Airlineres

Analysis of PIA & Reasons of Poor Performance

ContentsINTRODUCTION......................................................................................................................................1

INTRODUCTION...........................................................................................................................................2

BACKGROUND.............................................................................................................................................5

PROBLEM STATEMENT................................................................................................................................5

SIGNIFICANCE OF THE STUDY......................................................................................................................6

SCOPE OF THE STUDY..................................................................................................................................6

RESEARCH DESIGN...............................................................................................................................7

Research Design & Methodology..............................................................................................................8

RESEARCH DESIGN....................................................................................................................................8

RESEARCH OBJECTIVES............................................................................................................................8

SOURCES OF DATA....................................................................................................................................8

A. Primary Source....................................................................................................................................8

B. Secondary Source................................................................................................................................8

SECONDARY SOURCES.............................................................................................................................9

RESEARCH INSTRUMENTS.......................................................................................................................9

I. Questionnaire Analysis........................................................................................................................9

II. Discussion analysis..............................................................................................................................9

QUALITATIVE QUANTITATIVE RESEARCH.............................................................................................9

UNIT OF ANALYSIS....................................................................................................................................9

LITERATURE REVIEW..........................................................................................................................10

REVIEW OF THE RELATED LITERATURE......................................................................................................11

US Airline Industry.................................................................................................................................11

Indian Airline Industry...........................................................................................................................12

Pakistan Airline Industry........................................................................................................................13

Background of PIA Airline..........................................................................................................................14

Labor Unions Strike............................................................................................................................16

Banned For Safety Issues...................................................................................................................16

During recruitment:...........................................................................................................................18

Employee Motivation Level:..............................................................................................................18

MBA Page 1


Nepotism and political involvement in the recruitment and selection:.............................................18

The lack of experience when it comes to the aerospace industry and top management:.................19

Lack of Planning:................................................................................................................................19

DATA ANALYSIS...................................................................................................................................20

Data analysis..............................................................................................................................................21

Financial Standing of PIA...........................................................................................................................22

Share price during last 5 years...................................................................................................................23

Industry Overview.....................................................................................................................................24

Differences between Lufthansa and PIA airline for the investors..............................................................25

COMPARISON OF PIA WITH LUFTHANSA...................................................................................................26

Lufthansa Financial Position..................................................................................................................26

PIA Financial Position.............................................................................................................................26

Strategic Development at LUFTHANSA..................................................................................................27

Strategic Development at PIA................................................................................................................28

Human Capital Management at Lufthansa............................................................................................28


Image of Lufthansa................................................................................................................................29

Image of PIA..........................................................................................................................................30

Financial Performance...........................................................................................................................30

Financial Highlights....................................................................................................................................31

Conclusion.................................................................................................................................................32

CLOSING UP..........................................................................................................................................34

FINDINGS FROM THE RESEARCH...............................................................................................................35

CONCLUSION.............................................................................................................................................36

RECOMMENDATIONS................................................................................................................................37

References.................................................................................................................................................38

Appendix...................................................................................................................................................39

MBA Page 2


INTRODUCTION

MBA Page 3


INTRODUCTION

In the 21st century, globalization, population, and technological advances in various

sectors have assisted to establish tourism into one of the world’s biggest industries. According to

a study, the receipts of tourism have reached more than £1100 billion by the end of 2006. In

addition to that, this sector has generated more than 350 jobs. Since, the sector has the ability of

generating income, taxes, currency and jobs, the industry of tourism needs to develop more to

make a significant contribution to the country’s economy across the globe (Bornhorst et al. 2010:

576).

Tourism industry is one of the largest worldwide, generates nearly 212 million jobs and

represents an important contribution to gross domestic product of many countries. In an industry

of this size, the information and communication technology (ICT) has played a key role as a

means to improve the efficiency of the organization as well as the delivery of services (Bornhorst

et al. 2010: 577).

Airline industry is described as a strongly competitive market. The air travel has always

been a large and growing industry. It facilitates international investments, tourism, world trade

and economic growth. It is, therefore, centre to the globalization that is taking place in numerous

other countries. In previous years, there has been a shakedown throughout the industry, having

wider effects on the trends of international and domestic services expansion. Initially, the

industry was partially or completely owned by the Government. Afterwards keeping the potential

in view, Private businesses also start their own Airliners and starts attracting money. Before 2011

incident the Airline industry is regarded as one of the biggest and fastest growing industry.

If we analyze the market of Pakistani Airliners they have some good number in their

financial statements other than the Government Airliner (PIA). But it was the time when these

MBA Page 4


Local Airlines are rated as top of the world, (PIA) is considered as one of the top most airlines of

the world and its Pilots are considered as highly trained and able to handle any of the problems in

air. According to an IATA survey, (PIA) was ranked as top 10 airlines of the world.

Pakistan International Airlines is the national flag carrier and was established in 1955. It

not only provides transportation services, but its operations extend to providing cargo services

and courier services also. Pakistan International Airlines serves two markets – Domestic and

International. In the domestic sector, it has outperformed itself by stretching its networks to areas

where other airlines do not fly to. In the international market it faces severe competition,

especially due to the fact that these international organizations are providing fares much lower

than Pakistan International Airlines. Internationally also, Pakistan International Airlines is

encountered with a severe and strong challenge with many renowned international names.

Pakistan International Airlines faces competition with not only international airlines but also

with local airlines on the various routes to the Middle East and the Gulf.

Due to fierce competition and rising oil prices, international aviation industry regulations

and some internal factors such as human resource issues of over recruitment, de-motivated

employees, mismanagement of resources both in case of manpower and other resources, aged

fleet, corruption and lack of accountability PIA is facing a deep financial crisis. It is losing its

market share both in international market and domestic circuit. The present report is written

about the current situation of PIA and future plan of action for PIA.

Although the Airline industry is no longer experiencing the rapid growth it exhibited

before 1990; commercial air travel in the U.S. remains the preferred method of transportation for

a majority of Americans due to cost-effectiveness and timesaving characteristics. From 1980 to

MBA Page 5


1990 the number of passengers traveling by air increased by approximately 72%, in contrast, in

the 1990-1998 period, the airline industry only experienced 36% growth.

On the other hand, if we analyze the Indian airline industry we would find out the fact

that they are operating the local (Government Owned) as well as, local airlines with full zeal and

zest. This means that they are increasing the profit figures and on the same way enhancing the

market share internationally.

