August issue 2002

By | Business | Published 20 years ago

Forget about flying fears. Bad air days may be a fact in some hemispheres these days, but when it comes to Pakistan, demand for air travel is as strong as ever. With international airlines struggling to keep afloat in the wake of September 11, due in no small part to a precipitous decrease in passenger reservations in Europe and the US, it may have been logical to predict a convergence in passenger psychology across the globe. Logical perhaps, but in the case of Pakistan, quite inaccurate. According to the country’s’ top travel agents, outbound travel trends in Pakistan have remained resilient, with reservation statistics of Pakistan’s national carrier Pakistan International Airlines (PIA), and those of foreign airlines remaining broadly static at levels recorded last year.

These trends have come as a relief to the precariously balanced aviation industry. The Director General of Pakistan’s Civil Aviation Authority (CAA), Air Marshal Aliuddin, predicts that given the continuation of consumer confidence, “the worst will be over approximately within a year.” Entrusted with the task of ridding the CAA of mismanagement and bureaucracy and faced with the external shock of 9/11, this has been no easy achievement. “The industry has pretty much hit rock bottom and now it’s all about convincing passengers that it’s safe to fly to Pakistan, and that the increased hassle of security is a necessary evil. There is no alternative to air travel, and despite everything it is the safest mode of transport,” states Aliuddin. Pakistanis, at least, seem to agree.

“Apart from the decrease in consumer choice due to the departure of foreign airlines,” says Jaffer Ali, Chief Executive of Trans-Air, and former head of Princely Travels, “outbound travel has amazingly remained quite stable, even though it is becoming very difficult to obtain visas.” And whilst the market has not grown due to visa restrictions, travel agents cite buoyant reservation statistics on all the main carriers operating out of Pakistan — in fact they state it is difficult to get a seat on flights to Britain and the US, still hugely popular destinations despite cumbersome visa procedures.

An estimate of the still thriving demand for international travel can be gauged by the statistics of the visa issuing department of Federal Express, which receives 300 US applications daily. Incredibly, this statistic encompasses only the number of new applicants for the US with returning applicants using the drop-box facility. “People are still flying as much as before, but the length of time it takes to get permission is proving to be a constraint on growth,” claims a travel official.

“Although the European and American visas remain problematic, Pakistanis can still obtain visas to the UAE and the Far East without much hassle,” states Ali. “So the holiday market to Dubai, Bangkok and Singapore is still strong. At the most I would say that there is only a five or ten per cent differential in outbound reservations to the west. Towards the east, numbers are holding steady, and so of course is the Umra traffic. I’d say the only traffic affected is that of ‘khaipia’ or smugglers traveling to Hong Kong, Singapore and Bangkok, due to increased surveillance.”

These factors are all positive indicators for airlines, so why are foreign carriers still shy of the lucrative Pakistani market? The country is strategically placed along the major air routes between Europe and the Far East, and should be capable of reaping the benefits of its geographical position. “It pioneered the air route to China and air links to the Central Asian States,” states Aliuddin. But these achievements date back several decades.

Despite notable attempts at reform, the CAA has not managed to replicate the success of the ’80s when numerous international flag bearers operated online in Pakistan. To be fair, however, this failure can no longer be blamed on the ill-conceived policies and mismanagement so rife in the past. A new national aviation policy has been in force since Y2K — the product of the 1998 revamped management — which aims, amongst numerous ambitious objectives, to be ‘more objective and in consonance with the emerging aviation scenario.’ This revision indicated an appreciable change in Pakistan’s aviation ideology. Faced with a lackluster kitty, and the departure of several high-profile, revenue-earning foreign carriers over the past decade, the CAA had a hard choice to make. It could either stick with its insulated, closed sky policy and complicated and bureaucratic procedures, or try to lure back quality international airlines on the back of competitive pricing and strategic marketing policies. And two years ago, it chose to do the latter with a number of market-friendly reforms.

The new millennium marked a watershed in the history of Pakistani aviation. From attracting top European, American and Far Eastern airlines, the negative fallout of the nuclear tests and increased competition in the market served to disable the pull factor. The departure of KLM, which went offline in 2000, left only one online European carrier in the market, Swissair. The lowest point came after the nuclear tests when only a handful of Middle Eastern airlines in addition to PIA remained online.

