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Final Year Project Factors Affecting Profitability Of Airline Industry Of Pakistan Submitted by Muhammad Tariq Ali Khan (52286) SUPERVISOR Syed Danish Aftab Zaidi I. Factors Affecting Profitability of Airline Industry of Pakistan I

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Page 1: Tariq Project Report-24!06!2011

Final Year Project

Factors Affecting Profitability

Of Airline Industry Of Pakistan

Submitted by

Muhammad Tariq Ali Khan

(52286)

SUPERVISOR

Syed Danish Aftab Zaidi

PROJECT REPORT SUBMITTED TOPAF-KARACHI INSTITUTE OF ECONOMICS AND TECHNOLOGY

TABLE OF CONTENTS

I. Factors Affecting Profitability of Airline Industry of Pakistan I

Page 2: Tariq Project Report-24!06!2011

Letter of Approval:....................................................................................... iv

Letter of Transmittal:......................................................................................v

Letter of Authorization:..................................................................................vi

Acknowledgement:.......................................................................................vii

Abstract:..................................................................................................... viii

1.0.0 Introduction : ........................................................................................01

1.1.0 Background to the Problem:.............................................................01

1.2.0 Purpose of the Research Project:.....................................................02

1.3.0 Hypothesis::......................................................................................02

1.4.0 Significance of Research Project......................................................03

1.5.0 Assumption of Project:......................................................................03

1.6.0 Limitations:.......................................................................................03

1.7.0 Delimitations:....................................................................................04

2.0.0 Literature Review:..............................................................................05

2.1.0 Crafting and Executing Strategy:......................................................06

2.1.1 Revenue Management:....................................................................06

2.1.2 Managing The Fleet , Finance & Assets:..........................................07

2.1.3 Managing Staff:...............................................................................07

2.1.4 Fleet Utilization:................................................................................07

2.1.5 Profitability and Load Factor for Airline: ............................................08

3.0.0 Research Design and Methodology:.................................................09

3.1.1 Population of the Research Project:...............................................09

3.1.2 Sampling Methods:.........................................................................10

3.1.3 Sample:..........................................................................................10

3.2.0 Instrumentation:..............................................................................10

3.2.1 Data Collection:..............................................................................11

3.2.2 Ethical Consideration:.....................................................................11

3.4.3 Data Presentation: .........................................................................12

3.2.4 Operational Definition of Research Variables:................................12

TABLE OF CONTENTS

I. Factors Affecting Profitability of Airline Industry of Pakistan II

Page 3: Tariq Project Report-24!06!2011

3.2.5 Procedure for testing hypothesis: .............................................13

4.0.0 Data and Interpretation of Results : ...................................................14

4.1.0 Research Variables......................................................................... 14

4.2.0 General Description of Data:............................................................14

4.3.0 Data Presentation:............................................................................15

4.4.0 Results of Hypothesis.......................................................................20

5.0.0 Conclusion & Recommendations:....................................................26

5.1.0 Conclusion:.......................................................................................26

5.2.0 Suggestion of further Studies:..........................................................28

Annexure : ....................................................................................................29

References:...................................................................................................34

I. Factors Affecting Profitability of Airline Industry of Pakistan III

Page 4: Tariq Project Report-24!06!2011

Letter of Approval

Project Title : Factors Affecting Profitability of Airline Industry of Pakistan

By : Muhammad Tariq Ali Khan

MB-2-07-52286

Supervisor : Syed Danish Aftab Zaidi

Academic Year : Spring 2011

This Research Project has been approved by the Board of Advanced Studies at PAF

KIET. The project is being submitted for the partial fulfillment of the requirements for

the degree of Master of Business Administration.

Approval Committee:

Mr. Syed Danish Aftab Zaidi

(Supervisor) (Director Academics)

I. Factors Affecting Profitability of Airline Industry of Pakistan IV

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LETTER OF TRANSMITTAL

ToMr. Syed Danish Aftab ZaidiPAF Karachi Institute of Economics & TechnologyCity CampusKarachi.June 30, 2011

Respected Sir:

This project has been prepared with the experience and knowledge I have acquired while studying in the institute and the methodologies learned during the course of conducting business research.

I have tried to fulfill all requirements to the best of my knowledge as per the advice and guidelines provided by you. I hope that my report will rise to the expectation of yours.

Sincerely,

Muhammad Tariq Ali Khan 52286

I. Factors Affecting Profitability of Airline Industry of Pakistan V

Page 6: Tariq Project Report-24!06!2011

LETTER OF AUTHORIZATION

JUNE 30, 2011

Dear Reader

I have been authorized by Mr. Syed Danish Aftab Zaidi to prepare Report on

“Factors Affecting the Profitability of Airline Industry of Pakistan”.

This project has been prepared with the experience and knowledge I have acquired while studying in the institute and the methodologies learned during the course of conducting business research.

Sincerely,

Muhammad Tariq Ali Khan 52286

VI

Page 7: Tariq Project Report-24!06!2011

Acknowledgement

First of all, I am deeply grateful to Almighty Allah for enabling me to accomplish this

research project.

I am deeply indebted to my supervisor Mr. Syed Danish Aftab Zaidi of the PAF KEIT

whose guide lines, suggestions and encouragement helped me to complete this

report.

I also want to thank Sqd. Ldr. Mr. Abdul Hameed for all his sincere help and

assistance in the final version of the paper for English style and grammar, correcting

both and offering suggestions for improvement.

At the end, I would like to give my special thanks to my family whose patient love

enabled me to complete this work.

