Pakistan International Airlines Privatization: Navigating Turbulent Skies Towards Economic Recovery
The caretaker administration in Pakistan is actively pursuing plans to privatize the financially troubled Pakistan International Airlines (PIA) ahead of the upcoming elections on February 8. This move marks a significant departure from the reluctance of previous elected governments to implement unpopular reforms, including the sale of the national flag carrier. The decision to privatize PIA was made in June as part of a broader agreement with the International Monetary Fund (IMF) for a $3 billion bailout to address Pakistan’s deep economic crisis.
The caretaker administration, which assumed office in August with the mandate to oversee the election process, has been empowered by the outgoing parliament to take necessary steps to meet the budgetary targets set in collaboration with the IMF. Privatization Minister Fawad Hasan Fawad stated that the plan to sell PIA is 98% complete, with the remaining 2% pending approval from the cabinet. The proposal, crafted by transaction adviser Ernst & Young, will be presented to the cabinet before the administration’s tenure concludes after the election. The cabinet will determine whether to sell the stake through a tender process or a government-to-government deal.
Fawad emphasized the unprecedented progress made in just four months, contrasting it with the unsuccessful attempts of past governments over a decade. The details of the privatization process, including the size of the stake to be sold, were not disclosed by Fawad. However, he confirmed that the plan involves segregating the airline’s debts into a separate entity.
According to sources close to the process, Ernst & Young’s report recommends offering a 51% stake with full management control to buyers after isolating the airline’s debts in a separate entity. PIA’s financial woes are substantial, with liabilities of 785 billion Pakistani rupees ($2.81 billion) and accumulated losses of 713 billion rupees as of June last year. The airline’s CEO anticipates additional losses of 112 billion rupees in 2023.
The fast-tracked privatization process includes amending a 2016 law that previously impeded the sale of majority shares in PIA. The caretaker government’s actions, including the amendment of the PIA privatization law, received approval from the IMF in a mid-January report expressing satisfaction over the measures taken to accelerate reforms of state-owned enterprises.
Under the proposed plan, government-guaranteed legacy debt and payables held by a consortium of seven domestic banks will be placed in a holding company. The government and the consortium have reportedly reached an agreement on settling the legacy debt, but specific details were not provided. The sources revealed that the banks are seeking a five-year bond with a 16.5% coupon against the debt, while the finance ministry is offering only 10%.
PIA has faced challenges beyond financial troubles, including governance and safety concerns raised by global aviation authorities. The airline’s operational issues came to light in early 2020 when Czech and Hungarian air force jets intercepted a PIA flight due to a pilot’s “avoidable human error.” Subsequently, a PIA plane crash in Karachi claimed nearly 100 lives, and a fake pilot license scandal emerged in 2020. The European Union Aviation Safety Agency (EASA) imposed a ban on PIA, restricting it from operating on lucrative routes in Europe and the UK, resulting in substantial revenue losses.
Despite ongoing pleas to lift the ban, PIA remains grounded, adding to its financial woes. Additionally, creditors have seized PIA aircraft in recent months due to non-payment of lease fees and ground handling charges. As the government contemplates the sale of PIA, the airline continues to require financial support, with an estimated 23.7 billion rupees needed to sustain operations for another five to six months before a new buyer assumes control.
While the caretaker government aims to expedite the privatization process, not everyone agrees with the accelerated timeline. Three senior airline officials, speaking anonymously, expressed concerns that a hasty sale could devalue PIA and emphasized the importance of transparent due diligence.
However, Singapore-based aviation analyst Brendan Sobie argued that PIA’s dire financial situation leaves little room for alternatives, and the proposed privatization plan may be the only viable option to save the airline. Sobie highlighted the need for deep restructuring and debt clearance for a successful sale.
PIA’s assets, including key slots at major airports and air routes to top destinations, could be attractive to potential buyers. The airline generates approximately 280 billion rupees in annual revenues, despite the EU ban. PIA’s assets include 10 slots at Heathrow, valued at 70 billion rupees annually, along with additional slots at Manchester and Birmingham. Turkish and Kuwaiti airlines currently operate 70% of these slots under a business arrangement with PIA.
The airline’s physical assets, such as aircraft and hotels in Paris and New York, are valued at 105.6 billion rupees ($375 million) as per the 2023 annual report. However, PIA officials suggest that the market value of these assets could exceed $1 billion. Regardless, they clarify that the hotels and other properties are not up for sale.
As the caretaker administration prepares to hand over responsibilities after the elections, the privatization of PIA remains a critical issue that will impact the incoming government’s engagement with the IMF, especially as the current bailout program is set to expire in March. The successful execution of the privatization plan will be closely monitored, with the fate of PIA and its financial future hanging in the balance.
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