Under Air Marshal Aliuddin, the aviation authority has made an effort to put forward a pro-market package. “The CAA offers an excellent deal,” says Laeeq Akbar, country manager for Alitalia and Senior Vice Chairman of the FPCCI’s Standing Committee on Aviation. “Many years ago, bureaucracy and high cost were the main drawbacks. But you will be shocked to discover that Pakistan offers the cheapest fuel and handling costs in the region, much less than those even in Dubai, India or Colombo.”

airline-2-aug02Incentives include a reduction in landing charges of 50 per cent to all airlines landing at Quaid-e-Azam International Airport and a 20 per cent discount below the prices prevalent in the region for ground handling services for technical landings. In addition, all airline operators now benefit from a one-window operation by the CAA for any business related with the airport — a move which significantly reduces the bureaucratic red tape traditionally associated with it.

“With a shortening of air routes coupled with our sophisticated radar system, airlines can now save up to 45 minutes of flying time which translates into a saving of millions of dollars to airlines,” enthuses Aliuddin. Significantly, fuel costs are now also the lowest in the region. The authorities have also done away with the repeat visit regulation, promised prompt remittance earnings and exempted duties on items as per air service agreements.

In order to remain competitive in the face of a changing aviation scenario, he concedes, liberalisation has been a necessary evil. “Pakistan has been pursuing a liberal aviation policy of deregulation. This has meant opening up the gateways of Islamabad, Lahore and Peshawar on the principle of reciprocity, albeit on a selective basis, and we are also pursuing an open skies cargo policy. We offer our airports to the air transport industry as major cargo and passenger hubs to serve the Middle East and Central Asia,” he states.

In these efforts, the CAA has taken a cue from its competitors. Sharjah International Airport is one of the largest sea and air cargo hubs in Asia, boasting 5 cargo terminals served by separate cargo aircraft parking bays with the capacity to load 14 narrow-bodied or 10 wide-bodied aircrafts. Two additional parking areas are also available, with plans to increase these by two further terminals by next year. A number of value-added services have also been introduced. “We are the first among all the airports in the Middle East to introduce a Cargo Tracking System online with touch screens placed at the airport to check the status of cargo,” declared Ali Saleem Al Midfa, Sharjah’s Administration and Commercial Director. Plans are also underway to implement e-commerce. As a result of these measures, the airport received a 35 per cent increase in import shipments and a 10 per cent increase in exports since the last year. Sharjah is Lufthansa’s second largest cargo hub after Frankfurt. Singapore Airlines operates 77 freighters per month through the airport, followed by Cathay Pacific with nine.

Mustafa Khan, Sales Manager Pakistan & CIS (Afghanistan and Central Independent States) of the recently suspended Singapore Airlines, is enthusiastic about this strategy. “Pakistan can take note of these marketing ploys,” he says. “Take the example of the Malaysian government which has decided to waive all landing and parking fees for five years on all new flights entering Kuala Lumpur. This strategy has already managed to attract Egypt Air into Malaysia. It’s a matter of economics really. Compare this to our civil aviation — they are seeking to increase their rents by 10 per cent! The rest of the world says fly to us for free, and Pakistan wants to increase prices! On the whole, however, the CAA has managed to do a half decent job. The airport in Karachi and the new terminal in Lahore are probably world class.”

In an effort to duplicate Sharjah’s success, a sum of 22 million rupees was set aside for the construction of a comprehensive cargo shed in Karachi, which the CAA has managed to accomplish with a saving of 16.5 million rupees. “This cargo shed is as good as the one in Dubai, just smaller,” maintains Laeeq Akbar. Given its capacity for handling approximately 250,000 tons a month — five times more than its earlier version — it is hoped that the cargo complex will enhance exports. Another cargo shed under construction in Lahore may also receive a boost from the increased cartage of goods to and from the city due to greater accessibility to the northern districts via the motorway. Also in the pipeline is the construction of cold storage facilities for perishable goods at the cargo complex in Karachi. The project is already paying dividends. Swiss now carries more cargo from Pakistan than it does from Dubai and Alitalia is currently considering bringing in freighters. “The feedback is very strong,” says Laeeq. “Ever since the minister of trade renegotiated the cargo contracts and the war risk premium was removed, cargo has really picked up. Pakistan enjoys abundant resources, and demand for its carpets, leather, textiles and perishable goods is very high. Booking cargo space has become a serious problem. So there is scope for more airlines to cash in on the demand.”

In addition to the cargo facilities, the task of modernising airports has also been tackled. “Now all modern airports are being constructed to fully cater to the variety of needs of the main customer — the traveller,” says Air Vice Marshal Arshad Rashid Sethi. ” Revenue generation is no longer restricted to the landing and parking of aircrafts. It now depends on opportunities for commercial exploitation.” In keeping with this concept, the new Lahore international terminal has been developed to become a hub for international traffic, and serve the country’s northern belt by attracting tourists. As such, it boasts seven contact stands, 55 check- in counters, five baggage reclaim belts and added services like a hotel, shopping mall, leisure centre, office space, flight kitchen, banks, restaurants, and duty free shops. Although present demand stands at 2.5 million, the new terminal is set to cater to 6.5 million passengers.