II. Factors Affecting Profitability of Airline Industry of Pakistan VII

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Abstract

This study was carried out to examine the relationship between the Profitability and

the other factors of Airline Industry of Pakistan. The data used was collected from

various annual Financial reports of Pakistani Airlines, data recorded by P.C.A.A.

(Pakistan Civil Aviation Authority ), Internet and Articles & Journals from 2005 until

2010. The data was analyzed using statistical data analysis (Regression analysis).

The dependent variable was the Net Profit and set of independent variables

comprised of Operating Cost, Flights per Aircraft, Expenditure per Flight and

No. of Passengers per Flight. The main objectives were to examine the influence

of independent variables on the Profitability of Airline Industry of Pakistan. The

findings reveal that Operating Cost, Flights per Aircraft, Expenditure per Flight and

No. of Passengers per Flight have strong relationships with the Profitability of Airline

industry of Pakistan. Finally, this study confirmed that Operating Cost and No. of

Flights per Aircraft are the most dominant factors that influence the Profitability of

Airlines of Pakistan.

II. Factors Affecting Profitability of Airline Industry of Pakistan VIII

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1.0.0 INTRODUCTION:

The airline industry has altered the life in which people live and conduct business

by shortening travel time. The concept of distance has been changed. Now it is not

considered impossible to visit and conduct business which was considered remote

earlier.

(Jane's airlines & airliners by Jeremy Flack, 2003) states that “ airline main aim is

to provide air transport service to passengers & freight forwarders. Airlines supply

services by owning or leasing their own aircrafts”.

According to (Robertson & David, October29, 2008 )“ it’s an intensely competitive

market for an airline industry. During the past years, the air line industry has

completely changed their business strategies; they are now expanding their

domestic and international services. Previously airline industry was generally owned

by the government however in most of the countries, all major airlines have been

privatized.”

(DELAG, 22-08-2010) Deutsche Luftschiffahrts states that “ Aktiengesellschaft was

the world's first airline. It was founded on November 16, 1909 with government

assistance, The five oldest airlines are Netherlands' KLM, Colombia's Avianca,

Australia's Qantas, Czech Republic's Czech Airlines, and Mexico's Mexicana. KLM

first flew in May 1920, while Qantas was founded in Queensland, Australia, in late

1920”.

1.1.0 Background to the Problem:

Pakistan airline industry is still in growth phase, it has to face a lot of competition

from other regional airlines,

The type of aircraft is a factor which must be considered while selecting for the

airline fleet. The type of aircraft must be appropriate to suit the requirement for

different markets. It must also be economical while considering the distances

involved. The distance covered in a trip will also influence traveler behavior. The

1

Page 10: Tariq Project Report-24!06!2011

other consideration such as convenience to approach the airports, frequency of

service, and intermediate stops also matters.

The cost of air travel depends on the length of the trip, Cost structure

charged up for an airline service is upon per mile flown. But due to uncertainty in the

business with respect to fares and limited routes a lot of airlines shut down their

business. The national airline is also not in good condition. As investors and

government aren’t taking any interest therefore it is facing losses since last few

years.

As a result, at present in Pakistan only three airlines are left in the business,

i.e Pakistan international airline, Shaheen Air international and AirBlue, which are

striving hard to give maximum services under constraint resources.

1.2.0 Purpose of the Research Project:

The main purpose of this research is to find out factors affecting the

profitability of airline industry.

How airlines are managing their Finance.

How airlines are managing their Fleet.

How airlines are managing their Employees & Services.

1.3.0 Hypothesis:

HO-1: There is significant relationship b/w OPERATING COST and profitability of

the airline. (β1 = 0)

HO-2: There is significant relationship b/w FLIGHTS PER AIRCRAFT and

profitability of the airlines. (β2 = 0)

HO-3: There is significant relationship b/w EXP. PER FLIGHT and profitability of

the airlines. (β3 = 0)

HO-4: There is significant relationship b/w PASSENGERS PER FLIGHT and

profitability of the airlines. (β4 = 0)

III. Factors Affecting Profitability of Airline Industry of Pakistan 2

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1.4.0 Significance of research project:

This study was conducted to find out the facts and the attributes which affect

the overall efficiency / performance of an airline. This study also high lights the

importance and the influence of these attributes as these are the basic parameters /

indicators which reflect the health of an airline.

These attributes even estimate the future of an airline whether it would survive in the

current resources even though their inter-correlation which will help in evaluation of

weakness and strength of the organization are also being calculated. Whereas, the

dependant and independent variables are found it as they provide overall

performance and help in formulating the future plans or future project viability.

1.5.0 Assumptions of project:

Before proceeding ahead it has been assumed that:-

Un-biased respondent data should be used.

Competition between operating airlines must be fair.

External factors (such as cultural, political demographical etc) should remain

same.

There’s no direct influence of government policies on any airline performance.

1.6.0 Limitations:

This study has some limitations:-

1. In accordance with essential service act it is very difficult to gather data and

responses from employees as all operating airports work under Pakistan’s

ministry of defense.

2. Due to the negligence towards this sector Literature with reference to the

Airlines aren’t available.

III. Factors Affecting Profitability of Airline Industry of Pakistan 3

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1.7.0 Delimitations:

1. Being an employee of CAA, its quiet convenient for me to get data and

records of all airlines to an extent as CAA deals with all airlines and the

record.

2. It is pertinent to mention here that due to the nature of my duty, required

information of airlines was easy to get from different airlines employees.

