Ongoing Concern: Risk Management at Pakistan International Airlines1 Ch. Ahmed Mukhtar, Chairman Pakistan International Airline Corporation (PIAC) was reading the final version of the PIAC audited annual report. He immediately called the Managing Director, PIAC to arrange a meeting to discuss the auditor’s report. The particular part of auditors’ opinion that caught his attention was the following: “We draw attention to note 1.2 to the unconsolidated financial statements, which states that the Corporation incurred a loss of Rs. 26,767.207 million during the year ended December 31, 2011, resulting in accumulated loss of Rs. 119,016.727 million as of December 31, 2011, and as of that date, the Corporation’s current liabilities exceeded its current assets by Rs. 88,221.403 million. These conditions indicate the existence of a material uncertainty which may cast doubt about the Corporation’s ability to continue as a going concern. Our opinion is not qualified in respect of this matter.” The agenda of the meeting was quite clear i.e., how to keep PIA solvent. PIAC Brief History2: In 1946 Quaid-e-Azam Muhammad Ali Jinnah realized the need for an airline network for the forming country and ask for the help of an industrialist Mirza Ahmad Ispahani to develop a flag carrier for the nation. Meanwhile, an airline called “Orient Airways”', registered in Calcutta, was formed on 23 October 1946. In May 1947 the airline was granted a license to fly. This was the first post-war airline flight by a South Asian registered airline company. Two months after this service began, Pakistan was formed. Orient Airways began relief flights to the new nation and, soon after, it moved its operations to Karachi, where it began flights to Dhaka on June 7, 1954. On 11 March 1955, Orient Airways merged with the government's proposed airline, becoming Pakistan International Airlines Corporation3 (PIAC). During the same year the airline opened its first international service, from Karachi. PIAC is majority owned by the Government of Pakistan, GoP (90.2 percent) while the remainder (9.8 percent) by other shareholders, for details see exhibit 6. The airline falls under the direction of the Ministry of Defense chaired by its current chairman, Ch. Ahmed Mukhtar. The airline is managed by Managing Director, Captain M. Aijaz Haroon as well as the Board of Directors. The Board consists of nine independent non-executive members and has four subcommittees, being an Audit Committee, Brand and Advertising Committee, Finance Committee
1

This case was written by Dr. Salman Khan, Assistant Professor at the Accounting and Finance Department, Lahore University of Management Sciences (LUMS) to serve as a basis for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative situation. The case is based on published resources. This material may not be quoted, photocopied or reproduced in any form without the prior written consent of the Lahore University of Management Sciences. Certain identifying information may have been disguised to protect confidentiality. 2 For detail history http://www.piac.com.pk/PIA_About/pia-about_History.asp 3 For complete PIAC Act, please refer to http://www.piac.com.pk/PIA_About/pia-about_PIAACT1956.asp

1

and Human Resource Committee each with its own charter and chairman. PIAC has a comprehensive corporate social responsibility structure in place as well, see Exhibit 2 for details. The MD leads the executive management of staff who in turn control the extensive running of the airline. In 2004 the Competition Commission of Pakistan (CCOP)4 approved divestment of 10 percent GoP owned shares and its sale to the general public through the domestic stock exchanges. Sale price was fixed at Rs. 22.00/share. Total number of shares fully subscribed stands at 115,073,000. PIAC operates a range of advanced aircraft, ranging from the world's preferred Boeing 777 airplane to the super-quiet Airbus A-310. In May 2009, PIAC tendered for short term, wet lease, of three Boeing 737-300 aircraft, to be added to the fleet from July 2009. During June 2009, PIA entered discussions with Airbus and Boeing for a new order of 27 narrow body A320 or 737 family aircraft, for the airline. PIAC holds three subsidiaries (non-listed) which are, PIA Investment Limited (PIAIL), Sky Rooms (Private) Limited, Midway House (private) Limited (under winding up). The PIAIL was incorporated on 10 September 1977 in Sharjah, UAE, as a limited company under a decree issued by HRH Prince Faisal Bin Khalid Bin Abdul Aziz and is currently registered in British Virgin Islands. The Holding Company (PIAC) interest in PIAIL is 99 percent. Following are the details of PIAIL’s subsidiaries; 1) Roosevelt Hotel Corporation N.V PIAIL Holding (100 percent) 2) Minhal France (Curacao) N.V. PIAIL Holding (100 percent) 3) Minhal France B.V. PIAIL Holding (100 percent) 4) Minhal France S.A. PIAIL Holding (90 percent) PIA & AIRLINE INDUSTRY5 PIA is considered to add to the fiscal burden, having incurred significant losses for the last several years as shown in the operational performance in Exhibit 6. The company’s operating performance continues to be disappointing. Operational efficiency as measured by revenue earned per aircraft (EPA), available seat kilometers (ASK) per aircraft and passenger capacity utilization (PCU) is widely below established benchmarks see Exhibit 11.

