Why Pakistani, Indian aviation industries promise growth despite regional troubles

Aviation industries set to grow as economies and commerce expand
By Robert Underwood - AP-BGK@LHR 18AUG12, CC BY-SA 2.0, https://commons.wikimedia.org/w/index.php?curid=29617875

A PIA Boeing plane, Photo: Robert Underwood/ Wikipedia

With the land and maritime disputes in the South and the East China Sea, China-India disputes on the sovereignty over two separated pieces of territories, Aksai Chin in Jammu and Kashmir and the Arunachal Pradesh, Pakistan-India dispute over Kashmir valley, almost four-decade long conflict in Afghanistan only give rise to skepticism about the economic growth of the region.

However, despite these disputes, conflicts, and wars, the region continues to lead the world economic growth.  For the next 20 years, an average GDP in the region is expected to be around 3.9% annually and the region would share close to 40% of global GDP by 2036 according to an estimate presented by the Boeing.

With the booming economies, the airline industries also show significant growth. In 2017, the total market share of the airlines by different regions (shown in Fig-1) shows that the Asia-Pacific nations have the highest aviation industry market share.

In 2017, the estimated net profit was around $7.4 billion by the regional airlines. It’s expected that the regional airlines would play important role in the international aviation industry growth in the years to come.

When discussed the airline performance, two terms are commonly used, the Revenue Passenger Kilometer (RPK) and the Freight/Cargo Tonne Kilometer (FTK/CTK).  The RPK of an airline is the sum of the products obtained by multiplying the number of revenue passengers carried on each flight stage by the stage distance – it is the total number of kilometers traveled by all passengers. Hence, the RPK is a measure of sales volume of passenger traffic. The FTK/CTK measures actual freight traffic.

It is the equivalent of RPK for freight. One FTK is one metric ton of revenue load carried one kilometer. The sum of FTKs for every flight stage flown by every aircraft over a period is the FTK of an airline over the period. Figure-2 shows the growth in the RPK and FTK. There is a rise of almost 24% in RPK and around 18% in the FTK within 4 years of the global aviation industry,

However, there is almost a 600% increase in the RPK of Asian airlines during last 27 years as depicted in Fig-3.  The data also demonstrates the airline industry vulnerability towards the international crises.  There were significant drops in the RPK after the 9/11 terrorist attacks in 2001, then the outbreak of Severe Acute Respiratory Syndrome (SARS) in 2003 and the Global Financial Crisis of 2007-2008.  The 9/11 attacks caused almost $13 billion loss to the airline industry. Interestingly, according to International Air Transport Association (IATA), although there were only fewer deaths caused by SARS it caused significant damage to the economy of China and Hong Kong, which strongly impacted the airline business in the region.  The global loss in GDP was around $33 billion and due to a sudden drop in traveling the airline industries’ RPK was significantly dropped.  The Asia-Pacific airline industry lost 39 billion RPK and drop of 8% of its annual traffic, and loss of an average revenue of $6 billion.  

According to IATA projections, by 2036, the passenger travel demand in China, India and in 10 ASEAN countries combined, would exceed the U.S. and Europe passenger travel demand  (Fig-4). 

In 2017, Association of Asia-Pacific Airlines (AAPA) published a report, telling that the first half of 2017 demonstrated a solid growth in the air travel market.  According to AAPA, the Asia-Pacific airlines carried around 33% of the passengers traveled globally and around 40% of the global cargo handling. The growth was estimated to be 5.7% annually, which would make Asia-Pacific airline companies fulfill almost 40% of international travel demand and the demand for 35,000 new aircraft (around $5.3 trillion) within next 20 years.

Many analysts and economists question that in such competitive market, where does Pakistan’s flag-carrier airline, Pakistan International Airlines (PIA) stand?

So far the airline showed a significant loss every year for almost 15 years and its management took over $400 million between 2003 and 2015 from the taxpayers to sustain its operations. There are some issues with the PIA:

  • Over-employment, nepotism, political pressure and labor union.
  • Last longest financial crisis was during the years after the 1971 war with India. This time, the downturn began when the oil prices soared during the 1990s and 2000s.
  • Starting from its inception in the 1960s, until 1990s, almost 70% of PIA’s revenues were earned from the international traveling. On January 1, 1998, the Nawaz Sharif government deregulated access to northern gateways. Immediately, Swissair, KLM, Emirates, Gulf Air and Qatar Airways added flights to Islamabad, Lahore, and That increased the competition for PIA, but due to its incapable management, which was dominated by the political appointees, PIA, thus, lost its market share and major advantage over the carriers operating inside Pakistan.
  • Next three years, PIA showed losses and it was recovered by General Musharaf’s military regime after a bailout package. Musharraf talked to the PIA executives and on their suggestion, he imposed a temporary restriction on issuing more flights to Gulf carriers.
  • After the 2001 terrorist attacks and the US invasion of Afghanistan, most of the European and American airlines decided to cancel their operations in Pakistan. The Gulf airlines filled the vacuum instead of PIA. They took over huge market share from left by the European and American airlines in the US-Pakistan route. In 2008, PIA had around 29% of the bookings while the Gulf airlines had some 40%, however, by 2015 PIA was left with only 11.4% and Gulf airlines share was risen to 73.8% over the same route.
  • The Partnership of Open and Fair Skies (POFS), a coalition of various US airlines and aircraft industry unions, claims that as per their forensic evidence, since 2004, the governments of Qatar and UAE have provided $52 billion subsidies and other unfair benefits to their state-run airlines, Qatar Airways, Etihad Airways and Emirates Airlines. These subsidies are the violation of the Open Sky Policy, which assures the fair competition.
  • Besides the loss of jobs in the U.S. and European airlines, these subsidies severely hurt PIA business, because the Gulf airlines have much larger bandwidths than PIA to provide on-time services, cheaper fares, more routes and better onboard services etc.

 One way to make the PIA more profitable in the highly competitive environment is to privatize the airline partially and accept the private investment, following the Sri Lankan Airline model. Air Lanka was established as the flag carrier of Sri Lanka in 1979 once the Sri Lankan government decided to shut down the operations of Air Ceylon, the former flag carrier, got bankrupt. Although Air Lanka was a government-owned airline, however, in 1998, it was partially privatized and Emirates Group invested and bought around 40% (later, increased to 44%) stake in the airline for 10 years. Although, the government of Sri Lanka held the majority of the stake, still, it gave full control to Emirates for investment and management decisions. In 1998, the Air Lanka name changed to Sri Lankan Airlines.  After the 10-year agreement was over in 2008, the Emirates notified Sri Lankan government that it would not renew its management contract and then, sold its 44% stake back to Sri Lankan government in 2010.

 

The labor unions and opposition political parties do not allow the sale or even the partial sale of the PIA.  In 2016, when the government proposed to privatize the airline, the opposition political parties, employee union, and the media strongly opposed the proposal and protests began on the streets.  On February 2, 2016, two PIA employees were killed during their rally.  As a protest, employees went to week-long strike causing cancellation of 100s of flights.  When the government refused to relent, the union decided to call off the strike and now it is very obvious to the PIA employees, that after cleaning the books the airline management will be handed over to the private investor – it is just a matter of time.

As the two largest economies in South Asia, India and Pakistan are expected to expand their aviation industries in the years ahead.

 

 

 

 

Categories
AviationIndiaPakistanSouth AsiaTechnology

Dr. Misbah Azam conducts Web TV ViewPoint discussion program and contributes articles /blogs to various media
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