You are on page 1of 62

Page 1 of 62

Risk Management
Submitted to:

Prepared by:

Ahmad Fawwad Khan Husnain shahid Adnan Sajid

(100645-025) (100645-013) (100645-011)

M.Com (6th)

Section (A)

Institute of Audit & Accountancy

Risk Management

Page 2 of 62

University of Management and Technology

All praise to Almighty Allah, the most merciful and compassionate, who give us skills and abilities to complete this project successfully. We are grateful to our parents who are always been a source of encouragement for us throughout our life and from start to the end of this report .we are thankful to all staff members so Pakistan International Airlines PIA. We found every one very cooperative and helpful for providing us the Theoretical as well as practical knowledge about the function and operation of the PIA and also thankful to Sir, Tehseen Mohsin who assign this project and due to this we gain experience on this sector.

Risk Management

Page 3 of 62

Future of Flight - The Flying Wing

Table of Contents
Executive Summery ..4 History of PIA..........................................................................................................4 Birth of a Nation, Birth of an Airline........................................................................4 PIAs First International Service..............................................................................4 New Planes, New Directions, New Management.....................................................4 Style, Glamour, and Charisma................................................................................5 Safety Management System at PIA.........................................................................5 The Pursuit of Excellence through Technology and Quality Control........................5 Vision......................................................................................................................6

Risk Management

Page 4 of 62
Mission....................................................................................................................6 Values.....................................................................................................................6 Customer Expectations.................................................................................6 Service..........................................................................................................6 Innovation.....................................................................................................6 Cohesiveness................................................................................................6 Integrity.........................................................................................................6 Reliability......................................................................................................6 Safety............................................................................................................6

Business Class Services.............................................................................................9 Kerb-Side Counters....................................................................................................9 Business Plus Porters and Check-In Counters..........................................................10 Fast Track................................................................................................................10 Efficient and streamlined cargo operations ............................................................10 PIA Speedex Delivers With Speed, Reliability, and Affordability..............................10 PIA Believes In Partnerships.....................................................................................11 Pre-Qualification......................................................................................................11 Special operations...................................................................................................11 Charter services..........................................................................................11 Hajj and Umrah operations..........................................................................11

Flight & Ground Safety Services..............................................................................12 Crew Resource Management (CRM) Training Services.............................................12 Emergency Response Planning (ERP) Services........................................................12 Quality Assurance (QA) Services..............................................................................14 Safety Management System (SMS) Implementation Services..................................16 Fire Protection Services...........................................................................................20 Functions.................................................................................................................21 PIA Winners of 9 industry awards............................................................................22 Trading strategies....................................................................................................22 Timing......................................................................................................................22 Live updates and risk management.........................................................................22 Success .22

Risk Management

Page 5 of 62
Insurance Policies. 22 SWOT Analysis. 24 PEST Analysis... 25 Major Risk Factors 25 Evaluation of Management 29 Quantitative Analyses ...31 Sensitivity Analyses of Cash Flows 33 Credit Risk ..36 Trade Debts & Aging Analyses .37 Comparative Statement of Financial Statements..40 Ratio Analyses .46 Analysis of Financials in context of Risk Measuring..48 Nutshell of Ratio Trends ..51

Risk Management

Page 6 of 62
Future Outlook 54 Conclusion .56

Risk Management

Page 7 of 62


In 1955 Pakistan International Airline formed. It is the 16th largest airline in Asia, operating scheduled services to 73 destinations throughout Asia, the Middle East, Europe and North America, as well as an extensive domestic network linking 24 destinations. In our project the requirement is about qualitative and quantitative analyses in context of risk management. No doubt it was an uphill task for us as we need a lot data to get through this project. Most of time we felt difficulty in interpretation of trends in the absence of whole information and consequently have to rely on the data given in the audited annual report of the corporation. But we put our maximum effort in getting data to a greater extent but it doesnt mean that our work is without flaws. Sometimes we have to borrow words from different research reports. In our report we did risk assessment of the company and determined the quantitative and qualitative analysis along with some risk factors which can be a threat for the company in the future. We also did SWOT analysis and PEST analysis on PIA, identify major strength we find as leading market position, brand recognition, superior operating structure, network presence, hub airport at Karachi, and effective use of technology. Formulation on GOVT rule, High dependencies on passenger revenues, high debt, and reliance on oil prices are major weakness, opportunities are like having MAX route and fleet, growth demand for low cost airline, customer loyalty, shifting customer needs and industry recovery, and major threats are high interest rates, accidents, strong competition by Air blue, interest and foreign currency exchange rates, and decline in industry. In PEST analysis we discover major Governments active role in increasing competition in the airline industry, inflation rate, turning of social environment of Pakistan liberal with the new regime. We recommend PIA for better service to decentralized its management system, adopt transparent promotion polices, employee empowerment to

Risk Management

Page 8 of 62
increase the employee motivation and moral. Try to decrease its overhead cost, adopt effective marketing policy, two way communication and TQM. Upgrade its fleet; purchase new Aircrafts with twin engines these will reduce the operating cost of PIA. Improve control over fares. Hire the services of IT specialists; improve service standards focusing on quality. We observed that financial trends have been improving gradually as management is taking keen interest in hedging its risks. The future outlook is not drastic one if the management continues its effective policies along with the market conditions of the economy.

Pakistan International Airlines

History of PIA
Birth of a Nation, Birth of an Airline: Air transport has probably never been more important to the development of a new nation than in the case of Pakistan. In June 1946, when Pakistan was still in the offing, Mr. Mohammad Ali Jinnah, the Founder of the upcoming nation, instructed Mr. M.A. Ispahani, a leading industrialist, to set up a national airline, on a priority basis. With his singular vision and foresight, Mr. Jinnah realized that with the formation of the two wings of Pakistan, separated by 1100 miles, a swift and efficient mode of transport was imperative. PIAs First International Service: The year 1955 marked the inauguration of the fledgling airline's first scheduled international service - to the glittering, glitzy capital city of London, via Cairo and Rome. Initially, there was much criticism, as the public could not comprehend or justify the need to operate an international route when, in their opinion, other projects vital for a developing country should have been given a higher priority. However, PIA's focus was, and continues to be, to serve the Pakistani community at large. The provision of transportation to expatriates has remained one of the foremost priorities of the national airline. Moreover, PIA earned substantial foreign exchange

Risk Management

Page 9 of 62
through international services, which it invested in the purchase of aircraft and spare parts, as fleet expansion was a grave necessity for the airline. New Planes, New Directions, New Management: In 1956, orders were placed for two Super Constellations and five Viscounts which were to be delivered in 1959. At this juncture, PIA possessed a small fleet which comprised of Convairs, Viscounts, Super Constellations and DC3s. While Mr. M.A. Ispahani was the first Chairman of the new dynamic airline; it was the first Managing Director of PIA, Mr. Zafar-ul-Ahsan, who in his 4 year tenure got the ball truly rolling and set the shape of things to come. The PIA Head Office building at Karachi Airport, which houses the entire major departments of the airline, was the brain-child of Mr. Zafar-ul- Ahsan. In fact, on his departure from the airline, the employees presented him with a silver replica of the building with the caption, "The House you built". In 1959, the Government of Pakistan appointed Air Commodore Nur Khan as the Managing Director of PIA. With his visionary leadership, PIA 'took off' and within a short span of 6 years, gained the stature and status of one of the world's frontline carriers. In aviation circles, this period has often been referred to as the "golden years of PIA". Development, expansion, and growth were keywords that the new management was committed to. In March 1960, PIA launched its first Boeing 707 jet service on the London-Karachi-Dacca, route which later proved to be very successful. This trail-blazing accomplishment resulted in PIA becoming the first Asian Airline to operate a jet aircraft, setting trends for the future. In 1961, the airline took on the mammoth task of initiating a cross-Atlantic service from Karachi to New York. By this time, PIA had placed orders for more new aircraft, which included Fokker F-27s, Boeing 720Bs and Sikorsky helicopters. Helicopter services in East Pakistan had gained momentum by 1962 and expanded to include Sylhet, Chittagong, Dacca, Comilla and Ishurdi. PIA's helicopter services carried over 70,000 passengers during the first year of operation. At the time, it was regarded as a stellar operation, equal to any other in the world. Unfortunately, due to two mishaps, the service was discontinued in 1966. In 1966, a system of feeder services linking eight new points in West Pakistan was introduced. By this time, the airline's Viscounts were proving inadequate owing to traffic growth, and had to be replaced by Tridents. The

