To Privatize or Not to Privatize, that is the Question

To Privatize or Not to
Privatize, that is the Question:
State of Aviation Industry in Pakistan
Dr. Joseph Wilson
Member, Competition Commission of Pakistan
International Conference on Air Transport, Law and Regulation:
Challenges for the Middle East
Abu Dhabi, April 14 ~ 16, 2009

‘Unless you become more
watchful in your states and check
the spirit of monopoly and thirst
for exclusive privileges, you will
in the end find that... the control
over your dearest interests has
passed into the hands of these
corporations. ‘
Andrew Jackson, Former US President
Farewell Address, March 4, 1837

Why liberalize?
 To promote competition
 To enhance economic efficiency
 To facilitate trade and globalization
 To protect consumers from anti-competitive
behaviour
 To provide better quality goods and services at lower
costs
 To generate employment and economic growth
 To promote broad development objectives
 To meet growing demand that incumbent cannot
meet
 To reduce incumbent’s inefficiencies and to make it
competitive

History of Aviation in Pakistan
 1946: Orient Airways formed
 1955: The state-run airline, Pakistan
International Airlines (PIA), formed and
merged into Orient Airways
 1960: Civil Aviation Ordinance, primary
aviation legislation in Pakistan, established
 1982: Civil Aviation Authority instituted to
handle civil aviation matters in Pakistan
 1992: Deregulation & entry of private airlines

 1994: Civil Aviation Rules, 1994 issued
 1998: Private airline, Bhoja Air, initiated
international flights to UAE from all major
cities of Pakistan; thus becoming a
competitor for PIA on these international
routes
 2000: National Aviation Policy drafted
 2005: Government allowed private airlines in
Pakistan to operate flights to destinations in
the UK, the US and Scandinavian countries in
addition to flights to Gulf countries

 2006: Pakistan ratified the Convention for the
Unification of Certain Rules for International
Carriage by Air
 2007: Draft National Aviation Policy devised
to counter effects of deregulation by National
Aviation Policy 2000

State of Aviation Industry
 Since 1955, PIA faced competition only on
international air routes by foreign airlines.
 Liberalization of Pakistan’s domestic aviation
industry started in 1992.
 As a result, private airlines, such as Bhoja Air,
Royal Airlines, Hajvairy Airlines, Safe Air, Aero
Asia, Raji Airlines and Shaheen Air
International entered the domestic aviation
stage.

 Most of these airline operators started
operations with only one aircraft wet leased
from Central Asian Republics.
 However, most of these airlines had to close
their operations within months leaving huge
debts behind.
 Karachi Airport was unilaterally opened up for
international airlines in 1992. However, the
policy was reversed in the following year.

 The current stage of the aviation industry of
Pakistan is set by three major airlines:
 PIA
 Shaheen Air International
 Air Blue

Open Skies Agreements
 Pakistan signed its first open skies bilateral
air services agreement with USA in 1995.
 In 1998, Pakistan signed its open skies
bilateral air services agreement with
Switzerland.
 At the same time, Pakistan concluded liberal
bilateral arrangements with Scandinavian
countries, Gulf Countries and Singapore
allowing them market access to three
additional gateways in Pakistan (i.e.
Islamabad, Lahore and Peshawar).

Role of Civil Aviation Authority
 Regulatory Body under the control of Ministry
of Defence, Government of Pakistan
 Provides services such as Facilitation, Air
Space Management, Air Traffic Control & Fire
Fighting Services
 Plans, develops and maintains civil aviation
infrastructures in Pakistan
 Ensures conformity International Civil Aviation
Organization standards
 Negotiates Air Services Agreements with
other countries

History of Aviation in India
 1912: Indian State Air Service in collaboration
with Imperial Airways conducted first flight in
India between Karachi and Delhi as an
extension of London-Karachi flight.
 1932: Tata Airlines, first Indian airline formed
 1947 (Partition): 9 air transport companies
-Tata Airlines, Indian National Airways, Air
service of India, Deccan Airways, Ambica
Airways, Bharat Airways, Orient Airways and
Mistry Airways

