INTERNATIONAL ISLAMIC UNIVERSITY H-10, ISLAMABAD

Analysis of Financial Statements (FIN 602)

Project on Pakistan International Airlines Date of Submission: 15 May, 2012

Submitted To: -

Mr. Shahzad Iqbal

Submitted By: -

Usman Malik

2688-FMS/BBA/F09 2649-FMS/BBA/F09 2873-FMS/BBA/F09 2681-FMS/BBA/F09

Malik Saad Noman Hazrat Wali Shoaib Alam

Program: -

Bachelor of Business Administration

FACULTY OF MANAGEMENT SCIENCES

DEPARTMENT OF BUSINESS ADMINISTRATION

Pakistan International Airlines

Overview Pakistan International Airlines, Pakistan s national flagship airline, has been a pioneer since its inception in 1955. PIA was the first Pakistani airline from a non-communist country to fly into the People s Republic of China and, in 1962 PIA set out to break the record for the fastest flight between London and Karachi. PIA continues to soar, ever committed to innovation and rich customer experience. With a fleet of young airplanes, a crew dedicated to providing the highest standards of in-house service, and stellar management, POA is a flight that is going places. However, recently, the profitability of PIA has been witnessing a downside. Year 2008 did not bring any significant improvement in the financial performance of PIA. The problems of the past years recurred and compounded to give the company a higher net loss for the year. The company is in a dire situation to salvage itself from further crises. A brief recap of year 2007 reveals that during the year, the company experienced a series of financial, operational and marketing problems. In the early part of the year, imposition of operating restrictions by EU caused considerable disruption in the PIA schedule as well as significant curtailment in capacity. With the airline brand severely dented, PIA lost market share as well as growth in business, which made the situation still more difficult. The unprecedented hike in oil prices adversely impacted PIA s bottom line. PIA, the late starter was unable to hedge the risk against the high oil prices and thus had to absorb the burden of expensive fuel. Apart from the fuel cost, increases in pay to certain categories of personnel and depreciation of the rupee vis-a-vis the US dollar towards the end of the year also adversely affected the financial results. The airline could not remain immune to ever-increasing competition due to an over supplied capacity environment including entry of new operators in certain key markets. PIA managed to increase the yields despite competition. However, this improvement was offset by reduced level of traffic. PIA s revenues, thus, remained static for the year. The cash position of the company remained under strain throughout the year and was managed by short/medium term borrowings from the market based on GOP guarantees. However, a positive development during the last quarter of 2007 was the withdrawal of EU operating restrictions, as PIA was able to satisfactorily address the issues highlighted by the EU Air Safety Committee. Company in a Glance Vision PIAC has a vision to be a world class airline, meeting customer expectations through excellent services, on-time performance, innovative products and absolute safety Mission Statement PIACs mission statement is as follows Employee teams will contribute towards making PIA a global airline of choice through

Offering quality customer services and innovative products Using state-of-the-art technologies Ensuring cost effective measures in procurement and operations Developing safety culture

Board of Directors of PIA Ch. Ahmed Mukhtar (Minister for Defence and Chairman PIA) Malik Nazir Ahmed Mr Javed Akhtar Syed Omar Sharif Bokhari Mr Husain Lawai Makhdum Syed Ahmad Mahmud Mr. Abdul Wajid Rana (Federal Secretary Finance) Khawaja Jalaluddin Roomi Mrs Nargis Sethi (Federal Secretary Defence) Mr Air Chief Marshal (Retd) Rao Qamar Suleman (Managing Director-PIA) Mr Yousaf Waqar Mr Muhammad Shuaib (Secretary-PIA)

