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DE RUEHKP #0387/01 3480616
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FM AMCONSUL KARACHI
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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) 
 
¶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