One of the main characteristics of the international aviation market, its high concentration

in large aircraft, has remained over the past years. This product category accounted for 55% of

industry sales in 2007(Graph 1). The midsize aircraft represented approximately 10% of trade

International small and less than 1%. The helicopter industry worldwide sold $ 6.4 billion or

approximately 4% of the total aeronautical sector. On its Instead, suppliers of parts, components

and systems continued presenting high participation in international trade, accounting in 2007 for

about ⅓ of Sales of the aviation industry. It is worth mentioning that this last segment includes

both components and systems used in the production process as the spare parts of Aircraft in use.

The involvement of Government in these state owned institutions will results in either

increase in their performance or on the other hand they would change the whole picture and

diminishes the overall growth. PIA was once renowned for its stunning service and better

compliance and flight safety. People feel proud while traveling from the flag bearing airline. But

things have changed suddenly the Growth pattern and sales graph of PIA has gone down so

much so that, its losing its valued customers. Government has announced a bailout package and

emergency Aid for the Public institution in order to buy new planes and to meet up the daily

requirements. On the other hand, one more reason is to fetch the daily losses.

MBA Page 6


From 1992 to 2004, PIA has given tough time to other leading international Airlines

BACKGROUND

Company Pakistan International Airlines, for which this year could be the fourth

unprofitable year in a row, plans to bail out of 30 billion rupees ($ 379 million), putting their

hotels. For her, it is perhaps the only opportunity to raise funds in the credit crisis. "We are an

organization in which no one wants to invest" - complained the managing director of the

corporation Aydzhar Mohammad Haroon. New York's Roosevelt Hotel Scribe in Paris and will

be part of the new business, which will be open to investment by state-owned companies.

Pakistan's largest airline also plans to reduce its staff by 5,000, or 28% of the total, going to

outsource. This is a necessary measure, due to the inability to obtain government assistance.

Among other things, Pakistan International Airlines, 88% owned by the state, has to cope with

the effects of rising fuel prices and reduced demand for tourist services caused by the downturn

in the world economy. For the first nine months of the year PIA suffered a loss of 38.4 billion

rupees, while last year their amount of 10.9 billion, according to "Bloomberg". According to

Harun, next week, the airline hopes to get government approval for the operation with hotels.

Investors will be provided with a guaranteed rate of return on hotels worth more than 60 billion

rupees. After about five years of PIA expects to buy them back.

PROBLEM STATEMENT

ANALYSIS OF THE PERFORMACE OF PIA AND THE REASONS OF HUGE LOSSES

MBA Page 7


SIGNIFICANCE OF THE STUDY

The study is significant in such a manner that it indicates the causes of loos and

Uncertainty to the flag bearing airline. As discussed above that PIA is world’s renowned airline

and is competing in the market with full zeal and zest. Then what are the reasons when other

Airliners are back to the track of economic progression, what is the reason why PIA is turning to

huge losses. Despite of a number of competitive advantages which the Airline enjoys, it is facing

huge losses. For example: Hajj flights are only allowed for PIA and thousands of passengers

every year travel from PIA. On the other hand, PIA enjoys Enormous Subsidies in Taxes from

the Government of Pakistan.

SCOPE OF THE STUDY

The Scope of the study is unique in the sense that it is useful for the employees as well as,

for the stakeholders who wants to know some strategic and factual reasons behind its downturn.

If we analyze the current Airline Market in Pakistan, One could find out the fact that, New

Airlines are Incorporating their business operations in Pakistan with a heavy investment For

Example: Recently introduced: Indus Air. Than why not PIA which is pioneer in the market and

has a flying reputation.

MBA Page 8


RESEARCH DESIGN

MBA Page 9


Research Design & Methodology

RESEARCH DESIGN

The analysis of research highlights the research design as ‘Descriptive’. This kind of

research design provides a complete description of regarding the problem statement and the

concepts discussed in it. As in this thesis Analysis of PIA and reasons of losses are discussed in a

descriptive manner.

RESEARCH OBJECTIVES

The main objective of the research study is as follows:

a) Aviation industry of Pakistan and Analysis of PIA?

b) What are the major reasons why the flag bearing Airline his facing Economic and

financial Downturn?

c) SWOT analysis describing the strengths and Weaknesses of PIA?

SOURCES OF DATA

A. Primary Source

B. Secondary Source

Primary data is gathered from Interviews from the people at PIA whereas on the other

hand, Secondary data is collected from a complete analysis of the international literature and

examples. Discussion with the employees of PIA is the major source of collecting information at

PIA.

MBA Page 10


SECONDARY SOURCES

Secondary sources for the data extraction are collected from International Research

papers and from IATA Association. On the other hand, Articles and performance of other

airlines which are in competition with PIA.

RESEARCH INSTRUMENTS

I. Questionnaire Analysis

II. Discussion analysis.

QUALITATIVE QUANTITATIVE RESEARCH

It is majorly a qualitative research in which clear description of the analysis of Pakistani

Aviation Market along with the performance of PIA is discussed. The research study is more of

qualitative nature rather than quantitative.

UNIT OF ANALYSIS

a) PIA Airline

b) Economic and financial factors

MBA Page 11


LITERATURE REVIEW

MBA Page 12


REVIEW OF THE RELATED LITERATURE

US Airline IndustryAir traffic is an engine of global growth and it seems that it will remain, despite the crisis.

To date, the number of passengers grew by an average 5% per year worldwide. Airbus, as well as

U.S. rival Boeing, predicts a growing demand for new aircraft over the next 20 years. The

manufacturers are benefiting mainly two scenarios. Firstly, more and more people in emerging

countries can afford air travel. Furthermore, older aircraft require replacement in developed

countries. After the financial recovery of US the Airliners are also increasing in their demands

and passengers. Ryan Air which is regarded as one of the most competitive airline strikes high in

the recent years.

The economic problems facing the Euro zone have impacted the operations of the airline

industry and forced airlines to implement new strategies in light of declining million passengers

specifically in that region, which stopped flying this year. The issue has had an adverse effect on

the demand for air travel and has affected all airlines serving Europe, we are one of the most

important across the Atlantic, in fact the most passengers are transported to Europe and itself has

affected us, we responded with a reduction in capacity as demand requires and reactivate as

demand recovers, "said Jeff Smisek, president and CEO of United Airlines. Under the

International Press Day to mark the second anniversary of the United-Continental merger was

attended by 75 journalists from all continents and most countries to which the airline flies,

Smisek acknowledged that integration was a very difficult, with many changes.