4

In the late 1990s, the Government of Pakistan (GOP) considered selling the airline to the private sector due to the persistent losses suffered by the airline. Several steps towards outsourcing of non-core business were initiated. Catering units (starting with Karachi Flight Kitchen, PIA Advertising (privatized by PC), Duty Free Shops (privatized by PC) etc.), ground handling (starting with ramp services) and engineering, were to be gradually carved out of the airline and operated as independent companies. During 1997, Pakistan called in a team from International Finance Corporation (IFC), the consulting arm of the World Bank, to advice on restructuring and privatization of Pakistan International Airlines (PIA) however no agreement was reached. The government has many times planned the privatization of the State owned entity.
5

http://www.sbp.org.pk/reports/annual/arFY11/Sector_Studies.pdf

2

Value addition by the air transport sector to real GDP recorded an increase of 40.9 percent during 2011 as compared to a 0.4 percent decline observed in 2010. In light of the fact that fuel costs have been increasing, rise in profitability for the airlines has been a welcome development, which was due to higher demand for air travel, resulting from improvement in trade volumes and frequent upward adjustments in airfares so as to support revenues. Although detail data on this head is not available, this is reasonable to assume that a greater share of the increase in value addition is contributed by foreign airlines as the profitability of domestic airlines did not show a strong increase in FY11. In particular, the deteriorating financial position of PIA presents enormous risks to its financial solvency (Exhibit 7). Though in the year ending December 2010, PIA recorded a nominal operating surplus, the real impact of this improvement was minimal, as the airline is on the brink of insolvency and needs immediate financial support from the government. To improve the financial performance of PIA, the fundamental issues which have impaired profitability must be identified and corrected. In this context, a comparison of PIA performance with some other Asian airlines (i.e., Singapore airlines, Thai airways, Emirates, Cathay pacific) reveals some interesting findings (Exhibit 11): Huge workforce is the root cause of PIA’s financial miseries. This is reflected from significantly higher employees per aircraft ratio for PIA as compared to other airlines. For instance, for Singapore airlines and Cathay pacific, this ratio stands below 200, whereas for Emirates and Thai airways it ranges from 200-300. By contrast, PIA hired more than 450 employees per aircraft, which indicates overstaffing in this organization. Consequently, a heavy wage bill eats into a relatively large portion of PIA’s operating revenues. For instance, during 2010, on average, wages & salaries expenses of PIA claimed 17.5 percent of operating revenues of this airline, whereas this ratio was significantly less for other airlines. This is because compared to the size of its workforce; PIA’s revenue operations are quite limited. The ASK per employee for PIA stand at around 1 million, whereas for other Asian airlines this ratios ranges between 3-8 million. Operational efficiency of the domestic carrier is also widely below the mark because of limited flight operations. PIA’s annual revenue per aircraft stands below USD 30 million, whereas for other airlines the annual earnings are widely above USD 50 million per aircraft. This is due to lower passenger capacity utilization i.e., 70 percent in the case of PIA, which is less than the international standards e.g., capacity utilization ranges around 78 percent for Singapore and Emirates airlines and 80 percent for Cathay pacific. Similarly the ASK per aircraft for PIA range around 500 million, whereas for other airlines this ratio stands fairly above 700 million. Presently, PIA Corporation is negotiating another restructuring arrangement with the Ministry of Finance. These negotiations are based on a 5-year’s business plan, prepared by PIA, which outlines a number of revenue enhancing and cost cutting measures to improve PIA’s profitability. However, the foremost objective of PIA is to avoid imminent insolvency for which it is negotiating roll-over of long term loans or fresh equity injections from GoP. Both of these options will tend to increase the fiscal burden for the government, which already stood at 0.02 percent of GDP in 2011. Given the high opportunity cost to the government in terms of allocating scarce fiscal resources at this point, any financial support provided to this entity
3

would be strictly linked to successful implementation of profitability enhancing measures as envisaged in its business plan. GLOBAL AIRLINE INDUSTRY- INDUSTRY FORECAST6 (Exhibit 11) The global economic growth environment is weak, airline industry profitability is not perfectly but closely correlated, high fuel price and growth in airline industry is now close to point where profit turns to loss. The Price of jet fuel remains persistently high. It spiked higher in 2008 but just for 7 months. The Jet fuel price remains higher than $120/b for the past 15 months even after recent fall still higher than early 2011. Given the difficult environment, the cash flow performance to date appears to be good at around 10 percent of revenues, except Europe where it stands at 5%. The financial market signals more or less consistent with the change in cash flows since 2009 as well as consistent with IATA forecast of losses in Europe this year, but profits of varying sizes in other regions. The key reasons for relatively robust cash flows include high asset utilization in passenger business and more disciplined approach to capacity. Deliveries of new capacity (aircrafts) increasing this year however the high utilization remains more of a challenge that can put pressure on yields. But demand for air travel expanding well above trend at 6 percent. The cargo showing signs of turning up (80 percent Middle East) without euro zone crisis would be getting optimistic about Cycle. The world trade continues to expand and the pattern of economic growth favored sea and not air. The 2011 weakness of global business confidence starting to recover, moderately. This in turn supports the business and premium travel volumes. The seat mix is also improving.

FINANCIAL RISK MANAGEMENT AT PIA The PIA activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk, fuel price risk and other price risk), credit risk and liquidity risk. The PIA overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on its financial performance. The senior management at PIA carries out financial risk management under governance approved by the Board of Directors. Senior management identifies, evaluates and hedges financial risks, wherever necessary. PIA faces market risk which represents the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprise three types of risk: interest rate risk, currency risk and other price risk, such as fuel price and equity price risk. Financial instruments affected by market risk include loans and borrowings, bank deposits, available-for-sale investments and derivative financial instruments. Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. With PIA borrowing at the center of
6

