PIA- Assignment Questions

Question 1

Complete Case Exhibit 7 and compare the results with three other international airlines. At the present
revenue and cost structure, what will be the break-even load factor for PIA? What will be the effect on
profitability if PIA operates with similar load factors and hours of flight per aircraft per day comparable
to those of other airlines?

PIA Case Analysis: Financial Performance and Break-Even Analysis

Part 1: Completing Exhibit 7 - Financial Metrics Comparison

Metric PIA Hawaii Emirates Easy Jet

Revenue/Revenue Passenger kilometers 6.87 8.11 8.05 7.03

Variable Cost/Revenue Passenger kilometers 4.34 3.51 3.45 4.05

Contribution Margin/Revenue Passenger kilometers 2.53 4.60 4.60 2.97

Total Contribution Margin (PKR Millions) 39,578.6 63,849 580,984 166,967

Fixed Costs (PKR Millions) 48,159.6 56,806 495,260 146,538

Profit/(Loss) before tax (PKR Millions) (8,579.7) 7,044 85,724 20,428

Calculation Notes:

Actual RPK: 15,657

Variable cost: 65,952.9

 Revenue/RPK for PIA = 107,531.5 million PKR ÷ 15,657 million km = 6.87 PKR/RPK

 Variable Cost/RPK for PIA = 67,952.9 million PKR ÷ 15,657 million km = 4.34 PKR/RPK

 Contribution Margin/RPK for PIA = 6.87 - 4.34 = 2.53 PKR/RPK

 Total Contribution Margin for PIA = 2.53 × 15,657 million = 39,578.6 million PKR

Part 2: Current Break-Even Analysis for PIA

Break-Even RPK Calculation

 Fixed Costs = 48,159.6 million PKR

 Contribution Margin per RPK = 2.53 PKR

 Break-even RPK=fixed Costs/Contribution margin per rpk

 Break-Even RPK = 48,159.6 ÷ 2.53 = 19,035.4 million RPK

Break-Even Load Factor

  Available Seat Kilometers (ASK) = 21,219 million

 Break-Even RPK = 19,035.4 million

 Break-Even Load Factor = 19,035.4 ÷ 21,219 = 89.7%

 Current Load Factor = 73.8%

 Required Increase = 15.9 percentage points

Comparative Performance

Fixed Costs Break-Even Actual RPK % of BE Load

Airline CM/RPK Hours/Aircraft/Day
(PKR M) RPK (M) (M) Achieved Factor

PIA 2.53 48,159.6 19,035.4 15,657 82.3% 73.8% 9.79

Hawaii 4.60 56,806 12,349.1 13,880 112.4% 85.5% 8.61

Emirates 4.60 495,260 107,665.2 126,273 117.3% 67.0% 13.70

Easy Jet 2.97 146,538 49,339.4 56,128 113.8% 89.0% 11.90

Part 3: Profitability Analysis with Improved Operational Parameters

Scenario 1: PIA with Hawaiian Airlines' Load Factor (85.5%)

 Current ASK = 21,219 million

 New RPK with 85.5% Load Factor = 21,219 × 0.855 = 18,142.2 million

 Revenue at 6.87 PKR/RPK = 124,637.1 million PKR

 Variable Costs at 4.34 PKR/RPK = 78,737.2 million PKR

 Contribution Margin = 45,899.9 million PKR

 Fixed Costs = 48,159.6 million PKR

 Profit/(Loss) = 45,899.9 - 48,159.6 = (2,259.7) million PKR

Scenario 2: PIA with Easy Jet's Load Factor (89.0%)

 New RPK with 89.0% Load Factor = 21,219 × 0.89 = 18,885 million

 Revenue = 18,885 × 6.87 = 129,739.9 million PKR

 Variable Costs = 18,885 × 4.34 = 81,960.9 million PKR

 Contribution Margin = 47,779 million PKR

 Fixed Costs = 48,159.6 million PKR

 Profit/(Loss) = 47,779 - 48,159.6 = (380.6) million PKR

Scenario 3: PIA with Emirates' Aircraft Utilization (13.70 hrs/day)