Risk Management

Page 10 of 62
airline continued up the growth curve, receiving two Fokker F-27s, two Boeing 707s and one Trident in the following year. Style, Glamour, and Charisma: Around this time, the airline saw a change in the top slot. Air vice Marshal, Asghar Khan took over the reins of PIA for a tenure of 3 years. A number of highpoints are attributed to this period. The most colorful, if not the most significant, occurrence for PIA was the introduction of a new air-hostesses' uniform designed by none other than the renowned French designer, Pierre Cardin. Taking the aviation world by storm, this move has more than any other single factor, imprinted PIA's name on the international market. The uniforms were an instant hit, both at home and abroad. Safety Management System at PIA: PIA is the first airline to get certified (initial certification) on Safety Management System (SMS) by Civil Aviation Authority CAA - Pakistan. CAA Air Navigation Order (ANO 91.0032 issued in September 2008) binds all airlines operating in Pakistan to have SMS. Well before the issuance of this ANO, PIA initiated SMS awareness and implementation in July 2008. PIA awarded initial certification on SMS in 27th February 2009 by CAA. The Pursuit of Excellence through Technology and Quality Control: Not content with a number of historic firsts under its belt, PIA made history yet again, by installing Pakistan's first computer, an IBM1401, in 1967. PIA's first Engine Overhaul Shop, located near the Head Office building, was also completed and commissioned around this time. The Ground Training School (GTS) now known as the PIA Training Centre was first conceived and developed during 1961-62. Interestingly, training was initially imparted in the T-shaped building which has now become the PIA Dispensary, close to the Head Office building. Besides visible development and growth in traffic and revenues in the sixties, PIA added additional destinations, new equipment, and cutting-edge technology to support its ever expanding operations. A new Jet Hangar for Boeings with a supporting airframe overhaul shop was completed and commissioned in 1968. In 1970, PIA set up its own Flight Kitchen in Karachi, which caters, even today, to the national airline as well as other carriers. Over the years, with

Risk Management

Page 11 of 62
the airline's expansion and increased capacity, the need for a second Flight Kitchen became imperative. Vision: PIA's vision is to be a world class airline exceeding customer expectations through dedicated employees, committed to excellence. Mission: Employee teams will contribute towards making PIA a global airline of choice: Offering quality customer services and innovative products Participating in global alliances Using state-of-the-art technologies Ensuring cost-effective measures in procurement and operations

Values: Customer Expectations Convenience, Caring, and Competitive Tariff Service Personalized and Courteous Innovation Cherishing New Ideas, Translated Into Action Cohesiveness Respect for Individuals, Teamwork, and Effective Communication Integrity Business Ethics, Accountability, and Transparency Reliability Loyalty and Consistency Safety Passengers, Employees, Environment, and Health

Risk Management

Page 12 of 62 Organizational Structure of PIA

The hierarchy of the organization follows, with the Chairman at the top and directors of departments reporting to him. The structure is centralized with the top-level management making the decisions. Pakistan International Airlines Corporation (PIAC) is majority owned by the Government of Pakistan (87%) while the remainder (13%) by private shareholders. The airline falls under the direction of the Ministry of Defence

Risk Management

Page 13 of 62
chaired by its current chairman, Ahmad Mukhtar. The airline is managed by managing director, Captain Aijaz Haroon as well as the Board of Directors. The Board consists of nine independent non-executive members and has four sub-committees, being an Audit Committee, Brand and Advertising Committee, Finance Committee and Human Resource Committee each with its own charter and chairman. The MD leads the executive management of staff who control the running of the airline. The airline's main headquarters are located in Karachi whilst smaller sub head offices are located in several cities within Pakistan. Management PIA is a huge corporation with more than 18,000 employees. This organization is divided into following departments: Human Resource and Administration, Marketing, Corporate

Planning, Information Services, Finance, Flight Services, Flight Operation, Engineering, Procurement and Logistics, Customer

Services, Training and Development, Quality Assurance. The hierarchy of the organization follows, with the Chairman at the top and directors of departments reporting to him. The structure is centralized with the top-level management making the decisions. Of PIA: PIA is a huge corporation with more than 18,000 employees. This organization is divided into following departments: Human Resource and Administration, Marketing, Corporate Planning, Information Services, Finance, Flight Services, Flight Operation, Engineering, Procurement and Logistics, Customer Services, Training and Development, Quality Assurance. Role of management in achieving aims and objectives through planning and monitoring: Planning acts as a base for achieving the aims and objectives in PIA. Through planning the management set their goals and develops the ways through which they strive to achieve these goals. Throughout our research we found that PIA does not depend upon the plans and strategies of a single department but the management of each department depends upon the

Risk Management

Page 14 of 62
coordination with other departments as management framework is interdependent. well. In other words the

For instance, If the Research and Development Department of PIA plans to expand their business in a new un-served area then they grasp information from their Marketing Department because Marketing Department has network of agents all around the world through which they will find out how many passengers are available in the target market, than the Research and Development will coordinate with Fleet Planning to purchase a fleet of certain number of seats according to the number of passengers (provided by Marketing Department). In the next step of coordination, the fleet planning will contact the finance department to know that whether they have sufficient funds for the purchase of new fleet or they will have to hire on lease. Finally with the coordination of the board of directors the plan gets approved and then strategy is made according to the requirement of the plan. The stated goals of P.I.A are different from its real goals. The real goal of P.I.A is to grow, develop and expand. Now how they achieve their real goals through planning and monitoring. They divide their real goals into sub goals that are objective, now to achieve these sub-objectives planning and monitoring is done at every level of P.I.A.

Services provided by PIA: Business class Its the only Business Class service that feels like First Class. Economy Class It makes you feel that every class provides comfort. PIA operates a three class configuration on its domestic routes which include Business Plus, Economy Plus+ and Economy. However on their international flights a two class configuration, Business Plus and Economy, has remained popular.

PIA Experience Risk Management

Page 15 of 62
Business Class Services: PIAs Business Plus class offers a range of exclusive services to their customers, from the time they leave their home till they land at their destination. Business plus Seats: A comfortable seat makes all the difference on a long flight. PIA's Business Plus Seats elevate the concept of luxury to a new level, fully endorsing the decision of the customer to choose PIA Business Plus. PIAs customized seats are designed in Italy and Switzerland and provide amazing levels of leg-room and shoulder space. PIA's Business Plus Seats ensure that their personal space is truly their own, and they'll never feel cramped. Whether they're sleeping, eating, working, reading a book, or just lying back and enjoying PIAs in-flight entertainment, PIA's Business Plus Seats will make them feel right at home. There is simply no better way to fly.

Business plus Lounges: The customers comfort and convenience mean the world to them. Business Plus Lounges will serve them at all international and major domestic stations where customer can sit back and relax. For the comfort of Business Class passengers at Karachi, Lahore, and Islamabad airports, PIA has its own exclusive Business plus Lounges. Their hospitable staff will ensure that their well looked after during their stay with us at the airport. PIA's Business Plus Lounges are equipped with the latest magazines and newspapers, Internet access, cable television, and snacks, so you can enjoy the best of Pakistani traditions in a modern, comfortable environment.

Kerb-Side Counters: The PIA experience extends to every part of customers trip. As a Business Plus passenger, they can avail a number of exclusive on-ground privileges to facilitate their airport arrivals and departures at Karachi and Islamabad (Domestic).

Risk Management

Page 16 of 62
When they arrive at the airport, they can easily spot PIA's Business plus Kerb-Side counters. Business plus Porters and Check-In Counters: Business class passengers traveling from Karachi can also enjoy the privilege of availing exclusive porter services. PIA's efficient, trained porters in sparkling white uniforms will collect their baggage and take them straight to the Business Plus Check-In Counter, where they will receive priority baggage tags as well as priority boarding facilities. The business customer won't have to queue up or worry about handling their baggage as their Business Plus porters and Check-In staff will take care of everything. Fast Track: Business Plus passengers arriving at Karachi, Islamabad, Lahore, London's Heathrow, or Dubai International Airport will receive a warm welcome from PIA.The representatives of PIA will walk them right through all the arrival formalities so that they don't have to stand in line or worry about clearance.

PIA Cargo
Efficient and streamlined cargo operations serving a vast number of domestic and global destinations. PIA Cargo, the air freight division of Pakistan International Airlines, commenced freighter operations in 1974, with initial flights to the USA, Europe, and Hong Kong. Within a short time-span, PIA Cargo has built a reputation for timely deliveries, operational excellence, and a high standard of customer service. In addition to its country-wide, domestic network in Pakistan, PIA Cargo delivers cargo shipments to over 40 international destinations, while serving the rest of the world through interline carriage.

Risk Management

Page 17 of 62
PIA Speedex
PIA Speedex Delivers With Speed, Reliability, and Affordability: PIA's flagship courier service, Speedex, delivers documents and parcels of any size, to your doorstep. With a vast domestic network, cutting-edge technology, and the highest standards of customer service, PIA Speedex is Pakistan's courier company of choice PIA for Businesses: PIA Believes In Partnerships: If you are a supplier of goods or services, this section lists the various tenders, or needs, for the divisions of PIA and its subsidiaries. At PIA, we focus on strengthening relationships with third-party service providers so that, together, we can deliver excellent customer experiences. Pre-Qualification: The pre-qualification of consultants is an important step in the selection process of firms that would like to work with PIA for the supply of products and services. Pre-qualification ensures that high quality proposals can be evaluated in a shorter period of time, leading up to the final selection of suitable consultants. The qualifications of consultants should indicate and reflect prior experience and the capability to handle projects with dexterity and efficiency. Special operations: Charter services PIA operates private charter flights using ATR 42s to Kadanwari and Sewan Sharif gas field in Sindh as well as to other parts of the country on behalf of oil and gas companies. Ad hoc charters for United Nations peacekeeping troops are also carried out to Africa and Eastern Europe using Boeing 747s. Hajj and Umrah operations PIA operates a two-month (pre- and post-) Hajj operation each year to and from Jeddah and sometimes Madinah in Saudi Arabia. PIA transports

Risk Management

Page 18 of 62
over 130,000 intending pilgrims each year from Karachi, Lahore, Islamabad, Peshawar, Quetta, Faisalabad, Multan, Sialkot, and Sukkur to the Kingdom of Saudi Arabia. In order to deal with the demand, the airline leases many different aircraft including Boeing 747-200s, Airbus A321s, Airbus A300 and Boeing 737-400s.

