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This case has been prepared as a class project. All the characters in the case are imaginary and any resemblance to a real person or organization is purely co-incidental and unintended.

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INTRODUCTION

On 16th September 2014, Mr. Khalid Hussain made to the breaking news on all television channels across Pakistan by standing up against the prevalent VIP culture. PIA flight PK 370 got delayed by more than 2 hours because the famous political leader Mr. Rehman Malik who had to board the aircraft was late for his flight. As a result the entire passengers were kept waiting. At first the PIA staff lied to the passengers citing "technical reasons" but eventually they admitted that it was none other than former minister Rehman Malik who made the life of 250 passengers miserable. The passengers refused to let Rehman Malik on the plane and he was eventually thrown out. The video made by the passenger Mr. Arjumand went viral and made headlines on all television channels and triggered a debate that the major national carrier was held hostage which resulted is millions of rupee losses while giving a bad name to the organization. Also this incident highlighted that the politicized state of affairs in running PIA and triggered an investigation into the corporate affairs of PIA. The prime minister of Pakistan took notice of this issue and formed an independent investigation committee comprising of 4 people to investigate this issue further and also asked the committee to give recommendations to ensure such incidents did not take place in future. Mr. Ammar Rehman, a former retired high court judge, was appointed as the chairman of the committee. Also the committee was given 2 months to probe into the matter and share their findings.

HISTORY

Pakistan International Airlines can trace its origins to the days when Pakistan had not yet gained independence from the British Raj. In 1946, the country's founder Muhammed Ali Jinnah realized the need for a flag carrier for the prospective country and requested financial help from a wealthy businessman Mirza Ahmad Ispahani and Adamjee Haji Dawood for this purpose. Around that time, a new airline Orient Airways, was registered in Calcutta on 23 October 1946. In February 1947, the airline bought three DC-3 airplanes from a company in Texas and obtained a license to fly in May of the same year. The airline started its operations in June, offering services from Kolkata to Sittwe and Yangon. On 14 August 1947, Pakistan came into being and Orient Airways started relief operations for the new country. It was the first and only Muslim owned airline in India.

On 7 June 1954, Orient Airways started its operations by offering flight services between East and West Pakistan, with service from Karachi to Dhaka, due to sustained losses being suffered by the airline, the Government of Pakistan proposed that Orient Airways merge with a new national airline. On 11 March 1955, Orient Airways merged with the government's proposed airline, becoming Pakistan International Airlines Corporation. The newly formed airline not just offered services on its domestic routes but also inaugurated its first international route, Karachi-London Heathrow Airport via Cairo and Rome.

The appointment of Air Marshal Nur Khan as the Managing Director of PIA in 1959 heralded an era of great successes for PIA. In March 1960, PIA wet-leased a Boeing 707 from Pan American airlines, thereby becoming the first Asian airline to induct a jet-aircraft in its fleet. With the newly acquired aircraft, the airline introduced its first trans-Atlantic route Karachi-New York JFK via London in 1961. In 1962, it expanded its fleet by placing orders for Boeing 720s, Fokker F27s, and Sikorsky helicopters. In the same year, one of Boeing 720s flown by Captain Abdullah Baig flying from London to Karachi made a world record for the Speed over a commercial airline service for powered landplanes of 938.78 km/h, a record which still holds to this day.

Upon the establishment of ties between Pakistan Government and People's Republic of China, PIA started flying to Beijing in 1964, becoming the first airline of a non-communist country flying to the People's Republic of China. At the outbreak of Indo-Pakistani War of 1965, the Pakistani Armed Forces seek PIA's services for logistics and transport purposes.

The 70s decade was marked by resumption of transatlantic flights, introduction of new destinations, appointment of Nur Khan as its executive for the second term, and the beginning of financially successful period for the airline. When the political situation in East Pakistan (present day Bangladesh) started deteriorating in early 70s, the Pakistan Army once again used PIA's services to airlift soldiers and ammunition to East Pakistan. Most flights had to detour to Sri Lanka during trips between West Pakistan and East Pakistan. With the establishment of cordial ties between the Libyan and Pakistani governments in early 70s, PIA added a new international route, Tripoli, to its map in 1972. It also signed an agreement with Yugoslav airline JAT. PIA acquired McDonnell Douglas DC-10s in 1973 and used those planes to replace Boeing 707-300s. In 1974, PIA launched Pakistan International Cargo, offering air freight and cargo services. In 1975, PIA introduced new uniforms for air hostesses which were chosen through an open competition, with the winning entry designed by Sir Hardy Amies, the designer of Her Majesty Queen Elizabeth II.