  Increased utilization factor = 13.70 ÷ 9.79 = 1.40 (40% increase)

 New ASK = 21,219 × 1.40 = 29,706.6 million

 New RPK (maintaining 73.8% load factor) = 29,706.6 × 0.738 = 21,923.5 million

 Revenue = 21,923.5 × 6.87 = 150,614.5 million PKR

 Variable Costs = 21,923.5 × 4.34 = 95,147.9 million PKR

 Contribution Margin = 55,466.6 million PKR

 Fixed Costs = 48,159.6 million PKR

 Profit = 55,466.6 - 48,159.6 = 7,307 million PKR

Scenario 4: Combined Improvement (Easy Jet's Load Factor + Emirates' Utilization)

 New ASK = 21,219 × 1.40 = 29,706.6 million

 New RPK with 89.0% Load Factor = 29,706.6 × 0.89 = 26,438.9 million

 Revenue = 26,438.9 × 6.87 = 181,635.2 million PKR

 Variable Costs = 26,438.9 × 4.34 = 114,744.8 million PKR

 Contribution Margin = 66,890.4 million PKR

 Fixed Costs = 48,159.6 million PKR

 Profit = 66,890.4 - 48,159.6 = 18,730.8 million PKR

Part 4: Key Findings and Implications

1. Current State Analysis:

o PIA's current load factor (73.8%) is far below its break-even load factor (89.7%)

o PIA has the lowest contribution margin per RPK (2.53 PKR) among compared airlines

o PIA's aircraft utilization (9.79 hrs/day) is significantly lower than industry leaders

2. Operational Improvement Impact:

o Improving load factor alone to Easy Jet's level (89%) would nearly eliminate losses

o Increasing aircraft utilization to Emirates' level (13.7 hrs/day) would generate profit
even at current load factor

o Combining both improvements would transform PIA into a highly profitable airline

3. Strategic Recommendations:

o Route optimization to improve load factors

o Improved scheduling and maintenance to increase aircraft utilization

 o Revenue management strategies to increase yield (Revenue/RPK)

o Cost control measures to reduce variable costs per RPK

o Organizational restructuring to optimize the employee-to-aircraft ratio

This analysis demonstrates that PIA's financial turnaround is achievable through operational
improvements rather than requiring radical structural changes. By optimizing load factors and aircraft
utilization, PIA could significantly improve its financial performance without major capital investments.

Question 2

Based on the results of your analysis of Question 1 and the industry data in Case Exhibits 1, 2, 3 & 6,,
what do you think are the major problems facing PIA?

Major Problems Facing PIA

Based on the comprehensive analysis and industry data from the case exhibits, PIA faces several critical
problems that are undermining its financial performance and competitive position. Let me outline these
major issues:

1. Operational Inefficiency

Low Aircraft Utilization:

 PIA's aircraft utilization (9.79 hours/day) is significantly lower than industry leaders like Emirates
(13.70 hours/day)

 This represents a massive underutilization of capital-intensive assets

 Each idle hour represents lost revenue opportunity while fixed costs continue to accumulate

Suboptimal Load Factor:

 PIA's 73.8% load factor falls below the industry average and well below its break-even
requirement of 89.7%

 This indicates issues with route selection, scheduling, and/or market demand management

 Empty seats represent a permanent loss of potential revenue

2. Cost Structure Problems

High Variable Costs:

 PIA's variable cost per RPK (4.34 PKR) is significantly higher than Emirates (3.45 PKR) and
Hawaiian (3.51 PKR)

 Particularly concerning given that fuel costs are relatively standardized globally

 Suggests inefficiencies in fuel consumption, maintenance practices, and operational protocols

Overstaffing:

 With 18,019 employees for 40 aircraft, PIA has an employee-to-aircraft ratio of 450:1

 For comparison, Emirates has 202:1 and Easy Jet has 35:1

 This bloated workforce contributes to excessive fixed costs and administrative complexity

3. Revenue Generation Challenges

Low Yield:

 PIA's revenue per RPK (6.87 PKR) is the lowest among compared airlines

 Indicates weak pricing power and potential issues with route selection

 May reflect poor service quality perceptions limiting premium pricing ability

Route Network Issues:

 Despite having a 74% market share of domestic routes and 40% of international routes from
Pakistan, profitability remains elusive

 Suggests focus on politically important but commercially unviable routes

 Potential lack of strategic focus on high-yield corridors

4. Financial Vulnerability

High Debt Burden:

 Long-term debt increased from 22,033.7 million PKR in 2003 to 98,533 million PKR in 2010

 This massive increase (347%) in debt creates significant interest obligations

 Finance costs (9,299.8 million PKR) consume nearly all potential operating profits

Negative Equity Position:

 Total assets (113,125 million PKR) are exceeded by long-term debt alone (98,533 million PKR)

 When accounting for other liabilities, this suggests PIA is operating with negative equity

 Creates a vicious cycle of borrowing to cover operating losses

5. Structural and Governance Issues

Public Sector Constraints:

 As mentioned in the case introduction, PIA is one of five public sector entities causing major
financial drain on Pakistan's economy

 Subject to political interference in operational decisions (routes, staffing, procurement)

 Likely faces bureaucratic decision-making processes that hamper agility

Management Effectiveness:

 Unlike successfully restructured airlines globally, PIA has failed to adapt to changing market
conditions

 The airline's performance deteriorated during a period (2003-2010) when global aviation was
expanding

 Consistently poor financial results suggest systemic management issues

6. Market Positioning and Strategy

Unclear Competitive Positioning:

 Neither a premium carrier (like Emirates) nor a low-cost carrier (like Easy Jet)

 Lacks clear differentiation in an increasingly competitive market

 Subject to competition from both ends of the market spectrum

Fleet Heterogeneity:

 Operating six different aircraft types (Boeing 777s, 737s, 747s, Airbus 310s, ATRs)

 Creates complexity in maintenance, crew training, and operations

 Prevents economies of scale in parts inventory and technical expertise

Conclusion

PIA's problems are multifaceted but interconnected. At its core, PIA suffers from a fundamental
mismatch between its revenue generation capabilities and its cost structure. The airline operates in an
environment where political considerations often override commercial imperatives, resulting in a vicious
cycle of operational inefficiencies, revenue shortfalls, increasing debt, and further deterioration of
service quality.

The combined effect of these problems has placed PIA in a precarious financial position where it cannot
generate sufficient contribution margin to cover its fixed costs, even as its debt burden continues to
grow. Without addressing these systemic issues through comprehensive restructuring, PIA's financial
losses will likely continue to drain Pakistan's limited financial resources.

Question 3

According to the national media, PIA intends to purchase 30 new aircrafts by the year 2020. Based on
your analysis, in Questions 1 and 2, do you think that the fleet size is the biggest problem for PIA?

Analysis: Is Fleet Size PIA's Biggest Problem?

Based on the comprehensive analysis of PIA's operations and financial performance, the plan to
purchase 30 new aircraft by 2020 requires careful scrutiny. Let me evaluate whether fleet size is indeed
PIA's biggest problem:
Evidence Against Fleet Size Being the Primary Issue

1. Underutilization of Existing Fleet

 PIA's current fleet utilization is only 9.79 hours per aircraft per day

 This is significantly lower than industry benchmarks:

o Emirates: 13.70 hours/day (40% higher)

o Easy Jet: 11.90 hours/day (22% higher)

 Adding more aircraft without addressing utilization would exacerbate inefficiency

2. Break-Even Analysis Findings

 PIA's break-even load factor is 89.7%, while actual load factor is 73.8%

 Scenario analysis showed that improving utilization of the existing fleet to Emirates' level would
generate a profit of 7,307 million PKR

 This indicates that operational efficiency, not fleet size, is the critical factor

3. Financial Implications

 New aircraft acquisition would substantially increase:

o Fixed costs (depreciation)

o Debt burden (already at 98,533 million PKR)

o Finance costs (already 9,299.8 million PKR annually)

 PIA is already operating at a loss of 8,579.7 million PKR

 Additional debt service would worsen financial position without addressing core issues

