Open skies policy behind PIA's decline

Body finds Gulf airlines' expansion, poor management led to loss of market share

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ISLAMABAD:

A parliamentary fact-finding committee has found that the decision to allow Gulf airlines to expand their operations was the main cause behind the downfall of Pakistan International Airlines (PIA), as these airlines carried passengers beyond the intended scope of their bilateral service agreements.

Due to the Open Sky Policy, PIA's market share decreased from 50% to 20%. Constant management changes, often resulting in the appointment of inexperienced individuals, also contributed to the airline's downfall, according to a report submitted to the National Assembly Standing Committee on Privatisation.

The committee also recommended setting up an Inquiry Commission to investigate former Aviation Minister Chaudhry Ghulam Sarwar, whose "irrational statement caused $600 million in losses to PIA over four years."

Headed by Pakistan Peoples Party's MNA Sehar Kamran, the fact-finding committee presented its report to the National Assembly Standing Committee on Privatisation on Tuesday.

The committee found that, due to the Open Sky Policy, international airlines now operate 100 flights per week. Other factors contributing to PIA's downfall include an outdated fleet, lack of finances, and high taxes on fleet expansion.

The airline's liabilities have already exceeded Rs740 billion, including vendor dues, fuel charges, and government-backed loans, stated the report.

The committee recommended implementing structured financial support, similar to international models where national carriers receive subsidies and tax exemptions. It also stressed the need for stable leadership.

While the Open Sky Policy aimed to enhance competition and improve service quality, it had a detrimental impact on PIA, which struggled to compete against international carriers, particularly those from the Gulf region that benefit from substantial government subsidies.

The report highlighted weaknesses in the agreements, which did not specify the number of passengers or carriers, nor did they impose any restrictions.

"The Open Sky Policy contributed to reducing PIA's market share from 50% to just 20%," said Kamran, the convener of the sub-committee. The influx of foreign carriers, particularly those from the Gulf region, dominated international routes, forcing PIA into a defensive position.

One key concern is the extensive use of the sixth freedom by Gulf, UAE, and other international airlines, which allows them to carry passengers and cargo between Pakistan and other countries beyond the intended scope of bilateral Air Services Agreements. Under this freedom, Gulf airlines can transport passengers with a stop in their home countries, further undermining PIA's competitiveness.

Over the past decade, PIA has focused on maintaining its key domestic and selected international routes. However, during this period, Emirates, Qatar Airways, Turkish Airlines, and Etihad Airways have significantly expanded their operations in Pakistan, offering over 100 flights per week, according to the report.

Compared to the year 2000, PIA carried 26% fewer passengers in 2024, reflecting a massive squeeze in operations despite the country's growing population, particularly within the middle-income group.

The scope of the inquiry included the implications of the Open Skies Policy adopted by various governments, sovereign guarantees to PIAC, the grounding of 21 PIA aircraft—including Boeing 777s—the staff-to-aircraft ratio, reasons for the lack of flights to major regional countries, failures of business plans, past recruitments, and the status of non-core assets.

The government also attempted to privatise PIA but failed. Secretary Privatisation Commission Usman Bajwa informed the committee that the government paid $4.3 million (Rs1.2 billion) to financial advisor Ernst & Young. He further disclosed that another $2.6 million would be paid to the advisor after the second attempt to privatise. However, Bajwa could not provide a firm date for issuing the Expression of Interest to invite bidders for PIA's privatisation.

Currently, only six of 12 Boeing 777 aircraft are operational, while the remaining aircraft are grounded due to financial constraints. Overall, out of a total of 32 aircraft, only 19 are in service.

High taxes on fleet expansion and maintenance, coupled with delayed procurement of essential components, have worsened the situation, leaving PIA struggling to match the operational capacity of regional competitors.

To compensate for its fleet shortage, PIA opted to wet lease aircraft, taking both crew and aircraft. However, this resulted in losses for both the brand and its finances. For instance, a wet-leased aircraft operated from Islamabad to London under the Premier Service caused total losses of Rs2.9 billion, including Rs1.1 billion in operational losses, according to the report. Notably, the London Premier Service was launched despite feasibility studies predicting losses.

The committee observed that the code-sharing agreement with Turkish Airlines was a well-intended move to expand PIA's international connectivity. However, internal opposition from the PIA Pilots' Association and political resistance led to its premature termination.

The committee further found that the introduction of the Golden Handshake Policy to lay off around 3,000 employees resulted in the loss of highly skilled engineers and technical staff, many of whom were subsequently recruited by competitor airlines.

The report stated that PIA continues to face high workforce costs, with an employee-to-aircraft ratio of 215, slightly above the industry average of 200.

Recommendations

The fact-finding committee recommended ensuring leadership stability, investing in fleet expansion, enhancing service quality, implementing financial restructuring, and strengthening aviation policy support to improve PIA's service delivery.

It also recommended that all privatisation efforts should include strategic restructuring, addressing past mismanagement, ensuring transparent governance, and securing sustainable financial backing.

PIA should focus on re-establishing its presence on key international routes and regaining passenger trust through service enhancements. Additionally, the government should review, renegotiate, and reconsider the Open Sky Policy to ensure a level playing field for PIA.

The committee also recommended constituting an Inquiry Commission to investigate the former Aviation Minister's statement regarding PIA pilots. The controversy and the subsequent ban by the European Union Aviation Safety Agency (EASA) caused an estimated $600 million loss in revenue to PIA over the past four years.