"It really is a slow process, the main problem occurred with the process of changing

technologies, setting up facilities, internet sites, etc. are many changes and some people are

MBA Page 13


resistant to change, that's been the hardest part of the merger, "the official said, during a tour of

the United Operations Center, Willis Tower in this city. Julian Pachon, executive director of

Planning Operations Center, said the company invested about $ 50 million just for the

construction and adaptation of the new Operations Center which occupies only one of the 102-

story tower, but the company actually pay rent for another 19 levels of offices.

Indian Airline Industry

In the recent years the Indian economy has grown with many folds and the economic

growth rate of India touches to 11.22% last year. Having a huge market the Indian business

environment enjoys full liberty of reaping profits. The Flag bearing airline is working under

public private partnership and it is doing better. The financial analysis of the Indian airline

highlights the growth at 3.5% last year. Internationally the Indian market has been the focus of

attention for the foreign investors. On the other hand they have the world largest IT setup which

helps in standing the growth pillars of the country. Last year 5,600 international delegations and

other investors move from different parts of the world and landed in India for the purpose of

investment and doing business in the world’s second largest market.

According to Dev Mukherji, Indian airlines are struggling towards expanding its routes.

The financial position is quite better and we have also witnessed increased air traffic from the

last three years. After saturation of US markets Indian market seems to be a good option for

international investors and therefore, Indian is witnessing larger number of tourists as well as

investors to come in.

MBA Page 14


Most of the US and UK firms have outsourced their operations to the Indian

manufacturers and in that case the transfer of employees and workers have become a common

practice. India being an international market for the investors is reaping the benefits.

Pakistan Airline Industry

The flag bearing airline was once the proud of Pakistani nation. According to Naseem

Khanji, the Director Commercial Operations Emirates Airlines is of the view that Pakistan

International Airline the potential to knock out each and every player from the domestic market.

But irony of the fate that, the Airline is doing the same as it has to do.

Pakistan International Airline (PIA) is one of the most progressive airlines before 2006;

the Airliner has the top ranking and efficient pilots. Despite of the old Radar and guidance

system the Airliner didn’t give a chance to any other airline. This becomes crystal clear, when

PIA won the award of being the best airlines having efficient pilots in the whole world.

The financial records of the flag bearing airline show stunning results before 2005, the

EPS was 1.21 per share. And the airline is having a growth rate of 1.23% annually. According to

Mr. Haseeb Hasan (Chairman, Sherman Securities) Pakistan has the only airline and investors

have invested a lot of money in the shares of PIA, when the situation and financial position of

the company was too strong. The PIA has to face two tragic events, the one is the 9/11, whereas

others include issues like rampant corruption, mismanagement, excessive employment on

political basis, borrow loans on higher rates, internal mismanagement etc.

According to Mr. Shadaad Soofi, Director Procurement and Purchase is of the view that

PIA has now become white elephant, an institution which the Government couldn’t even close

Down. It was a time when people outside Pakistan that is from international routes proud to be

MBA Page 15


travel from it. The airline has the finest and most trained working staff which includes (Cabin

Crew, Pilots and Aviation authorities). But as the financial position of the company goes down

the competitors takes the advantage of this, and starts recruiting the competitive staff from PIA.

According to Sohail Hamdan the Director HR, in the past 3 years we have lost our 21

experienced pilots. 33 Aeronautical and maintenance engineers are taken over by Emirates and

other competing Airlines. Most of the staff shifted from PIA just because the Institution is under

severe financial crises and which makes the growth stagnant. The decreasing popularity and

reputation make the employees to leave the Airline and shift to any other one. Emirates being the

biggest competitor of PIA hired 80% of their staff from PIA and other local airlines, now they

are enjoying experienced people without expensing more on training them. The main issue the

airline is facing is that the government is not paying proper and the needed attention which the

institute needs. But on the other hand, they are making it weaker day by day by employing

people of no use. In the last four years 1,875 employees are directly recruited on influence basis.

It is irony of the fate that, the department didn’t have the positions for these employees but they

are created on political basis. These employees are even not accountable for anything because

they are hired on influence basis. Most of them didn’t know the Job Description and create

lobbies to secure them and their positions.

Background of PIA Airline

Dynamism in the environment has changed the way of doing business. Now safety and service

have become the major preference of customers. While the airline industry has also changed the

pace of its growth and sustainability turn into huge losses after 9/11 especially. From a number

of Airliners PIA Air holds a significant position due to its operations and service quality (Fojt ,

MBA Page 16


2006). According to PIA they are progressing towards becoming a strong airline and to address

the challenges and realize the opportunities – but we must take decisive action, as we have

throughout our history. Safety is always the PIA group’s first priority we invest $13 million in

aircraft maintenance.

As a global industry, aviation is more exposed than almost any other sector to unpredictable

shocks business resilience responding to shocks and crisis, natural disasters, political instability

and global economic volatility all have an impact on industry performance and profitability.

Australia is located within the fastest growing economic zone in the world new realities, new

opportunities – the growth of Asia if it is to grow and thrive – and continue driving economic

activity in Australia – the PIA Group must capitalize on the opportunities Asia presents (Annual

report of Lufthansa. 2011, pp. 21 – 28).

According to the financial analysts of JS group Ahmed Islam, if PIA addresses some important

issues it would again tore the best position in the whole world again. Some of them are as

follows:

a) Corruption

b) Bad Governance (Labor Union s and Strikes)

c) Extra recruitment of employees and workers.

d) Circular debt

e) Political influence

f) Falling reputation

g) Safety issues.

MBA Page 17


The Supreme Court of Pakistan banned the recruitment of new staff to the state airline

"Pakistan International Airlines' (PIA) in the course of the application the organization expressed

concern about alleged corruption and mismanagement in the PIA, including the purchase of

aircraft at inflated prices and the cancellation of hundreds of flights this year, said the channel

"Dawn News". At trial, the board brought to court for the next meeting ACA Chairman

Lieutenant General (Retd) Malik Asif Hayat and Director General of Civil Aviation Agency

Nadeem Yusufzaya, media reported. Court required the ACA report on the recruitment of

specialists and adjourned the hearing for two weeks.

