Identifier
Created
Classification
Origin
09KARACHI387
2009-12-14 06:16:00
CONFIDENTIAL
Consulate Karachi
Cable title:  

KARACHI - NATIONAL AIRLINE FLOUNDERS AS PRIVATE CARRIERS

Tags:  EAIR PGOV ECON PK 
pdf how-to read a cable
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ZNY CCCCC ZZH
R 140616Z DEC 09
FM AMCONSUL KARACHI
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INFO RUEHIL/AMEMBASSY ISLAMABAD 0907
RUEHBUL/AMEMBASSY KABUL 0320
RUEHLO/AMEMBASSY LONDON 0365
RUEHNE/AMEMBASSY NEW DELHI 1916
RUEHLH/AMCONSUL LAHORE 2778
RUEHPW/AMCONSUL PESHAWAR 4660
RUEAIIA/CIA WASHINGTON DC
RHMFISS/JOINT STAFF WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
C O N F I D E N T I A L SECTION 01 OF 02 KARACHI 000387 

SIPDIS

E.O. 12958: DECL: 11/25/2019
TAGS: EAIR PGOV ECON PK

SUBJECT: KARACHI - NATIONAL AIRLINE FLOUNDERS AS PRIVATE CARRIERS
PROFIT

Classified by: Acting Consul General Dawn M. Schrepel, Reasons 1.4
(b)and (d)

C O N F I D E N T I A L SECTION 01 OF 02 KARACHI 000387

SIPDIS

E.O. 12958: DECL: 11/25/2019
TAGS: EAIR PGOV ECON PK

SUBJECT: KARACHI - NATIONAL AIRLINE FLOUNDERS AS PRIVATE CARRIERS
PROFIT

Classified by: Acting Consul General Dawn M. Schrepel, Reasons 1.4
(b)and (d)


1. (C) Summary: While Pakistan's national carrier, PIA, has been
operating at a loss for years, Pakistan's private carriers are seeing
profits increase and are cautiously preparing to expand -
particularly into the Middle Eastern market. PIA executives blame
reduced travel demand and unfair competition from international
carriers for their losses; PIA's competitors however, blame
government interference, including deliberate flight delays, up to 20
seats blocked on each flight for GoP officials, and free flights for
officials and their friends and family. End summary.

--------------
PROBLEMS AT PIA
--------------


2. (C) EconOff met November 12 and 13 with executives from Pakistan's
national airline, Pakistan International Airlines (PIA),the two
leading private carriers, Air Blue and Shaheen, and Pakistan's Civil
Aviation Authority (CAA) to discuss Pakistan's aviation industry.
PIA's Director of Corporate Planning, Shahnawaz Rehman told EconOff
that PIA has operated at a loss "for some time," although he did not
provide specifics on the extent or duration of the loss. Rehman
blamed poor revenues, reduced travel demand due to the global
economic crisis, and competition from international carriers such as
Qatar Airways and Emirates for the shortfall. Rehman said that while
Qatar Airways and Emirates receive backing from their respective
governments, PIA was not supported by the Government of Pakistan
(GoP),adding that while the GoP guaranteed PIA's loans, "we don't
receive a cent from the government."


3. (C) On Rehman's last point, in separate meetings executives from
Shaheen and Air Blue, which had each previously worked at PIA,
disagreed strongly. "The GoP gives PIA approximately $850 million
annually in government-backed loans that it does not repay," said
Arshad Jalil, Shaheen's Vice Chairman. Agreeing, Air Blue's Managing
Director Syed Nasir Ali added that "PIA also collects the same
government taxes from passengers as the other airlines, but is not
required to remit these fees to the CAA, resulting in millions of

dollars of additional government subsidies."