Safety & Quality Certifications

IOSA IATA Operational Safety Audit (IOSA) is basic requirement to retain airlines IATA membership. PIA is among the few developing country airlines which are compliant to IATA Operational Safety Audit (IOSA) requirements and standards since 2005. The standards body for IOSA is based in Montreal, Canada. A typical IOSA Certification Audit is based on a check list comprising of +950 IATA Standards and Recommended Practices. Each IOSA certification audit has two years validity and an airline must pass through a series of periodic recertification audits by IATA approved Audit Organization to retain its IATA membership. PIA is successfully maintaining its IOSA certification and the current IOSA Registry is valid up to 24th June, 2013. IOSA registration demonstrates PIAs renewed commitment to meeting the highest international operational safety standards in critical areas which include: EASA EASA (European Aviation Safety Agency) is the centerpiece of European Unions strategy for aviation safety, promoting highest standards of safety and environmental protection within the aviation industry. Its primary task is to draft legislation and provide technical advice to the European Commission and to the Member States. EASA part-145 regulation is adapted by many aviation maintenance organizations. PIA Engineering & Maintenance is among the very first group of Non-European organizations which qualified as EASA Part-145 approved maintenance organization back in April, 2004. This has enabled PIA to provide aircraft maintenance services to European registered aircraft. The EASA Part-145 approval validity is subject to clearing surveillance audits being conducted on periodic basis by European auditors. PIA Engineering & Maintenance, has so far, successfully gone through six such audits. The approvals renewal Audit is conducted after every two-year period. PIA Engineering & Maintenance has not only cleared the renewal audit in March 2006, but has also got extension of their scope of approval which now includes the heavy maintenance Organization & Management System Flight Operations Operational Control and Flight Dispatch Aircraft Engineering & Maintenance Cabin Operations Ground Handling Operations Cargo Operations Security Management

on state-of the-art Boeing 777 aircraft. The scope of approval also includes light and heavy maintenance of Boeing 747, Boeing 737, Airbus A300 and Airbus A310 aircraft including maintenance on most of their Components at Shop level. Quality Management System (ISO 9001:2008) Certifications At PIA, Customer Focus and Continual Improvement is embedded in the heart of each and every employee, right from the top to the bottom most cadre. To achieve this aim of enhancing its customer satisfaction, PIA has undertaken a number of pioneering initiatives throughout its history. The latest in this series of customer service initiatives is PIA achieving successful certification against the global benchmark standard ISO 9001:2008 for its entire chain of customer service activities. Starting from the Passenger Reservations and Ticket Sales / Cargo Sales, , then through to the Passenger Handling Services and finally culminating in the In-flight Cabin Services; the entire process has been carefully developed to meet the stringent requirements of ISO 9001:2008 Quality Management System Standards. PIA achieved the initial ISO certification in the year 2006, and since then it is successfully maintaining all the certifications through regular independent management systems audits by accredited audit organizations.

HSE Management System (Health, Safety & Environment) PIA has been proactive in understanding the needs of time and has launched the Health, Safety & Environment (HSE) initiative. The objective of this program is to mature the airlines HSE systems to a level which will eventually lead to OHSAS-18001 and ISO-14001 certification. As part of this program, PIA plans to conduct organization wide HSE trainings, development of HSE objectives, implementation of HSE system procedures and management reviews to assess the continual effectiveness of the HSE system. These accomplishments will make PIA a safer airline, paving the way for OHSAS and ISO certifications.

Analysis of Pakistan International Airlines

Analysis of unconsolidated statements of Pakistan International Airlines is below. Ratio Analysis:Main Categories Year Ratio Current Ratio Liquidity Measurement Quick Ratio Ratios Cash Ratio Gross Profit Margin Operating Profit Margin Net Profit Margin Profitability Ratios Return Asset Return Equity on Formula Current Ratio/ Current Liabilities Cash+ Trade Debt +Short Term Investment (Cash+ Invested Funds)/Current Liabilities Gross Profit /Revenue Operating Profit Margin /Revenue Net Income /Revenue Net Income /Average Total Assets Net Income /Average Shareholder Equity Net Income /Capital Employed Revenue /Fixed Asset Revenue /No. of Employees Total Liabilities /Shareholder Equity Total Liabilities /Total Assets Long Term Financing/( Long-term 2008 0.20 2009 0.23 2010 0.21

0.09

0.12

0.13

0.001 0.15 0.01 0.12 0.02

0.11 0.17 0.03 0.05 0.14

0.018 0.13 0.0007 0.19 0.08

on

0.681

0.97

0.40

Operating Performance Ratios

Return on Capital Employed Fixed Asset Turnover Sales Per Employee Debt to Equity