III. Factors Affecting Profitability of Airline Industry of Pakistan 4

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2.0.0 Literature review:

It’s been a decade that airline industry growth is at its peak but mostly all the airlines

are consistently un- profitable. There are a number of aspects to run a successful

airline. Many steps are taken towards the betterment of this airline business but

mostly all of them are hitting back which are resulting great losses in the financial

statements.

According to ( Doganis Rigas, 2002 ) “ an Aviation Consultant and Strategy Adviser

of Airlines there are three main aspects to make an airline profitable which are the

unit costs, the unit revenues or yields and the load factors. To make a profitable

combinations airline managers should make adjustments in costs, fares and load

factors”.

Doganis states that “ airline industry are characterized by:-

short run marginal cost

Marginal cost of carrying an extra passenger on a flight

An airport passenger charge,

The cost of ground handling and the fuel burnt as a result of extra weight.

These costs are short, if the seats remain unsold, the revenue will be lost forever.

Therefore, he suggests that each airline must maximize revenues and their load

factors”.

Thus, it was suggested by him that “Combining passenger yields with low cost and

relatively high load factors can be easily converted into profits. He emphasizes that

low cost does not provide big profit interacting with low revenues, nor does high cost

necessarily mean low profits if the revenues are high enough”.

Doganis ended his strategy by giving an opinion to start revenue management

process, in this process profits are maximized by cutting down tickets pricing

strategy and tariffs.

III. Factors Affecting Profitability of Airline Industry of Pakistan 5

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2.1.0 Crafting and Executing Strategy

According to (Thompson, Arthur A., Jr., A. J. Strickland, and John E. Gamble.

2005.) “ Success factor of an airline industry are usually its competitive factors which

rejoins and motivate all the industry members to be passionate at the work place. A

success factor have a direct and several possible uses but according to strategy

analysis, success factors are an analytical tools for examining the characteristics of

the industry”.

According to (Richard McCabe, PhD, 2006) “ an airline, should be strong and

focused on four general areas which could result in their success which are”

1) Attracting customers

2) Managing its fleet

3) Managing its people

4) Managing its finances.

2.1.1 Revenue management:

(McGill and van Ryzin 1999) states that, “Revenue management is also a vital

factor for success, as many airlines keep an eye on their RM systems and related

information technology to determine the industry’s future success and all of these

industries invest their money heavily for such systems.

According to (Talluri and van Ryzin, 2004), “ revenue management has possessed

a lot of attention in the airline business”.

According to (Kimes 1989) “ the major objective of revenue management is to give

off the correct inventory to the correct recipient, on the required time and place”.

According to (Philips 2005 & McGill and van Ryzin 1999) “ Inventory allocation and

dynamic pricing are the most common techniques for revenue management”.

III. Factors Affecting Profitability of Airline Industry of Pakistan 6

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2.1.2 Managing the Fleet, Finance & Assets.

Fiancé department of any business is the most important and the complex part. The

same goes with the airline financing as all the financial matters take place on very

high level. According to (Rigas Doganis, Routledge, 2001) “Airlines don’t only

purchase aircraft and engines regularly but they also have to take long-term

decisions to meet the demand of their market as well as they have to be relatively

economical while operating and maintaining the fleet”.

2.1.3 Managing Staff.

According to (Richard McCabe, 1998), productivity of an airline can be calculated

through there management. Effectiveness of the employees clearly shows how well

is passenger been treated on the board. Reports give a clear view of airline

employee’s performance.

2.1.4 Fleet utilization:

Airplane utilization is a key performance indicator for an airline operations. Airplane

utilization depends upon following elements such as,

airplane design features and characteristics,

airline maintenance programs,

airplane technical reliability,

airline business philosophy,

market demand characteristics,

Availability of trained labor.

point-to-point service and faster airplane turnaround.

Improved and performance base airline utilizations helps on fixed ownership costs

over an increased number of trips, reducing costs per seat-mile or per trip. (Richard

M.McCabe, 2006 ).

III. Factors Affecting Profitability of Airline Industry of Pakistan 7

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2.1.5 Profitability and the load factor for airlines

The result indicates that there is profitability and the growth of load factor cause

fatalities / accidents. Causality tests show that profitability does not cause

fatalities/accidents. ( Adrangi, Chow and Raffiee 1997) &( Rose 1992).

III. Factors Affecting Profitability of Airline Industry of Pakistan 8

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3.0.0 Research Design and Methodology

Here we will observe major factors affecting the profitability of airline industry while

going through that data for the period of 2005 – 2009. Population of our study is

based on 20 Airlines which are providing their services in Pakistan, out of which 17

are foreign airlines and 03 are locally operated.

In this study will be collect and consider only those airlines which are being operated

from Pakistan. The main source of data as follows:-

- Data recorded by P.C.A.A. (Pakistan Civil Aviation Authority )

-   Annual Financial Reports of different Airlines.

-  Internet.

-   Articles & Journals.

In this study, we will use both qualitative and quantitative approaches.

3.1.1 Population of the Research project

Population of our study is based on 20 Airlines which are providing their services in

Pakistan, out of which 17 are foreign airlines and 03 are locally operated. A target

population approach is used to identifying the local airlines, the static data used in

this research report was obtained through company website.

There are about 20 foreign and regional airlines operated in Pakistan from different

countries of the world, such as:-

a) Air Blue

b) Air Arabia

c) Air China

d) Biman Baangladash

e) Cathypacific Airline

f) Emirates Airline

g) Etehad Air

h) Fly Dubai

i) Gulf Air

j) GMG Air

III. Factors Affecting Profitability of Airline Industry of Pakistan 9

Page 18: Tariq Project Report-24!06!2011

k) Iran Air

l) Iraq Air

m) Malaysian Airline

n) Oman Air

o) Pakistan International Airline

p) Qatar Airways

q) Shaheen Air International

r) Saudia Air

s) Thai Air

t) Turkish Air

3.1.2 Sampling methods :

The convenience sampling method was adopted to determine the factors affecting

the profitability of Pakistani Airlines, It is a non-probability sampling method . it is a

least expensive of all sampling methods. In this method, we conveniently can add

and delete our sample on the bases of accessibility and availability of data.