www.iata.org

4

going-on concern, the interest rate on the existing debt is under continuous monitoring. Exhibit 12 provides the details of PIA interest payments and sensitivity analysis. Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Corporation’s revenue streams are denominated in a number of foreign currencies resulting in exposure to foreign exchange rate fluctuations. In addition, the Corporation has substantial foreign currency borrowings and lease liabilities that are primarily denominated in US Dollar (USD), Saudi Riyal (SAR), United Arab Emirates Dirham (AED) and Great Britain Pound (GBP). The Corporation can experience adverse or beneficial effects arising from foreign exchange rate movements. The Corporation manages some of its currency risk by utilizing its foreign currency receipts to satisfy its foreign currency obligations. Exhibit 13 gives details of sensitivity of financial instruments held by PIA to a reasonable possible change in the foreign currency exchange rates, with all other variables held constant, on (loss) before tax. The PIA’s earnings are affected by changes in price of aircraft fuel. The Corporation hedges fuel prices to a limited extent through use of derivative contracts. There are no derivative contracts outstanding as of yearend; therefore, the Corporation is not exposed to risk related to fuel price derivative contracts. Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from currency risk or interest rate risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors effecting all similar financial instruments traded in the market. The Corporation is not significantly exposed to equity securities price risk as majority of its investments are in subsidiaries and associated companies which are stated at cost. Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or other financial asset. The Corporation manages its liquidity risk by maintaining sufficient cash and cash equivalents and through support of GoP either in the form of capital / loans or in the form of guarantee to obtain financing from lenders. Exhibit 14 shows the Corporation's remaining contractual maturities of financial liabilities, including estimated interest payments. Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. All financial assets except cash in hand are subject to credit risk. The total credit risk exposure is shown in exhibit 15. The Corporation has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. The Corporation normally grants a credit term of 30 to 60 days to customers and in certain circumstances such exposure is partially protected by bank guarantees. Trade debtors mainly represent passenger and freight sales due from agents and government organizations. The majority of the agents are connected to the settlement systems operated by the International Air Transport Association (IATA) who is responsible for checking the credit
5

worthiness of such agents and collecting bank guarantees or other monetary collateral according to local industry practice. In most cases amounts due from airlines are settled on net basis via an IATA clearing house. The credit risk with regard to individual agents and airlines is relatively low. The credit risk on liquid funds (cash and bank balances) is limited because the counter parties are banks with a reasonably good credit rating i.e. at least "A3" or equivalent for short term and "BBB" or equivalent for long term. There is no credit risk on aircraft lease deposits because they are security against the finance lease obligation. Other deposits are not significantly exposed to credit risk as they have been paid as security deposits to receive future services. Advances to employees are primarily against their salaries. There is no significant credit risk against other receivables as majority of the receivable is from GoP. The chairman knows that PIA has kept strong hands on risk management systems in place, however he is unsure as how much more could have been done in order to reduce the increasing trend in liabilities. The Chairman was constantly thinking that it would be difficult to sell the performance of PIA to the stakeholders in order to raise additional funding to cover rising liabilities. He knew something has to be done but an important question filled his thoughts. How to offset/contain /reduce liabilities over the course of next year? Assignment Questions What is your assessment of various operational inefficiencies in PIA? Do these operational inefficiencies create significant risks for PIA? What are the different operational and financial risks at PIA and how these risks are managed? What type of risks should PIA actively hedge? What are the benefits that can be derived using active hedging from firm and investors perspective?

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EXHIBIT 1: PROFILE OF BOARD OF DIRECTORS OF PIAC
1) ACM(R) Rao Qamar Suleman joined PIA as Managing Director in March 2012 and was appointed Chairman-PIA and Chief Executive since May 2012. He joined Pakistan Air Force in 1972. He has commanded PAF from March 2009 till March 2012, where he managed over 600 aircraft, more than 80, 000 personnel and all other resources of PAF. He is a graduate of PAF Air War College and the National Defence University. Malik Nazir Ahmed is an elected Director since March, 2008. He has been re-elected Director effective April 2011. He holds Bachelor’s Degree in Laws from Punjab University. Malik Ahmed is a renowned Businessman and is presently CEO of Name International (Pvt.) Ltd, Namco Associates (Pvt) Ltd, and Executive Director of Wire Manufacturing Industries Ltd. (WMIL). Malik Nazir is also Member of Board’s Human Resource Committee and Board’s Finance Committee. Mr. Javed Akhtar is a nominated Director since July, 2008 and was nominated for the second term in September, 2011. He holds a Bachelors Degree from University of Karachi. Mr Akhtar is Chairman Akhtar Group of Industries and Chairman Fashion Apparel Designing and Training Institute (FADIN). He is also working as Director of Karachi Garment City. He was formerly Member Managing Committee and currently Member General Body of the Federation of Pakistan Chamber of Commerce & Industry (FPCCI). He was Director of Karachi Cotton Association. He held the position of Chairman, Pakistan Cotton Fashion Apparel Exporters Association during 1997-1998 and 2001-2003. He is also Member of Board’s Audit Committee and Human Resource Committee. Syed Omar Sharif Bokhari is a nominated Director since September, 2011. He holds Masters in Business Administration in Banking & Finance from Preston University and Bachelors in Economics as well as Associate of Arts in Economics from Strayer College, Washington D. C. USA. He is serving as Director Evacuee Trust Property Board since April 2010. Syed Bokhari also served as Resident Vice President at Faysal, Financial Manager at North America Control Risks Group, LLC USA and Accounting Manager at Rowan & Blewitt, Incorporated USA. He is also Member of Board’s Audit Committee, Board’s Human Resource Committee and Board’s Finance Committee. Mr. Husain Lawai is a nominated Director since July, 2008 and was nominated for the second term in September, 2011. Presently, he is President and CEO of Summit Bank Limited and is a seasoned banker with vast experience in the banking and financial services industry. He holds Masters Degree in Business Administration from Institute of Business Administration, Karachi. Mr Lawai held the position of President & Chief Executive Officer at Muslim Commercial Bank and holds the distinction of establishing Faysal Islamic Bank, Pakistan branches; the first Islamic Sharia compliant bank. He also served as the General Manager, Emirates BBD Bank for Pakistan and Far East, and as Director, Security Investment and Finance Ltd, UK. Currently, Mr Lawai is on the Board of Directors of GlaxoSmithKline Pakistan Ltd, Sanofi-Aventis Pakistan Ltd, and on the Implementation & Coordination Board of Civil Hospital Karachi. He is also Chairman Board’s Audit Committee and Member Board’s Finance Committee. Makhdum Syed Ahmad Mahmud is a nominated Director since September, 2011. He holds Bachelor Degree in Arts from Allama Iqbal Open University. Makhdum Mahmud is Member, Provincial Assembly of Punjab. Professionally, he is an agriculturist and industrialist. He belongs to a renowned political family of Punjab. He served as Chairman District Council during 1985-88 and District Nazim during 2001-2005 of District Rahim Yar Khan. He has extensively travelled abroad. Makhdum Mahmud remained Member, Provincial Assembly of the Punjab during 1985-88, and Provincial Minister for Excise & Taxation during 1988-90. He was Member, National Assembly of Pakistan during 1990-93, 1993-96, 1997-99 and also served the nation as Minister of State for local Governments and Environment. He is also Chairman Board’s Human Resource Committee. Lieutenant General (Retired) Asif Yasin Malik, Federal Defense Secretary is a nominated Director since August 2012. He joined the Pakistan Army in 1973 as an Infantry officer. He is a Graduate of Command & Staff College, Quetta. He holds Masters Degree in War studies from National Defense University, Islamabad and in Strategic