Labor Unions Strike

According to Singapore's "Lianhe Zaobao" reported on the 11th, the Pakistan International

Airlines employees strike entered the third day, nearly 100 flights were grounded, 25,000

passengers were affected, causing airlines lost about Rs. 1170 million..

The part of the staff of the airlines and lead to a strike against management with Turkish Airlines

signed a route-sharing agreement; They also demanded the expulsion of Managing Director of

the Company. Pakistan International Airlines Pilots Association said, the staff will continue to

strike until sharing agreement on the routes in the plan is terminated; the managing director to

leave and the reinstatement of all employees were suspended from far.

Banned For Safety Issues

Islamabad (Pakistan) - A plane of the airline Pakistan International Airlines Pakistan has been

victim of a fire at the international airport of Islamabad (Pakistan) after the APU system,

auxiliary power unit began to catch fire.

MBA Page 18


The aircraft, a Boeing 777-200, registration AP-BGL, flight PK701, which would make the

connection between Islamabad International Airport and Manchester International Airport

(United Kingdom) was ready for departure and passengers had embarked when sparks and

smoke came out of the back of the unit which is located between the other auxiliary power unit

that provides power when the aircraft is on the ground. Fire services are immediately intervened

to extinguish the fire start. Surprisingly, the passengers were not landed and the APU was simply

disconnected so that the device can however take off with the minimum of delay, about two

hours. Recall that for all practical purposes the Boeing 777 aircraft are the only company not to

be blacklisted on European soil.

The business loss of PIA has come to 35% to PKR66.22 billion. However, non-operating costs

related to loans rose, rose nearly 50%. Operating profit also declined to PKR5.94 billion

PKR8.45 2006. Currently, PIA is ranked among the Asians top 20 Airliners. PIA still has the

ability to regain and remark the historical position. But due to a number of reasons, PIA’s market

share is currently declining which was at times greater than the world best airliners. Despite of

number of difficulties and issues the airline still inhabit a protuberant position in the national

circuit to be carrying the flag position the national but current threat to national flag carrier. The

company has faced huge losses of more than Rs. 30 Billion in total; on the other hand, the debts

of PIA are piling up in dollars. Expenditures of the company going and growing, but profits are

small. All the money is gone and the shareholders are now facing economic downturn. In the last

fiscal year, PIA has dropped its share from the international market up 70%. International front

things were not so different PIA, when the market share of the national airline international

market fell 48-43%. Yield IRP decreases. PIA share price closed at Rs 5.25 in the in 2008 shows

a capital loss of about 14% since last month. On May 2, 2008, the share price of the company

MBA Page 19


was 6.03 Rs. But in 2011 the share price of PIA has decreased up to Rs. 4.74 and is now become

Rs. 1.32. The declining share price of the airline is because of rampant corruption,

mismanagement and political interference, the Pakistan International Airlines is currently facing

a loss of about 40 million rupees a day. The confidence of local and international shareholders is

declining day by day, most of the people are of the view that time comes when Government of

Pakistan has to withdraw from PIA. There are still chances of hop for the Airline, said Captain

Mushtaq.

From a pileup of problems which the airline is facing some of them are given below.

During recruitment:

PIA is an organization which has more than 18,000 employees. The fleet includes 43 aircraft.

This operatizing aircrafts are only 33. If we compare this ratio with the industries overall average

ratio it’s between 150 – 250 employees. This situation describes the issue of overstaffing clearly.

And it also describes the company's position clearly; this would increase the cost per employee

and declines the overall productivity.

Employee Motivation Level:

The reputation of PIA is declining in every segment, be it flight Safety or Service quality. This

would decrease the employee motivation level and on the other hand, it is overstaffing which is

making the situation more difficult. Staff members didn’t feel confident in and try to get other

organizations. It would also decrease the motivation level as well as the decision power also.

Nepotism and political involvement in the recruitment and selection:

PIA is facing the worst financial crises of all times but on the other hand, the airline is recruiting

as many employees as then can but the irony of the fate is that these employees are hired on

MBA Page 20


heavy salaries, without no use. These employees includes: managers and upper level staff who

are hired at not only higher salaries but on higher grades too. According to Mr. kamal Ahmed, in

the recent government more than 6500 employees are hired on different position out of which

65% are hired directly on political basis. The deputy general manager today is another example

of a pilot profession and currently deputy general manager still fly a few hours a week to keep

your license away.

The lack of experience when it comes to the aerospace industry and top management:

The three former presidents of PIA include Mr. Tariq Kirmani who was from PSO, Mr.

Zafar Khan was PTCL and Mr. Ahmed Said was not an experience in the service sector in the

aviation industry. What can they contribute to the organization without such knowledge?

Lack of Planning:

All the top most airlines of the world plan each and every aspect before. But the

management structure of PIA is designed in such a manner that, there is authority clash between

the departments and if any of the disagreement arises between the departments, the problem will

become a political issue at PIA.

MBA Page 21


DATA ANALYSIS

MBA Page 22


Data analysis

For the purpose of data gathering a questionnaire is filled with the lower management of PIA.

Through this questionnaire following facts and figures are disclosed to us.

60% of low level management thinks that they are not part of decision making.

The second question shows that only 20% employees are not happy with the salary

package.

Response of question six indicates that 60% employees are satisfied and 40% are partly

satisfied with the facilities provide in the department. Majority of the employees are

satisfied with quality of training program. Repair cost is the major cause of loss to PIA in

the opinion of employees.

80% employees are satisfied with code of conduct.

60% employees admit the political influence on working of PIA. Majority of employee

suggest that proper training is needed to make the organization successful.

60% of the employees are not happy with high transfer rate. On the other hand data

collecting from customers reveal the following facts.

50% of customers are not happy with the services of PIA. Non punctuality of departure

and arrival of flights also displeased the customers. Many customers angry with ticket

getting process.

By taking a view of profit and loss account of PIA that indicate many of the expenses

increases at a very high rate which causes loss to PIA.

MBA Page 23


These expenses are fuel cost that increases due to rapid rise in oil prices in recent years.

Repairing expenses also becoming the major of cost that is very as compared to others

companies of same business.

Due to war against terrorism in Afghanistan is also badly affected the revenue of PIA.

Due to this war the insurance expenses also increases. And it also causes to decrease the

number passengers.