The latter half of the decade witnessed further expansion of PIA's fleet with the introduction of Boeing 747s through either leased or purchased aircraft. During this decade, airline gained considerable popularity and was regarded as Asia's best airline. For the first time since its inauguration, PIA started providing technical and administrative assistance or leased aircraft to foreign airlines including Somali Airlines, Philippine Airlines, Air Malta and Yemenia. A subsidiary of PIA also started providing hotel management services in United Arab Emirates towards the end of the decade.

The 1980s decade began with the opening of a cargo handling centre at Karachi airport, duty-free shops, the first C and D safety checks on its entire fleet, as well as the introduction of airline's first Airbus A300B4-203 aircraft. In 1984, the airline introduced Night-Coach service as a low-cost alternative to day-time domestic flights. In the following years, PIA Planetarium was inaugurated in Karachi which was followed by planetariums in Lahore and Peshawar. These planetariums featured retired PIA aircraft on display for educational or observational purposes. Also in 1985, five new Boeing 737-300s airplanes were introduced in PIA's fleet, making PIA the first Asian airline with such diverse aircraft fleet. In late 1987 and early 1988, services to Malé and Toronto were introduced. In 1989, Shukria Khanam became the first woman pilot to obtain a license to fly a commercial passenger plane but never joined PIA as a pilot. A year later, First Officer Maliha Sami became the first female pilot of PIA when she took off on Karachi-Panjgur-Turbat-Gwadar route.

In mid-1980s, PIA also helped establish Emirates by leasing two of its airplanes - Airbus A300 and Boeing 737 - as well as providing technical and administrative assistance to the new carrier.

PIA has a long history of milestones in aviation, such as being the first Asian airline to operate a jet aircraft and Boeing 737aircraft; It today remains by far Pakistan's largest airline with a fleet of 31 airplanes and at least 10 more on order. Furthermore, PIA was the launch customer to operate the 777-200LR model

March 1993 AVM Farooq Umar became MD PIA and also open skies from Karachi to Dubai were declared and 12 private air lines were allowed to operate domestically in Pakistan. Both steps came simultaneously and put great pressure on PIA's financial performance. Farooq Umar to meet the challenge, fought the battle of open skies and opened up 6 new routes to the Persian Gulf and CIS countries along with tourist’s attraction air safari

On 5 March 2007, the European Commission banned all but 9 planes of PIA's 42-plane fleet from flying to Europe citing safety concerns of its aging fleet. The ban was imposed following an on-site visit led by Federico Grandini, European Commission’s Air Safety Administrator. On 29 November 2007, the EU completely removed the ban and PIA's entire fleet was permitted to fly to Europe.

To sum up, there was a time when PIA was among the top 10 best airlines of the world. It was even sometimes referred as best flag carrier because of its fabulous services. 70’s and 80’s are known as the golden era of PIA. PIA was considered to be one of the best airlines in the world between 1962 and 1980. It constantly scored high for having best in-flight entertainment, business class, most convenient connections, delicious cuisine and a wide selection of beverages. PIA was enjoying rapid growth within and outside Pakistan. It was also been noted for having the most stylishly dressed air hostesses.

PIA CORPORATE MANAGEMENT STRUCTURE

Pakistan International Airlines Corporation (PIAC) is majority owned by the Government of Pakistan (87% shares) while the remainder (13% shares) by private shareholders. The airline is under the administration of Ministry of Defence the chairman of which is Muhammad Mian Nawaz Sharif. The airline is managed by managing director as well as the Board of Directors. The Board consists of nine independent non-executive members and has four sub-committees: an Audit Committee, Brand and Advertising Committee, Finance Committee, and Human Resource Committee each having its own charter and chairman. The MD leads the executive management of staff who run the airline. The airline's main headquarters are located at Karachi Airport while smaller sub head offices are located in several cities within Pakistan.