0.05 0.79 0.0016

0.10 0.64 0.0015

0.075 0.71 0.0017

4.15 0.61

4.10 0.72 0.51

4.05 0.50 0.47

Debt Ratios

Debt Ratio Capitalization Ratio

Interest Coverage Ratio

Financing +Shareholder Equity) Profit/(Loss) From Operations /Finance Cost

0.077

(0.345)

Cash Operating Cycle:Years Ratio Formulas Credit Sales Account /Average Receivable Account Turnover Receivables 365 /Account Average Receivable Collection Turnover Period Cost of Goods Inventory Sold /Average Turnover Inventory 365 Average age of /Inventory Inventory Turnover Cost of Goods Average /Average Turnover of Sold Account Account Payables Payables 365 /Average Average age of Turnover of Account Account Payables Payables Average Collection Period Add: Average age of Inventory Less: Average age of Account Payables Average 2009 2010

12.42

11.8

12.98

29.36 (Days)

30.7 (Days)

28.11 (Days)

21.7

19.6

20.86

16.8 (Days)

18.6 (Days)

17.5 (Days)

3.025

2.98

3.07

120 (Days)

122 (Days)

118 (Days)

(73.84) Days

(72.7) Days

(72.4) Days

Liquidity Measurement Ratios:-

The current ratio is a popular financial ratio used to test a company's liquidity by deriving the proportion of current assets available to cover current liabilities. The concept behind this ratio is to ascertain whether a company's short-term assets (cash, cash equivalents, marketable securities, receivables and inventory) are readily available to pay off its short-term liabilities (notes payable, current portion of term debt, payables, accrued expenses and taxes). High current ratio is the good but in PIA case its below. It is 0.21 below standard of 2 and even low as compare to past results. Quick ratio or quick assets ratio or the acid-test ratio is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities. The quick ratio is more conservative than the current ratio because it excludes inventory and other current assets, which are more difficult to turn into cash. Therefore, a higher ratio means a more liquid current position. But in case of PIA its below, which is 0.13 below the standard but better as compare as past. The cash ratio is an indicator of a company's liquidity that further refines both the current ratio and the quick ratio by measuring the amount of cash; cash equivalents or invested funds that are in current assets to cover current liabilities. In our case its 0.018 below standard which is 1 and even worse than as compare to past. Company has almost no cash for pay its neither short term liabilities nor company invested in any other company. This liquidity metric expresses the length of time (in days) that a company uses to sell inventory, collect receivables and pay its accounts payable. The cash conversion cycle (CCC) measures the number of days a company's cash is tied up in the production and sales process of its operations and the benefit it gets from payment terms from its creditors. The shorter this cycle, the more liquid the company's working capital position is. The CCC is also known as the "cash" or "operating" cycle. This company is taking a lot of time over 70 days so liquidity chances is low. Profitability Ratios:The gross profit margin is used to analyze how efficiently a company is using its raw materials, labor and manufacturing-related fixed assets to generate profits. A higher margin percentage is a favorable profit indicator. For last many years this ratio is lower than standard, so it is unfavorable profit indicator the result is 0.12 and even terrible if we compare it with past results. By subtracting selling, general and administrative (SG&A), or operating, expenses from a company's gross profit number, we get operating income. Management has much more control over operating expenses than its cost of sales outlays. Thus, investors need to scrutinize the operating profit margin carefully. Positive and negative trends in this ratio are, for the most part, directly attributable to management decisions. Basically our company is showing negative trend in this ratio. And this is showing loss in income statements.