As the value of rupee decreases which causes a loss to company.

Financial Standing of PIA

Income Statement

Revenue 26,764m

Net Income -9m

EPS - Net Income - Diluted -1.02

Revenue per Share 23.96

Total Assets 21,382m

Total Liabilities 15,198m

Shareholders' Equity 6,184m

Profitability Ratios 06/30/2011

06/30/2010

06/30/2009

ROA % (Net) 1.23 0.56 0.59

ROE % (Net) 4.14 1.92 2.04

MBA Page 24


ROI % (Operating) 3.47 2.25 2.06

EBITDA Margin % 12.88 11.92 10.9

Calculated Tax Rate % 24.58 34.07 29.59

Liquidity Ratios 06/30/2011

06/30/2010

06/30/2009

Quick Ratio 0.78 0.81 0.78

Current Ratio 0.9 0.93 0.89

Net Current Assets % TA (2.85) (2.05) (3.73)

Debt Management 06/30/2011

06/30/2010

06/30/2009

LT Debt to Equity 0.89 0.86 0.86

Total Debt to Equity 0.98 0.96 0.96

Interest Coverage 2.34 3.25 28.48

Asset Management 06/30/2011

06/30/2010

06/30/2009

Total Asset Turnover 0.73 0.69 0.73

Receivables Turnover 14.08 12.86 11.69

Inventory Turnover 43.11 48.41 62.5

Property Plant & Equip Turnover 1.14 1.12 1.19

Cash & Equivalents Turnover 4.14 3.76 4.68

Per Share 06/30/2011

06/30/2010

06/30/2009

Cash Flow per Share 0.79 0.58 0.55

Book Value per Share 2.71 2.62 2.53

MBA Page 25


Share price during last 5 yearsShare Price

2008 4.65

2009 3.28

2010 2.91

2011 1.812

2012 1.257

Industry Overview

The international airline industry has experience diminishing growth in the past five years due to

a slowdown in demand, high fuel costs and falling profitability. The number of participants in

the International Airlines industry has grown, with the introduction of Tiger Airways and Air

Asia X in 2007. Strong competition has resulted in operators leaving the industry, such as Swiss

Airlines and Japanese Airlines. International Airline Industry To and from Australia, the total

number of passengers carried on international flights has increased at a 5.5% annualized rate

over the past five years. In 2011, passenger services and the rest from freight generated 90.1% of

total revenue. Industry analysts forecast revenue growth at an average rate of 2.7% per annum,

due to lower consumer and business sentiment. Material and supply expenses account for 47% of

industry revenues, with fuel accounting for 20- 30% of all operating expenses. Fuel prices have

increased strongly over the past five years at an average of 26.2% per annum. Wages are another

major expense accounting for an estimated 12.2% of revenue. Average wages are estimated at

MBA Page 26


$113,249 per annum per person. Medium industry concentration with the top four players

accounting for 47.6% of industry revenue High and increasing competition on price and quality,

as passenger preferences change. High but decreasing barriers to entry as costs to purchase

aircrafts, machinery and skilled labor are very high and there is limited airport capacity (Bragg &

Steven, 2004, pp 22 - 29).

Barriers are decreasing as the foreign ownership cap has been raised and the Government has

allowed 100% foreign owned companies to begin operations to and from Australia. Medium and

increasing industry globalization as increasing levels of international trade results in higher

demand for international air services. Australian Domestic Airline Industry the Australian

domestic airline industry appears to be maturing as growth slows following rapid growth in the

1990s and early 2000s with the introduction of low-cost airlines. Due to increasing competition

in the sector, revenue growth is forecast to average 0.9% per annum in future years. Materials

and supplies expenses account for 48% of industry revenue. Fuel costs account for 10- 30% of

operating expenses. Depreciation accounts for an estimated 8.3% of operating revenue, which

has risen due to increasing capital investment.

Differences between Lufthansa and PIA airline for the investors

Managers should have the ability to assess performance of decisions they have made or

intend to make, through structured and robust financial analysis. Managers need tools to forecast

or predict as they struggle to make decisions on a daily basis to execute business strategy for the

company. Financial analysis tools can drive projections and predictions in many areas of the

business, from planning for production and distribution to decisions on a product or service.

MBA Page 27


Managers can use these tools to both assess and improve business performance (Bragg & Steven,

2004, pp 22 - 29).

Ratio analysis allows management too quickly and efficiently addresses concerns like return on

capital investment and the company’s profit margin

Ratio analysis allows management too quickly and efficiently addresses concerns like

return on capital investment and the company’s profit margin. Ratio analysis can be an effective

and useful management tool if ratios are calculated on items that are meaningful and where

practical steps can be taken to make improvements in business operations based on the

information the ratios reveal. Vertical analysis is used to develop insight into the economic

characteristics of different industries and of different firms in the same industry. This can make

you aware of developments and areas of opportunity that can make your business more

competitive, and ultimately more profitable. Financial statements will provide managers with

valuable information, the above-mentioned comparisons and analysis can be perform and can

give managers insight into how they can better manage the business can improve

profitability (Bragg, 2004).

COMPARISON OF PIA WITH LUFTHANSA

Lufthansa Financial Position

Lufthansa is known for surviving financial turmoil in the past when others were engulfed

in bankruptcy and receiving bailout packages their governments. Lufthansa was close to

bankruptcy and facing fierce competition from low cost no frills airlines the company sold fifty

percent of its stake in the Thomas Cook Tourism Company to Karstadt Quelle. They also sold

MBA Page 28


parts of LSG Sky Chef which handled catering. Lufthansa wanted to raise money and cut cost.

Before this strategy Lufthansa acquired Swiss Air as a way to expand globally. They used that

strategy to look for share holdings in other airlines. That was the reason why they did away with

Ground Globe Airport Service and financial divestments in order to concentrate on corporate

strategy to expand internationally (Bragg & Steven, 2004, pp 22 - 29).

PIA Financial Position

PIA is on the verge of intense losses and the airline is of the view to bankruptcy. If PIA was a

private Airline it would be forced shutdown as its financial position is under huge distress. The

airline is under debt of 11 billion and it is increasing day by day. On the other hand, the financial

losses of PIA grew by 31% in the last four years, while their performance standard decreases up

to 17%.

