PM Sharif’s government is currently pushing for the early privatization of PIA.
For this PIA has been made a debt free entity by carving out its entire losses, outstanding commercial bank loans, sovereign debts, trade payables, all assets and investments and placed them in a newly incorporated Special Purpose Vehicle – the PIA Holding Company Limited (PIAHCL). This new company has also substituted PIA on PSX. The above arrangements are termed as the biggest financial restructuring ever done in the country. However even after this, PIAHCL’s own financial health remains deeply challenged and needs a thorough analysis.
According to the audited financial statements for the year ended on December 31, 2024, PIAHCL reported a loss of PKR 47 billion, escalating its accumulated losses to a whooping PKR 698 billion. Its long term and short term liabilities stood at PKR 406 billion and 320 billion respectively. Long term liabilities include commercial banks loans of PKR 277 billion at a mark-up rate of 12% and government loans of PKR109 billion were obtained at mark-up rate of 10-17%. Short term liabilities of PKR 320 billion include accrued mark-up of PKR 111 billion to be paid in full in the 1st quarter of 2025 only through government support. PIAHCL also holds PKR 194 billion as trade payables, where PKR 148 billion pertains to Civil Aviation Authority who has also raised an off balance sheet claim of PKR 73 billion. The Company is also indebted to PSO by PKR 24 billion. On the asset side PIAHCL was holding investment properties of PKR 10 billion and long term investments of PKR 57 billion with following details:
PIA PKR 52 billion, Skyrooms (Pvt) Ltd PKR 40 million, Midway House PKR 28 million and PIA investments Ltd PKR. 4.4 billion, the owner of Roosevelt Hotel New York and Scribe Hotel Paris. As a matter of fact after PIA’s privatization PIAHCL main earning assets will be confined to above 2 hotels only. Roosevelt Hotel is presently used as a shelter home under an agreement with the Mayor of New York, which can be revoked under 120 day notice. Roosevelt has generated net revenue of PKR 34 billion plus net profit of PKR 7 billion in last year. However Scribe Hotel Paris remains undisclosed.
The miseries of PIAHCL amplified as its Auditors gave a qualified opinion on its accounts due to non-disclosure of a subsidiary company which is also in loss. The auditors have further raised a going concern warning, highlighting that current liabilities have exceeded current assets by an unprecedented 81x. They have further emphasized that PIAHCL’s operations are wholly dependent on government bailouts, making it practically balance sheet insolvent. PIAHCL, even by selling above 3 major earning assets may not be able to generate sufficient funds to pay off its total liabilities PKR 726 billion. Roosevelt Hotel with a reported fair value of $ 777 million (PKR 240 billion) and still in profit provides a little respect to the accounts of PIAHCL. However this hotel and Scribe Hotel need complete refurbishment, involving huge funds in foreign exchange.
Now coming to PIA accounts of December 31, 2024 where it has shown operating profit of PKR 9.3 billion and a profit after tax of PKR 26 billion. This operating profit is inclusive of a non-cash income of PKR 3 billion that must be subtracted to arrive at actual profit of PKR 6 billion only. Profit after tax of PKR 26 billion was nothing but an accounting gimmick. PIA in fact achieved this number through deferred tax reversal of PKR 31 billion: a non-cash item. Barring this from PIA’s Income Statement shows a net loss of PKR 5 billion. PIA recorded net sales revenue of PKR 204 billion, a drop of 14% over last year. The local sales revenues also plummeted by 27%, attributed to capacity constraints. PIA carries current liabilities of PKR 142 billion versus current assets of PKR 54 billion translating to a negative current ratio of 0.38:1, signaling acute cash flow stress. Its fixed assets of PKR 132 billion include aircraft fleet, plant, property and equipment of PKR 92 billion and deferred taxation of PKR 32 billion. Book value of aircraft fleet was PKR 42 billion. Land & building carried a book value of PKR 21 including revaluation surplus PKR 20 billion. PIA’s equity has collapsed to only PKR 3.5 billion, underscoring its eroded capital base.
The above analysis showcases the cosmetic nature of above discussed restructuring. In fact the government was effectively engaged in debt warehousing by shifting losses and mounting liabilities to PIAHCL without addressing underlying operational inefficiencies. This could have been done by any local consultant that may have saved outflow of millions of dollars on account of foreign consultant fee. The second round of PIA’s privatization is currently in process but like 1st round, it has failed to evoke any international interest and signals a distrust of the government’s privatization program. The local bidders (cement manufacturers, stockbroker, school operators and a charitable trust) unfortunately lack sufficient financial muscles to meet estimated post privatization investment requirements of PKR 75-100 billion over the next few years.
Driven by IMF conditionality’s, the government is desperate to conclude PIA’s privatization by this year end. However, a hasty sale deal with any of the undercapitalized local entities may not yield the desired results rather it will expose PIA to some greater financial, operational and reputational risks. PIA is a strategic asset of national pride. It holds good growth potential that has already been unlocked due to partial resumption of European routes. Nevertheless at this critical juncture, PIA is unable to capitalize on this opportunity due to capacity constraints. The government must follow a prudent path by retaining this strategic asset and after having a real financial as well as operational turnaround may sell it at some later but appropriate stage which may be 2-3 year down the line.
—The writer is independent financial analyst & former Regional Operations Chief HBL.