COMPOSITION OF THE BOARD OF DIRECTORS – (NON EXECUTIVE)

Mr Nasser N.S. JafferChairman-PIA

Mr Nasser N. S.Jaffer is a nominated Director since July, 2014, He holds an Associated Science Diploma in Agriculture from University of California. He is the CEO of Jaffer Group of Companies and Chairman on its Board of Directors. He was Director of Jaffer Brothers (Private) Ltd. from 1969 to 2003, responsible for the chemical, insecticides and pesticides businesses, as well as the fertilizer and machinery business from time to time. In 2003 he took over as Chairman and CEO of the company to manage the overall business to ensure growth, profitability and business satisfactory results to the stakeholders. He is on the Board of other business, philanthropy, social and health associations such as the Kidney Centre and Honorary Secretary Modern Club and Modern Society. He also held office as the Honorary Consul of the Philippines till 2010. Mr Jaffer is on the board of Shell Pakistan Limited’s Since June 13, 2011. He was on the Board of Pakistan International Airlines Corporation from July 3, 2013 to August 01, 2013. He is also the Chairman of PIA Investment Limited.

Mr Ghiasuddin AhmedMember, PIA Board of Directors

Mr Ghiasuddin Ahmed is a nominated Director since September, 2013. Mr Ahmed holds a Master’s Degree in English Literature; Master’s in Public Administration (Public Enterprises) from International Institute of Public Administration Paris (IIAP); Bachelor’s Degree in Law from the University of Punjab; and a Diploma on Project Appraisal and Management from Harvard Institute, United States of America. During his career as a civil servant, he held senior positions in the provincial and federal Government including Federal Secretary Establishment Division as well as Planning & Development Division. He has served as Member as well as Vice Chairman/Acting Chairman of National Electric Power Regulatory Authority (NEPRA). Mr Ahmed has participated in a number of national and international conferences and workshops. He has also served as Member Board of KESC and National Database and Registration Authority (NADRA). Mr Ahmed is presently serving as Chairman Board of Directors of Islamabad Electric Supply Company. He is Member of PIA Board’s Audit Committee, Board’s Human Resource & Remuneration Committee and Board’s Customer Services Committee.

Malik Nazir AhmedMember, PIA Board of Directors

Malik Nazir Ahmed is an elected Director since March, 2008. He is re-elected twice as Director effective April 2011 and May 2014 respectively. He holds Bachelor’s Degree in Laws from Punjab University. Malik Ahmed is a renowned Businessman and is presently CEO of Nam International (Pvt.) Ltd, Namco Associates (Pvt) Ltd, and Executive Director of Wire Manufacturing Industries Ltd. (WMIL). Malik Ahmed has attended various courses in Business and Administration from Lahore Chamber of Commerce and Industry of which WMIL is a Corporate Member. He actively participates in welfare activities. He has attended many business forums and trade exhibitions within and outside Pakistan. He is Chairman of Board’s Information Technology Steering Committee and Member of PIA Board’s Audit Committee, Board’s Human Resource and Remuneration Committee, Board’s Customer Services Committee, Board’s Information Technology Steering Committee and Board’s Fleet Management Committee.

Syed Yawar AliMember, PIA Board of Directors

Syed Yawar Ali is a nominated Director since September, 2013. He holds Bachelor’s Degree in Chemical Engineering and Master’s Degree in Management Science from Stevens Institute of Technology. He is a ‘Certified Director’ from Pakistan Institute of Corporate Governance (PICG) in collaboration with IFC (the World Bank Group). He had participated in different conferences, seminars and workshops on aviation held nationally and internationally. Syed Yawar Ali joined the family business, Packages Limited and then became Managing Director of Milk Pak Ltd. He is presently serving as Chairman of Nestlé Pakistan Limited; Wazir Ali Industries Limited and remained Chairman of Pakistan Dairy Association. He is serving as a Member on the Board of State Bank of Pakistan, Agricultural Development Bank of Pakistan and Lahore Electric Supply Company. Currently he is Vice-President of the India-Pakistan Chamber of Commerce and Industry and is heading a committee to ‘Promote Trade with India.’ He was on the Board of Pakistan International Airlines Corporation twice from June, 1991 to March 05, 1993 and June 26, 1997 to January 20, 2000, respectively. He is Chairman of PIA Board’s Customer Services Committee, and Member of Board’s FinanceCommittee, Board’s Information Technology Steering Committee and Board’s Fleet Management Committee.