4. Comparative Analysis with Peers

 Hawaiian Airlines operates profitably with 36 aircraft (fewer than PIA's 40)

 Easy Jet achieves much higher utilization and load factors with a similar aircraft type strategy

 This suggests fleet composition and utilization, not fleet size, are more critical factors

Actual Core Problems Identified

1. Operational Efficiency Issues

 Low aircraft utilization (9.79 hrs/day vs. industry leaders at 13+ hrs/day)

 Inadequate load factor (73.8% vs. break-even requirement of 89.7%)

 These issues can be addressed without fleet expansion

2. Structural Cost Problems

  Excessive headcount (18,019 employees for 40 aircraft)

 High variable costs per RPK (4.34 PKR vs. Emirates' 3.45 PKR)

 Adding aircraft would increase fixed costs without addressing these fundamental issues

3. Revenue Generation Challenges

 Lowest revenue per RPK among compared airlines (6.87 PKR)

 Poor contribution margin per RPK (2.53 PKR vs. competitors' 4.60 PKR)

 Fleet expansion doesn't address yield management problems

4. Strategic and Governance Issues

 Political interference in route selection and staffing decisions

 Fleet heterogeneity creating complexity and inefficiency

 Public sector constraints on management decision-making

Assessment of Fleet Expansion Plan

The plan to purchase 30 new aircraft by 2020 appears to be addressing a symptom rather than the root
causes of PIA's problems. This approach risks:

1. Amplifying Existing Problems: Adding more aircraft without resolving utilization issues would
likely worsen financial performance.

2. Increasing Financial Burden: New aircraft acquisition would significantly increase debt and fixed
costs when PIA already struggles with existing obligations.

3. Diverting Resources: Capital and management attention would be diverted from addressing
fundamental operational and structural issues.

4. Perpetuating the Cycle: Without addressing governance and operational efficiency issues, new
aircraft would likely experience the same underutilization.

Recommended Alternative Approach

Instead of fleet expansion, PIA should prioritize:

1. Maximize Current Fleet Utilization: Improve scheduling, maintenance planning, and route
optimization to increase daily aircraft utilization hours.

2. Enhance Load Factors: Implement better revenue management systems, adjust capacity on
underperforming routes, and improve marketing.

3. Reduce Operating Costs: Address overstaffing, optimize fuel consumption, and streamline
maintenance operations.

4. Rationalize Fleet Composition: Focus on fleet standardization rather than expansion to reduce
complexity and maintenance costs.
 5. Improve Governance: Implement professional management practices with reduced political
interference in commercial decisions.

Conclusion

Fleet size is not PIA's biggest problem. The analysis clearly demonstrates that PIA's fundamental issues
are operational efficiency, cost structure, revenue generation capability, and governance. The proposed
fleet expansion without addressing these core issues would likely exacerbate the airline's financial
difficulties rather than resolve them.

PIA could achieve significant financial improvement by simply operating its existing 40 aircraft more
efficiently, as demonstrated by the scenario analysis. Adding 30 new aircraft would be justifiable only
after addressing the fundamental operational and structural issues that currently plague the airline.

Question 4

Assume that the average number of passengers flying on the Islamabad-Sukkur route is 115. Calculate
the profitability of this route based on the following data; and then, on the basis of your analysis, make
suggestions as to what should be done?

Aircraft used: Boeing 737-200ER

Seating capacity: 300 passengers

KM’s /gallons (based on 300 available seats): 132

Price per gallon of fuel1: Rs 210

Air distance: 1,000 km

Revenue/passenger KM charged for this route: Rs 6.86 per actual PKM

Repair and maintenance, aviation, and passenger costs can be assumed to be the same as are
given in the case for PIA.