Corporate Safety & QA Corporate Safety & Quality Assurance Division is capable of providing assistance/services in the following areas:

Flight & Ground Safety Services

Flight Safety Auditing: Flight safety is a matter of cardinal importance in the aviation industry. PIA offers a range of services to help airlines meet international regulations and improve operational safety conditions. PIA offers customized operational safety audits for small airline operators, backed by a team of experienced internal flight safety auditors. Aircraft Accident Investigation: PIA also offers the following consulting services: Investigations following a serious aircraft accident Consulting services for flight and cabin safety

Publishing Services: PIA offers design, development, editing, and printing services to commercial operators for the following products: Aircraft Emergency Equipment Location Charts Passenger Safety Briefing Cards Flight Safety Publications

Crew Resource Management (CRM) Training Services

Risk Management

Page 19 of 62

CRM Initial & Recurrent Trainings: PIA offers human factor training that meets the ICAO Annex-6 CRM. PIA offers CRM Phase 2 training for cockpit crew, cabin crew, and dispatchers. PIA's CRM facilitators have been trained by Continental Airlines - USA, the airline that pioneered CRM training. Emergency Response Planning (ERP) Services: Flying is one of the safest forms of travel, thanks to strict adherence to standardized operating procedures, sound regulatory oversight, extremely high levels of mechanical reliability, and the unremitting efforts of well trained staff. The airline industry has repeatedly demonstrated exceptional resilience in the face of major crises, thanks to effective contingency planning and a good track record of everyone in the industry pulling together when an emergency occurs. Apart from aircraft accidents, aviation emergency response planning has been widening its scope to cover a range of other operational emergencies that may affect the travel and tourism industry. These could include natural disasters, health-related crises, or unusual security alerts, all of which can have a major disruptive impact on airline operations. In all such cases, various crisis management and contingency planning skills can be applied to both prepare for and manage such emergencies. Pakistan International Airlines pays the utmost attention towards passenger care and takes every step to make its operation safe and sound. Nevertheless, some time weather or other factors may lead to an untoward situation. Accordingly to efficiently respond to such situations and to minimize the losses if accident occur, PIA has put on considerable efforts in the area of Emergency Response Planning (ERP) which on one side gives integrated course of operational actions for effectively coping with an emergency and on the other side ensures that its valued customers and their families should escape trauma, mishandling, neglect or receive due care following an unfortunate accident or air crash. A dedicated Emergency Response Planning Section has been established and the procedures have been elaborated with minute details for handling the emergencies. During such major emergencies, Emergency Response Centre (ERC) Karachi will be the nerve centre to support the operations at the station concerned.

Risk Management

Page 20 of 62

Furthermore, ERC Team, Field Team, Family Assistance & Support Team and Station Teams have been formulated to perform their specific roles. A network of Family Assistance & Support Volunteers has been structured and training of the various teams and volunteers has been started. Besides their family assistance role PIA Volunteers are also being trained in basic rescue, elementary fire fighting and first aid to injure so could be helpful in responding to natural disasters, earthquakes, fires and day to day accidents as well. The Emergency Response Facilities at Head Office include the soft data storage of teams and volunteers. An organized call back system for contacting the affected families is also being devised. Right after an accident ERP activities start at the station concerned with the immediate notification to Rescue, Fire & Emergency Services, and PIA / GHA Team Members who start handling of victims at lounges, hotels and hospitals by utilizing local resources. Station where accident has taken place or Station Nearest also informs Situation Room Karachi who triggers an IVR based notification to all Emergency Team Members through PIA Contact Centre. Emergency Response Centre starts functioning within 30 minutes of notification and members of ERC Team comprising of senior executives immediately respond in an organized and coordinated manner. Simultaneously Members of Field Team also report here and get briefing of the situation and leave for the site of accident. PIA keeps on updating its ERP and strengthens it through regular training sessions and exercises.

Quality Assurance (QA) Services

Quality Management System (QMS): Corporate Quality Assurance Section has a team of Professionally Qualified personnel having vast experience of QMS consultancy, audits and systems development. Qualified technical experts from various customer related departments are also in the panel for assistance. QMS services capabilities relates to both aviation and non-aviation industry. IATA Operational Safety Audit (IOSA): IOSA Certification is considered a symbol of international standard for safe operations, designed specifically by IATA for operators. PIA QA Auditors are actively involved in assisting other airlines in systems development for IOSA

Risk Management

Page 21 of 62
Certification. PIA has been successfully maintaining IOSA Certification since 2005 and is familiar with the operational, management and QA requirements in this context. Management System Audit: Corporate Quality Assurance Section has a team of experienced & qualified auditors. Our lead auditors are competent; they have been carrying out 1st and 2nd party audits. Internal and 2nd Party audits play a very important role for ensuring that the QMS components are in place and effective. It prepares the organization for 3rd party certification audits such as IOSA & ISO 9001. Gap Analysis: Before introducing a new management system in an existing setup or upgrading or integrating any existing management system, a gap analysis exercise is very useful. It provides the guidelines for the management to efficiently manage the transition or upgrade. Systems Development: Every system is built on foundations of a given standard translated into policies and procedures for the organization to implement a standardized management approach. All Manuals, work-instructions, information management and communication system, training exposition and KPIs have to be synchronized with the organizational vision, in a way to ensure continual improvement and enhanced customer satisfaction. PIA also offers systems development consultancy for its clients for consolidating QMS implementation efforts. Compliance Management: PIA has assistance capabilities for compliance management support. Ever changing internal and external environment and in statuary and international legal requirements demands active response and adjustment by organizations. PIA has been successfully maintaining compliance to all subscribed standards ranging from CAA requirements, QMS, IOSA to EASA. IT Solutions for QA: Audit Database Management: PIA also offers Quality Database Management System Software Support Services to interested clients. PIA is using its own customized software for

Risk Management

Page 22 of 62
handling QA functions. PIAs IT departments programmer and project managers are capable of building state-of-the-art software packages. IT department is a source of in-house software design, development and maintenance. Safety Management System (SMS) Implementation Services: In recent years a great deal of effort has been devoted to understanding how accidents happen in aviation and other industries. As a result of extensive research, it has been proved that most accidents result from human error. Studies have further confirmed that these human errors are not purely indicative of carelessness or incompetence on the job. Investigators are Finding that the human is only the last link in a chain that leads to an accident. In the 1990s the term organizational accident was coined because most of the links in an accident chain are under the control of the organization. Since the greatest threats to aviation safety originate in organizational issues, making the system safer will require action by the organization. Aviation safety experts and Regulatory Authorities worldwide have accepted and endorsed the conclusion that the most efficient way to enhance aviation safety is, to adopt a systematic approach to manage safety.

The basic safety process is accomplished in five steps:

1. A safety issue or concern is raised, a hazard is identified, or an incident or accident happens. 2. The concern or event is reported or brought to the attention of management; 3. The event, hazard, or issue is analyzed to determine its causes or sources; 4. Corrective action, control or mitigation is developed and implemented; and 5. The corrective action is evaluated to make sure it is effective.

Risk Management

Page 23 of 62
If the safety issue is resolved, the action can be documented and the safety enhancement maintained. If the problem or issue is not resolved, it should be re-analyzed until it is resolved. Safety is defined by ICAO as a state in which the risk of harm to persons or property damage is reduced to and maintained at or below an acceptable level through a continuing process of hazard identification and risk management. A Safety Management System is a systematic approach to managing safety, including the necessary organizational structures, accountabilities, policies and procedures. A Safety Management System concerns itself with organizational safety and defines how the Airline intends the management of air safety to be conducted as an integral part of the companys business management activities. In common with all management systems a safety management system provides for goal setting, planning, and measuring performance. Notwithstanding the Regulatory aspect, aviation experts agree that implementation of an SMS, by an Airline, is justifiable as it also makes good business sense from the viewpoint of cost/benefit analysis.

Aviation can never be entirely risk free. While risk can never be completely eliminated, it must be reduced to as low a level as is reasonably practicable to ensure maximum safety and operational efficiency. The primary requirement for a Safety Management System (SMS) is to establish a management system that has the necessary processes and procedures in place such that operational safety is maintained at this acceptable level (risk management) and specified operational results are always achieved (quality management).Unlike traditional methods, which typically identify safety deficiencies after undesired events, safety management systems proactively identify and reduce causative hazards and their associated risks.

Safety Management System in PIA

The Safety program of PIA is an integrated set of policies, procedures and activities aimed at improving safety. The organizational structures and activities that make up the Airlines Safety Management System are found throughout the organization. Every employee contributes to the safety health of

Risk Management

Page 24 of 62
the organization. In some departments safety management activity is more visible than in others, but the system must be integrated into the way things are done throughout the organization. This will be achieved by the implementation and continuing support of a safety program based on a coherent policy that leads to well designed procedures. This develops the capability to anticipate and address safety issues before they can lead to a serious incident or accident, thus improving operational safety and productivity.