Mr Atif Aslam BajwaMember, PIA Board of Directors

Mr Atif Aslam Bajwa is a nominated Director since September, 2013. Mr Bajwa is a graduate from Columbia University, New York, USA. He is a seasoned banker and has 30 years of diverse national and international banking experience. Presently, he is working as President & Chief Executive Officer of Bank Alfalah Limited. He started his career in 1982 with Citibank, Karachi, and worked on various senior level positions. Mr Bajwa has worked for ABN AMRO Bank in Pakistan, Singapore and Amsterdam. He has served as President and Chief Executive Officer of MCB Bank Limited, Pakistan, the 4th largest Bank in Pakistan as well as Soneri Bank Limited, Pakistan, as President & Chief Executive Officer. He has also served as President of Abu Dhabi Group. He is Chairman of PIA Board’s Audit Committee and Member of Board’s Finance Committee and Board’s Fleet Management Committee.

Syed Muhammad Ali GardeziFederal Secretary Aviation & Member, PIA Board of Directors

Syed Muhammad Ali Gardezi, Federal Secretary Aviation Division is a nominated Director on PIA Board since July 3, 2013 and he is a Civil Servant and has held different positions including Commercial Secretary in Hungary; Commissioner Sibi; Principal Secretary to Governor Baluchistan; Director Finance of Multan Development Authority; Managing Director of PSIC, Federal Secretary Labor Division; Commissioner Multan Division; Chairman National Highway Authority; and, Secretary Ministry of Climate Change. He is also serving as Chairman of Pakistan Civil Aviation Authority, and was Acting Chairman from August 6, 2013 to October 16, 2014.

Dr Miftah IsmailSpecial Assistant to Prime Minister of Pakistan & Member, PIA Board of Directors

Dr Miftah Ismail is a nominated Director since September, 2013. He holds Bachelor’s Degree in Business Administration from Duquesne University, Pittsburgh, USA; Master’s Degree in Public Policy and Management; and, Doctorate in Public Finance and Political Economy from The Wharton School, University of Pittsburgh, USA. He is presently working as Special Assistant to Prime Minister of Pakistan ; Chairman of Board of Investment, Pakistan; Vice Chairman of Punjab Board of Investment and Trade, Chairman of Delmare Foods (Pvt) Ltd, Chief Executive Officer and Director of Ismail Industries Ltd and Astroplastics (Pvt) Limited, Director of Sui Southren Gas Company Limited and Flexipack Films (Pvt) Ltd, President of Board of Trustees, Karachi American School; and Member, Advisory Committee, Institute of Business Administration. He has served as President of Rotary Club of Karachi Sunset Millennium, President of Institute of Business Administration, Chairman of Punjab Board of Investment and Trade and Economist in International Monitory Fund, Washington DC. He is Chairman of PIA Board’s Human Resource & Remuneration Committee and Member of Board’s Finance Committee and Board’s Information Technology Steering Committee.

Mr Aslam KhaliqMember, PIA Board of Directors

Mr Aslam Khaliq is a nominated Director since February, 2014. Besides CHAL Foundation and The Hunar Foundation (Not for Profit- NGO’s) Chairmanship Mr. Aslam Khaliq is also presently serving as Chairman Reckitt Benckiser Pakistan. He has been former Chairman and Advisor of Pakistan Tobacco Company where he worked for over 40 years. Furthermore, He has also served on the Boards of OGDCL, National Data Base & Registration Authority (NADRA), Intellectual Property Rights Organization (IPO-Pakistan), Pakistan Atomic Energy Bio Sciences (Pvt.) Limited & Islamabad Stock Exchange, JS Global Capital Limited. Besides being Honorary Consulate General for Bulgaria, he is on the Board of Governors of Lahore University of Management Sciences (LUMS) since 2003.He was on the Board of Pakistan International Airlines Corporation as Acting Chairman from July 3, 2013 to August 05, 2013. He is Chairman of PIA Board’s Fleet Management Committee, Member of Board’s Audit Committee,Board’s Human Resource & Remuneration Committee, Board’s Finance Committee and Board’s Customer Services Committee.