Often referred to simply as a company's profit margin, the so-called bottom line is the most often mentioned when ever discussing a company's profitability. While undeniably an important number, investors can easily see from a complete profit margin analysis that there are several income and expense operating elements in an income statement that determine a net profit margin. It behooves investors to take a comprehensive look at a company's profit margins on a systematic basis. But in such case its chances is low. And this also showed loss in current year. Ratio indicates how profitable a company is relative to its total assets is the return on assets (ROA) ratio, which illustrates how well management is employing the company's total assets to make a profit. The higher the return, the more efficient management is in utilizing its asset base. The ROA ratio is calculated by comparing net income to average total assets, and is expressed as a percentage. The return is low in such company so efficiency is unsatisfied. The result is 0.08 which is lower in every case. Return on equity ratio indicates how profitable a company is by comparing its net income to its average shareholders' equity. The return on equity ratio (ROE) measures how much the shareholders earned for their investment in the company. The higher the ratio percentage, the more efficient management is in utilizing its equity base and the better return is to investors. It is also low as below a certain percentage. The answer of this company is 0.41 which is awful in every case. The return on capital employed (ROCE) ratio, expressed as a percentage, complements the return on equity (ROE) ratio by adding a company's debt liabilities, or funded debt, to equity to reflect a company's total "capital employed". This measure narrows the focus to gain a better understanding of a company's ability to generate returns from its available capital base. ROCE is a measurement to calculate comprehensive profitability indicator because it gauges management's ability to generate earnings from company total tools of company. The result is 7.5% which is shocking for company in every situation. Operating Performance Ratios:This ratio is a rough measure of the productivity of a company's fixed assets (property, plant and equipment or PP&E) with respect to generating sales. For most companies, their investment in fixed assets represents the single largest component of their total assets. This annual turnover ratio is designed to reflect a company's efficiency in managing these significant assets. Simply put, the higher the yearly turnover rate, the better the result is .71 that shows efficiency is below all standards. As a gauge of personnel productivity, this indicator simply measures the amount of dollar sales, or revenue, generated per employee. The higher the dollar figures the better. Here again, labor-intensive businesses (ex. mass market retailers) will be less productive in this metric than a high-tech, high product-value manufacturer. It is 0.0017 which is so smaller to attract standards.

Debt Ratios:The debt ratio compares a company's total debt to its total assets, which is used to gain a general idea as to the amount of leverage being used by a company. A low percentage means that the company is less dependent on leverage, i.e., money borrowed from and/or owed to others. The lower the percentage, the less leverage a company is using and the stronger its equity position. In general, the higher the ratio, the more risk that company is considered to have taken on. In PIA case its well high from standard. The debt-equity ratio is another leverage ratio that compares a company's total liabilities to its total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligors have committed to the company versus what the shareholders have committed. It is 4.5, which is in excess of all standards. To a large degree, the debt-equity ratio provides another vantage point on a company's leverage position, in this case, comparing total liabilities to shareholders' equity, as opposed to total assets in the debt ratio. Similar to the debt ratio, a lower the percentage means that a company is using less leverage and has a stronger equity position. The capitalization ratio measures the debt component of a company's capital structure, or capitalization to support a company's operations and growth. There is no right amount of debt. Leverage varies according to industries, a company's line of business and its stage of development. Nevertheless, common sense tells us that low debt and high equity levels in the capitalization ratio indicate investment quality .this Company tells that they are more focusing on equity because of low credibility in market. The interest coverage ratio is used to determine how easily a company can pay interest expenses on outstanding debt. The ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) by the company's interest expenses for the same period. The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is only 1.5 or lower, its ability to meet interest expenses may be questionable. As in PIA case the rate is lower which 0.077 is the chance to payback debt expense is doubtful. But in 2010 it get worse as it is now in negative.

Analysis of Income Statement:Vertical Analysis

Line Items Revenue Cost of Services:Aircraft Fuel Others Gross Profit Distribution Cost Administrative Expenses Other Provisions and Adjustments Exchange Loss Other Operating Income Loss From Operations Finance Cost Loss before Taxation Taxation Loss For the Year Vertical analysis;

2008 100% 52% 44% 4% 6% 7% 2% 27% 2% 36% 9% 45% 4% 41%

2009 100% %33 49% 17% 6% 8% 1% 7% 1% 3% 10% 13% 8% 5%

2010 100% 42% 45% 14% 5% 7% 1% 2% 2% 1% 9% 8% 11% 19%

We are comparing every value with revenue of the company of the given years. First in 2008 as you see company is bearing loss in every year as the value of expenses is over 90% of total revenue so the situation is so bad that it is having only 4% of gross profit which extract the attention of share holder as they are concerned with this statement. Comparing three year in 2008 company was better than all year as their expanses were cut off. Operating expenses were also low in 2009 but due to loss at the end at every year we can simply saw not interested in washing away our money. Simple words we simply are not investing our money as you are suffering loss in a huge quantity and having no profit how would you entertain us in future to help retrieve our money as your own money is sunk far away where retrieving is almost impossible.