1. Safety Management System Components:

To achieve the objective of highest level of operational safety, PIA has the following requisite components of an effective SMS.
2. A Safety Policy Statement:

It provides the Airlines fundamental approach toward safety and promotes a positive safety culture. The Safety Policy Statement, signed by the Managing Director, is based on a genuine commitment to safety by the Airlines senior management team.
3. A Statement of Accountabilities:

It defines safety responsibilities of managers and employees at different levels in the organization, with effective deputation of responsibilities established for operationally critical areas when principal office holders are absent.
4. An Accident Prevention Programme:

It ensures the capture, analysis and dissemination of information used to identify operational hazards, and raise awareness throughout the organization. This programme includes an incident reporting system, flight data analysis as well as regular analysis of accident reports.
5. A Risk Management Programme:

It comprised of systematic risk identification, expressed in terms of severity and likelihood of occurrence requires further development and implementation. The objective of this is to quantify risk in order to devise effective mitigation strategies. It also includes internal safety investigations.
6. A Safety Assurance Programme:

Risk Management

Page 25 of 62
It incorporates safety performance monitoring and measurement and continuous improvement of the Safety System; encompassing activities ranging from safety audits, implementation of corrective & preventive actions to flight data management & analysis and safety management reviews.
7. A Safety Promotion Programme:

It includes training and education, and safety communication through various means. It ensures that SMS awareness among all employees is maintained.
8. An Emergency Response Programme:

It consists of contingency plans to ensure the proper response demanded of different parts of an organization when an emergency arises. All of these systems and processes would need to be further developed and augmented. Over time, there will inevitably be changes to equipment, practices, routes, contracted agencies, regulations, etc. In order for the safety management system to remain effective it must be able to identify the impact of these changes. Monitoring will ensure that the safety management system is updated to reflect the changes in organizational circumstances (and is reviewed constantly). 9. Monitoring the safety: Management system is the way in which it is constantly reviewed and refined to reflect the company's changing arrangements.

10. A Continuous Improvement Programme: It comprised of: a Safety Committee to assess achievement of SMS objectives at least twice a year; senior management reviews to ensure the appropriate allocation of resources; internal audits to ensure proper functioning of specific airline departments; as well as external audits such as Annual AOC Inspection by CAA, IOSA, etc.

Risk Management

Page 26 of 62

Risk Assessment
SMS philosophy is to manage safety by managing all threats to safety. The better we are able to map the inherent & potential risks in our operations, the better we will be able to manage our operational safety. This demands a careful assessment of existing and potential risks. A safety conscious organization may opt for availing our risk assessment capabilities exclusively. Such risk assessments will be based upon organizations defined risk acceptability criteria and/or against given industry reference. Operational Safety & Security Audit: Organizations having established safety & security management systems can use our Auditing Capabilities to assess their level of compliance to subscribed standards. Our qualified QA auditors will thoroughly evaluate the system and report their findings and observations as an independent evaluation of your systems and their performance. Gap Analysis: To prepare feasibility for having a new management system demands an intelligent Gap Analysis exercise. It saves time and cost of system development and enables an organization to define best strategy for optimal utilization of its resources. PIAs qualified auditors can be engaged for conducting gap analysis to evaluate the strength of existing SMS of your organization. Systems Development for SMS: PIA offers SMS related systems development services to its clients. Every system is built on foundations of a given standard translated into policies and procedures for the organization to implement a standardized management approach. All Manuals, work-instructions, information management and communication system, training exposition and KPIs have to be synchronized with the organizational vision, in a way to ensure continual improvement and enhanced safety. PIA also offers systems development consultancy to its clients for consolidating SMS implementation efforts. Risk Based Resource Allocation:

Risk Management

Page 27 of 62
SMS enables the management to take Risk Based Decision and to ensure Risk Based Resource Allocation. How this will be achieved and how this approach will be implemented are some key questions. It demands an effective and efficient SMS to be in place. Top management of any organization, if committed for ensuring Safe Operations, need intelligent data, analysis, reports and risk based recommendations from middle management. SMS serves as a decision support system for the top management. It not only minimizes the resource wastages but also legally strengthen the validity of decisions taken. Acquiring SMS Implementation Services from PIA establishes solid foundation for Risk Based Resource Allocation Capabilities of an organization. Just Safety Culture Development: SMS requires a just and positive safety culture to get maximum benefit from the system. Every organization always has some level of safety culture. Its a matter of measuring it, introducing appropriate Confidence Building Measures (CBMs) with top management participation and involvement. Every individual has to be given awareness and empowerment so that he/she can contribute in the best possible way for safety enhancement. Organizations interested in evaluating their level of safety culture in comparison with industry and global data can use our specialized services.

Health Safety & Environment (HSE) Services

Design and Development of HSE System: Highly qualified team of professionals with diversified expertise in manufacturing, maintenance, services & food hygiene in the field of aviation and other industries, is capable to design, develop, implement & controls of HSE system. PIA has established HSE Management system with Strong commitment to health & safety of its passengers, customers & employees. PIA is contributing its social responsibility towards care of environment and protection of natural resources. Gap Analysis: A tool enabling an organization to assess its actual performance with its potential for improvement as where we are? and where we want to

Risk Management

Page 28 of 62
be?HSE section is providing services of gap analysis regarding HSE compliance of existing and new system.

Occupational Health & Safety (OH&S) Risk Assessment: PIA has established an effective mechanism through which all significant hazards are identified, analyzed, assessed their existing controls, and recommend additional controls to mitigate the unacceptable risk level, if needed. Our HSE specialists assist other departments to carry out this exercise on regular basis. Study of environmental Aspects and their Impacts: PIA contributes towards social responsibility for the society towards green environment and protection of natural resources. Our qualified HSE Lead auditors monitor environmental aspects and analyze significance of their impacts to the environment through environmental audits and random inspections. HSE Audits & Inspections: Audit is an effective tool by which health of any management system can be monitored. HSE section conducts scheduled audits and random inspections for assessing level of HSE compliance against the audit criteria. Food Hygiene & HACCP Audits: HSE section conducts HACCP based food safety audits and inspections to monitor the hygienic standards of PIA flight kitchens, food suppliers/contractors. HSE Training: To create the basic awareness of Health Safety & Environment, HSE section imparts the training module to all tiers of the management. Energy Conservation: Being a developing nation it is our prime responsibility to conserve energy resources for our upcoming generations. HSE section is playing a pivotal role

Risk Management

Page 29 of 62
through energy audits and inculcating a culture amongst employees to save energy through different ways.

Fire Protection Services

Fire Fighting Training: PIA offers Fire Response and Customized Fire Safety Training for general employees, fire wardens and emergency team members. This service is being provided to national and multinational companies.

Fire Safety Survey: PIA has a team of qualified and experienced fire officers for carrying out Fire Safety Inspection and Survey of a property to evaluate the danger to life from fire and to evaluate and to determine ways for minimizing fire risk to buildings and contents. Installations Management: There is a system in place for inspection, maintenance and testing of portable and fixed fire protection installations. The expertise to introduce the same is available for interested clients. Flight Simulator Training: PIA flight simulators date back to the inception of the airline. Extremely effective for flight crew training, PIA B707 flight simulator has been used by a number of regional airlines. Until the turn of the century, Air Malta, Alyemda, CAAC, Egypt Air, East African Airlines, Iran Air, Iraq Air, Libyan Air, JAT, Tarom, Saudia, Alia and Pakistan Air Force have utilized PIA's flight simulators for the training of their flight crew. PIA maintains A310 and B747 FFS; for in-house flight crew training and other and airlines can also schedule training sessions. PIA Flight Simulators are approved by the Civil Aviation Authority of Pakistan as per FAA advisory circulars. Following services are offered to other operators crew training: Transition training Recurrent training

Risk Management

Page 30 of 62
Customized training

PIA Training
PIA offer Airline Training in all areas of the Airline Industry. They have one of the most advanced Airline training infrastructures approved by local and international regulatory authorities such as CAA, ICAO and IATA. Functions:

To develop and conduct quality training as per the requirements of user departments and regulatory authorities. To maintain centralized training database of all PIA personnel for organizing HR activity. To maintain regular contact with vendors functionalities, modifications and additions to programmes and train the instructors. regarding new update training

To formulate criteria which will enable the training of PIA personnel to achieve excellence in their respective fields/functions? To conduct courses, workshops, seminars, workouts, conventions, and to present papers so as to make PTC prominent in aviation training, particularly in this region.

Winners of 9 Industry Awards: PIA first are an ex investment bank research team specializing in high frequency intraday and weekly trading strategies. For the past 9 years the analysis of the PIA-first team has been entrusted by 1, 300 institutional clients and since 2000 the team and the service have won 9 industry awards. In March 2009 PIA was voted best FX Technical research by a panel of industry professionals at the annual Technical Analyst awards in London. Trading strategies: PIA produces a trading strategy each morning in 13 of the major FX crosses and 6 Equity Indices. Most trades are market orders with profit targets and stops set for each cross, dependent on analysis. The inputs are derived from a proprietary approach that combines elements of Technical and Statistical Analysis with Behavioural Finance. This already has an established track record of success. As the Technical strategy team at Dresdner Kleinwort, PIA trade strategies maintained a 70% hit rate across, FX, Equity Indices, Fixed Income and Commodities.