Dr Waqar Masood KhanMember, PIA Board of Directors

Dr Waqar Masood Khan is Federal Secretary Finance and nominated Director since July, 2013. He holds Ph.D Degree in Economics and Masters in Arts in Political Economy from Boston University Massachusetts, USA and also Masters in Arts, in Economics and L.L.B from University of Karachi. Dr. Khan has held several prestigious positions in the Federal Government including Special Secretary to the Prime Minister, Secretary Finance Division, Secretary Economic Affairs Division and Secretary, Textile Industry. He also has the experience of teaching micro as well as macro economics at Boston University Massachusetts, USA as Assistant Professor. Apart from having several institutional and personal publications at his credit, he has served on the Boards of primes national and international institutions including Islamic Development Bank, National Bank of Pakistan, and Pak-Oman Investment Company etc. Presently, he is serving as Federal Secretary, Finance Division. He is Chairman of PIA Board’s Finance Committee.

Mr Muhammad Azam SaigolMember, PIA Board of Directors

Mr Muhammad Azam Saigol is a nominated Director since September, 2013. He holds Bachelor’s (Hons) Degree in Arts from Oxford University, UK. Mr Saigol is an industrialist and has interests in textile, electronics/electrical, international trading automobile, energy and banking industries. Mr Saigol is presently serving as Chief Executive of Kohinoor Industries Limited and Kohinoor Power Company Limited. He is also serving on the Boards of Pak Elecktron Limited and Saritow Spinning Mills Limited.

Mr Yousaf WaqarMember, PIA Board of Directors

Mr Yousaf Waqar is an elected Director since April, 2011. He has been re-elected as Director effective May 2014. He has done BBA from Lahore School of Economics. He is a ‘Certified Director’ from Pakistan Institute of Corporate Governance (PICG) in collaboration with IFC (the World Bank Group). 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 Member of Board’s Human Resource & Remuneration Committee and Board’s Information Technology Steering Committee.

Mr Younus M. KhanSecretary-PIA

Mr Younus M. Khan is the 18th Corporate Secretary of PIA. Besides a Master of Business Administration, he also hold Bachelor’s Degree in Engineering. He is a ‘Certified Director’ from Pakistan Institute of Corporate Governance (PICG) in collaboration with IFC (the World Bank Group). During his career at Pakistan International Airlines he had the opportunity of working at various technical and managerial positions including the key positions like Special Assistant to Managing Director and Principal PIA Training Center. He had participated in different conferences, seminars and workshops on aviation held in Pakistan and around the World. Mr Khan is ex-officio Member of CSR Committee, and ex-officio Secretary of Board’s Audit Committee, Board’s Human Resource &

Remuneration Committee, Board’s Finance Committee, Board’s Customer Services Committee, Board’s Information Technology Steering Committee and Board’s Fleet Management Committee of the Board. He is also Chairman of Women's Protection Committee of PIA.

CHIEF INTERNAL AUDITOR : MR JAWED MANSHA

EXISTING MANAGEMENT OF PAKISTAN INTERNATIONAL AIRLINES CORPORATION

The following is the existing management of PIA Corporation:

Managing DirectorMr. Shahnawaz Rehman

Chief Financial OfficerMr. Nayyar Hayat

Director - Engineering & MaintenanceMr. Maqsood Ahmed

Director - Corporate Planning & AccountabilityMr. Anjum Amin Mirza

Director - Information TechnologyMr. Syed Aijaz Mazhar

Director - Safety & Quality AssuranceCapt. S. Adnan Haris

Director - Flight OperationsCapt. Salman Azhar

Director - Human Resource, Administration & CoordinationMr. Rashid Ahmed

Officiating Director - MarketingMr. Rashid Aziz

Director - Precision Engineering ComplexAVM Sohail Ahmed Malik

Director - MRO, Training & EASA-145Mr. Amir Ali

Director - Food Services & Flight ServicesMr. Amanullah Qureshi

Executive Director- Skyrooms (Pvt) Ltd

Ms Ghazala Rashid

Director Flight Operations

Captain Qasim Hayat

Director Airport Services

W J Bornshin

Director (Without assignment)

Khurram Mushtaq

Director Engineering (Incumbent)

Saminuddin Naqvi

Chief Legal Officier

Mr. Waseem Bari Salimi

Director-Vigilance & Monitoring

Flt Lt (Retd) Waseem Ahmed Khan

External Auditors

Messrs A.F> Fergusan & Co.

Chartered Accountants

Member firm of PriceWaterhouse Coopers (PwC)

Messrs KPMG Taseer Hadi & Co.