2)

3)

4)

5)

6)

7)

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Resource Management from National Defense University, Washington DC. He is Chairman of Pakistan Civil Aviation Authority, Fauji Foundation and Defense Housing Authority (Karachi, Lahore, and Islamabad). He is also Member Board of PIA Investment Limited. 8) Mr Abdul Wajid Rana is a nominated Director since February, 2012. He holds Master of Business Administration degree with Specialization in Economics / Master of Finance from Saint Louis University, Missouri, USA; Master of Arts (Political Science) from University of Punjab; Master of Science from Quaid-i-Azam University, Islamabad; and, LLB degree from University of Sindh, Hyderabad. At present Mr Rana is working as Federal Secretary Finance. Prior to this he held various senior positions during his service with the Government of Pakistan which includes the Federal Secretary, Economic Affairs Division; Special Secretary Finance; Economic Minister/Financial Advisor, Embassy of Pakistan, Washington D.C., USA/Canada; Principal Staff Officer to the Prime Minister of Pakistan; Joint Secretary (EF&P), Ministry of Finance; Special Assistant to Minister for Finance, Economic Affairs, Revenue, Planning & Statistics, Government of Pakistan; Provincial Secretary Finance, Sindh; and, Provincial Secretary Finance, Khyber Pakhtunkhwa. Khawaja Jalaluddin Roomi is a nominated Director since May, 2010. He holds a Masters Degree in Business Administration with a specialization in Marketing from Bahauddin Zakaria University. He has attended a specialization course in Finance from United Kingdom and textile courses from Switzerland. Presently, Khawaja Roomi serves on the Boards of Mahmood Textile Mills Ltd (Group of Industries). He remained the President of Multan Chamber of Commerce & Industry as well as D.G. Khan Chamber of Commerce & Industry. He is also the Chairman of All Pakistan Bed sheets & Upholstery Association and Chairman Board of Management of Nishtar Medical College Multan and Nishtar Allied Hospital. Khawaja Roomi belongs to the respectable Khawaja family of Multan which is involved in business for more than 100 years. He is also Member of Board’s Audit Committee and Board’s Human Resource Committee.

9)

10) Mr Yousaf Waqar is an elected Director since April, 2011. He has done BBA from Lahore School of Economics. He is a well known business man and is presently looking after his family business, namely Diamond Group of Industries. Mr Waqar has extensively travelled to many countries of the world. He is the CEO of Eagle Industries (Pvt) Limited and is Director and partner of six other companies. Mr Waqar is an active member of Entrepreneurs Organization of Pakistan. He is very active in supporting the social sector organizations working for the development of education and health care. His passion is to serve the nation by generating new resources of employment through producing environment friendly products. He is also Member of Board’s Audit Committee and Finance Committee.