Risk Management

Page 31 of 62

Timing: The timing factor underpins the PIA strategy. 9 years of providing daily analysis has shown that the optimum period of accuracy for PIA research recommendations is the European morning. The trading horizon or PIA strategies are therefore 7am 1pm UK time. Live updates and risk management: A key feature of the PIA service is that all research and trades are monitored and risk managed live in real time. Throughout the morning email updates are sent to take profits, move stops, or close out trades. Success: The PIA service has an outstanding reputation for success built over 9 years of delivering advice. The service is entirely performance based with a daily performance report summarizing each days wins and losses, and a monthly summary of performance by cross and asset class.

Insurance policy
In PIA the passenger is required to provide following additional information at the time of opting the insurance offer from PIA booking offices or Travel Agents.:
1. Name of beneficiary.

2. Relationship of beneficiary with the passenger. 3. Insurance is applicable for the passengers traveling on valid return tickets only. 4. Passengers are covered for accidental death or permanent disability (Including any Terrorism Risk). 5. Insurance is covered by EFU. 6. The insurance charges are optional for the passengers. 7. Applicable for Adult and Child only. 8. Insurance charges are refundable only for wholly unused tickets. 9. Passenger Insurance is valid for travel originating from all International points on PIA to Pakistan and return.

Risk Management

Page 32 of 62
A passenger is covered for Insurance from the time the Passenger disembarks in Pakistan. This includes the period of his/her stay along with the validity of ticket.

Sum Insured: PKR 10 Million per passenger. Claims: 1. The passenger can claim by providing the necessary documents within 15 days from the date of loss: 2. Claim amount will be payable in Pak Rupee in Pakistan only. 3. All claims will be paid through PIA after submission of following documents: a. Duly completed and signed Claim Form b. Death Certificate or Medical Certificate authenticating the cause of Death/Accident. c. Identification of the beneficiary e.g. Identity Card or Passport details. d. Succession Certificate.

SWOT Analysis
Internal Factors:

Risk Management

Page 33 of 62

Leading Market Position Brand Recognition Superior Operating Structure Network Presence Hub airport at Karachi


Formulation of Govt. Rules High dependence on Passenger Revenues Debt Reliance on Oil Prices

External Factors: Opportunities

Having the maximum route and fleet Growing demand for low cost airlines Customer loyalty Shifting customer needs Industry Recovery


High Interest Rates Accidents Strong Competition by Air-blue Interest and foreign currency exchange rates Decline in airline industry

Risk Management

Page 34 of 62
Pest Analysis
Political Factors

Increased Competition (Deregulation of airline industry) Political Stability Increased Investment Opportunity

Economical Factors

Improved Purchasing Power Demand Value-for-Money Soaring Oil Prices Reduced Ticket Prices

Social Factors

Greater Customer Awareness Increased Entertainment Spending Technology Averse Customers

Technological Factors

In-flight Entertainment E-ticketing Automated (Self) Check-in SMS Services

Risk Factors in PIA

Operational Risks: The management of the Corporation wishes to highlight the following material risk factors, which may affect the profitability and/or the operations of the Corporation. The Corporation generates revenues primarily from its international and domestic passenger and cargo aviation services. It therefore faces the following key operational risks:

Risk Management

Page 35 of 62
Route impairment due to unforeseen geo-political events Grounding of aircraft due to technical faults Fares may decline due to price competition from existing domestic and/or foreign airlines and any new entrants in the industry. Passenger and/or cargo traffic may decline due to various reasons including but not limited to recession, terrorism etc. Employees may go on strike or resort to go-slow methods Fuel prices may raise causing erosion in margins Each of the above mentioned risks would lead to a decline in PIACs profitability and cash flows. Regulatory Risk: Adverse changes in the regulatory framework of the Aviation Sector may have a negative impact on PIACs margins.

Problems recently faced by PIA management

The main problem that all the airports of the country is presented a deserted look when the national carrier PIA grounded all its fleet on November 2, 2007. The main reason that led to the situation was that more than 800 engineers of PIA had collectively gone on sick leave following a protest campaign against the administration's reluctance to increase their salaries. They had also asked for improvement in workplace conditions, privileges such as flight allowance, rest allowance, fulfillment of promises made by the PIA management and the elimination of a 'faulty' evaluation system. The management had to lead down in front of the engineers as they had to increase their salaries because there was no way out for the management due to the reason that without engineers PIA could not carry on its operations. Recommendation: The staff should be hired on merit basis rather than favoritism and skilful and competent staff should be given reasonable salary packages and

Risk Management

Page 36 of 62
benefits according to the international standards to motivate them as well as to avoid such issues. Operating on the non-profitable routes also called socioeconomic routes is also a constraint Secondly, PIA management because due to government intervention the management has to deploy fleets on such non-profitable destinations. As a result of which PIA is bearing a loss of Rs Four crores per day i.e. Rs. 18 Lakhs per hour. For instance Chitral, Gilgit, Skardu, Gwadar, Panjgur, Turbat, Pasni and Jiwani are non-profitable routes for PIA as the fares on these routes are less than the fuel consumption. We have concluded that PIA management should negotiate with the government officials and brief them through the fact and figures, either to increase the fares on these routes or must convince the government that PIA management will decide where to fly to avoid socioeconomic routes. The third point is that PIA has a ratio of 440 employees per plane, as against the international average of 150 to 250 employees. This is because of the external intervention by the government officials to recommend their own people to be adjusted in PIA which is one of the root causes of huge financial losses to the organization. Recommendation The management should plan to deal with this issue by considering the option of downsizing of surplus employees and retaining skilled personnel.

Problems of management of Resources

We have emphasized upon the major resources that the P.I.A possesses which are: 1. Fleet Resources: P.I.A possesses 40 fleets. The management of P.I.A endeavors to efficiency utilizes the fleet resources but due to the government intervention and other external forces the management is unable to utilize the resources. For

Risk Management

Page 37 of 62
instance, the fleet having a seat capacity of 120 passengers carries only 100 passengers from one point to another. Due to inefficiency of management the revenue of 20 seats is gone to waste. Recommendation We recommend that P.I.A should deploy the fleets according to the seating capacity or P.I.A can deploy two small air crafts for the same destination to avoid the loss. 2. Cargo Resources: P.I.A cargo services are one of the main sources of revenue. As we have analyzed that the management is properly utilizing the cargo resources. The management makes sure that each cargo flight is taking a maximum amount of consignments. So, we dont think that there is no need of recommendation as management is handling it perfectly. 3. Technology Resources: In today dynamic environment technological developments are playing a vital role in progress of any organization. P.I.A is using different sort of softwares in its different departments to help managers in making accurate decision. For instance, fleet management uses TRAP, FP5 software. Marketing department uses the computerized data base management system powered by CAA (civil aviation authority) for improving marketing decision. P.I.A has launched SMS services through which customers can get there flight schedule by sending single SMS on 7422. Decision are made on the basis of facts and figures, the softwares provided by Boeing company is specially designed to process information of passengers and fleet which helps in making decision making and future perditions. Recommendation As this Boeing software was implemented by P.I.A in 1998 so, there is need to implement latest software developed by AIR BUS and biometric scanners.

Risk Management

Page 38 of 62
4. Human Resources: The organizational structure of PIA is centralized, therefore decision-making is a time- consuming process and delays occur in downward communication. Though, it is believed that the current Chairman is inclined towards a decentralized system, the effectiveness of such an approach in PIA will be seen soon. Effective communication is essential in all organizations and it becomes even more essential in an organization like PIA due to its large size and expanded network. It is necessary that people from various departments communicate between each other to have an overall uniformity. Amid a highly competitive environment, PIA needs to motivate its employees. For this purpose, Promotion Boards are held twice a year. Extra-mile Awards are handed over to the competent employees. An Employee Suggestion Scheme gives employees an opportunity to be vociferous regarding their issues. The three best suggestions are given monetary awards ranging from Rs.5000 to Rs. 20,000. Efforts are made by PIAs management to ensure that employees are exposed to information in a manner which minimizes uncertainty amongst them so that they are not disillusioned. However, information through grapevine disturbs this process at times. Recommendation Employee unions are basically formed for the purpose of empowering employees and to make sure that the rights of the employees are given appropriately but it has been experienced that the PIA employee union is engaged in some mishaps with the organization which was seen couple of months back when the employees went on strike for the purpose of increasing their salaries. So the employee union should be banned in PIA as the HR management is already committed to take necessary steps for the improvement of employee benefits. 5. Informational Resources: Basically the major sources of information for P.I.A is I.A.T.A (international air traffic authority), which provide information of current market trends, information about routes, latest technological improvements. Another source

Risk Management

Page 39 of 62
of information is civil aviation authority. Each department has a suggestion box where employees can drop any suggestion

Evaluation of Management
Throughout our study we found that P.I.A is possessing talented, experienced and efficient managers. They have the capability and skills to cope with the difficult circumstances as we have observed that under current economic meltdown the survival of P.I.A is a an example of good management because P.I.A which is already facing the loss of 16.5 billion rupees would have gone bankrupt, under such critical global economic crisis, but it is the management of P.I.A who review their business strategies to deal with the economic condition of P.I.A.