Chartered Accountants

Member firm of KPMG International Corporative

INVESTIGATION OF THE COMMITTEE

The committee under the supervision of Mr. Ammar Rehman started its investigation from various angles. Several rounds of interviews were held with existing employees and management to understand the prevailing problems. It was ensured that the confidentiality of the employees would be maintained to encourage employees to share their point of view. However, to get candid opinion, former management and staff including the former Managing Directors were also interviewed to understand the issues and identify its root cause.

The following issues were identified during the investigation:

MISSING CHARACTERISTICS OF BOARD OF DIRECTORS

The investigation committee interviewed the Board of Directors of PIA. It was observed that the existing board of directors did not fulfilled the requirements of being on the board that is they had the occupational education, knowledge, respectability and the experience to complete their tasks properly as board members. Also, they did not have direct or indirect commercial relations with the company, a related party of the company or with shareholders. The board members had experience in fields such as textile and healthcare which have no relevance to airline industry since it requires technical knowhow to make important decisions about running the airline efficiently.

It was observed that they did not protect the rights of the beneficiaries within the company and did not remain impartial since the organization was under the administration of Ministry of Defence headed by the Prime Minister. As a consequence all final approvals were made by Ministry of Defence which at times took decisions which were not in the best interest of PIA to ensure that the decisions did not have any negative repercussions from general public.

BOARD ROOM PRACTICES

Ideally, all the directors, particularly the non-executive directors, should be able to contribute effectively to the decision making process. For this they must be supplied with sufficient timely information, in advance of board meeting, relating to all the matters the board will be discussing in the next meeting. However, in case of PIA, no timely information was available and agenda for the meeting was seldom not shared with all members or changed during the meeting. Although there are written procedures for conduct of board meetings but compliance to these procedures is not monitored by an appropriate committee.

SHAREHOLDERS

One of the board member pointed out that since in PIA 87% of the total shares were owned by the government while the remaining were owned by private shareholders, the board had to make decisions that were in the best interest of the government. The ultimate decision was with the shareholders which was the government. Although he emphasized that as impartial board member, it was obligatory for him to work for all shareholders and not restrict himself to a group of shareholder, he could not fulfil this duty due to the

involvement of the government. This prevented the board from becoming INED and made it ineffective.

CHARACTERISTICS OF BOARD

When detailed interviews were conducted with each board member, it was observed by the committee that the board had missing characteristic of suitability and sound judgement. Some of the board members did not have understanding of marketing, finance and other disciplines relevant to the success of a large corporation in today’s business environment and had little understanding of the Company's business and technology and educational and professional background required for the success of the organization.

BALANCE IN THE BOARD

Because the board was non independent, the board lacked:

1. Knowledge and talents to participate meaningfully in board proceedings2. An understanding of individual interests of all stakeholders3. Independence and courage to differ with government where it is necessary4. The power to overrule the government where collective interest of all stakeholders

demands

INABILITY TO PERFORM BOARD FUNCTIONS: OVERSIGHT, DIRECTIONAL AND ADVISORY

It was observed that the board of directors were appointed based on their contacts with the government officials and were not appointed based on their knowledge, skills, abilities and experience. Hence they lacked the competencies required to work effectively as board members and perform their duties of oversight, directional and advisory functions in the best interest of the company.

SHADOW DIRECTOR

The committee also observed after interviewing the board of directors the existence of ‘shadow director’ in PIA which was namely the existing government. The shadow director, that is the government, accordance with whose directions or instructions the directors of PIA were accustomed to act and could not go against the wishes of the government. Although the government officials did not sit in the board meetings but exerted influence through directors who sat in the meeting. Terms were being dictated by government officials who acted as shadow directors. As a consequence, all decision making was done by the government which had complete control over PIA.

RUBBER STAMP BOARD OR YES MAN BOARD

Another issue observed by the committee was that the board of directors were literally rubber stamp and yes man board members. Anything that came top down from the Ministry of Defence was accepted without any resistance from the board of directors. Although the board members could take an action independently but in practice followed the advice or counsel of the government officials and approved anything that was presented to them even if it was not in the best interest of PIA. As a result, this failed the very purpose of having a board in the first place whose purpose was to oversight all matters and made decision impartially which never happened due to the involvement of the government officials.