Islamabad-Sukkur Route Profitability Analysis

Route Data

 Aircraft: Boeing 737-200ER

 Seating capacity: 300 passengers

 Average number of passengers: 115 passengers

 Fuel efficiency: 132 km/gallon (based on 300 available seats)

 Fuel price: Rs 210 per gallon

 Air distance: 1,000 km

 Revenue per passenger km: Rs 6.86 per actual PKM

Step 1: Calculate Key Operational Metrics

Load Factor

Load Factor = Average Passengers ÷ Seating Capacity

Load Factor = 115 ÷ 300 = 38.33%

Available Seat Kilometers (ASK)

ASK = Seating Capacity × Distance

ASK = 300 × 1,000 = 300,000 seat-kilometers

Revenue Passenger Kilometers (RPK)

RPK = Average Passengers × Distance

RPK = 115 × 1,000 = 115,000 passenger-kilometers

Step 2: Calculate Revenue

Total Revenue = RPK × Revenue per PKM

Total Revenue = 115,000 × Rs 6.86 = Rs 788,900

Step 3: Calculate Variable Costs

Fuel Cost

Fuel Consumption = Distance ÷ Fuel Efficiency

Fuel Consumption = 1,000 km ÷ 132 km/gallon = 7.576 gallons

Fuel Cost = Fuel Consumption × Fuel Price

Fuel Cost = 7.576 gallons × Rs 210 = Rs 1,590.91

This seems very low - let's recalculate considering the fuel efficiency might be misinterpreted.

Alternative interpretation - the plane consumes fuel at a rate that allows it to travel 132 km on
one gallon when fully loaded with 300 passengers:

Fuel Consumption = Distance ÷ Fuel Efficiency

Fuel Consumption = 1,000 km ÷ 132 km/gallon = 7.576 gallons

Adjusted Fuel Consumption for Actual Load = 7.576 × (300 ÷ 300) = 7.576 gallons
 (No adjustment needed as fuel efficiency was stated based on 300 available seats)

Fuel Cost = Adjusted Fuel Consumption × Fuel Price

Fuel Cost = 7.576 gallons × Rs 210 = Rs 1,590.91

This still seems extremely low. Let's make one more interpretation - perhaps the fuel efficiency is
meant to be 0.132 km per gallon:

Fuel Consumption = Distance ÷ Fuel Efficiency

Fuel Consumption = 1,000 km ÷ 0.132 km/gallon = 7,575.76 gallons

Fuel Cost = Fuel Consumption × Fuel Price

Fuel Cost = 7,575.76 gallons × Rs 210 = Rs 1,590,909.09

This seems more realistic. Let's proceed with this interpretation.

Other Variable Costs

From Exhibit 5, PIA's variable costs per RPK:

 Aviation charges: 11,921.7M ÷ 15,657M RPK = Rs 0.76 per RPK

 Repairs and maintenance: 7,630.3M ÷ 15,657M RPK = Rs 0.49 per RPK

 Passenger services: 3,693.9M ÷ 15,657M RPK = Rs 0.24 per RPK

Calculating for this route:

Aviation Charges = Rs 0.76 × 115,000 RPK = Rs 87,400

Repairs and Maintenance = Rs 0.49 × 115,000 RPK = Rs 56,350

Passenger Services = Rs 0.24 × 115,000 RPK = Rs 27,600

Total Other Variable Costs = Rs 171,350

Total Variable Costs

Total Variable Costs = Fuel Cost + Other Variable Costs

Total Variable Costs = Rs 1,590,909.09 + Rs 171,350 = Rs 1,762,259.09

Step 4: Calculate Contribution Margin

Contribution Margin = Total Revenue - Total Variable Costs

Contribution Margin = Rs 788,900 - Rs 1,762,259.09 = -Rs 973,359.09

Step 5: Allocate Fixed Costs

To allocate fixed costs, we need to determine what portion of PIA's total fixed costs should be
assigned to this route.

Let's allocate based on the proportion of this route's ASK to PIA's total ASK:

Route ASK as Percentage of Total PIA ASK = 300,000 ÷ 21,219,000,000 = 0.00141%

Allocated Fixed Costs = Total PIA Fixed Costs × Percentage

Allocated Fixed Costs = Rs 48,159,600,000 × 0.00141% = Rs 679,050.36

Step 6: Calculate Route Profitability

Route Profit/(Loss) = Contribution Margin - Allocated Fixed Costs

Route Profit/(Loss) = -Rs 973,359.09 - Rs 679,050.36 = -Rs 1,652,409.45

Break-Even Analysis

Break-Even Load Factor

Variable Cost per ASK = Total Variable Costs ÷ ASK

Variable Cost per ASK = Rs 1,762,259.09 ÷ 300,000 = Rs 5.87

Revenue per ASK = Revenue per PKM (assuming constant pricing)