Decision making is one of the most crucial responsibilities of managers it was the P.I.A management who took the biggest economic decision in the history of Pakistan by purchasing eight Boeing -777 against $ 1.5 billion. But on the other hand P.I.A management is having certain loop holes. For example, the management previously took decision to provide assistance to EMIRATES airline through assisting their pilots, staff, crew and management. Now the EMIRATES is three times bigger than P.I.A and their main competitor.

Suggestion for PIA

Decentralization: PIA should decentralize its structure that would lead to the easy management, increased motivation, easy access to information and resolution of the conflicts (as they would be resolved by the immediate manger time span would then reduced). Since employees issues regarding their behavior would lessen, so it would ultimately lead to more satisfied employees that would result in enhanced productivity of the organization. Employee empowerment:

Risk Management

Page 40 of 62
PIA should make efforts towards empowering the employees that is going to lead to more employees participation in the decision making process and also result in more employee satisfaction and enhanced motivation. Apart from this, employees would feel more independent to discuss the issues explicitly without hesitation. This would also enhance team work process at PIA as quality team and cross-functional teams. The employees will work with more commitment and dedication and every employee would work to his/her fullest due to increased motivation. However, with empowerment comes accountability, so it is suggested that while they empower their employees, there should also be a controlled check on them to ensue the correct usage of power delegated to every employees within their circumscribed limits. Overhead Costs: PIA should also reduce its overhead costs that are it should manage its resources: labor more effectively, so that with less input, more output can be achieved and the saved resources can be utilized in other areas such as introducing more training courses for the employees so that the quality of the workforce could be increased. Hiring the services of expertise can improve the efficiency of their services, so by saving the overhead costs, they can utilize that money for the expertise services. So by analyzing the various segments of the organization and making the right corrections the corporation can get through its major crises. Two-Way Communication: The suggestions of the employees can prove to be very effective in improving the operations as they are the ones who manage them. Therefore, a top-down approach should be replaced with two-way communications. In this way, the employees would feel motivated and valued as they would be included in decision-making. Improvement in Services: P.I.A should provide services according to customers need not according to Pakistani/local culture in order compete with their competitors. Properly train air hostess make them familiar with different foreign languages.

Risk Management

Page 41 of 62
Hiring on merit basis: P.I.A should remove all the employees appointed on political grounds, because most of them are more like a burden on P.I.A expenditures as they are getting salaries for nothing. On the other hand skillful and talented engineers should be paid reasonable salary package to motivate them.

Proper utilization of fleets: What we have analyzed that P.I.A is using four engine plans even for the short roots like Islamabad and Lahore. We recommend that the P.I.A should use two engine fleets for short roots in order cut some maintenance cost.

Quantitative Factors
Financial Risk Management
Overview: Airlines are considered to be more risky and the business addresses different types of risks involved like market, credit, liquidity and operational risks. PIA management no doubt has taken sufficient measures in order to mitigate risk in all aspects to a greater extent. Lets see these risks factors in detail. Market Risk: Market risks deals with the unfavorable fluctuations in the cash flows on account of significant changes in the market values. The potential market risk deals with the 1) Fuel Price Risk

Risk Management

Page 42 of 62
2) Currency Risk 3) Interest rate Risk 4) Other Price Risk Fuel Price Risk: As the fuel prices are highly unpredictable and in spite of forecasting it is very difficult to manage fuel price risk. PIA management adopted a reasonable measure to hedge fuel price risk. The management hedges its fuel price risk by entering forward contracts in derivative market. Currency Risk: Currency risk relates with the unfavorable fluctuation in the price of financial instruments with the change in foreign exchange rates. PIAs revenue comes from different currencies that are why fluctuations in foreign exchange rates can be adversely affect on corporation earning. More the corporation has borrowed a substantial part of borrowing from foreign currencies like Great Britain Pound (GBP), US dollar and Saudi Riyal. The fluctuations in foreign exchange rates can impact in both way, negatively and positively.

Risk Management in the Corporation

To handle the adverse impact on financial soundness of the corporations, the management always looks a sharp look in the prices of foreign currencies in order to retaliate and mitigate any currency risk arising through market conditions. The corporations also use its foreign receipts to meet its foreign obligations. The following table will demonstrate the effects of currency rate affects; will result in a financial loss in the last couple of years.

Particulars Impact of loss due to Change in USD rate Change in GBP rate ,

2009 (000) 1,113,300 20,220

Changes in Rate +5 in USD +5% in

2008 (000) 1,166,970 20,120

Risk Management

Page 43 of 62
loss impact on before tax Change in SAR rate , loss impact on before tax Total GBP 44,660 1,178,180 +5% in SAR 3,450 1,190,540

The table is representing that the corporations is more need to take measure to hedge risks in order to avoid loss. There is a stringent need of making forward commitments in order to hedge risks. Interest Rate Risk: Interest rate risk defines the fluctuation in the value of financial instrument due to the rapid changes of market interest rates; London interbank offer rate, Karachi interbank offer rate etc. the corporation has obtained long term borrowings. These borrowing that are obtained by corporation through internal and external financial institutions that is affected when the interest rate goes up. In other words, corporation is exposed to risk in terms of long term borrowing and bank balances. In this way cost of funding can be increased and interest rate risk will increase, by which the impact will lead to reduction in profitability of PIA. Risk Management in the Corporation PIAs management has taken according to data available in the annual report 2009, certain measures in the form of financial derivatives to hedge interest rate risk.

Sensitivity Analysis for Cash Flows


KIBOR December December 2009 2008 +1%

LIBOR December December 2009 2008 +0.25 %

Change in interest rate

Risk Management

Page 44 of 62
Rs (000) Effect on Loss Before Tax Change in interest rate Effect on Loss Before Tax (386,728) -1% 386,728 287,610 (287,610) Rs (000) (233,285) (237,435)

-0.25% 233,285 237,435

The table is clearly depicting the resultant change in the amount of cash flows in case of positive and negative fluctuations in the interest rates. Other Price Risk: The other price risk is arises due to changes in the fair value of future cash flows of a financial instrument other than the currency and interest rate risk. At now the corporation is not significantly exposed to price risk because most of its investments are in subsidiaries, associated companies and joint venture which are stated at cost.

Liquidity Risk
If an organization feel difficult meet its obligation at the scheduled time, this explains managing the liquidity risk. In this regard we will evaluate whether the corporation by observing that whether it is maintaining sufficient cash balances for meeting short term obligations and working capital requirements. For this we will examine its schedules of future obligations. We need here to compare between two years long term and short term financing for assessing the trends of improving or deteriorating.


Weighted Average Rate

Less than 1

1-5 years

More than 5

Total (000)

Risk Management

Page 45 of 62
of Interest Long term Financing Term Finance & Sukuk Certificates Liabilities Against Assets Subject to finance Lease Trade & Other Payables Accrued Interest (profit) Short term Borrowing Total

Year (000)
7,095,953 25,056,5 86 19,599,5 16

11,621,895 43,775,4 34 19,605,7 95



2.62% 13.50%

10,568,706 20,330,967 1,845,592

41,540,4 59 -

27,767,691 -

79,876,8 56 20,330,9 67 1,845,59 2 28,684,5 14 194,119, 158



2008 Long term Financing Term Finance & Sukuk Certificates Liabilities Against Assets Subject to finance Lease Trade & Other Payables Accrued Interest (profit) Short term

Weighted Average Rate of Interest


Less than 1 Year (000)


1-5 years
13,126,8 46 12,430,1 43

More than 5 Years


Total (000)
24,823,9 38 12,430,1 43


2.51% -

9,762,644 19,726,002 1,475,456 30,500,062

45,534,5 68 -

27,974,758 -

83,271,9 70 19,726,0 02 1,475,45 6 30,500,0


Risk Management

Page 46 of 62
Borrowing Total
62 172,227, 571

These graphs are representing the obligations that PIA will have to make according to terms and conditions. By sketching diagrams we can better compare the trends.

According to the data available the borrowings has been increased to a greater extent. The main reason about current liabilities have increased in the form of greater long-term financing and short-term borrowing. The greater long-term borrowing had been facilitated for the purchase of three Boeing 777 and three ATR aircrafts. In financial year 2009, the current liabilities have dropped by 4% while the current assets showed a growth of 12%. The current liabilities' composition shows that short term borrowings dropped by 20% in the year 2009.

The corporation arranged its amount of borrowings. After four years now the corporations is able to attain some profit. Finance cost has increased to Rs 9.24 billion in the year 09, primarily due to increased mark-up on short term borrowings. So the credit risk is considered to be very high. As far as the liquidity position of PIA is concerned, the corporation has faced a declining trend over the past couple of years but in the year2009, it has showed a little growth. The declining trend can be primarily attributed to a sharp rise in the current liabilities of the company over the years. Mainly, current liabilities have increased in the form of greater long-term financing and short-term borrowing.