Last year, the Travel Agents Association of Pakistan (TAAP) has introduced the yield and service improvement scheme (YASIP) to regulate fares in Pakistan. “Given the numerous taxes involved,” says a travel agent, “agencies cannot survive if commissions are split further, which was common practice in the past. All travel agents under this banner are in agreement that they will not split the commissions with passengers as commissions from airlines are meant to be incentives for the agent and not the passengers, who are offered discounts.”

This move also benefits airlines by keeping the market profitable. However, not all agencies have agreed to cooperate. “A few agents were actually fined for breaking the rules,” states Jaffer Ali of Trans Air, “but American Express and McKinon and McKinsey have not joined this association and continue undercutting. We are therefore losing business to them. Unfortunately agents have not been able to get the government into play to enforce this regulation,” he states.

So far, however, the package of measures has have not yielded any appreciable benefits. Today only 19 international airlines operate in Pakistan — 17 passenger and two cargo — up from just nine passenger and no freighters after the events of September 11. The big carriers are few and include Egypt Air, Emirates Airlines, Cathay Pacific, Malaysian Airlines, Royal Jordanian, Swiss, Thai International and Qatar Airways, apart from Pakistan’s own carriers: PIA, and two privately owned airlines, Shaheen International Airways and Aero-Asia. Those in the upper echelons of Pakistani aviation have learned their lesson the hard way. A bird in hand is worth more than two in the bush and now that the big birds have flown the coop, it is proving to be the devil’s own job to lure them back.

Defending the lackluster pace of recovery Aliuddin emphasises, “We have to take bold and dynamic initiatives in order to be commercially viable. This cannot be achieved overnight. Unlike most government organisations, the CAA is financially viable and despite the events of September 11, it has the strength to weather the storm and continue without too much of a setback. It not only meets its requirements in terms of revenue, but has also contributed billions of rupees in taxes to the national exchequer, one of the few public organisations to do so.”

The goal of profitability however requires a delicate balancing act. PIA is, to date, the CAA’s largest customer. This puts the aviation authorities in a tough spot: they need to be able to stay profitable by generating revenues from overseas carriers whilst servicing the profitability demands of the national carrier, thereby staying out of the red themselves.

PIA no longer enjoys a monopoly in either its domestic or overseas market. Apart from foreign airlines, smaller private carriers such as Aero-Asia and Shaheen Air International have provided effective competition on its profitable domestic routes. Heavy politicisation over the years meant that PIA suffered from a legacy of excessive bureaucracy, overstaffing by at least 40 per cent, a strong pilots’ union demanding higher pay and an antiquated IT system which translated into heavy losses for two decades. The subsequent government approval of a 20-billion rupee bailout thus served as a much-needed injection which allowed PIA to lease several wide- bodied aircraft to upgrade its existing outdated fleet, and also take measures to upgrade its technological facilities.

It is elementary to conclude that PIA would thus benefit from the departure of foreign carriers, both on the passenger and cargo/freight front following September 11. Its passenger load may have been affected negatively by about 10 per cent immediately after the attacks, but it still managed to stay afloat on reservations at the 65 per cent level and then rebounded completely. “PIA’s bread and butter are flights to Europe, the US, Canada and Saudi Arabia. And it is very profitable on these routes; you can’t get seats. The flights are so full that they really do not need to be too worried,” says Jaffer Ali. PIA fares are low, as heavy cost cutting and a management overhaul have reaped the required dividends, which are being passed on to the customer. In addition, discounting in the UK and US has also brought down prices by 30 per cent from last year. PIA also has the advantage of nonstop direct flights. “Emirates also has benefitted due to the withdrawal of foreign airlines,” states Ali. “People prefer to fly Emirates than say Swiss, because of its legacy of bankruptcy. And as Dubai and Abu Dhabi offer numerous connecting foreign carriers, Emirates steps in as a very convenient option. It’s getting business without even having to try because it’s the only conduit for foreign carriers.”

But the ban (recently overturned) by the Indian government on flights out of Pakistan using Indian airspace served as a blow to PIA. This is a profitable route; in addition to passengers travelling to the region, it is also frequented by international tourists going to Nepal, Bangladesh and Sri Lanka. Pakistan suspended flights to Delhi, Mumbai, Singapore, Kathmandu, Dhaka, Colombo and Manila. For Bangkok and Hong Kong, PIA re-routed its flight patterns and decided to use Chinese airspace. It is estimated that PIA lost revenues of 0.5 million rupees because of the ban, hard currency given that PIA’s solvency is still on tenuous ground.