Strategic Development at LUFTHANSA

Lufthansa used the low cost moving strategy because there were high barriers to mergers and

acquisitions of airlines due to regulations. The potential risks Lufthansa may encounter since one

third of the work force is non-German, the company can easily lose its workforce. Morale can

also be low with existing German employees due to lack of integration into the normal flow of

communications and consensus building. A potential risk for Lufthansa is not having employees

trained properly because training programs has to be developed in different languages and for

different cultures.

Management is also faced with the new emergence of issues concerning global warming.

Therefore, Lufthansa has to strategize a way to reduce emissions from its air traffic without the

MBA Page 29


risk of losing their license in certain countries. Some of Lufthansa organization strategy is

incorporated into the Star Alliance organization structure which is made up of corporate office,

commercial, products and services, loyalty marketing, and information technology. Lufthansa

itself consists of Lufthansa Holdings and Lufthansa Regional. Within this structure Lufthansa

manages its organization effectively with various departments such as catering, logistics,

passage, MRO, IT Services, leisure and travel, Swiss Air, Lufthansa Regional and Lufthansa’s

Core Fleet.

Strategic Development at PIA

PIA is of the view to design a cost saving strategy but the company is under huge debts and

therefore, it is bound to implement the old strategy of recovering the losses through increasing

the fair prices. Sudden change in the Top management of PIA retains from developing a

corporate Strategy for the Airliner. If they design a strategy the top management changes and the

implementation plan goes to trash bin. But now PIA is planning to implement a long term

strategy which saves the Airline from being closure.

Human Capital Management at Lufthansa

In order to develop human capital at Lufthansa the company should have an overall strategic

plan, annual performance goals; analyze the outcome of the strategic plan and how it is used in

decision making. All human capital plans should be integrated with Lufthansa’s strategic plan.

The management team in each organizational structure should meet the needs of its customers

efficiently and effectively. A workforce plan and summary should be updated frequently,

training and recruited will have to updated in all languages and cultures.

MBA Page 30


Human Capital Management at Lufthansa

PIA is overburdened by useless staff. The analysis and interviews from the management tell us

that, after huge and rampant corporation every department of the Airline is blessed with an extra

staff of 35%. Most of the staff is useless and even their need is nothing but they all are recruited

on special orders and without a merit list. How can an organization grow with this kind of worst

situation?

Markets

In airline markets, advertising is the most important promotional tool. For Lufthansa, company

use IMC promotional tool that creates favorable and unique images to introduce the product,

routes and aircraft of Lufthansa. Direct marketing One of the growing usages of IMC tools by

Lufthansa is direct marketing. The company has started to sell products to customers with

various activities, under direct marketing including direct selling, telemarketing, web site and

magazines, in terms of direct marketing. Direct marketing are playing now a vital role in getting

the products into the view of the public. Lufthansa use different methods to direct marketing with

these products. For example, Lufthansa published three in-flight magazines to introduce the

product, routes and aircraft of Lufthansa (Bragg & Steven, 2004, pp 22 - 29).

Image of Lufthansa

Lufthansa build a positive brand image in the environmental protection. Nowadays,

environmental protection is an important topic around the world. Everyone advocate protecting

the Earth. Lufthansa also support those topic, Lufthansa is proudly develop an environmentally

sustainable strategy that aims at protecting natural resources and reducing air pollution and then

Lufthansa try to do their best in the recycling effort and selecting the most fuel efficient aircraft.

MBA Page 31


It shows that Lufthansa want to build an environmental protection brand in the airline market. It

can help Lufthansa build a positive image, which can accept by the social .when Lufthansa create

a positive image they can attracts current and potential customers (Cento, 2009).

Now, Lufthansa have the maturity web site, differences cultural can be met on the web. It a great

opportunity for Lufthansa introduce their produce, routes and aircraft to the world. Lufthansa

create a maturity website, which can offer options for language of preference on the homepage.

Image of PIA

PIA after all this is in news with bad reputation, the airline is losing international customers who

once feel proud to fly from PIA. The image of PIA has become worst after being in rumors for

different cases: especially in Corruption and nepotism. even the residents of Pakistan rarely

travel from PIA even if they had no other choice except PIA.

Financial Performance

Financial Performance In 2010/2011 the Qantas Group reported a strong result despite a number

of significant challenges, with all segments of the Group profitable. Underlying PBT was $552

million, up 46 per cent on 2009/2010. The result was achieved through improvements in earnings

across all operating segments and despite the $224 million financial impact of natural disasters

and over $200 million of ongoing losses in Qantas’ international business (Roberts, Weetman &

Gordon, 2008).

Aircraft used by Qantas are operated on both financial and operating leases. Under an operating

lease, assets and liabilities are off-balance sheet and only rent expenses are recognized. Under a

finance lease asset, liability and depreciation expenses are recorded. Since these two accounting

choices have different impacts on the financial statements, utilizing both gives the company

MBA Page 32


enough flexibility to manage both the assets and profits of Qantas. In 2011 passenger aircraft

residual value and major cyclical maintenance cost for operating leases were revised, perhaps

because of poor aircraft conditions and certain incidents occurring.

The efficiency ratios Analysis Average Age of Receivables and Accounts Payable Payment

Period have shown a steady improvement over these years. Given the high debt to equity ratio, it

is reassuring to know the firm is improving its ability to meet debt obligations efficiently. The 27

days collection period in 2011 indicates the company is able to collect its receivables before its

payables come due. Asset turnover has also dropped from 2007 and implies the business is not

generating adequate revenue on the assets of the company. This could potentially create issues if

returns remain low and expenses increase (Nobes & Parker, 2008, pp. 112).

Financial Highlights

In particular, Fixed Asset Turnover indicates that the company manages a significant portion of

their long-term investments in PPE and given net sales, the recovery of total investment is

difficult given the current level of Total Assets Turnover. Performance Analysis PIA had

revenue declined by 4.80% this quarter. The Gross Profit shows a steep decline from 2008

dropping from 6.54% to 0.90%. Net Profit Margin depicts a healthier decline from 1.76% in

2009 to 3.21% in 2011. Profit after interest has increased by 87% because of a decrease in other

expenses, depreciation and amortization charges. Return on Equity has a decreased from 16.24%

in 2008 to just 2.03% in 2009, before recovering slightly in 2011. Profit Margin indicates that

only a small amount of revenue was available to the company after major expenses. Net

Operating Income to Capital and Return on Investment shows the declining effectiveness of

investment management (Saudagaran, 2004).

