Analyzing the aviation industry

Despite rising costs, increase in taxes, financial burden and weak economic state, the demand for air travel has perpetually remained high. With the current law and order issues in Pakistan, people aim to travel abroad for peace and unwind whereas others move permanently through immigration. More and more Pakistanis in the past few years are placed in Saudi Arabia and Middle East increasing the demand for air travel. The price of tickets is high and further expected to increase with rising fuel costs. Even through ticket cost constitute to be a large portion of air travel, flights both domestic and international tend to be fully booked. Air travel is a multibillion dollar business globally where each major airline with wide internal presence e.g. Emirates, Singapore, Malaysia to name a few are placing orders with Airbus and Boeing for expansion of their fleet. In the current situation, one would always find flights overbooked with no availability during peak seasons. Flights are generally overbooked through advance booking for domestic as well as international travel. Looking at population growth and demand for travel, international airlines have increased their presence in Pakistan. Emirates have increased their routes to Pakistan multiple times a week.

Leisure travel has increased globally with countries with high inflow of tourists further investing in infrastructure and development as a mean to attract tourism which in turn translates into foreign exchange. Some cities aim to be tourist attractions, biggest success story in recent times being Dubai, Bangkok, Malaysia and Singapore. Dubai is investing heavily in developing of recreational activities and Malls to attract more tourists. International chains such as Intercontinental being the largest hotel group in the world, Hyatt, Marriott and Hilton all invest year on year in developing new hotels and chains in tourist resorts. The success of the airline industry is directly perpetual to the law and order situation of the country which attracts foreign tourists. Northern Pakistan including Chitral, Skardu, Gilgit, Swat, Kalam to name a few have raw sceneries, which many claim are better than Switzerland. It is unfortunate that these areas have not been developed with the law and order issues. There was once a time where a brand exercise commenced to advertise Pakistan as a brand just as “Malaysia Truly Asia” slogan. The tourism industry in Pakistan continues to be in despair as the country does not provide avenues to attract international tourism, which would increase arrival and routes for international carriers.

It is unfortunate that Pakistan does not have many airlines or businesses who want to set-up an airline within Pakistan. PIA in Pakistan has 39 aircrafts and controls a majority share in international routes from Pakistan. PIA has been highlighted frequency for management competence, poor customer services, high airfares and significant delays in arrivals and departures. PIA is also pointed for poor tap on internal cost controls and overstaffing, which erodes the bottom line in terms of profitability. Airblue based on general consumer opinion excel’s where PIA lacks in terms of customer services. Airblue with its fleet of 8 aircrafts primarily competes with PIA for Middle East destinations, domestic travel and Manchester. The company has ordered three Airbus A380 and will be leasing Boeing 747-400. The company has aggressive plans for growth. Shaheen Air has a total fleet of 17 aircrafts and has ordered 5 Airbus A320-200. The company aims to compete within Pakistan and Middle East in competition with PIA and Airblue. Shaheen competes with PIA and Airblue primarily on cost factors. The airline is known for the lower rates as compared to its competition.

The fundamental challenge for the airline industry particularly in Pakistan is the level of customer service and satisfaction coupled with international reach and destinations to help grow the business. With the rail network in turmoil, a wide opportunity exists to start low cost domestic flights through small aircrafts covering various cities across Pakistan. Costs controls are key to ensure margins for profitability. Globally, the top three costs for an airline are fuel, labor and maintenance. If fuel costs increase, this would result in the change in price of fares, however, if international demand for air travel remains sluggish, pressure on margins without an increase in air fare will reduce the profitability for the airlines. Maintenance expense is another major cost driver which includes stores and spares for replacement of parts. The ground time for an aircraft due to unavailability of spares creates unnecessary loss in revenue, which has been a major concern for PIA. Rumors have been in circulation that PIA management is deliberately pulling the performance if the airline down with an aim to reduce its price to book value for its sale. The new government has initiatives in line to privatize PIA and other government organizations which continue to be in losses and an expense for the government. The employees and unions of PIA are likely to revolt against the same since any attempt of privatization would result in loss of jobs, a hard decision which needs to be taken. With each change in the government, jobs are given through forced employment and are likely to continue if the present government does not take any action.

Each airline globally tends to expand network globally through purchase of new planes. One of the reasons why Emirates, Malaysian Airlines and Singapore Airlines have been highly regarded is due to their geographic reach and over 100 destinations to serve the world market rather than limiting their focus to few countries. A more critical success part for each airline is the customer services and experience of travel which needs to be reviewed timely for corrective measures. Best practices are seen with the best airlines winning awards in aviation. At best what airlines in Pakistan can do is to follow these best practices to uplift their standard. This requires investment in Capex, which may be arranged from lenders, sponsors and players in the capital market. The airline industry has scope to expand business provided Pakistan provides an enabling environment.