service and attract more customers due to time availability. Due to its marketing efforts, PIA was able to increase its market share from 49.8% in 2007 to 50.1% in 2008.


PIA - Financial Highlights


                  2003     2004     2005     2006     2007     2008



Turnover           47,951,816  57,788,078  64,074,470  70,587,146  70,480,734  89,201,257

Gross Profit         11,082,333   8,734,272   5,133,634    704,929   3,924,239   3,639,290

Operating Profit       6,041,739   4,103,387  -1,759,442  -7,648,148  -5,935,076  -31,377,642

Profit Before Tax       3,700,100    837,303  -4,513,236  -13,215,157  -13,070,921  -39,729,290

Net Profit          1,298,652   2,306,598  -4,411,657  -12,763,420  -13,398,706  -35,880,157




Total Equity         6,673,496  13,441,192  10,446,298    138,288  -11,903,558  -46,701,927

Current Liabilities     23,197,885  18,990,089  21,237,101  41,025,290  52,049,542  71,707,905

Non-current Liabilities   26,694,251  46,245,292  41,214,104  65,728,191  77,655,550 100.471,189

Current Assets        20,470,245  19,716,285  12,770,243  18,353,435  13,251,331  15,039,282

Non-current Assets      36,095,387  58,960,288  60,127,260  88,538,334  105,522,243  124,630,585




Current Ratio           0.88     1.04      0.6     0.45     0.25     0.21




Inventory Turnover (days)     35.25     15.05     15.68     17.19     16.61     14.89

Days Sales Outstanding      25.63     26.88     29.34     31.26     25.60     23.56

Operating Cycle          60.88     41.93     45.02     48.45     42.21     38.45

Total Asset Turnover        0.85     0.73     0.88     0.66     0.59     0.64



Debt to Asset Ratio        0.88     0.83     0.86       1     1.09     1.23


Debt to Equity Ratio        7.48     4.85     5.98    771.96    -10.90     -3.69

Long Term Debt to Equity       4     3.44     3.95     475.3     -6.52     -2.15

Times Interest Earned       2.35     1.87     0.63      1.6     -0.83     -3.76




Gross Profit Margin       23.11%    15.11%     8.01%     1.00%     6.04%     4.08%

Profit Margin           2.71%     3.99%    -6.89%    -18.08%    -19.01%    -40.22%

Return on Assets         2.00%     3.00%    -6.00%    -12.00%    -11.28%    -25.69%

Return on Equity         19.00%    17.00%    -42.00%   -9230.00%    112.56%    76.83%




EPS                1.57     1.76     -2.55     -6.8     -6.61    -17.79

Average Market Price       20.27     13.37     11.6     7.74     11.3     3.17

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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