The Weird $2b PIA Deal Which has Raised a Billion Questions
Dec 2-8, 2002
By M. Malkham (Opinion)
ISLAMABAD: The European Community is up in arms against Pakistan, cutting down its textile quotas. Half of the Jamali cabinet, and some outgoing ministers of the Musharraf Cabinet, are dumb struck. Every one knows and believes Pakistan has committed a grave mistake by buying 8 US Boeing 777 aircraft under Washingtons pressure.
The two billion dollar deal, in hush-hush and mysterious circumstances has yet to be explained by the finance and aviation managers of Pakistan. But before they do so, the European Community has already protested and cut almost $ 24 million worth of Pakistans textile quotas, duties are being raised on more than 100 items, and anti-dumping measures are in the works.
In a dramatic about turn, Pakistan International Airlines (PIA) has announced that it will buy US-made Boeing 777s instead of the French-made Airbus-310 in a major overhaul of the national carrier. At the weekend, in leaks to the local media, PIA indicated that it would buy the French craft. However, in a move that reflects deep divisions within the PIA board, the decision was reversed 24 hours later, Asia Times reported as early as August 28. Click here for Report
Pakistans new Commerce Minister, Humayun Akhtar Khan, is rushing to the EU countries immediately after the Ramadan Holidays to talk about these cuts but he is not very happy with the Boeing deal himself. What can he offer the EU countries is hard to guess. But Opposition Parties in the National Assembly are preparing to take on the left overs of the Musharraf cabinet on this issue in a major political battle as they try to get back power from un-elected favorites of a dictator.
Pakistan International Airlines, which bought six Jumbo jets from Cathay Pacific Airlines in July this very year, took off in a whiff and signed a deal with the US for another 8 long haul aircraft, specially at a time when other world airlines are getting rid of similar aircraft in view of slump in the aviation industry. The deal was signed amid conflicting statements issued by PIA officials. Some said four aircraft were under consideration, then the figure became six and when the deal was signed, it was for eight 777s.
"We have proposed to buy four Boeing 777 aircraft and the proposal is being processed by Ex-Im bank," Imran Gardezi, the airline's general manager for media affairs said, in a report published by the Aviation Times on October 23, 2002. Click Here for Report
According to a leading Pakistani newspaper,
the Boeing 777s Pakistan has purchased at $250 million a piece were being offered by a US airline at $86 million a piece. And naturally no one was asking for cash. Loans would have been available, as are in the present case. So why pay three times more price per piece is the big question no one has answered.
But an earlier story in the Asia Times gave hugely different figures. It said: "The US Import and Export Bank has shown a willingness to provide 60 percent financing if PIA opts to buy Boeing craft, while the manufacturers of the A-340 Airbus have offered to make available 75 percent financing if their craft are bought. Click Here for Report
"With this knowledge, the PIA constituted an evaluation committee headed by Air Vice Marshal Salim Arshad, which traveled to Seattle and Paris to assess the purchase of either the Boeing or the Airbus.
"Boeing has offered three new 777-200ERs for delivery in 2003-04 at a cost of $120.96 million to $127 million each. Airbus has offered two new A-340-300 white bodies at $101.9 million each and two white tail A-340-300s at $84 million each.
A sources in Foreign office confided that it had been conveyed to Pakistan in so many words because EU is under pressure from member states to review concessions given to Pakistan. According to an EU diplomat
We feel betrayed by the PIA deal, , we think PIA went back on a gentleman's agreement with Airbus and buckled under political pressure from US. We feel since we had helped Pakistan at the time of its need, Pakistan should have been more considerate in dealing with us.
According to aviation experts Pakistan has done the biggest deal ever with the US Boeing Company. PIA Chairman Hamid Nawaz Khan finalized the deal but the civilian MD Ahmed Saeed conveniently absented himself to avoid future accountability.
According to Dawn, PIA was already in an air pocket and was being sucked down after 9/11. Uncertainties in the region, particularly the war-like situation between Pakistan and India and the closure of Indian air space since January 1, 2002, had resulted in the stoppage of the PIA operations in the regional market, adversely affecting the traffic and revenue generations.
The government had already injected Rs500 million in 2001 to improve the liquidity of the airline and keep it in air, and then subsequent to June 2002, a further equity of Rs400 million was injected by the government.
After 9/11, the timely sovereign indemnity provided by the government to the National Insurance Company (NIC) saved the airline from huge insurance premiums which had risen from $12 million annually to $40 million. The Corporation incurred accumulated losses of Rs12.02 billion up to June 30, 2002 as against the share capital and reserves of Rs8.01 billion.
As of that date, the current liabilities exceeded its current assets by Rs15.86 billion. In order to address the above problems and to enable the Corporation to meet its liabilities when due, the government firmed up a generous financial package, increasing the burden on the budget. Under this package it issued guarantees for raising long-term loans of Rs20.5 billion. Next it made a commitment to provide equity contribution to the Corporation over the next four years to cover the interest payments on the above loan up to a cumulative contribution equivalent to the accumulated losses of the Corporation.