Revenue per ASK = Rs 6.86

Contribution per ASK = Revenue per ASK - Variable Cost per ASK

Contribution per ASK = Rs 6.86 - Rs 5.87 = Rs 0.99

Break-Even ASK = Allocated Fixed Costs ÷ Contribution per ASK

Break-Even ASK = Rs 679,050.36 ÷ Rs 0.99 = 685,909.45

Break-Even Load Factor = Break-Even ASK ÷ Total ASK

Break-Even Load Factor = 685,909.45 ÷ 300,000 = 228.6%

This implies that the route cannot break even even at 100% capacity with the current cost
structure and pricing.
Break-Even Number of Passengers (Ignoring Fixed Costs)

To at least cover variable costs:

Break-Even RPK = Total Variable Costs ÷ Revenue per PKM

Break-Even RPK = Rs 1,762,259.09 ÷ Rs 6.86 = 256,889.08

Break-Even Passengers = Break-Even RPK ÷ Distance

Break-Even Passengers = 256,889.08 ÷ 1,000 = 256.89 ≈ 257 passengers

This exceeds the aircraft's capacity of 300 passengers, confirming the route cannot cover even its
variable costs at full capacity.

Alternative Scenarios

Scenario 1: Use Smaller Aircraft

If PIA used a smaller aircraft with 120 seats:

New ASK = 120 × 1,000 = 120,000

New Load Factor = 115 ÷ 120 = 95.8%

New RPK remains 115,000

New Revenue remains Rs 788,900

Adjusted Fuel Consumption = 120 ÷ 300 × 7,575.76 = 3,030.30 gallons

New Fuel Cost = 3,030.30 × Rs 210 = Rs 636,363.64

New Other Variable Costs remain Rs 171,350

New Total Variable Costs = Rs 636,363.64 + Rs 171,350 = Rs 807,713.64

New Contribution Margin = Rs 788,900 - Rs 807,713.64 = -Rs 18,813.64

Even with a smaller aircraft, the route still fails to generate a positive contribution margin.

Scenario 2: Increase Ticket Price

Required revenue to cover variable costs with current 115 passengers:

Required Revenue = Total Variable Costs

Rs 1,762,259.09 = 115,000 × Required Price per PKM

 Required Price per PKM = Rs 1,762,259.09 ÷ 115,000 = Rs 15.32

This represents a 123% increase from the current Rs 6.86 per PKM.

Recommendations

1. Discontinue the Route: The analysis shows that the Islamabad-Sukkur route is financially
unviable with the current parameters. Even at 100% load factor, it cannot cover its costs. PIA
should consider discontinuing this route unless there are strategic or public service obligations.

2. Switch to Smaller Aircraft: If the route must be maintained, PIA should deploy a much smaller
aircraft, ideally with capacity close to 115 seats. While this alone won't make the route
profitable, it will significantly reduce losses.

3. Increase Fares: A substantial fare increase to approximately Rs 15.32 per PKM would be
required to cover variable costs. However, this might further reduce passenger numbers,
creating a negative spiral.

4. Negotiate Fuel Contracts: The fuel cost appears to be the major variable cost driver. PIA should
explore options for more favorable fuel pricing on this route.

5. Public Service Obligation: If this route serves a public interest and must be maintained despite
losses, PIA should seek government subsidies specifically for this route to offset the operational
losses.

6. Code-sharing or Partnerships: Explore partnerships with regional carriers who might operate
this route more efficiently with smaller aircraft.

7. Route Restructuring: Consider making this a connecting route rather than direct, potentially
combining passenger loads from multiple destinations.

The fundamental issue is that the Boeing 737-200ER with 300 seats is grossly oversized for a
route that only attracts 115 passengers on average. The cost structure of operating such a large
aircraft cannot be supported by the revenue generated from this passenger volume and current
pricing.