MBA Page 33


Table of key difference point

Differences Lufthansa PIA

International Recognition Internationally recognized Declining Recognition

Goodwill Moderate Worst

Associates Equity and debt method Equity method

Asset valuation Historical cost Market value (fair value)

Depreciation charges Tax based Economic based

Inventory valuation - FIFO

Finance leases Moderate level Excessive level

Deferred taxes Accrued Accrued

Reserves for income

smoothing

Yes No

Conclusion

The international airline industry has experience diminishing growth in the past five years due to

a slowdown in demand, high fuel costs and falling profitability. Fuel prices have increased

strongly over the past five years at an average of 26.2% per annum. High and increasing

competition on price and quality, as passenger preferences change. High but decreasing barriers

MBA Page 34


to entry as costs to purchase aircrafts, machinery and skilled labor are very high and there is

limited airport capacity.

Performance evaluation is an important component of managing a business. Managers need

feedback to evaluate, how well they have accomplished business strategy and managed key

business process. Managers need to be able to link strategy with profitability.

Accounting analysis of PIA airline, the airline is in worst condition. Lack of proper management,

rampant corruption, worst financial performance and circular debt are some of the issues which

the company is dealing with. PIA was one of the biggest and top most airline in the world having

experienced staff, and proper management structure but Government interference has lead the

Airline to a situation which has now become uncontrollable for anyone.

MBA Page 35


CLOSING UP

MBA Page 36


FINDINGS FROM THE RESEARCH

Some of the findings from the research are as follows:

PIA (Pakistan International Airline) is the flag bearing airline of Pakistan. The airline was

once the proud of Pakistan but know it is under heavy debts from Government and from the

private sector. The share price of the Airline is has decreased up to 43% in the last 5 years

period. Investors are not willing to invest in a single share of PIA. It was a time when people

from Pakistan and from different parts of the world feel proud to fly with PIA. After Hajj

Corruption case and many others like the same, people feel bad about the airline. The fair of the

airline is also higher from the domestic competing airline and this becomes the reason of

declining market share too. Despite of the worst financial performance of the airline is having

other issues too. One of the main issues is political intervention in decisions and management of

PIA. The major decisions cannot be taken by the management itself. Corruption in tenders has

become a common example now. The international airline industry has experience diminishing

growth in the past five years due to a slowdown in demand, high fuel costs and falling

profitability. Fuel prices have increased strongly over the past five years at an average of 26.2%

per annum. High and increasing competition on price and quality, as passenger preferences

change. High but decreasing barriers to entry as costs to purchase aircrafts, machinery and

skilled labor are very high and there is limited airport capacity.

Internationally the demand has declined but now after the financial recovery in US the situation

is becoming profitable against and the airlines are progressing again. While PIA is on the same

trend of ignoring things

MBA Page 37


Performance evaluation is an important component of managing a business. Managers need

feedback to evaluate, how well they have accomplished business strategy and managed key

business process. Managers need to be able to link strategy with profitability.

Accounting analysis of PIA airline, the airline is in worst condition. Lack of proper

management, rampant corruption, worst financial performance and circular debt are some of the

issues which the company is dealing with. PIA was one of the biggest and top most airline in the

world having experienced staff, and proper management structure but Government interference

has lead the Airline to a situation which has now become uncontrollable for anyone.

CONCLUSION

The vision and mission of PIA states that it has to go up with the people of Pakistan and

is established with a view to lead the airline industry. The airline has gained its name and

recognition in the market within a short span of time but after a number of issues, it derails from

the earned reputation. One rumor is that, Indus air which belongs to a political party would

become the biggest competitor of PIA in the coming future and would eat up the whole share of

PIA. It has not only attracted the staff of PIA by offering them higher salary packages but is also

taking up hands on its routes.one of the competitive edge which PIA has on other airlines is its

routes and Government Subsidy. But irony of the fat that none of them works and PIA, has

become a doubtful airline in the future.

MBA Page 38


RECOMMENDATIONS

PIA should focus on developing strategies which change the whole situation.

The Airline should define new policies of hiring employees and making goals.

The goals should be flexible and achievable

The Airline should have to purchase new airplanes as to support the seating capacity and

enhance safety

PIA should regulate policies in such a manner which banned the Government

intervention in the airline

Corruption and Loop holes should be avoided and need to have a strict action against

them.

MBA Page 39


References

Data Retrieved From: www.pia.com.pk Dated, 12th February, 2013

Bornhorst, T., Brent R., J. & Sheehan, L. (2010). Determinants of tourism success for DMOs &

destinations: An empirical examination of stakeholders' perspectives, Tourism

Management, vol. 31, no. 5. Pp. 572-589

Buhalis, D. (2000). Marketing the competitive destination of the future, Tourism Management,

vol. 21, no. 1. Pp. 97

Costa, C. (2006). Tourism planning, development and the territory, in Buhalis, D & Costa, C

(ed.) Tourism Management Dynamics – trends, management and tools, Elsevier Ltd.,

Oxford, ch. 25. Pp. 395

Crouch, G. & Ritchie, J. (1999). Tourism, Competitiveness, and Societal Prosperity, Journal of

Business Research, vol. 44, no. 3. Pp. 137-152

Fayos-Solà, E. & Bueno, A. P. (2001). Globalization, National Tourism Policy and International

Organizations, Tourism in the Age of Globalization, London: Routledge. Pp. 45-65

Johnson, P. & Thomas, B. (1999). Tourism Research and Policy: An Overview, Perspectives

on Tourism Policy, London: Mansell. Pp. pp. 1–13

Palmer, A. & Bejou, D. (2002). Tourism Destination Marketing Alliances, Annals of Tourism

Research, vol. 22, no. 3. Pp. 616

Ritchie, J. & Crouch, G. (2000). The competitive destination: a sustainability perspective,

Tourism Management, vol. 21, no.1. Pp. 1-35

MBA Page 40

http://www.pia.com.pk/


Appendix

QUESTIONAIRE

Q1. What job function do you work within?

Planning

Finance

Operations

Administration

Senior management

Other (please specify)?

Planning Finance Operations Administration Senior management others

2

4

3

5

2

0

MBA Page 41


Q2. For how long have you been working for PIA?