“Given the competition in the region,” says Mustafa, “and with our problems, the Pakistani government will have to come up with some sort of sustainable plan to attract the business of international airlines. PIA is the biggest user of airport facilities, and there is always some sort of problem in terms of money being owed to the civil aviation. So the CAA is in a rather tight spot; it has to generate funds after all.” This need has served as an incentive to levy charges on aviation facilities at a time when regional competitors are waging price and quality wars.

The most pressing question that the CAA has to resolve is that of the pros and cons of deregulation and liberalisation. Deregulation and liberalisation in the west has led to the complete decimation of grand flag bearing carriers as has been the case with British Airways and Swiss Air. With huge losses being incurred by international carriers, airline fares have risen by only five or seven per cent. Taking a page out of the success of Ryan Air and Easy Jet in the west, airlines are increasingly looking to cut costs and offer a cheap and popular no-frills package and it is now a fait accompli that all national carriers must cut costs to stay competitive. And so at the moment, in order to protect PIA whilst attracting foreign carriers, the CAA has compromised — operating an open sky policy for cargo, and increased gateways for passengers.

“An open sky policy for passengers would go completely against PIA’s interests,” maintains a travel agent at one of Karachi’s largest agencies. “PIA seeks to control its competition, as it has enough problems without having to worry about a decrease in passenger numbers. International airlines are not interested in the increase in Pakistan’s gateways, given the high fixed costs and debt levels. At present, it’s only lower-cost airlines which have been able to benefit from this move: Qatar Airways and Gulf Air for example, which have gained in popularity by offering cheaper seats. Thus the CAA’s policies of increased gateways has not really served to bring in much revenue, as most lucrative airlines are still offline. And these Middle Eastern airlines have eaten into PIA’s market. So the policy has not been very successful.”

International commercial air transport is currently based on a framework of bilateral agreements where aviation authorities negotiate with their counterparts in other countries to obtain traffic rights for their respective national carriers. Developing countries exchange traffic rights and provide airspace to foreign carriers when they feel that local airlines can benefit from the agreements. Pakistan has been cautious on this front in the past, fearing that PIA would not be able to withstand increased levels of competition. As a result, its operations to foreign destinations have been curtailed.

But it is not all gloom and doom. Recent experiences have been encouraging. Most airlines which had suspended their operations in Pakistan after 9/11 returned in a few months once the question of available airspace was resolved. Swiss’ General Manager, Hanspeter Wegmueller, expressed his confidence in the future of the industry stating that the difficult months were over and Swiss, the new carrier of Switzerland, was “gearing up to meet strong demand in the forthcoming summer.” He stated that Swiss would operate four flights to and from Karachi every week. Oman Air and Kryghyzstan Airlines have resumed operations recently. It was even expected that other airlines which had quit the region a couple of years ago would return, with British Airways rumoured to come online by the end of the year. CAA’s Director General stated that, “We are in agreement with British Airways that now needs formalities with the British Government.”

This optimism, however, was cut short due to external shocks. Britain ordered a hold on talks because of concerns over the uncertain law and order conditions in the country — concerns that proved all too prophetic with the recent bombing incidents and the fear of nuclear war leading to an exodus of foreigners and the withdrawal of embassy staff belonging to France, Britain and the US.

These developments also served to diminish the numbers of travellers to Pakistan. This has meant a decline in profitability for airlines. The global benchmark for keeping airlines out of the red is a passenger load of at least 65 per cent. Singapore Airlines, which had returned after 9/11, went offline as a result of the recent bus bomb, and all online carriers which could, arranged turnaround schedules to lodge their crew elsewhere. All Swiss crew, for example, are now housed in Dubai.

However, it is too early at this stage to write off the possibility of a rebound in the aviation industry. The CAA’s reforms may be on the right track but a lot more remains to be done. Perhaps countering the negative perceptions is what the CAA needs to address most urgently. “It’s not just the border, it’s a matter of feeling safe,” says Mustafa Khan. “After all, bomb blasts happen all over the world, in Israel, Paris, Rome, Istanbul, Ireland; what’s important is how you handle them and manage public relations. Unfortunately, Pakistan suffers from a very bad press. What is needed is a crisis management team, to ensure that we do not give conflicting statements, and deal positively with these matters.”

So is it a thumbs up or down for the future? “People have short memories,” states Akbar. “Every country has had wars. Just look at Afghanistan. An Afghan millionare has recently announced plans for launching a new 20 million dollar carrier. It operates a General Sales Agency (GSA) in Pakistan. If a country that has gone through so much can start a new airline, then the scope for Pakistan is tremendous. The government has taken very positive steps in recent times. If this momentum continues, I predict the re-establishment of a number of online carriers in the market to meet the demand potential.”