3.1.3 Sample:

To find out the factors affecting profitability of Airlines in Pakistan, the said research

considered only (03) Airlines Currently operating in Pakistan such as Pakistan

International Airline (PIA), Airblue and Shaheen Air International(SAI) from our

targeted population. We will observe different ratio analysis in our study Such as:

Flights per Aircraft.

Expenditure per Flight,

Passengers per Flights,

Operating Cost per Flight.

We will collect and analyze the data for the period of 2005 – 2009. The time frame of

this research if 6,months. The sample selected for this research according to

financial availability of the targeted companies.

III. Factors Affecting Profitability of Airline Industry of Pakistan 10

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3.2.0 INSTRUMENTATION My study is purely based on statistical data

analyses. Study is about the factors that affect the profitability of Airlines operating in

Pakistan. Best analysis tool for the study is Regression.

3.2.1 DATA COLLECTION :

The data used in this study was acquired from different sources. The main source of

data is as follows:-

Data recorded by P.C.A.A. (Pakistan Civil Aviation Authority ) 

Annual Financial Reports of different Airlines.

 Internet.

Articles & Journals.

Passengers

The period covered by the study extends to five years starting from 2005-2010

3.2.2 ETHICAL CONSIDERATION:-

Ethical consideration are basically to protect the rights of research participants.

The undersigned assures that a procedure will be adopted to consider all relevant

ethical issues. The results which will arise from my analysis will be based upon my

independent judgment. And they will not affect the activities of the Airline industry.

Following are some of the ethical consideration that I will try to follow.

All the participants are voluntary

The research participants will be fully informed about the procedures

and risks involved in the research

The study will not put any participants in a situation where they might

be at risk of harm both physical and psychological.

The information regarding the subject study will not be made available

to anyone who is not directly involved in the study.

Tthe participant will remain anonymous where ever and as far as

possible throughout the study.

The participants will be provided with all treatment or program that

have beneficial effects.

III. Factors Affecting Profitability of Airline Industry of Pakistan 11

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3.2.3 Data Presentation

This research project would be done in the form of

Charts

Graphs

Figures

Tables

Tools The tools which will be used to complete the research are as under:

Microsoft Excel.

Microsoft Word.

Microsoft PowerPoint.

3.2.4 OPERATIONAL DEFINAITON OF RESEARCH VARIABLES.

Net profit

Net profit is calculated by subtracting an airline’s total expenses from total revenue,

thus showing what the company has earned (or lost) in a given period of time

(usually one year). It is also called net income or net earnings.

Operating Cost :

An expense incurred by the Airline in transacting normal operations. Operating

expenses include wages for employees, research and development ,administrative

and selling expenses but exclude interest, taxes, and cost of goods sold.

Flights per Aircraft:

It means that how many flights are carried out by a single Aircraft in the year. It is

calculated by dividing total no. of flight in one year by total No. of A/C.

Expenditure per Flight:

it means how much is the expenditure of Airline per flight. It is obtain by dividing total

expenditure by dividing by total No. flight in one year.

III. Factors Affecting Profitability of Airline Industry of Pakistan 12

Page 21: Tariq Project Report-24!06!2011

Passengers per Flight:

It means how many passenger had travelled by each flight. It is obtain by dividing

total No. of passengers by total No. of flight in one year.

3.2.5 Procedure for testing hypothesis:

The Regression analysis is a statistical method used to describe the nature of the

relationship between variables, that is, positive or negative, linear or nonlinear.

Applications of regression analysis exist in almost every field. In economics,

I will be using regression analysis for the purpose of hypothesis Testing. The

dependent variable will be an Profitability of the Airline and the independent

variables will be the Operating Cost, Flight per Aircraft, Exp. Per Flight and

Passengers per Flight and other factors that would affect the air lines expenditure

patterns.

III. Factors Affecting Profitability of Airline Industry of Pakistan 13

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4.0.0 Data Analysis & Interpretation of Results.

In this chapter, the collected data from different sources Such as :-

(a) Data recorded by P.C.A.A. (Pakistan Civil Aviation Authority ) 

(b) Annual Financial Reports of different Airlines.

(c) Internet

(d) Articles & Journals has been calculated in average through statistical

tools.

The values of variables including, Net Profit, Operating Cost, Flights per Aircraft,

Exp. Per Flight and Pax. Per Flight have been separately calculated .

In his study, we wil l use quantitative approaches. Best analysis tool for the

study is Regression because It shows the relationship b/w the variables in a

better way.