 1948: Air India International formed as a
national carrier.
 1953: All airlines nationalized and
consolidated under Air Corporations Act 1953
– Indian Airlines Corporation (Domestic) & Air
India International (International) formed.
 1986: Air Taxi Scheme – Private companies
allowed non scheduled air transport
 1994 – Liberalization policy – Air Corporation
Act 1953 repealed

 1995: 10 Airlines started including Jet
Airways Sahara, NEPC Airlines, East West
Airlines, ModiLuft Airlines, Jagsons Airlines,
Continental Aviation, and Damania Airways –
 Only Jetways and Sahara Survived
 Currently: Indian Airlines, Jet Airlines, Air
Deccan, GoAir, IndiGo,
Kingfisher Airlines, Paramount Airways &
SpiceJet

Privatization in India
 Privatization of NACIL (Air India International
& Indian Airlines) was announced in 2000.
 Due to change in governments and their
approach towards privatization of the national
carrier, the process has suffered setbacks
and the carriers have not been privatized yet.

India-Pakistan 1991-2008: Comparison
Pakistan-India Domestic Air Traffic Comparison
0
5
10
15
20
25
30
35
40
Year
1992
1994
1996
1998
2000
2002
2004
2006
Year
Passenger(Millions)
India
PakistanLiberalization in India
Liberalization in Pakistan
LCC Entry Pakistan
LCC Entry India

PIA – a failing monopoly
 PIA incurred losses of:
 12 billion rupees in 2006
 Despite continuous heavy losses, PIA
survived due to unmitigated financial and
administrative support of the Government of
Pakistan.

State-Aid vis-à-vis Privatization
 Liberalization of the aviation industry depends
on the privatization of state-owned flag
carriers
 When the state provides administrative and
financial support to a national airline while
private airline do not have access to similar
assistance, the latter face a competitive
disadvantage while the former become
increasingly inefficient and uncompetitive
 The very thesis of liberalization is distorted
when entities are not privatized

 Sinking fuel prices made it possible for PIA to
post a profit of Rs 600 million after a lapse of
nearly four years with the handsome revenue
of Rs 121 billion in the last quarter 2008-09.
 However, the difference in fuel prices was not
passed on to PIA passengers, as reflected
from the high Hajj air fares charged by PIA
during Hajj season 2008.

 Unsatisfactory Customer Services
 PIA’s cancellation/rescheduling charges
appear to be against international standards
and practices.
 PIA applies percentage charges across the
board to all categories, including normal and
discount fares, while Air Blue and Shaheen Air
charge a fixed fee for refund and change.
 Airlines in the United States as well as Thai Air
& Gulf Air, impose fixed refund and change
fees.
 Poor Safety Standards
 EU banned 35 of 44 PIA aircrafts which failed
EU safety tests in 2007

Reluctance to Privatize PIA
 Labor Concerns
 A large number of employees have been
inducted in PIA on political basis.
 Aircraft to Employee Ratio: Comparison
 Ideal ratio ranges between 1:130 to 1:170
 PIA – 1:418
 Air India – 1:229
 Japan Airline – 1:74
 US Airways – 1:106

Government’s Stance on Privatization
 Government officials are deliberating that
state-run entities, such as PIA, Railways and
PEPCO, that are extracting 200 billion PKR
from the masses in the form of taxes, should
be privatized to save Pakistan’s economy.
 The government is also planning to devise a
long-term scheme for PIA to improve its
financial health after reviewing its
performance in first quarter of 2009.

Competition Regime in Pakistan
 The Government of Pakistan established the
Competition Commission of Pakistan under
the Competition Ordinance, 2007 in
November 2007.
 The Commission intends to detect, and where
necessary condemn anti-competitive
practices, in line with the international
standards, while reflecting the state of
development in the fines imposed or
remedies suggested.

Competition Regime in Pakistan
 The Commission is analyzing the
unreasonable increase in Hajj air fares
charged by PIA in Hajj season 2008 as
compared to the Hajj fares in preceding years
(2006 and 2007).
 PIA and Saudi Airways entered into an
agreement and fixed the airfares to be
charged from Hajjis, which is against the spirit
of competition.

Conclusion
 There is a need for a strong and independent
regulatory body
 The implementation of competition regime will
help prevent anti-competitive issues arising
because of government ownership
 Privatization is essential for effective
liberalization and therefore competition

To Privatize or Not to Privatize, that is the Question

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