Horizontal Analysis Line Items 2008 2009 2010

Revenue Cost of Services:Aircraft Fuel Others Gross Profit Distribution Cost Administrative Expenses Other Provisions and Adjustments Exchange Loss Other Operating Income Loss From Operations Finance Cost Loss before Taxation Taxation Loss For the Year Horizontal or trend analysis;

100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

148% 119% 143% -320% 155% 166% -480% -5907% 52% 185% -332% 276% 7370% 112%

168% 169% 147% -292% 155% 181% -505% -1900% -183% 42% -334% 290% 12016% 471%

Now in horizontal analysis first the revenue is increasing every year but at the same side expenses are getting higher and higher which are the reason o downfall of company which we have seen and research deeply we are on a point that it is still continuing due to international flights but expenses locally are evasive, alarming for the company and their standard is getting worse due to not investing at a right time or may be no investment by the company there is a huge increase in amount of taxes yearly that indicate it is deflourishing its resources and such circumstances shows non availability of shareholder due to such disasters statement maintain by the company. PIA management took several initiatives to drive down the cost and increase the revenue in the wake of a difficult business environment. As far as the profitability of the company is concerned, the company has been facing a serious crisis, reporting financial losses for last years. Revenue is increasing year by year but huge amount of cost of services and operating expenses this increase is marginal and does not cover the expenses. So that loss of company is increasing. Reason for this is, PIA is Pakistans national air line and it is under the Govt. of Pakistan. And government is giving subsidies to its people because of which every year almost company is showing loss. The profitability of the company has declined to a disturbing level over the last a couple of years. The major problem is the fuel prices which are increasing year by year.

Balance Sheet Ratios As at December 31, 2010 Assets 2008 Non-Current Assets (Fixed Assets) Property, Plant and Equipment Intangibles Long Term Investments Long Term Advances Long Term Deposits and Prepayments Current Assets Stores and Spares Trade Debts Advances Trade Deposits and Prepayments Accrued Interest Other Receivables Short-term Investments Taxation Cash and Bank Balance TOTAL ASSETTS Equity and Liability share Capital and Reserves 2008 Total Equity Share capital (Reserves) Surplus on revaluation of Property, Plant and Equipment Non-Current Liabilities Long Term Financing Term Finance and Sukuk Certificates Liabilities against Assets subject to Finance Lease Long Term Deposits Deferred Liabilities Current Liabilities Trade and Other Payables Provision for civil Aviation Authorities Claims Accrued interest Provision for Taxation Short term Borrowings 15.04% 46.46% 9.96% 13.67% 8.72% 45.65% 0.21% 2.28% 18.56% 1.05% 1.03% 21.41% 2009 14.3% 42.21% 17.8% 15.08% 12.03% 37.64% 0.22% 3.79% 16.50% 0.92% 1.13% 0.52% 14.74% 2010 20.32% 69.38% 4.59% 21.55% 13.76% 42.35% 0.3% 3.97% 23.75% 2.42% 1.21% 17.87% 70.66% 0.079% 3.40% 5.46% 2.62% 4.04% 0.99% 1.12% 0.00093% 1.01% 2.96% 0.189% 0.55% 100% 2009 82.06% 0.056% 2.73% 5.33% 2.45% 4.9% 0.079% 0.71% 0.49% 0.015% 0.46% 100% 2010 76.13% 0.055% 35.04% 7.32% 3.03% 6.53% 0.367% 0.89% 1.7% 0.02% 1.096% 100%

Current Maturities of:Long Term Financing Term Finance and Sukuk Certificates Liabilities against Assets subject to Finance Lease TOTAL LIABILITIES AND EQUITY Vertical Analysis:-