Risk Management

Page 47 of 62
Credit Risk
Credit risk arises when one party having financial instrument cause a loss for the other party in absence of meeting the due obligation. We come to know that all financial assets except cash in hand are subject to credit risk. The corporation has a credit policy in place and proper monitoring is done by management on timely basis. The following table has clearly distinguished the credit items that are taken from corporations balance sheet. Particulars Long Term Advances Long term deposits Short term loans and advances Trade deposits Other receivables Trade debts Receivable from centre hotel Long term investments Bank Balances Total 2009 Rs 12,051 3,621,125 364,072 72,005 629,411 8,335,142 636,064 93,021 4,325,519 18,088,410 2008 Rs 7,629 3,367,139 417,433 47,059 734,528 6,190,561 596,027 140,185 3,864,042 15,364,603

Trade Debts
Trade debts mainly represent passenger and freight sales due from government and other sales agents which is guaranteed by government. The figure of trade debts is representing a high amount but we observed that the entire amount is backed by strong guarantor. For verifications the huge amount of trade debts, our main focus is to check the trade terms that are improving or not? The firm usually grants credit normally 30-60 days. Not an improvement from the last year. Consequently the credit risk regarding these individual agents and government is relatively low.

Risk Management

Page 48 of 62
The aging analyses of trade debts are as follows; Aging Analysis: With the help of table we can better view the trade debts

Particulars Gross Within in 1 year 1-2 years 2-3 years Over 3 years Total 8,066,382 118,697 226,904 547,570 8,959,553

2009 Impaired 163,563 39,904, 77,413 343,531 624,411 Gross 6,213,827 161,997 47,288 508,104 6,931,216

2008 Impaired 274,914 86,087 27,094 352,560 740,655

The impaired debts in the year 2009 amounting 624,411 are considered to be doubtful as compared to 740,665 in the last year resulting a little improvement about 15.70%.

The gross amount of debts in the year 2009 has increased to 29 %. Within 1 year the amount of trade debts has expanding as compared to last year but the doubtful debts has been reduced which is presenting an improving positions in impaired recovering amount from trade debts of corporation. Details of Other Receivables: Considered Good Insurance and other claims Excise duty Sales tax receivable 2009 (000) 214,993 100,000 231,927 2008 (000) 189,305 100,000 150,463

Risk Management

Page 49 of 62
Receivable against commercial development of land Receivable from Gop Others Total 204,399 142,305 110,019 1,003,643 180,465 738,473 264,758 1,623,464

The trend of other receivables can be better understood with the help of a bar diagram that is as under.

The receivable amount from Gop (Government of Pakistan) has reduces to a greater extent in the financial year 2009. Insurance and other claims receivable increased to 13.5 %. According to data available in the annual audited financial statement the amount of Receivable against commercial development of land year 2008 include 61.833 million which is receivable from Pakistan Cricket board due to various payments made in the year 1980 to 1981 due to agreement between PIA and PCB. Lease details: Due to an agreement between PIA and PCB the land was registered in the name of one of the shareholders of the PIA. The lease is for 92.5 years. However I nthe year 1990 PCB demolished the boundary wall and possess the legal premises of PIA. In May 13, 1990 the high court declared its verdict and dismissed the possession of PIA. Receivable from Gop: This amount represents the maintenance and running charges of the aircraft owned by Gop. Summary:

Risk Management

Page 50 of 62
PIA, now has improved its receivables position. The amount has been condensed to 38.2 % which is far better for such business. The management is taking accurate measures to reduce the level of receivables by giving rebates to its clients.

Comparative Statement of Financial Statements

Profit & Loss Account: Name of Organization PIA Currency Rupees Chughtai
Particulars 2009 Rs (000) 94,563,76 5 78,629,42 7 83.15% 15,934,33 8 16.85% 5,911,946 6.25% 7,180,665 7.59% 689,849 6,711,336 494,462 4,064,996

Location Pakistan Auditor Shahzada Saleem

2008 Rs (000) 88,863,25 8 85,275,81 1 95.96% 3,587,447 4.04% 5,309,808 5.98% 5,818,218 6.55% 1,807,645 24,118,82 3 1,830,920 31,636,12 7

2007 Rs (000) 70,480,73 4 66,556,49 5 94.43% 3,924,239 5.57% 4,448,674 6.31% 5,256,700 7.46% 433,223 720,151 999,433 31,377,64 2

2006 70,587,14 6

Revenue net Cost of Services % of Sales Gross Profit % of Sales Distribution Cost % of Sales Administrative Expenses % of Sales Other provisions Exchange Loss net Other operating Income Loss from operations

Risk Management

Page 51 of 62

Finance costs Taxation Net income / Loss for the year % of Sales

9,243,768 7,486,333 -5,822,431 -6.16%

8,351,648 3,849,133 36,138,64 2 -40.67%

7,135,845 327,785 13,398,70 6 -19.01%

With the help of following tables the trends can be analyzed easily.

The trend of graph is stating an increasing trend but at a slow pace. There are many reasons behind this background. Passenger and freight traffic showed significant decline during 2009.

The largest expense item for PIA is fuel. Cost of services includes two basic things. One is aircraft fuel and the 2nd one is salaries, wages, retirement benefits, and compensated benefits, legal and professional charges. In addition to these, crew layover, staff training, utilities and communication expenses also a major part of cost of sales. The main reason of declining cost of sales in 2009 is the reduction in oil prices of aircrafts. Gross Profit: The gross profit in the year 2008 is digressing due to increase in cost of sales but in the year 2009 it has showed a great increase.

The gross profit margin has increased from 4.08% in 2008 to 16.85% in 2009 due to a significant growth. The return on assets have grown from

Risk Management

Page 52 of 62
negative 25.69% in 2008 to negative 3.64% in 2009 showing an increase of 86%.

PIA has authorized to hedge 20% of its oil requirement in year 2009, which saved Rs 500 million in the similar year. Now Board of Directors has now increased the limit to 40% to capitalize on a potential to increase such savings in future. The proportion of distribution cost and administrative cost has been increased almost the desired level. Operating Income: The corporation operating income has been reduced because in 2009 it didnt get any the dividend income from investments as compared to financial year 2007 & 2008.

Thus nearly 72&% decrease in operating income is recorded in the year 2009. But this loss is compensated due to decrease in cost of sales. Finance Costs The finance cost includes the following items:200 9 200 8

Risk Management

Page 53 of 62

Finance costs have been increased due to borrowings from different financial institutions. The corporation is utilizing these costs in terms of its needs and requirements. No doubt the profitability is although negative but the drastic trend has been improving.

Balance Sheet
Name of Organization PIA Currency Rupees Chughtai Assets: Location Pakistan Auditor Shahzada Saleem

Particulars Fixed Assets Property plant & Equipment Intangibles Long Term Investments Long term Advances Long Term Deposits and Prepayments Current Assets Stores & Spare Parts Trade Debts Advances

2009 Rs (000)

2008 Rs (000)

2007 Rs (000)

133,555,56 0 91,962 4,446,950 5,038,148 3,987,423 7,978,187 2,189,162

115,010,33 7 113,154 4,497,642 5,009,452 3,726,940 5,757,849 1,418,610

95,497,151 103,475 4,540,229 1283,000 4,098,388 3,251,940 5,012,778 604,470

Risk Management

Page 54 of 62
Trade Deposits & Prepayments Accrued Interest Other Receivables Short Term Investments Taxation net Cash & Bank Balances Total Assets

1,158,497 799,193 25,151 742,945 160,013,1 78

1,591,583 1,325 1,441,564 42,505 269,351 789,555 139,669,8 67

1,023,312 32,789 1,043,971 32,093 274,519 1,975,459 118,773,57 4

Liabilities & Equities: Particulars Share Capital 23,280,356 Reserves Total Equity Surplus on Revaluation of Fixed Assets Non Current Liabilities Long Term Financing Term Finance & Sukuk Certificates Liabilities against Assets (subject to Finance Lease Long Term Deposits Deferred Liabilities Current Liabilities Trade & Other Payables (72,335,101) (49,045,745 ) 28,281,903 (68,945,437) (47,522,423) 14,192,700 21,423,014 2007 Rs (000) 2008 Rs (000) 2009 Rs (000) 20,878,07 4 (32,781,63 2) (11,903,55 8) 972,040 17,037,07 5 10,723,73 8 46,524,02 4 321,547 3,049,166 20,055,16

24,553,113 19,592,320 61,272,797 365,847 6,184,327 28,684,514

19,471,411 12,430,143 65,024,660 301,770 3,243,205 27,947,496

Risk Management

Page 55 of 62
3 Accrued Interest Provision for Taxation Short term borrowing 23,982,160 Current Maturities of Long term financing Term finance and sukuk certificates Liabilities against assets subject to finance lease Contingencies & Commitments Total Equity & Liabilities Total 5,328,458 5120 8,122,882 160,013,178 160,013,17 8 5,352,528 7,252,859 139,669,867 139,669,86 7 5,662,451 2,523,232 4,724,495 118,773, 574 30,500,062 1,845,592 848,890 1,475,456 18,105,88 4 978,317

Ratio Analyses

Particulars Revenue Growth Rate Net Income / Average Net worth Net Income / Average Assets Average Assets Revenue / Average Assets Current Ratio

Ratios 2009 6.41% -3.22% -3.89% 149,841 ,523 63.11% 0.25

2008 26.08% -20.89% -27.97% 129,221, 721 68.77% 0.21

2007 N/A -10.33% -22.56% 59,386, 787 118.68% 0.25

Risk Management

Page 56 of 62
Quick Asset Ratio Days Inventory Days Payable Leverage Debt / Equity Return on Assets Return on Equity 0.17 17.91 25.70 -3.64 1.28% 2.56% 0.13 14.89 23.54 -3.69 -25.73% 76.83% 0.17 16.61 30.79 -10.90 -3.65% 11.89%

Analysis of Financials in context of Risk Measuring

Revenue Analyses: The trend of graph is stating a negative trend. There are many reasons behind this background. Passenger and freight traffic showed significant decline during 2009.

