After decades of failed attempts, the Government of Pakistan has finally privatized the Pakistan International Airline (PIA) under intense pressure from the International Monetary Fund (IMF). Nonetheless, it is a deal that will give the national airline not only a chance to survive but to thrive in the long run. As part of structuring the sale for Rs. 135 billion, the government has assumed Rs. 654 billion in debt and pension obligations. The government gets only Rs. 10 billion in cash but it gives the new owners a clean balance sheet in return for a commitment to invest Rs. 125 billion of the Rs. 135 billion sale price in the carrier.
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| PIA Privatization Deal Structure. Source: Standard Capital Securities Pvt Ltd. |
Pakistani politicians have used state-owned enterprises like the PIA as a vehicle for doling out political patronage. They have given jobs, including top jobs, to political cronies who have neither the experience nor the inclination to run these PSUs like businesses. Their focus has been on extracting as much financial gains as possible, and sharing some of these gains with their political patrons.
Privatization will save Pakistan’s taxpayers tens of billions of rupees each year, and raise the prospect of the PIA becoming a contributor rather than a continuous drain on the national treasury. Prior experience with privatizations of state-owned units like banks and the telecom company has shown that this is a realistic expectation. Taxpayer money saved can be used to fund education, healthcare and critical infrastructure.
The PIA has a huge potential to succeed as an airline business. It has lucrative routes and landing rights which it is currently unable to fully utilize. It has a small aging fleet of 32 aircraft. Half of the fleet is out of service at any given time due to maintenance issues.
Arif Habib, the head of the buying consortium, has committed to hiring a professional management team to run the PIA as a business to serve its customers and shareholders. He has announced plans to grow the PIA fleet from around 15-18 operational aircraft to 38 in the first phase, then potentially reaching 64-65 aircraft within a few years, essential for reclaiming international routes and improving service by adding more planes and restoring operational strength.
Pakistan has the world's 6th largest diaspora. In addition, millions of Pakistanis travel for Hajj and Umrah pilgrimage to Saudi Arabia each year. Majority of the overseas Pakistanis and pilgrims would choose to travel by PIA if it offered convenient schedules and better service with direct flights to Pakistan.
A successful national airline can make a significant contribution to the nation's economy by improving connectivity for tourism, trade and investment in the country. Business people, in particular, value their time. Operating direct, non-stop flights to destinations in Pakistan from major international airports are essential for serving this customer base.
Related Links:
Haq's Musings
South Asia Investor Review
Pakistan Air Travel Market
Pakistan $20 Billion Tourism Industry Booming
Saving PIA, Railways and Education in Pakistan
Pakistan: Political Patronage Trumps Public Policy
Riaz Haq's Youtube Channel
13 comments:
Riaz Sb., good question. I guess we can look at record of previous privitization of KESC and MCB etc. to gauge if this privitization is going to be successful.
Zamir
Great news !! Based on Indian experience of Tatas acquiring Air India, the change is gradual but will be evident. Most of Air India domestic flights now have upgraded interiors and service . International sectors are still a struggle due to fierce competition and high expectations from flyers. https://www.aircraftinteriorsinternational.com/news/mro/air-india-completes-first-phase-of-legacy-a320neo-fleet-retrofit-programme.html
The airlines’ current debt is an obligation on PK government. Buyers are paying PK government Rs 135b, in part so PK could neutralize that debt. It is all about sliding numbers. Bottom line — Rs 135b to acquire the asset.
Buyers are not under obligation to keep the airline running. Its parts are far more valuable to keep it that way. Lucky group would do the same. Only Air Blue wouldn’t have. PK government did not have courage to shut it down.
Arif Habib is a stock trader. He is not known for long term investments. The government knows that. That’s what raise a large kickback scenario.
PIA restructuring was done prior to the privatization exercise.
Fiscal Year 2024 (Annual): PIA reported an operating profit of PKR 9.3 billion for the year ending December 31, 2024. This was its first operational profit in over 20 years following major restructuring and debt transfer to the government.
First Half 2025: For H1 2025 (Jan–Jun), PIA reported a pre-tax profit of PKR 11.5 billion and a net profit of PKR 6.8 billion.
The bidding has been done on this basis. To reiterate:
The understanding of Headline Value vs. Government Proceeds is critical to comprehend the deal.