4.1.0 RESEARCH VARIABLES.

Following are the research variables which are used in this study :-

a) Net Profit ( Dependent Variable )

b) Operating Cost ( Independent Variable )

c) Flights per Aircraft ( Independent Variable )

d) Exp. Per Flight ( Independent Variable )

e) Pax. Per Flight ( Independent Variable )

4.2.0 General Description of data :

Variables Means MedianStandard Deviation

Standard Error Range Min Max

Net Profit -4754.55 82.88 8402.82 4851.37 14570.02 -14455.27 114.75Operating Cost 16870.41 875.95 28144.51 16249.24 48999.86 361.71 49367.57Flts. Per Aircraft 119 1071 447.53 258.38 871 814 1685Exp. Per Flt 1042 627 779.32 449.94 1383 558 1941Pax. Per Flt. 170.47 187.6 48.62 28.07 92.6 115.6 208.2

This table gives the descriptive statistics of Airline Industry of Pakistan for the period

III. Factors Affecting Profitability of Airline Industry of Pakistan 14

Page 23: Tariq Project Report-24!06!2011

of five years from 2005–09. The table state that the average value of Net Profit is

( 4754.55) million and the standard deviation is 8402.82. the minimum and maximum

values of Net Profit is (14455.27) million and 114.75 million respectively. The average

value of Operating Cost is 16870.41 million and the minimum and maximum value

of Operating Cost is 361.71 million and 49367.57 million. The average No. of Flights

per Aircraft is 119 and the minimum and maximum No. of Flights per Aircraft is

814 and 1685 and the standard deviation of Flights per Aircraft is 447.53% this

mean that No. of Flights can deviate from mean to both sides by 447.53%.

Information from the descriptive statistics also indicate that the mean of Exp. Per

Flight is 1042 ( thousand ), the standard deviation is 449.94% which means that the

Exp. Per Flight can deviate from mean to the both sides by 449.94% and the

minimum and maximum value of Exp. Per Flight is 558( thousand ) and

1941(thousand). The average No. of Pax. Per Flight mean is 170.47 passengers,

standard deviation is 48.62 which means that No. of Passengers per Flight can

deviate from mean to the both sides by 48.62% and the minimum No. of Passengers

per Flight is 115.6 and maximum No. of passenger per flight is 208.2

4.3.0 Data Presentation

Net ProfitAir Line 2009 2008 2007 2006 2005

PIA -5822431000 -35880157000 -13398706000 -12763420000 -4411657000

Airblue 361013000 51917000 89914000 152994000 -82067000

SAI 93223288 60313536 173518880 67403616 19943304

III. Factors Affecting Profitability of Airline Industry of Pakistan 15

Page 24: Tariq Project Report-24!06!2011

2009 2008 2007 2006 2005

-40,000,000,000

-35,000,000,000

-30,000,000,000

-25,000,000,000

-20,000,000,000

-15,000,000,000

-10,000,000,000

-5,000,000,000

0

5,000,000,000

-5822431000.0

0

-35880157000.

00

-13398706000.

00

-12763420000.

00

-4411657000.0

0

361013000.00 51917000.00 89914000.00 152994000.00-82067000.00

93223288.00 60313536.00 173518880.00 67403616.00 19943304.00

PIAAirblueSAI

My data analysis shows that in case of PIA, net profit is decreasing day by day due to

certain decisions taken by the government as it is semi government airline. PIA has

faced great loss during 2007-08 due to excessive operating cost, fuel crises and over

employment.

As far as air blue is concerned, air blue is maintaining its net profit. Air blue

came into existence in 2005, the net profit of that year was in negative however data

analysis revealed that later on they have maintained their fleet well and gradually

increased their net profit. The results show that they are in progress and maintaining

profit.

Operating CostAir Line 2009 2008 2007 2006 2005

PIA 98628760000 72084990000 71764150000 7916437000067075580000

Airblue 581351000 411805000 417902000 286319000 141149000

SAI 1267179000 1049809000 772820000 712312000 577630000

III. Factors Affecting Profitability of Airline Industry of Pakistan 16

Page 25: Tariq Project Report-24!06!2011

2009 2008 2007 2006 20050

20000

40000

60000

80000

100000

120000

98628.76

72084.99 71764.1579164.37

67075.58

581.350999999997 411.805

417.901999999997 286.319 141.1491267.179 1049.809 772.82

712.311999999998 577.63

OPERATING CHARGES

PIAAirblueSAI

Operating cost of PIA is excessively increasing from the day one due to over

employment, not using resources properly, less fuel hedging. PIA has also inducted

12 new ATRS in place of Fokkers .

AIR blue and Shaheen airlines have also faced increase in operating cost however it

is manageable.

Flights per AircraftAir Line 2009 2008 2007 2006 2005

PIA 1028 927 693 698 724

Airblue 1775 1598 1820 1453 1781

SAI 1007 1015 1049 1186 1098

III. Factors Affecting Profitability of Airline Industry of Pakistan 17

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2009 2008 2007 2006 20050

200

400

600

800

1000

1200

1400

1600

1800

2000

1028927

693 698 724

17751598

1820

1453

1781

637 643 679816

728

PIAAirblueSAI

In case of flight per aircraft, Airblue is maintaining high efficiency due to proper use of fleets, maintaining proper schedules and selective routes.

While in this case PIA is in average position whereas Shaheen airline is facing problems.

Expenditure per FlightAir Line 2009 2008 2007 2006 2005PIA 1912 2244 2079 1963 1508Airblue 858 801 564 404 163SAI 699 664 625 593 553

2009 2008 2007 2006 20050

500

1000

1500

2000

2500

1912

22442079

1963

1508

858 801564

404163

399 364 325 293 253

PIAAirblueSAI

III. Factors Affecting Profitability of Airline Industry of Pakistan 18

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In case of PIA, expenditure per flight is very high as some of the routes are made

mandatory by government whether the routes are unprofitable or not.

In case of air blue and shaheen as they are private airline, they have very selective

routes especially in coastal areas. As a result they have lower rate of expenditure per

flight. As compare to PIA.