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EXHIBIT 2: CORPORATE SOCIAL RESPONSIBILITY AT PIAC
PIA has institutionalized the practice of good governance by establishing a Corporate Social Responsibility Committee. 1) Reaching Out to Help IDPs To address the suffering of IDPs PIA decided to activate its Emergency Response Centre for collecting Relief Goods for onward dispatch to the people in distress in an efficient and transparent manner (more than 300,000 Kgs transported). 2) Boy Scouts Association The PIA Boy Scouts Association (PIA-BSA), a provincial segment of the Pakistan Boy Scouts Association, is based on the value system of the Scout Promise and Law. The PIA-BSA's major contributions include providing Haj services at domestic and Saudi Arabian airports, engaging in activities with the Heritage Association of Pakistan, assisting special children at PIA's Al-Shifa Trust, and participating in a number of health, cleanliness, literacy, tree plantation, drug prevention, cricket academy, emergency services and blood donation drives. 3) PIA Planetariums Through a combination of projectors, optics, electronics, and precision engineering, PIA offers a range of cosmic experiences to the Pakistani people. The PIA Planetariums enable the viewing of virtual universes, replete with stars, planets, and nebulae and visitors throng the planetariums to look at astronomical phenomena such as eclipses, alien landscapes, planets, and the sun. PIA is the only airline in the world to have invested in an innovative and educational planetarium project that is open to the general public at affordable rates. 4) PIA Horticulture Plants and trees provide habitat, shelter, food, materials and medicines to human beings and animals. Realizing the significance of a healthy and pollution-free environment, PIA set up a horticulture division in 1996. In addition to maintaining indoor and outdoor plants and trees, PIA Horticulture provides seasonal flowers for display in PIA's offices and for a range of events, winning several awards and accolades at flower exhibitions across the country. To reduce pollution and contribute towards a greener Pakistan, PIA Horticulture actively participates in tree plantation campaigns during each spring and monsoon season. 5) Support for Non-Profit Organizations As a responsible corporate citizen PIA has a special social commitment which it takes very seriously. PIA is engaged and actively supports various social projects. As part of its corporate social responsibility initiatives, PIA fully sponsors Al-Shifa Trust, which provides relief and rehabilitation services to special children suffering from cerebral palsy and other motor disorders. Besides this, PIA has been providing help to charities and trusts. 6) PIA Training Center The PIA Training Center is a leading airline training institution that delivers the highest standards of aviation instruction. The Training Center is built around a highly advanced training infrastructure, approved by local and international regulatory authorities such as CAA, ICAO, and IATA. The PIA Training Center's courses are based on a unique, standards-based curriculum designed to impart knowledge and best practices in all the aspects of the airline industry. The PIA Training Center provides quality training to PIA's pilots, engineers, air hostesses, and to employees of other associated PIA divisions. 7) PIA Model Secondary School The PIA Model Secondary School was set up in 1980 to provide high quality education to the children of PIA's employees at an affordable fee. Situated at a distance from the hubbub of the city, the school is housed in a modern building that spans over 10 acres of land and is staffed by teachers dedicated to empowering children with knowledge and skills for the future. Equal emphasis is placed on curricular and extracurricular activities in order to produce well-rounded, holistic, and responsible citizens. 8) PIA Industrial Training Institute

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The PIA Industrial Training Institute was established in 1986 to provide technical, vocational, and industrial knowledge to the families of PIA's employees. With the sustained support of top-level management at PIA, the Institute has functioned smoothly for over two decades, and has emerged as a leading industrial training center in the region. The Institute imparts industry knowledge, and specialized training courses in arts and crafts to the families of employees for a very nominal fee, empowering them to earn livelihoods and gain respect in their communities. 9) PIA Employee Health and Medical Services The health and welfare of our employees has always been a matter of utmost importance and significance at PIA. All employees are provided with a comprehensive medical package, in collaboration with reputable hospitals, diagnostic labs, and medical institutions. In 1959, PIA established a Medical Division to supply wide-ranging medical coverage to active and retired employees. To ensure that the highest standards of aviation are maintained, a Crew Center periodically carries out air crew checks, in conformity with international and Civil Aviation Authority standards. PIA's medical facilities cover the parents and spouses of serving employees, children up to the age of 27, unmarried daughters, and disabled, mentally challenged children of any age. Retired employees and their spouses are also eligible for medical care at PIA's Medical Centers. In addition to coverage in Pakistan's major cities, PIA has extended its medical network to 35 smaller stations, in collaboration with private and public sector hospitals. PIA also looks after its overseas employees under the Local National Health Scheme and Insurance Schemes. 10) Corporate Safety & Quality Assurance The PIA Corporate Safety & Quality Assurance Division ensures safe operations by monitoring implementation of international standards and recommended industry practices. Strict adherence to Safety & QHSE policy and procedures during flight as well as in ground operations helps in maintaining safe workplace environment. Corporate Safety & QA Division is responsible for effective implementation of Safety Management System (SMS), Health Safety & Environment (HSE) Program, Flight & Ground Safety Management, Flight Data Monitoring & Analysis Program, Emergency Response Planning (ERP) and Fire Protection Services as well as a robust Quality Assurance Program encompassing overall operation of the airline.

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EXHIBIT 3: PIAC FLEET PIA's fleet of modern aircraft is spacious, comfortable, and designed to get you to your destination safely. PIA operates a range of advanced aircraft, ranging from the world's preferred Boeing 777 airplane to the super-quiet Airbus A-310. A brief introduction of PIA fleet is given below: BOEING 777 The Boeing 777 family comprises of long-range, wide-body twin-engine airplanes. PIA was the first airline in the world to operate all the three variants of the 777 family: 777-200LR, 777-200ER and 777300ER, all of them are well loved by PIA's seasoned travelers for their spaciousness and comfort. PIA also holds the privilege of being the launch customer for 777-200LR, one of PIA’s aircraft holds the record for the longest commercial jet flight in aviation history. At present PIA is serving destinations in USA, Canada, UK and Europe through its 777 fleet. Boeing 747 The Boeing 747, often referred to as “Jumbo Jet”, is amongst the world's most iconic and recognizable jet airplanes. This 4 engine long haul wide-body airplane has a two-deck configuration. PIA operates two variants of 747 family which includes 747-300 and 747-200 Combi. 747 Combi is so called as it has mixed pax and cargo configuration on the main deck. At present due to its capacity, 747-300 fleet is mostly deployed to cater high density requirements like carrying intending pilgrims to and from Saudi Arabia. Airbus A310 The Airbus A310 is a medium to long range wide-body airplane providing a spacious interior to its travelers. PIA has deployed the A310-300 fleet on Far East, Regional as well as Domestic routes. Boeing 737 The Boeing 737 is one of the world's favorite narrow-body short/medium haul jet airplane. Amongst its many credits, it has the distinction of being the most ordered and produced commercial airplane of all time and Boeing continues to manufacture its variants, to date. PIA’s 737-300 aircraft mostly serve its domestic and regional routes. ATR42 This modern technology turbo prop is the latest type inducted in PIA’s fleet. PIA’s fleet of seven ATR42500 aircraft is configured in comfortable two class seating arrangement. This aircraft has enabled the airline to provide its valued customers the most convenient way to fly to far flung destinations of the country.