- Equity Purchase Price (PKR 10 billion): This is the actual amount the consortium will pay the Government of Pakistan for a majority stake (reportedly 75%) in PIA. This money enters the national exchequer.
- Capital Injection Commitment (PKR 125 billion): This is the amount the new owners have committed to invest into PIA itself after the acquisition. This capital will be used to recapitalize operations, and potentially fund fleet renewal. This money does not go to the government; it is an investment into an asset the consortium will then own.
The addition of these two figures creates the PKR 135 billion Total Transaction Value. While not an uncommon headline in global deals, the lack of persistent, clear differentiation in public messaging has led to a widespread misconception that the government is receiving PKR 135 billion.
From what I read, the buyer would pay the govt 10B cash and the rest would be invested back into the çompany. That’s strange!
Rashid: “ From what I read, the buyer would pay the govt 10B cash and the rest would be invested back into the çompany. That’s strange”
It ‘s mandatory investment as a condition of sale. I think it makes a lot of sense to ensure the airline gets significant injection of capital to survive and thrive. Not unusual at all for a troubled state owned airline privatisation.
The deal is what it is after multiple failed attempts to sell the PIA! The alternative was to continue the status quo. That was not acceptable to the government or the IMF, nor would it revive the airline or rebuild it.
I guess that was the only legal way to mandate Rs 125 billion investment in the airline!
Riaz Sahib, at these give away terms you and some other Bay Area Pakistanis could have been a part of Arif Habib consortium! 🙃
Rashid: “at these give away terms you and some other Bay Area Pakistanis could have been a part of Arif Habib consortium!”
Arif Habib and other members of the consortium are experienced businesspeople running successful businesses in Pakistan. They know how to turn around a business in Pakistan. I think they have a good chance of succeeding in making PIA a viable and profitable business to serve customers and shareholders alike.
To compare with the very similar story of Air India across the border, I'm not sure if Tata group's "re-acquisition" of Air India (JRD Tata founded the airline as "Tata Airlines" in 1932) was such a bright idea after all, as the Tatas are still struggling with many of the legacy issues of the carrier that came from the decades of government ownership and mismanagement - poorly maintained aircrafts that are badly in need of repair or replacement, staff and workers who have been used to a different "work culture" etc. The recent crash of Flight 171 in Ahmedabad and the higher operational expenses arising from Pakistan's ban on the Indian carriers from using its airspace has only made their struggles worse. (The blame for the latter of course lies with the Modi govt's misadventure.)
"Air India asks govt for access to Chinese airspace as Pak ban strains finances: Report"
https://www.google.com/amp/s/www.cnbctv18.com/business/aviation/air-india-seeks-access-chinese-airspace-pakistan-ban-financial-strain-india-china-direct-flights-19799453.htm/amp
Furthermore, as part of the deal with the government the Tata group is also reportedly under resttrictions as to what it can and cannot do about the airline for a period of 5 years (I think) after its acquisition.
I can only hope that Air India would not become the proverbial albatross around Tata's neck and would not weigh down the group's other profitable businesses.
But good luck to Arif Habib group and the other members of the consortium who bought out the PIA. Just saying from the experience of the Tatas that running an airline and turning around its fortunes while fighting against legacy issues and geo-political troubles isn't exactly cake walk.
400 million USD capital injection by Arif habib is a decent amount if the investors can actually pull this off. For reference Air India has 6x fleet size of PIA and approx 3B USD Tata/Singapore air consortium is injecting.. so 400million in is in same zone.
Indeed Airlines is not for faint hearted but Tatas have taken the big leap. With troubles for Indigo, Tatas have a small window to solidify their position. Airline market in India still has small room before high speed trains start saturating the travel market in another 10years time.
@Anon,
I'm not expecting "high-speed trains" to saturate travel market in India anytime soon. The Vande Bharat isn't exactly "high speed" or even "semi-high speed" when you consider their current operational speeds in the Indian rail network. As for the real "high-speed" trains that can compete with airlines in travel times, its likely to take India a couple of decades at least to build a high speed rail network that comes anywhere near as large as China's at present.
Semi high speed will actually make a big dent in <1000km sectors/traveller volume.. as flights have hassle of travel to airports+security which in itself adds to travel time..where as most train travel connects city centres directly .. you mentioned Vande bharat and just that platform can scale to semi high speed and 10years is a long time in life of a young nation if things are done right ..
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