4. (C) Shaheen and Air Blue executives independently also described
the challenges facing PIA, the majority of which they attributed to
direct government interference. According to these executives, PIA
regularly delays flights to wait for GoP officials that are running
late. The airline is required to hold up to 20 seats on each flight
for GoP officials that may or may not use them - resulting in empty
seats on nearly every flight. PIA also gives numerous free tickets
to GoP officials and their friends, families, and contacts. In
addition to this government interference, PIA is required to maintain
certain unprofitable routes as a public service, causing greater
losses across the board.

--------------
PRIVATIZATION UNLIKELY
--------------


5. (C) PIA Corporate Planning Director Rehman said PIA was looking
for ways to return to profitability, including enhancing business
class and cost cutting, but he continued to point to external factors
such as the economy and unfair international competition as the root
causes of PIA's troubles. While Jalil and Ali said privatization was
PIA's only viable path to profitability, all three men agreed this
was not likely, with Jalil adding that the GoP "is never going to let
go of PIA, profitable or not, they receive too many advantages to
ever walk away."

--------------
CLEARER SKIES FOR PRIVATE CARRIERS
--------------


6. (C) Both Shaheen and Air Blue cited innovation, on-time flights,
and excellent customer service as the keys to their continued
profitability. Air Blue Managing Director Syed Nasir Ali admitted
that Air Blue had fashioned itself after the American carrier Jet
Blue, introducing E-tickets and paperless offices to Pakistan and
implementing strict cost controls. Shaheen's Vice Chairman Arshad
Ali said Shaheen has taken similar steps and is positioning itself

KARACHI 00000387 002 OF 002


for growth with $9 million recently invested in self-financed
infrastructure projects such as a new wide-body hanger and an
expanded office headquarters. While each acknowledged the challenges
of reduced travel demand, they expressed optimism that the recent
increase in profitability will be a continuing trend. On average the
two airlines turn a profit when they are able to fill 75 percent of
the seats on each flight - they are currently averaging 85-90
percent.


7. (C) Looking ahead, both airlines are targeting the Middle Eastern
markets, particularly Dubai. International fares now account for
between 65-70 percent of each carrier's profits, a percentage they
see increasing. "Fifteen years ago we made 80 percent of our money
domestically, now it's the reverse," Ali said, adding that "while
domestic travelers don't always have to travel, the international
laborers going to Dubai have no choice...the Middle East is built on
Pakistani labor."

--------------
CURRENT FLEET SIZE AND POTENTIAL ACQUISITIONS
--------------


8. (SBU) PIA's fleet of 40 aircraft includes six Boeing 737s, six
Boeing 747s, nine Boeing 777s, twelve Airbus A310s, and seven ATR
Turboprops. Rehman said that PIA has been in discussions with Boeing
and Airbus over the purchase of some 30 additional aircraft, but is
likely to reduce that number given the airline's current financial
challenges.


9. (SBU) Shaheen, formed by the Pakistani Air Force in 1990 as a
cargo carrier, was purchased in 2004 as a private airline by Khalid
Sehbai. After operating for one year as a domestic passenger
carrier, as required by civil aviation law, Shaheen now carries one
million passenger annually to 16 domestic and international
destinations. Shaheen owns a fleet of 11 Boeing 737-200s, with 1,200
employees -- 850 with the airline and 350 with their subsidiary
aviation services firm which provides the military and government
with lubricants and services. Shaheen is in the process of
purchasing four new Boeing 737-900s. (Note: Shaheen expected
deliver of aircraft in December 2010, but due to pre-payment delivery
financing difficulties with Boeing, delivery is delayed until June

2011. End note.)


10. (SBU) Air Blue, launched in 2004, currently runs a fleet of seven
leased Airbus aircraft -- A319s, A320s, and A321s -- to nine domestic
and international destinations. In 2006 they agreed to purchase 14
Airbus A320s, but they have struggled to gather the needed financing
and are likely to reduce the order to between seven and nine
aircraft, with the first to be delivered in 2010. Ali offered the
difficulty in operating wide-body aircraft as the reason Air Blue
chose Airbus A320s over Boeing's 737 series.

SCHREPEL