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EXHIBIT 4: INTERNATIONAL ROUTE NETWORK - PIAC

EXHIBIT 5: DOMESTIC ROUTE NETWORK - PIAC

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EXHIBIT 6: PIAC SHAREHOLDERS DISTRIBUTION

Categories of Shareholders As at December 31, 2011
Categories of Shareholders Number of Number of Shares Held Shareholders Ordinary 'A' Ordinary Class 'B' Class 1 1 1 62,166 7,825 2,421,698 100 Percentage

Associated Companies, undertakings related parties NIT & ICP National Investment Trust Investment Corporation of Pakistan NBP Trustee Department Directors, CEO and their spouses and minor children Malik Nazir Ahmad, Director Yousaf Waqar Shaffi, Director Executives Public Sector Companies and Corporations Banks, DFIs, NBFIs, Insurance Companies, Modarabas and Mutual Funds Shareholders holding 10 percent or more voting interest (Secretary - Ministry of Defence, Govt. of Pakistan) PIA Employees Empowerment Trust (PEET) Individuals Others

0.00 0.00 0.08

1 1 276 -

1,800,000 10,000 39,247 -

-

0.06 0.00 0.00 -

41

28,081,299 3 0.98

1 2,435,208,439 1,462,515 1 53444 259 231,855,493 79,989,800 97,741,500 34,454 2,927 84.64 8.06 2.78 3.40

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EXHIBIT 7: Six Year Performance Summary - PIAC
2011 OPERATION Route Kilometers Revenue Kilometers Flown (000) Revenue Hours Flown Available Tonne Kilometers (000) Available Seat Kilometers (000) TRAFFIC Revenue Passengers Carried (000) Revenue Passengers Kilometers (000) Passenger Load Factor ( percent) Revenue Freight Tonne Kilometers (000) Kgs. of Excess Baggage & Cargo (000) Kgs. of Mail (000) Revenue Tonne Kilometers (000) Revenue Load Factor ( percent) Avg. Pax Stage Distance (Statute Kilometers) FINANCIAL Operating Revenue (Rs. in million) Operating Expenses (Rs. in million) Operating Profit/(loss) (Rs. in million) Profit/(loss) after tax (Rs. in million) Fixed Assets (Rs. in million) Current Assets (Rs. in million) Current Liabilities (Rs. in million) Long-Term Debts (Rs. in million) Net Worth (Rs. in million) Jet Fuel Prices (Rs. per US Gallon) Cost per A. T. K. (Rs.) RATIOS Earnings per share (Rs.) Debt equity ratio Current ratio SHARE PRICES (Rs. 10 Share) High Low Closing PERSONNEL Average No. of Employees Revenue per Employee (Rs.) A. T. K. per Employee 460,719 84,898 141,727 2,972,014 21,725,390 5,953 15,663,646 72 288,497 93,305 1,335 1,677,646 56 2,631 2010 424,570 81,588 142,940 3,091,344 21,218,879 5,538 5,656,596 74 329,285 104,116 1,454 1,745,746 56 2,827 2009 380,917 80,108 132,155 2,933,253 19,859,050 5,535 13,891,225 70 270,310 95,393 702 1,525,293 52 2,510 2008 311,131 79,580 132,378 2,934,626 19,528,207 5,617 13,925,297 71 319,835 111,088 778 1,580,507 54 2,479 2007 383,574 80,759 132,416 3,125,558 20,313,265 5,415 13,680,916 67 350,758 115,229 1,127 1,593,349 51 2,527 2006 446,570 88,302 141,479 3,369,288 22,092,475 5,732 15,124,413 69 427,006 121,174 1,410 1,801,026 54 2,639

116,550.58 134,477.33 (17,926.76) (26,767.21) 96,685.08 16,562.57 104,783.97 89,535.86 (85,933.56) 270.06 45.25 (9.73) N/A 0.16 3.40 1.61 1.97 18,014 6,470,000 164,984

107,531.59 106,811.51 720.08 (20,785.12) 96,714.94 16,410.13 75,507.09 98,533.01 (62,244.18) 194.57 34.55 (8.39) N/A 0.22 4.02 1.95 2.26 18,019 5,967,678 171,560

94,563.77 98,628.76 (4,064.99) (5,822.43) 133,647.52 16,880.56 68,817.62 105,418.23 (49,054.75) 149.39 33.62 (2.72) N/A 0.25 5.10 2.31 2.61 17,944 5,269,938 163,467

88,863.26 120,499.38 (31,636.12) (36,138.64) 115,123.49 15,039.28 72,528.40 96,926.21 (47,522.42) 216.04 41.06 (17.79) N/A 0.21 7.65 1.70 3.51 18,036 4,926,994 162,709

70,480.73 76,415.81 (5,935.08) (13,398.71) 95,600.63 13,251.33 52,049.54 74,284.84 (11,903.56) 132.93 24.29 (6.61) N/A 0.25 11.30 6.10 6.30 18,149 3,883,450 172,217

70,587.15 79,164.37 (8,577.22) (12,763.42) 79,062.44 18,353.43 41,025.29 62,650.89 (788.03) 123.55 23.49 (6.80) N/A 0.45 16.30 7.05 7.05 18,282 3,861,019 184,295