CONTROVERSY RELATED TO NUMBER OF DIRECTORS

At present there are eighteen directors in PIA against approved posts of twelve hence PIA has 50 per cent more top executives than allowed by law. The Spokesman of PIA, Mashood Tajwer while talking to the committee agreed that there were 18 directors. According to details, the PIA Board of Directors in its 255th meeting had declared that the number of directors in PIA could not exceed twelve but the incumbent management had promoted six extra directors which had resulted in issuance of at least five notices of contempt of court against Director Human Resource, Admin and Coordination, Mr Aijaz Mazhar.

OVERSTAFFING

During the investigation, it was revealed by a former Managing Director that PIA has the singular distinction of employing the highest number of staff per aircraft and over Rs200 Billion of accumulative losses. Despite being overstaffed, PIA hired PAF officers on senior posts during his tenure in the procurement department which led to a lot of controversy within the organization. However, the former Managing Director proposed to the board of directors to downside staff to reduce operating expenses, but his proposal was never accepted due to government involvement in running the state of affairs of PIA.

GHOST EMPLOYEES

It was revealed to the committee by the employee union head that a lot of ghost employees existed within PIA that were the major reason for the operational inefficiencies. These ghost employees were appointed by the government and received regular salaries but never came to work.

DEMOTIVATED STAFF

The overwhelming majority of the staff when interviewed by the committee stated that the major source of concern and the root cause for demotivation was constant rumours for years that the airline will be privatized which would lead to massive layoffs. Also, due to

centralized decision making and low salaries the employees did not have any say in the running of the company and wanted to move to foreign airlines offering lucrative packages.

Moreover, government announced pay increment was never followed. Also the contractual staff pointed out that there was a huge difference in the salaries of the contractual and permanent staff which demotivated them. The absence of time bound policies on holding promotion boards on regular basis was a source of demotivation for them as well. This issue was pointed out several times by the board of directors to the Ministry of Defence but no action had been taken to rectify this issue.

POLITICAL APPOINTMENTS WITHIN ORGANIZATION

Another issue identified during the investigation was political appointments. Many former employees pointed out that PIA being the government organization is influenced heavily by government personal. Selection and recruitment is not done on merit and is greatly influenced by politicians and government officials. Political appointments were a norm and new appointments took place with every government change. “Being a rubber stamp board, no action could be taken against this serious irregularity”, said a board member.

EMPLOYEE UNIONS

The existing directors when interviewed raised concern about the presence of employee unions which resulted in political activities such as strikes that adversely affect the origination. For instance there have been frequent cases of pilots protesting by following ‘Go Slow’ which have caused delays in flights due to non-availability of pilots which have translated into millions of rupees loss to the airline.

OPERATIONAL ISSUES

The technical staff highlighted another critical issue of PIA aircrafts grounded due to non-availability of spare parts. This was the major cause of delay and cancelation of flights. Since the spare parts are very costly and technical issue in spare parts cannot be repaired within Pakistan due to restrictions by the manufacturer, the parts have to either be repaired abroad or replayed completely. There is a delay in purchasing of spare parts due to non-availability of funds.

INCREASE IN OIL PRICES

The director of finance shed light on the external factors namely oil price increase which is a major expense in the income statement. He explained to the committee that increase in oil prices have been witnessed in the international markets over the last couple of decades. Global demand for oil has been increasing, outpacing any gains in oil production and excess capacity. A large reason is that developing nations, especially China and India, have been growing rapidly. These economies have become increasingly industrialized and urbanized, which has contributed to an increase in the world demand for oil. In addition, in recent years fears of supply disruptions have been spurred by turmoil in oil-producing countries

such as Nigeria, Venezuela, Iraq, and Iran. As a result, the profit margins for PIAC have shrunk due to high operating cost mainly due to increased oil price.

“That was the time airlines had parked their aircraft to save fuel costs. PIA should have cut back on loss-making routes aggressively but that didn’t happen,” said a former director of marketing.

DEPLETED FLEET

A senior pilot when interviewed said “Airlines must switch to newer aircrafts after every 10 years or so. PIA’s fleet replacement had been unduly delayed. Also airlines such as Emirates that were created by the indirect help of PIA currently have the latest Airbus A380, with exceptional in house entertainment, higher passenger carrying capacity and fuel efficiency. It is high time PIA upgraded its fleet and shifted to new fuel efficient aircrafts.”