Passengers Per Flight

Air Line 2009 2008 2007 2006 2005

PIA 107 112 127 118 114

Airblue 217 220 210 216 178

SAI 156 169 212 208 193

2009 2008 2007 2006 20050

50

100

150

200

250

107 112127

118 114

217 220210 216

178156

169

212 208193

PIAAirblueSAI

Air blue passenger per flight ratio is very attractive as they have maintained

attractive and economical prices, better services, time schedules.

35 % of PIA s’ fleet based on ATR this is the main reason that their passenger per

flight ratio is low. Results also show that Shaheen airline has not been able to

manage their fleet properly and their flight cancellation is also very high.

III. Factors Affecting Profitability of Airline Industry of Pakistan 19

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4.4.0 Results of Hypothesis

1: HYPOTHESIS FOR OPERATING COST AND NET PROFIT

H-O: There is significant relationship b/w Operational cost and profitability of the airline.(β = 0)H-1: There is no significant relationship b/w Operational cost and profitability of the airlines. (β ≠ 0)

Statistically:

H0:β1=0

HA: β1 ≠ 0

SUMMARY OUTPUT

Regression Statistics

Multiple R 1.00

R Square 1.00 Adjusted R Square 1.00

Standard Error 84.76

Observations 3.00

ANOVA

df SS MS F Significance

F

Regression 1.00 141,207,583.44 141,207,583.44 19,654.38

0.00454

Residual 1.00 7,184.53 7,184.53

Total 2.00 141,214,767.97

Coefficient

s Standard Error t Stat P-value Lower 95% Upper

95%

Intercept 284.15 60.71 4.68 0.13 (487.23)

1,055.53

operating Cost (0.30) 0.00213 (140.19)

0.0045 (0.33)

(0.27)

Dependent Variable: Net ProfitIndependent Variable: Operating Cost.

Y = a + bX

After putting the values of the result the equation will become as under:-Net Profit = 284.15 – 0.30x

III. Factors Affecting Profitability of Airline Industry of Pakistan 20

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Interpretation of the Result: The regression analysis shows, the correlation b/w

the Net Profit and Operating Cost is 100% and there is 100% of variation in Net

Profit ( dependent variable ) is explained by the Operating Cost ( independent

variable ) which shows the relationship b/w Net Profit and Operating Cost is very

strong. The F value of the regression model is found statistically significant ,

because F- value 19654.38 is greater than the significant value of 0.00454.

The slope of the Operating Cost is negative it means when the operating cost will

increase ,the Net profit will decrease. The coefficient of Operating cost is (0.30)

which means that the amount of as change in the predicted value of the Net Profit

associated with a one unit change in the value of the Operating Cost . P-value is

0.0045 which is less than 0.05 it means that p-value lies in the rejection area so we

will reject the Null Hypothesis.

2: HYPOTHESIS FOR FLIGHTS PER AIRCRAFT AND NET PROFIT

H-O: There is significant relationship b/w FLIGHTS PER AIRCRAFT and profitability of the airlines.(β = 0)H-A: There is no significant relationship b/w FLIGHTS PER AIRCRAFT and profitability of the airlines. (β ≠ 0)

Statistically:

H0:β2=0

HA: β2 ≠ 0

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.73

R Square 0.53

Adjusted R Square 0.06

Standard Error 8,135.48

Observations 3.00

III. Factors Affecting Profitability of Airline Industry of Pakistan 21

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ANOVA

df SS MS F Significance F

Regression 1.00 75,028,685.30 75,028,685.30 1.13 0.48

Residual 1.00 66,186,082.67 66,186,082.67

Total 2.00 141,214,767.97

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept (21,038.97 16,001.52 (1.31) 0.41 (224,356.66) 182,278.71

Flts per A/C 13.69 12.85 1.06 0.48 (149.64) 177.01

Dependent Variable: Net ProfitIndependent Variable: FLIGHTS PER AIRCRAFT

Y = a + bX

After putting the values of the result the equation will become as under:-

Net Profit = - 21084.97 + 13.69x

Interpretation of the Result: The regression analysis shows, the correlation b/w

the Net Profit and Flights per Aircraft is 73% and there is 53% of variation in Net

Profit ( dependent variable ) is explained by the Flights per Aircraft ( independent

variable ) which shows the relationship b/w Net Profit and Flights per Aircraft is not

strong. The F value of the regression model is found statistically significant ,

because F- value 1013 is greater than the significant value of 0.48

Beta is 13.69. It means that the slope of independent variable (Flights per Aircraft )

is positive, when the Flights per Aircraft will increase the Net Profit will also increase.

P-value is 0.48 which is > then 0.05 it means that p-value lies in the accept ion area

so we will accept the Null Hypothesis.

3: HYPOTHESIS FOR EXPERDATURE PER FLIGHT AND NET PROFIT

H-O: There is significant relationship b/w EXP. PER FLIGHT and profitability of the airlines.(β = 0)H-1: There is no significant relationship b/w EXP. PER FLIGHT and profitability of the airlines. (β ≠ 0)

III. Factors Affecting Profitability of Airline Industry of Pakistan 22

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Statistically:

H0:β3=0

HA: β3 ≠ 0

SUMMARY OUTPUT

Regression Statistics

Multiple R 1.00

R Square 1.00

Adjusted R Square 1.00

Standard Error 501.92

Observations 3.00

ANOVA

df SS MS F Significance F

Regression 1.00 140,962,847.91 140,962,847.91 559.55 0.03

Residual 1.00 251,920.06 251,920.06

Total 2.00 141,214,767.97

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept 6,470.09 555.93 11.64 0.05 (593.65) 13,533.83

Exp. Per Flt (0.01) 0.00 (23.65) 0.03 (0.02) (0.00)

Dependent Variable: Net ProfitIndependent Variable: EXP. PER FLIGHT

Y = a + bX

After putting the values of the result the equation will become as under:-

Net Profit = 6470.09 - 0.01x

Interpretation of the Result: The regression analysis shows, the correlation b/w

the Net Profit and Exp. Per Flight is 100% and there is 100% of variation in Net Profit

( dependent variable ) is explained by the Exp. Per Flight ( independent variable )

which shows the relationship b/w Net Profit and Exp. Per Flight is very powerful.