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EXHIBIT 8: PIAC UNCONSOLIDATED BALANCE SHEET
UNCONSOLIDATED BALANCE SHEET AS AT DECEMBER 31, 2011 2011 2010 Rs. in '000 Non Current Assets Fixed Assets -Property, plant and equipment -Intangibles Long-term investments Long-term advances Long-term deposits and prepayments Current Assets Store and spares Trade debts Advances Trade depositis and prepayments Other recievables Short-term investments Cash and bank balances Total assets EQUITY AND LIABILITIES SHARE CAPITAL AND RESERVES Share capital Reserves TOTAL EQUITY SURPLUS ON REVALUATION OF PROPERTY, PLANT AND EQUIPMENT- NET NON CURRENT LIABILITIES Long-term financing Term finance and sukuk certificates Liabilities against assets subject to finance lease Advance from a subsidiary Long-term deposits Deferred liabilities CURRENT LIABILITIES Trade and other payables Accrued interest Provision for taxation Short-term borrowings Current maturities of: - Long-term financing - Term finance and sukuk certificates - Liabilities against assets subject to finance lease TOTAL EQUITY AND LIABILITIES CONTINGENCIES AND COMMITMENTS

2011 2010 USD. in '000

96,632,229 52,855 96,685,084 4,440,454 9,140,474 13,580,928 3,863,885 8,396,481 316,862 795,465 2,275,838 19,220 894,814 16,562,565 126,828,577

96,645,494 69,444 96,714,938 4,445,572 9,289,712 13,735,284 3,842,539 8,283,109 465,382 1,127,425 1,272,297 25,629 1,393,754 16,410,135 126,860,357

1,074,340 587 1,074,927 49,368 101,622 150,990 42,958 93,351 3,523 8,844 25,302 214 9,948 184,140 1,410,057

1,126,404 809 1,127,213 51,813 108,272 160,085 44,785 96,540 5,424 13,140 14,829 299 16,244 191,261 1,478,559

28,779,674 (114,713,233) (85,933,559)

25,774,948 (88,019,131) (62,244,183)

319,967 (1,275,361) (955,394)

300,407 (1,025,864) (725,457)

7,834,036 31,264,901 10,925,653 47,345,301 989,403 444,685 9,174,189 100,144,132 44,578,472 4,690,092 1,045,281 25,801,027 10,957,001 8,664,107 9,047,988 104,783,968 126,828,577

5,827,329 27,346,957 17,457,280 53,728,778 384,161 6,359,907 105,277,083 32,626,449 3,072,545 1,540,980 22,665,109 7,363,198 2,135,040 8,596,807 78,000,128 126,860,357

87,097 347,598 121,469 526,376 11,000 4,944 101,997 1,113,384 495,615 52,144 11,621 286,851 121,818 96,327 100,594 1,164,970 1,410,057

67,918 318,729 203,465 626,210 4,477 74,125 1,227,006 380,261 35,811 17,960 264,162 85,818 24,884 100,196 909,092 1,478,559

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EXHIBIT 9: PIAC UNCONSOLIDATED PROFIT AND LOSS ACCOUNT

REVENUE - net COST OF SERVICES Aircraft fuel Others GROSS PROFIT

UNCONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED DECEMBER 31, 2011 2011 2010 Rs. in '000 116,550,576 107,531,590 (62,965,435) (52,001,630) (114,967,065) 1,583,511 (6,388,576) (8,791,872) (656,042) (4,219,421) 545,645 (19,510,266) (17,926,755) (10,099,046) (28,025,801) 1,258,594 (26,767,207) (44,707,004) (47,852,170) (92,559,174) 14,972,416 (5,888,031) (7,816,408) (726,147) (2,091,706) 2,269,952 (14,252,340) 720,076 (9,299,818) (8,579,742) (12,205,381) (20,785,123)

2011 2010 USD. in '000 1,295,788 1,253,282 (700,038) (578,145) (1,278,183) 17,605 (71,027) (97,746) (7,294) (46,911) 6,066 (216,912) (199,307) (112,279) (311,586) 13,993 (297,593) (521,061) (557,718) (1,078,779) 174,503 (68,625) (91,100) (8,463) (24,379) 26,456 (166,111) 8,392 (108,389) (99,997) (142,254) (242,251)

Distribution costs Administrative expenses Other provisions and adjustments Exchange loss - net Other operating income

(LOSS) / PROFIT FROM OPERATIONS Finance cost LOSS BEFORE TAXATION Taxation LOSS FOR THE YEAR EARNINGS PER SHARE - BASIC AND DILUTED Loss attributable to: 'A' class ordinary shares of Rs. 10 each 'B' class ordinary shares of Rs. 5 each

(9.73) (4.87)

(8.39) (4.20)

(0.11) (0.06)

(0.10) (0.05)

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EXHIBIT 9: PIAC UNCONSOLIDATED CASHFLOW STATEMENT
UNCONSOLIDATED CASH FLOW STATEMENT 2011 Rs. in '000 CASH FLOWS FROM OPERATING ACTIVITIES Cash generated from operations Profit on bank deposits received Finance costs paid Taxes paid Staff retirement benefits paid Long-term deposits and prepayments Net cash (used in) / generated from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment 3,686,004 45,997 (8,481,499) (566,137) (461,687) 149,238 (5,628,084) 12,509,338 20,457 (8,072,865) (391,460) (334,648) (609,579) 3,121,243 2010 2011 2010 USD. in '000 40,980 511 (94,296) (6,294) (5,133) 1,659 (62,573) 145,796 238 (94,089) (4,562) (3,900) (7,105) 36,378

(3,650,542) (1,429,852) Proceeds from sale of property, plant and equipment 8,149 10,193 Purchase of intangibles (3,214) Proceeds from held to maturity investments 7,289 (3,638,318) (1,419,659)

(40,586) 91 (36) 81 (40,450)

(16,665) 119

Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of share capital Repayment of long-term financing Proceeds from long-term financing Advance from a subsidiary Redemption of term finance certificates Proceeds from long-term deposits

(16,546)