Industry officials when interviewed blamed this myopic approach for many of the problems faced by the national carrier. The said “Government should have made a capital injection on yearly basis like it did in 2003. That would have helped it buy desperately needed narrow body aircraft”. The board of directors also presented upgrade of fleet to the Ministry of Defence, however their proposal was not accepted since the airline was a loss making proposition and the government was not in favour of making investments through debt or equity financing. Exhibit 1 gives complete details of the existing fleet.

MAINTENANCE ISSUES

PIA has had a history of problems of maintenance and repairs. It was stated by a former procurement director during an interview by the committee members that tender for the maintenance of the aircrafts has been given to the company that does not have international reputation. It is further stated that PIA tends to sublet dubious and substandard companies with no international credibility and little experience for maintaining its fleet. During the investigation, Saleem Irshad, retired engineer, claims that high-ups of PIA have financial stake in these small and substandard companies.

Lack of Investment and Depreciation of Rupees

The existing Finance director confirmed that PIA had purchased Boeing 777 aircrafts against debt in US Dollars which was a mistake. Depreciation of dollar over the last decade had resulted in increase in overall debt in Pakistani Rupees.

COMPETITORS DUE TO OPEN SKIES POLICY

The existing Managing Director claimed that the real fault for the mess lied with the open skies policy. PIA is carrying 43.1% of the international traffic from Pakistan, followed by the

second highest market shareholder Emirates at 14% due to Open Skies Policy. PIA’s market share is constantly decreasing with every passing year due to this policy.

Open skies policy was enforced in Pakistan, after a number of incidents caused by some non-professional decisions taken by the PIA management of the time, coupled with gross mishandling of passengers and their baggage.

Because of the haste with which this policy was implemented without doing any homework, ignoring some sane suggestions from within the PIA and CAA, it backfired, as was expected.

Exhibit 2 and 3 give details of the existing domestic and international routes of PIA.

COMMITTEE MEETING

After doing extensive research and interviewing all stakeholders, the committee members were astonished about the sorry state of affairs of PIA. With only a week left before the conclusion of the 2 months deadline for submission of final report, Mr. Ammar Rehman had a challenging task of ahead of him of highlighting all exiting issues and come up with recommendations that would solve all problems of the national airlines and help it gain its past glory.

QUESTIONS

1. List and briefly discuss the main problems faced by PIA.2. Where would you place the responsibility of ineffectiveness of the board? 3. If PIA was not under the Ministry of Defence, would the issues be the same?4. If board room practices are followed in true spirit, what would be its impact on the

performance of PIA?5. What are the consequences of having a rubber stamp board in this case?6. Should PIA proceed with the privatization or not?7. What should Mr. Ammar Rehman recommend to the government?8.

EXHIBIT 1: FLEET STRUCTURE

PIA's fleet of modern aircraft are 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 777The 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 777-300ER, all of them are well loved by PIA's seasoned travellers 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 747The 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 A310The Airbus A310 is a medium to long range wide-body airplane providing a spacious interior to its travellers. PIA has deployed the A310-300 fleet on Far East, Regional as well as Domestic routes.

Boeing 737The Boeing 737 is one of the world's favourite 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.

ATR42This modern technology turbo prop is the latest type inducted in PIA’s fleet. PIA’s fleet of seven ATR42-500 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.

EXHIBIT 2: DOMESTIC ROUTE

EXHIBIT 3: INTERNATIONAL ROUTE

REFERENCES

http://tribune.com.pk/story/769084/man-who-stood-up-against-vip-culture-on-pk-370-fired-from-job/

http://www.piac.com.pk/pia_about/pia-about_bodirectors.asp

http://www.piac.com.pk/pia_about/pia-about_fleet.asp

http://www.utrade.co/Magazine/Utrade-Magazine.aspx?Key=408

http://www.pakistantoday.com.pk/2012/03/22/comment/editors-mail/pia-under-crisis/

http://www.dawn.com/news/864516/open-skies-policy

http://www.hmrc.gov.uk/manuals/insmanual/ins44133.htm

http://www.dawn.com/news/1114474

http://www.thenews.com.pk/Todays-News-2-239924-PIA-explains-status-of-18-directors-on-its-board

http://www.thenews.com.pk/Todays-News-2-239924-PIA-explains-status-of-18-directors-on-its-board