3.76% 5.09% 100%

3.27% 0.00315% 4.99% 100%

5.8% 1.68% 7.78% 100%

Out total asset company is having only 13% of are trying to take their current assets which mean liquidities ratio would be lower as a result providing shareholder or debenture holder back up money at any time would be impossible since its a airline so its most would be at fix asset corner and would be enjoying a better life but due to overdone loans of people and banks the trust is broken and they are looking to evacuate their money from this company as soon as possible and even other stack holder are making company expenses more by withdrawing their money which is unsafe and even new holders are not ready to put their money at 100% risk..

Horizontal Analysis:Balance Sheet Ratios

As at December 31, 2010 Assets 2008 Non-Current Assets (Fixed Assets) Property, Plant and Equipment Intangibles Long Term Investments Long Term Advances Long Term Deposits and Prepayments Current Assets Stores and Spares Trade Debts Advances Trade Deposits and Prepayments Accrued Interest Other Receivables Short-term Investments Taxation Cash and Bank Balance 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 2009 8.81% (23.84%) (7.35%) 4.59% 0.26% 29.84% (15.06%) (31.79%) (48.05%) (44.53%) (11.82%) 7.07% 2010 (22.73%) (43.58%) (9.11%) 9.84% (5.19%) 32.29% (69.83%) (34.86%) (18.84%) (44.53%) 62.32% (18.09%)

Equity and Liability share Capital and Reserves 2008 Total Equity Share capital (Reserves) Surplus on revaluation of Property, Plant and Equipment Non-Current Liabilities Long Term Financing Term Finance and Sukuk Certificates Liabilities against Assets subject to Finance Lease Long Term Deposits Deferred Liabilities Current Liabilities Trade and Other Payables Provision for civil Aviation Authorities Claims Accrued interest Provision for Taxation Short term Borrowings Current Maturities of:Long Term Financing 100% 100% 100% 2009 1.83% (2.73%) 86.73% 18.16% 47.69% (11.7%) 13.59% 78.68% (6.88%) (6.29%) 17.21% (26.32%) (6.72%) 2010 10.64% 22.31% (62.24%) 29.15% 29.15% (24.02%) (17.05%) 151.02% 4.77% 91.50% (31.66%) 26.50%

100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Term Finance and Sukuk Certificates Liabilities against Assets subject to Finance Lease Analysis:-

100%

4.95%

8.99%

The comparison of historical financial information over a series of reporting periods, or of the ratios derived from this financial information. As this company PIA is in danger because of its performance. As compare to 2008, companys assets increase in 2009 but in next year its going to decrease with 18.09%. Company increases its long term assets in 2009 comparatively from 2008, companys financing also increase but its equity portion is low then debt financing. Company increase share equity portion in 2010 as compare to 2009, also increase its debt portion in same year but on asset-side Company cant increase its fixed assets. Main problem with PIA is that its focus for financing is Debt, but unfortunately company cant payback its loans. For that interest expanse of company is increase in 2010. In 2009 company cant pay its loan of 6% almost which we think main cause of increasing interest expense. And that interest is the reason that company just focus to pay interest. Did not invest in any new project or start any project. Continuously company is going downward. On revaluation of fixed assets suddenly decreased in 2010. Company incurred a loss during the year 2010. And its current liabilities are more than its assets. OVERALL ANALYSIS Comparing internally for the three year we can say that PIA is maintained its bad liquid position. In the financial side creditors are not providing more loans to the PIA because of losses and loss in shareholders equity. And the financial ratio is very high and the cushion of protection afforded the firms creditors are very large. In long term capitalization the numeric figure of ratio is greater than one. The company is going to losses continuously. In the case of losses company has no sufficient charges. Company incurred the loss of 92,327.743 at the end of year 2010. This company is going to lose its reputation because of continuously losses. The companys activity position is little bit good. In the profit side PIA is bear very high level of loss. PIA is intimating loss on assets. It does not go in as favor. And in audit report auditors give unqualified opinion about the company. Which shows its account system is according to international accounting standards.

Thank You