As part of the above financial packages, the Corporation has obtained a short-term bridge financing of Rs4.73 billion and Rs4.9 billion in the form of restructuring of the existing debt into long-term debt with five years maturity from the commercial banks secured against the guarantee issued by the government during the financial year 2001. The short-term bridge financing has been rolled over during the period. The Corporation has incurred interest amounting to Rs900 million on the financing obtained as interest costs during the period from August 2001 to June 2002.
What has the Corporation done with all this financial injection from the budget? Well, the first thing it did was to window-dress the balance sheet to show a profit after tax of Rs447 million (a paltry $7 million). Next on the basis of this so-called profit (it makes one wonder how a company which has accumulated losses of Rs12.02 billion and the liabilities of Rs15.86 billion can even think of talking of profits), the board of directors decided to distribute if not the entire profit, but at least a substantial chunk of it among themselves as bonus.
This is the first time in the last 15 years for the airline staff to receive a bonus and that too, very very generous - even the lowliest employee received around Rs10,000. No one would grudge this for the low employees but it should have been based on the real profits, not on window-dressing. But all this was peanuts.
The profit was shown not for the bonus distribution but to justify a $2 billion deal which would have been unthinkable for a losing organization like the PIA, otherwise. The decision is to buy 8 Boeing aircraft at a total cost of $2 billion most of which will come as loans from the US Exim Bank and the down-payment too, amounting to $150 million has been arranged through commercial loans. The PIA has proudly announced that it has awarded the UBL, the Citibank and the Islamic Development Bank the mandate and arrange $150 million to finance its fleet replacement program.
The financing envisages a one-year facility of $85 million to be replaced by a three-year facility of $150 million. In the $85 million facility, the UBL and the Citibank/Saudi American bank have underwritten $45 million and 4$0 million, respectively. The IDB has agreed to underwrite $70 million in the three-year facility.
On November 14, only two days before the coming into being of an elected parliament after a lapse of three years, the Chairman PIAC and the Secretary Defence signed a deal in Washington DC for 8 Boeing 777s. The order includes three 777-200ER, two 777-200 LR and three 777-300 ER aircraft for use on the PIA's long-haul routes. Deliveries are scheduled to begin in 2004 and will continue to 2008.
According to one aviation analyst what has surprised him was that the PIA, which has just acquired from the Cathy Pacific six Boeing 747-300's, a long-range aircraft, has now sought an outright purchase of 8B777 which is also a long-range aircraft. Everybody, and his auntie knows that the revenue earning sectors of the PIA have always been the Gulf and the Middle East sectors. And there has also been a steady growth in revenue on the PIA's Manchester route. But the Trans-Atlantic sectors are not on break-even level because of fierce competition. It does not, therefore, make financial sense for an airline like the PIA to acquire such a large number of long-range aircraft which would be economical only on trans-atlantic route.
The PIA Board of Directors have claimed that the B777 due for delivery in 2004 will replace the A300 B4 aircraft, a medium-range aircraft with a spacious underbelly cargo carrying capacity that makes it ideal for use on the Gulf and the Middle East sectors. But then the question is how does the airline plan to repay the mounting debt when the routes on which these aircraft are to fly are not breaking even.
How, and via which route has the Board of Directors reached to the laughable conclusion that the airline's passenger traffic would grow at the rate of 3 per cent between 2000-2011 and its cargo traffic would grow at the rate of 7.5 per cent during the same period is not known. Aviation experts question these assumptions.
These experts also recall that the PIA management had earlier claimed that the total cost of 8 new Boeing 777 would be under $900 million only! It is said that the United Airlines, a US airline company after canceling its fleet replacement and expansion program due to massive recession in the international airline sector had offered to sell three new B777 to the PIA at a price of $86 million a piece (against $250 million a piece the PIA will be paying to the Boeing company under the deal it had inked on November 16), and was also willing to further reduce it by another $5 million.
And according to another source when the airline market was growing steadily before 9/11, and when there was no stagnation in the aircraft making sector, many airlines had booked orders for the same type and make of aircraft at prices lower than what Pakistan has agreed to pay now for the same aircraft when the aircraft industry is facing a serious slump in orders.
The aircraft manufacturers have never been so pressed for seeking new orders than they are today. So, the argument that we are getting them cheaper in a declining market also does not hold. And looking at the actual projections of growth in the passenger and cargo traffic in the coming years, it is impossible to believe that the PIA would earn enough from the new addition to meet its amortization obligations in time without the help from the budget.
So, why this deal? And that too at a time when Pakistan's economy is still in the grips of stagnation and we are obliged under the IMF conditionalities to reduce as much as possible the burden on the budget by privaitizing anything and everything which the public sector cannot handle without the budgetary support?
The Weird $2b PIA Deal Which has Raised a Billion Questions