Less than 1 year

1-5 years

5-10 years

More than 15 years

Less than 1 year 1-5 years 5-10 years More than 15 years

2

5

4

6

Experience Number Of Respondents

Less than 1 year 2

1-5 years 5

5-10 years 4

More than 15 years 6

MBA Page 42


Q2. In your opinion is the Airline working smoothly as it does before 8 years?

No

Yes

Feedback

Yes No Feedback

12

4 4

Reviews Number of People

Yes 12

No 4

Feedback 4

MBA Page 43


Q3. In your personal opinion why PIA is in huge losses?

Rampant Corruption

Bad Management

Over Employed

Lack of Planning

Old Planes and Safety Issues

Others (please specify)

Rampan

t Corru

ption

Bad M

anag

emen

t

Over E

mployed

Lack

of Plan

ning

Old Planes

and Sa

fety I

ssues

Others

4

6

3

2

4

Activity Number of Respondents

Rampant Corruption 4Bad Management 6Over Employed 3

Lack of Planning 2Old Planes and Safety Issues 4

Others

MBA Page 44


Q4. What makes the people dissatisfied from the service of PIA?

Service

Attitude

High Fare

Employee Behavior

Late Arrival & Take off

Others (Please Specify)

Servi

ce

Attitude

High Fa

re

Employe

e Beh

avior

Late A

rriva

l & Ta

ke off

Others (P

lease

Speci

fy)

0 0 0 0 0

5

3 3

2

6


Service 5

Attitude 3

High Fare 3

Employee Behavior 2

Late Arrival & Take off 6

MBA Page 45


Q5. Being an internal employee what is the major problem of PIA?

Management

Planning

Financial Stability Circular Debt

Government Influence and Intervention

Others (please specify)

Manag

emen

t

Planning

Finan

cial S

tabilit

y Circ

ular Deb

t

Govern

ment In

fluence

and In

terve

ntion

Others (p

lease

speci

fy)

6

4

3

5


Management 6Planning 4

Financial Stability 3Government Influence 5

Others

Q6. Why the management of PIA is not focusing on these core issues?

MBA Page 46


Weak Management

They don’t Care

Lack of Business Expertise

Other Requirements (Please Specify)

Weak Management They don’t Care Lack of Business Expertise Other Requirements (Please Specify)

8

4

5


Weak Management 8They don’t Care 4

Lack of Business Expertise 5Other Requirements (Please Specify)

Q7. Is PIA able to solve these problems?

MBA Page 47


Yes

No

Other Factors (Please Specify)

Yes No Others

12

5


Yes 12

No 5

OthersQ8. What does PIA do to secure their position again?

MBA Page 48


Management Focus

Plan Activities

Leadership Skills

Other Factors (Please Specify)

Management Focus Plan Activities Leadership Skills Other

5 5

6


Management Focus 5

Plan Activities 5

Leadership Skills 6

Other

MBA Page 49


Q9. What are the major areas in which PIA has to focus in order to make their service better?

Flight Safety

Human Resource Development

Increase Financial Standing

Flight timings

Customer satisfaction

Others (Please Specify)

Fligh

t Safe

ty

Human Reso

urce Dev

elopmen

t

Increase

Finan

cial S

tanding

Fligh

t timings

Customer

satisfa

ction

0

1

2

3

4

5

6

7

Axis Title


Flight Safety 5Human Resource Development 4

Increase Financial Standing 5Flight timings 6

Customer satisfaction 3

MBA Page 50


ContentsINTRODUCTION......................................................................................................................................1

INTRODUCTION...........................................................................................................................................2

BACKGROUND.............................................................................................................................................5

PROBLEM STATEMENT................................................................................................................................5

SIGNIFICANCE OF THE STUDY......................................................................................................................6

SCOPE OF THE STUDY..................................................................................................................................6

RESEARCH DESIGN...............................................................................................................................7

Research Design & Methodology..............................................................................................................8

RESEARCH DESIGN....................................................................................................................................8

RESEARCH OBJECTIVES............................................................................................................................8

SOURCES OF DATA....................................................................................................................................8

A. Primary Source....................................................................................................................................8

B. Secondary Source................................................................................................................................8

SECONDARY SOURCES.............................................................................................................................9

RESEARCH INSTRUMENTS.......................................................................................................................9

I. Questionnaire Analysis........................................................................................................................9

II. Discussion analysis..............................................................................................................................9

QUALITATIVE QUANTITATIVE RESEARCH.............................................................................................9

UNIT OF ANALYSIS....................................................................................................................................9

LITERATURE REVIEW..........................................................................................................................10

REVIEW OF THE RELATED LITERATURE......................................................................................................11

US Airline Industry.................................................................................................................................11

Indian Airline Industry...........................................................................................................................12

Pakistan Airline Industry........................................................................................................................13

Background of PIA Airline..........................................................................................................................14

Labor Unions Strike............................................................................................................................16

Banned For Safety Issues...................................................................................................................16

During recruitment:...........................................................................................................................18

Employee Motivation Level:..............................................................................................................18

Nepotism and political involvement in the recruitment and selection:.............................................18

The lack of experience when it comes to the aerospace industry and top management:.................19

MBA Page 51


Lack of Planning:................................................................................................................................19

DATA ANALYSIS...................................................................................................................................20

Data analysis..............................................................................................................................................21

Financial Standing of PIA...........................................................................................................................22

Share price during last 5 years...................................................................................................................23

Industry Overview.....................................................................................................................................24

Differences between Lufthansa and PIA airline for the investors..............................................................25

COMPARISON OF PIA WITH LUFTHANSA...................................................................................................26

Lufthansa Financial Position..................................................................................................................26

PIA Financial Position.............................................................................................................................26

Strategic Development at LUFTHANSA..................................................................................................27

Strategic Development at PIA................................................................................................................28



Image of Lufthansa................................................................................................................................29

Image of PIA..........................................................................................................................................30

Financial Performance...........................................................................................................................30

Financial Highlights....................................................................................................................................31

Conclusion.................................................................................................................................................32

CLOSING UP..........................................................................................................................................34

FINDINGS FROM THE RESEARCH...............................................................................................................35

CONCLUSION.............................................................................................................................................36

RECOMMENDATIONS................................................................................................................................37

References.................................................................................................................................................38

Appendix...................................................................................................................................................39

MBA Page 52

Education

Airlineres