The F value of the regression model is found statistically significant , because F-

value 559.55 is greater than the significant value of 0.03.

The slope of the Exp. Per Flight is negative it means when the Exp. Per Flight will

increase ,the Net profit will decrease. The coefficient of Exp. Per Flight is (0.01)

III. Factors Affecting Profitability of Airline Industry of Pakistan 23

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which means that the amount of as change in the predicted value of the Net Profit

associated with a one unit change in the value of the Exp. Per Flight. P-value is

0.03 which is less than 0.05 it means that p-value lies in the rejection area so we will

reject the Null Hypothesis.

4: HYPOTHESIS FOR PASSENGER PER FLIGHT AND NET PROFIT

H-O: There is significant relationship b/w PAX. PER FLIGHT and profitability of the airlines.(β = 0)H-A: There is no significant relationship b/w PAX. PER FLIGHT and profitability of the airlines. (β ≠ 0)

Statistically:

H0:β4=0

HA: β4 ≠ 0

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.98

R Square 0.96

Adjusted R Square 0.91

Standard Error 2,495.46

Observations 3.00

ANOVA

df SS MS F Significance F

Regression 1.00 134,987,461.21 134,987,461.21 21.68 0.13

Residual 1.00 6,227,306.76 6,227,306.76

Total 2.00 141,214,767.97

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept (33,557.09) 6,352.32 (5.28) 0.12 (114,270.61) 47,156.43

Pax. Per Flt 168.97 36.29 4.66 0.13 (292.17) 630.12

Dependent Variable: Net ProfitIndependent Variable: PAX. PER FLIGHT

Y = a + bX

After putting the values of the result the equation will become as under:-

III. Factors Affecting Profitability of Airline Industry of Pakistan 24

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Net Profit = -33557.09 + 168.79x

Interpretation of the Result: The regression analysis shows, the correlation b/w

the Net Profit and Pax. Per Flight is 98% and there is 96% of variation in Net Profit

( dependent variable ) is explained by the Pax. Per Flight ( independent variable )

which shows the relationship b/w Net Profit and Pax. Per Flight is very strong. The

F value of the regression model is found statistically significant , because F- value

21.68 is greater than the significant value of 0.13.

Beta is 168.97 The slope of PAX. PER FLIGHT is positive when the Pax. Per

Flight will increase the Net Profit will also increase. P-value is 0.13 which is > then

0.05 it means that p-value lies in the accept ion area so we will accept the Null

Hypothesis.

5.0.0 Conclusion and Recommendations

III. Factors Affecting Profitability of Airline Industry of Pakistan 25

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Here we had observed major factors affecting the profitability of airline industry. We

had collect and analyze the data for the period of 2005 – 2009. Population of our

study is based on 20 Airlines which are providing their services in Pakistan, out of

which 17 are foreign airlines and 03 are locally operated. So that the data set

analyzed in this study had collected and consider only those airlines which are

operated from Pakistan.

In this section of the project, the following areas are further to be discussed:

1- Discussion: Discussing about summary of findings/ results

2- Implementations: Applied different methods to find out how effectively and

efficiently airlines are managing their Finance, Fleet, Employees & Services

in order to improve/ enhance their profitability.

3- Conclusion: To summarizing the main area covered in the report, further

comments and judgment

4- Recommendations: Giving suggestions to improve the profitability. and study

about what is left for future to be further explored.

5. Suggestion for further studies. :Revenue, operating cost and fleet utilization

must be consider for further study, as far as my project results/study shows

we/Pakistan is lacking in these major areas.

5.1.0 Conclusion:

My research study results reveals that Pakistan is effectively using its resources in

airline industry but lacking behind in some areas where it need more focus for

improving its airline industry s well as its economy as airline industry plays major role

in any country’s economy.

Research shows that factors such as Operating Cost, Flts per Aircraft, Exp. Per

Flt and PAX. Per Flight have strong relationship with the Net Profit of the

Airline Industry of Pakistan. In order to increase their Revenue, the Airlines of

Pakistan should put in their best, minimize their Operating Cost and should utilize

their Aircrafts efficiently.

III. Factors Affecting Profitability of Airline Industry of Pakistan 26

Page 35: Tariq Project Report-24!06!2011

It is revealed that PIA is operating 68.95% of total flights and facilitating 56.30% of

total passengers flying from Pakistani Airlines. It is also revealed that PIA profitability

is effected by the excessive Operating Cost, poor utilization of aircrafts ( fleet ) and

overcrowded employees. Their Average operating cost per Flight is Rs. 20,724,14/=,

Flights per Aircraft is 814(flights), Passengers handling per Employee is

213(passengers), Aircraft handling per Employees are 445(employees),

Passengers per Flight is 115.6(passengers ), profit earned per flight is Rs. –

47114 /= , Lost baggage per flight average is 0.088 and Average Flight cancellation

is 0.76 which are also not good .