This was in line with global recessionary trends reflecting a decrease in trade activities. PIA reduce its burden of its post-tax losses by 83% in financial year 2008-2009 on the back of fuel cost reduction, a comparatively stable Pak Rupee and prudent financial management. The post-tax financial loss came down to Rs 5.82 billion from Rs 36.12 billion in 2008. Net Income to Average Net Worth: Average net worth is actually interpreting the corporations equity with respect to net income. As the corporation suffered great trouble in terms of its financial position due to intense low profitability in the past years. But now the corporation is recovering from the brink of chaos. Its position has been improving gradually with induction of better finance management.

Risk Management

Page 57 of 62

The negative trend of net assets the inefficiency of the corporation that interprets about how much the firm utilizing its assets in getting more of its net income.

Though the trend of revenue with respect to average is representing some deteriorating picture of the corporation but on the other hand corporation has taken some stand in reshaping its risk hedging techniques and reducing its unnecessary operational expenses along with some investment strategies. This whole thing has leaded the organization to a better way and in the future the corporation is optimized in terms of its results comprising more profitability by increasing revenue. Liquidity Position: The corporation liquidity position is also week. The firms current ratio and quick ratio is not as strong as it should be.

Nutshell of Ratio Trends: A significant reduction of losses testifies that the management capitalized on the opportunities offered by a changing macroeconomic environment both global and domestic plus successfully tackled the challenges of challenging year 2009, closing at a much better result in comparison with the previous year. However, it fell far short of the profitability required to earn a return on capital and create value. As far as the profitability of the company is concerned, the company has been facing serious crisis, reporting financial losses for the past three years

Risk Management

Page 58 of 62
of 2005, 2006 and 2007, 2008. According to data available through secondary resources it is quite evident that total turnover of the company stood at Rs 94.5 billion, representing a 6.25% increase. Cost of services amounted to Rs 78.6 billion - a decrease of 8%. The return on equity has declined significantly from 76.83% in 2008 to 11.87% in 2009. As for the liquidity of PIA, the corporation has faced a declining trend over the past couple of years but in the 2009, it has showed a little growth. The declining trend can be primarily attributed to a sharp rise in the current liabilities of the company over the years. Mainly, current liabilities have increased in the form of greater long-term financing and short-term borrowing. The greater long-term borrowing had been facilitated for the purchase of three Boeing 777 and three ATR aircrafts (source: BRecorder). In financial year 2009, the current liabilities have dropped by 4% while the current assets showed a growth of 12%. The current liabilities' composition shows that short term borrowings dropped by 21% in the year 2009. The current ratio stands at 0.25 in 2009 as against 0.21 in the year 2008. The advances have increased by 57% due to advances extended to suppliers to the amount of Rs 1.8 billion. As far as asset management of the company is concerned, inventory turnover (days) has shown an erratic trend, decreasing drastically in 2004 then rising in 2005 and 2006, and then again decreasing in 2007 and 2008 and rising in 2009. The ratio has increased in CY09 and stood at 18 days. Days sales outstanding (DSO) has increased to 31 days in CY09. In CY08, it was 24 days. The overall operating cycle has declined lately from 38 to 49 days. Rise in the days sales outstanding indicates that the creditors to the corporation have not been paying off their debts on time, thus placing the PIA at crossroads as far as asset management is concerned. The total turnover of the company has been rising over the years, increasing by 17.59% and 14.57% over the years 2008 and 2009. In fact if we are to measure PIA performance by isolating the abnormal impact of fuel price

Risk Management

Page 59 of 62
increases, then the airline, using the 2004 fuel price level, would've posted a profit of Rs 3.3 billion in 2005 and another profit of Rs 0.8 billion in 2006. Hence, we can say that the overall turnover performance of the company has been commendable. As far as debt management by the company is concerned, PIA has a very highly leveraged financial structure. Its debt to assets ratio has been generally very high. This shows a highly unstable financial base, with most of the financing achieved through leveraging and a minimal equity base. Liabilities against assets subject to finance lease, all of this, mainly to finance the purchase of three Boeing 777 aircrafts and three ATR aircrafts. In the year 2009, the debt to asset ratio has dropped to 1.13 from 1.23 in 2008. Long-term debt to equity has decreased from -2.15 in 2008 to -2.28 in 2009. The debt to equity ratio has remained stable at -3.69.

The market price of PIA shares has showed a growth of 7% in the 2009 and stood at Rs 3.4 per share. This growth trend has now increased the confidence to invest more in the corporation business. The effect of a rise in equity has been mitigated by the rising number of weighted average number of outstanding shares. The basic purpose of PIA should be radical business restructuring to come out of the crisis and meet the customers expectations. PIA has been facing a severe financial crisis in terms of profitability, asset and debt management, as well as liquidity and needs to bring up its financial results to a more positive level. Erratic fuel prices and financial costs are a severe setback for the company and it needs to manage its distribution, administrative and marketing costs well in order to show better margins in later years.

For better quantitative Analyses we have to observe corporations long term goals with both perspectives; corporation point of view and as a loan giver

Risk Management

Page 60 of 62
(banker). We should need to present a sensitivity analysis to better judge the future trends in order to capture future financial in the business. In this context the following assumptions we have taken keeping in mind the inflation factor. The assumptions have been taken prudently keeping in mind the past performance according to annual audited statements.

PIA (customer) Sensitivity Revenue Growth CGS Revenue 85% Gross Profit Finance Cost 12,000,000 Income Tax Rate Admin Expenses Distribution Cost 7.0% Reduction in Exchange loss 60% Reduction in Other Provisions 65% Note: Amount of finance costs is in thousands. Operating income will enhance in the coming expected year due fruitful investments of the corporation that is the reason positive trend has been taken, where as decreasing trend in the exchange loss and other provisions is evident from the past track record. 6% 4% 83% 15% 10,376,800 40% 7.5%


35% 6.8% 6.25% 72%


Risk Management

Page 61 of 62
Projected Profit & Loss Account


2007 Rs (000)

2008 Rs (000)
88,863,258 85,275,811 95.96% 3,587,447 4.04% 5,309,808 5.98% 5,818,218 6.55% 1,807,645 24,118,823 1,830,920 31,636,127 8,351,648 ( 71,623,902) 3,849,133 (36,138,642)

2009 Rs (000)
94,563,76 5 78,629,42 7 83.15% 15,934,33 8 16.85% 5,911,946 6.25% 7,180,665 7.59% 689,849 6,711,336 494,462 4,064,996 9,243,768 (17, 373,760) 7,486,333 (5,822,43 1)

2010 Rs (000)
100, 237,591 83, 197,200 83.00% 17, 040,390 17.00% 6 ,264,849 6.25% 6 ,816,156 6.80% 496,691 1 ,879,174 123,616 609,749 10, 376,800 (9, 279,414) (6, 031,619) (3, 247,795)

Sensiti vity Rs (000)

98,3 46,316 83,5 94,368 85.00% 14,7 51,947 15.00% 6,8 84,242 7.00% 7,3 75,974 7.50% 241,447 2,3 48,968 49,446 1,0 16,249 12,0 00,000 (15,0

Revenue net Cost of Services % of Sales Gross Profit % of Sales Distribution Cost % of Sales Administrative Expenses % of Sales Other provisions Exchange Loss net Other operating Income Loss from operations Finance costs EBIT Taxation Net income / Loss for the year

70,480,734 66,556,495 94.43% 3,924,239 5.57% 4,448,674 6.31% 5,256,700 7.46% 433,223 720,151 999,433 31,377,642 7,135,845 (4 4,448,563) 327,785 (13,398,706)

(9,7 92,566) (5,2 72,920)


Risk Management

Page 62 of 62
No doubt risk management is an uphill task that requires a lot of exercise according to the nature and scope of organization. The past record of financials of the PIA is showing a drastic one. The corporation did a great deal in emerging again as a profitable concern. But the business of corporation depends upon on various factors. The overall recession in the economy, accidents of aircrafts, management relation with employees, political disturbances and market dynamic situation all impose certain limitations on the performance of the management. The schedules of bank loans and payment of respective interest rate are a healthy sign that enhance the credibility of organization with its lenders. The corporation is in dire need of borrowings to continue in its operations due to emerging growing trend. The balance sheet and cash flow statements will present positive trends due to increase profitability. Certainly, the bank or any financial institutions forecasting comprises better tools to measure risk factors as compared to ours due to lack of data availability and inside information of financial prospects. In our weak opinion the corporation is recovering from serious drawbacks of the past and improving its structure and implementation of ERP will come reduction its cost as well as will fetch better financial trends in the future.

Risk Management