3,004,726 (7,107,615) 14,619,362 989,403 (2,560) -

2,494,592 (6,854,666) 11,683,250 (5,120) 18,314 (7,070,094) 266,276

33,406 (79,021) 162,535 11,000 (28) 673 (65,954) 62,611 -

29,074 (79,891) 136,168 (60) 213 (82,401) 3,103

60,524 Repayment of obligations under finance lease - net (5,932,296) Net cash generated from financing activities (Decrease) / increase in cash and cash equivalents CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR CASH AND CASH EQUIVALENTS Cash and bank balances Short-term borrowings 5,631,544

(3,634,858) (21,271,355) (24,906,213) 894,814 (25,801,027)

1,967,860 (23,239,215) (21,271,355) 1,393,754 (22,665,109)

(40,412) (236,491) (276,903) 9,948 (286,851)

22,935 (270,853) (247,918) 16,244 (264,162)

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EXHIBIT 10: AIRLINE INDUSTRY ANALYSIS

2006 Revenues growth Operating expenses growth Fuel Non-fuel Wages & salaries Exchange loss Operating balance Finance cost Profit/ (loss) before tax Tax Profit/ (loss) after tax Memorandum item: Average fuel cost US$/barrel 70.6 10.2 79.2 18.0 33.2 46.0 10.4 0.5 -8.6 4.8 -13.2 0.5 -12.8

2007 70.5 -0.2 76.4 -3.5 30.3 46.1 11.9 0.7 -5.9 7.1 -13.1 0.3 -13.4

2008 88.9 26.1 120.5 57.7 46.2 74.3 14.2 24.1 -31.6 8.4 -40.0 3.8 -36.1

2009 94.6 6.4 98.6 -18.1 31.2 67.4 17.2 6.5 -4.1 9.2 -12.4 1.4 -4.9

2010 107.5 13.7 106.8 8.3 45.2 61.6 18.1 2.1 0.7 9.3 -8.6 1.1 -20.8

67.1

72.4 90.1 62.5 79.9 Source: PIA Annual reports

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EXHIBIT 11: GLOBAL AIRLINE INDUSTRY ANALYSIS

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EXHIBIT 12: PIAC INTEREST RATES AND SENSITIVITY

The Corporation’s exposure to the risk of changes in market interest rates relates primarily to the following:

The following table demonstrates the sensitivity to a reasonable possible change in interest rates, with all other variables held constant, on the Corporation’s loss before tax.

EXHIBIT 13: PIAC FOREIGN EXCHANGE SENSITIVITY

The following table demonstrates the sensitivity of financial instruments to a reasonable possible change in the foreign currency exchange rates, with all other variables held constant, on (loss) before tax:

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EXHIBIT 14: PIAC INTEREST RATES (LIQUIDITY RISK)

The following table shows the Corporation's remaining contractual maturities of financial liabilities, including estimated interest payments:

EXHIBIT 15: PIAC CREDIT RISK

The carrying amount of financial assets of PIA as at December 31, 2011 represents the maximum credit exposure, which is as follows:

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EXHIBIT 15: BUSINESS RECORDER NEWS

PIA to get Rs 49 billion guarantees: five-year business plan approved by ECC
February 27, 2013

The Economic Co-ordination Committee (ECC) of the Cabinet approved on Tuesday an interim ''business plan'' for Pakistan International Airlines (PIA) and directed to issue fresh continuing guarantees to the tune of Rs 49 billion during the ongoing year to meet the critical liquidity condition of the corporation. Finance Minister Saleem Mandviwalla who chaired the meeting approved five-year business plan with the Ministry of Defence request that Finance Ministry would arrange $46 million with or without government guarantee so that PIA could acquire five narrow body aircraft to replace its ageing fleet. The ECC also approved the proposal for extending loans/guarantees to the tune of Rs 33.5 billion until June 2013 as well as borrowing by the national flag carrier of Rs 13.50 billion from National Bank of Pakistan (NBP) against letter of comfort to be subsequently replaced by government guarantees. The approved measures/strategy will provide for; (a) the fuel efficiency through fleet modernisation; (b) optimum fleet deployment on the network; (c) introduction of additional frequencies on high demand high yield routes; (d) revenue enhancement and increase in market share; (e) separation of the core airlines business activities from non-core (SBUs); (f) restructuring of PIA liabilities to reduce financial cost. The ECC approved the margin for oil marketing companies and dealers to be increased by Rs 0.10 per liter on high speed diesel on a summary moved by Ministry of Petroleum and Natural Resources seeking review of OMCs and dealers'' margins for its review on yearly basis. Another summary was submitted by Ministry of Petroleum and Natural Resources seeking its approval for the recovery of Parco claims from freight pool (IFEM), the ECC directed Ogra to continue with the implementation of earlier ECC decision dated August 16, 2011 and reimburse the price differential to Parco as per existing practice. Petroleum and Natural Resources also moved the summary seeking approval of the ECC to the formula for fixation of ex-refinery price of high speed diesel (HSD). The ECC approved the proposed mechanism/formula for computation of HSD price due to change of benchmark price from HSD 0.5 sulphur to HSD 0.5 percent Sulphur (Euro-II) which will remain in force till June 30, 2014. The ECC banned the marketing of high speed diesel with Sulphur content more than 0.5 percent (Euro-II) grade in the country. The ECC agreed to the proposal for allocation of first 20 mmcfd gas from SSGC share from new discoveries to 100 MW Nooriabad Industrial Estate power plants as requested by the government of Sindh and subsequent to a summary moved by Ministry of Petroleum and Natural Resources regarding approval for allocation of gas from new sources. The ECC further directed that the allocation of the said gas from SSGC should be placed at the disposal of Ministry of Water and Power till the power plant at Nooriabad Industrial Estate gets operational.

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