Air Blue is operating only 17.63% of the total flights and facilitating 25.94% of the

total passengers flying from Pakistani Airlines. It is viewed that their Average

operating cost per Flight is Rs. 1,379,35/=, Flights per Aircraft is 1685(flight),

Passengers handling per Employee is 1010 (passengers), Aircraft handling per

Employees are 501(employees), Passengers per Flight is 208.2 (passengers ),

profit earned per flight is Rs. 101598 /=, Lost baggage per flight average is 0.049

and Average flight cancellation is 0.027. Air Blue is required to induct more aircrafts

in order to bring good impact on the revenue and profitability. Their Fleet Finance

and Staff utilization is already quite effective.

It is also revealed that Shaheen Air International is operating only 13.42% of the

total flights and facilitating 17.76% of the total passengers flying from Pakistani

Airlines. Their Average operating cost per Flight is Rs. 1,512,54/=, Flights per

Aircraft is 1071(flights), Passengers handling per Employee is 332 (passengers),

Aircraft handling per Employees are 397(employees) and Passengers per Flight

is 187.6 (passengers), profit per flight is Rs. 74437 /=, average flight cancellation is

0.121 which is high in all and their lost baggage per flight is 0.074. Shaheen Air

International have to reduce their Operating Cost. They have to upgrade their fleet

which will not only reduce their maintenance Cost but also improve the fleet

utilization so that their flight cancellation and delay will be reduced and profit /

revenue will increase.

III. Factors Affecting Profitability of Airline Industry of Pakistan 27

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5.2.0 Scope for further Studies.

There is a great scope for further studies in Revenue management, operating cost

and fleet utilization. My study results show that Pakistan is lacking behind in these

areas.

It is also revealed through the study that the major areas for further studies are as

under:-

- How to decrease the level of corruption

- How to improve the quality of customer services

- How to overcome overstaffing

- How to overcome the influence of Government officials on rules and

regulations

- The usage of state of art technologies.

- How to motivate crew for good performance

- How to create co-operative environment

- Study of developing safety culture.

These are the major areas which need more importance for further studies.

III. Factors Affecting Profitability of Airline Industry of Pakistan 28

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ANNXURES: Total Revenue

I

Air Line 2009 2008 2007 2006 2005 AveragesPIA 94563765000 89201257000 70480734000 70587146000 64074470000 77781474400Airblue 9949219000 8040305000 5941833000 3972082000 1516061000 5883900000SAI 3139178553 2643173007 2390842395 2171619433 1665236226 2402009923

Total ExpenditureAir Line 2009 2008 2007 2006 2005PIA 78629427000 85275811000 66221976000 69882217000 58940836000 71790053400Airblue 9143385000 7683060000 5416284000 3523973000 1452186000 5443777600SAI 3054728897 2572894319 2208871203 2152412536 1837236504 2365228692

Operating ProfitAir Line 2009 2008 2007 2006 2005

PIA -4064996000-

31377642000 -5935076000 -7648148000 -1759442000-

10157060800Airblue 213146000 -54560000 143992000 202188000 -74487000 86055800SAI 168305643 70278688 181971192 19206897 -172000278 53552428.4

Net ProfitAir Line 2009 2008 2007 2006 2005

PIA -5822431000-

35880157000-

13398706000-

12763420000 -4411657000-

14455274200Airblue 361013000 51917000 89914000 152994000 -82067000 114754200SAI 93223288 60313536 173518880 67403616 19943304 82880524.8

No. of PassengersAir Line 2009 2008 2007 2006 2005PIA 4388431 4231288 4037070 4215735 4458388 4266182.4Airblue 2306417 2109969 2016775 1893939 1501218 1965663.6SAI 1191957 1193017 1440281 1533222 1364019 1344499.2

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No. of FlightsAir Line 2009 2008 2007 2006 2005PIA 41127 38007 31858 35602 39083 37135.4Airblue 10653 9593 9611 8718 8906 9496.2SAI 7647 7075 6791 7345 7275 7226.6

No. of EmployeesAir Line 2009 2008 2007 2006 2005PIA 23163 22036 18149 18282 19263 20178.6Airblue 2471 2286 1979 1643 1468 1969.4SAI 5609 5106 4257 3532 3081 4317

No. of AircraftAir Line 2009 2008 2007 2006 2005PIA 40 41 46 51 54 46.4Airblue 6 6 5 6 5 5.6SAI 12 11 10 9 10 10.4

Revenue per passengerAir Line 2009 2008 2007 2006 2005PIA 21548 21081 17458 16744 14372 18240.6Airblue 4314 3811 2946 2097 1010 2835.6SAI 2634 2216 1660 1416 1221 1829.4

Revenue per FlightAir Line 2009 2008 2007 2006 2005PIA 2299311 2346969 2212340 1982673 1639446 2096147.8Airblue 933936 838143 587018 455618 170229 596988.8SAI 410511 373593 352060 295660 228898 332144.4

III. Factors Affecting Profitability of Airline Industry of Pakistan 30

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Expenditure per passengerAir Line 2009 2008 2007 2006 2005PIA 17917 20154 16403 16576 13220 16854Airblue 3964 3641 2686 1860 967 2623.6SAI 2563 2157 1534 1404 1347 1801

Expenditure per FlightAir Line 2009 2008 2007 2006 2005PIA 1912 2244 2079 1963 1508 1941.2Airblue 858 801 564 404 163 558SAI 699 664 625 593 553 626.8

Profit per FlightAir Line 2009 2008 2007 2006 2005PIA -41572 -59041 -43576 -48503 -42879 -47114.2Airblue 143888 123412 132355 127549 -19215 101597.8SAI 86191 78525 75551 79177 52742 74437.2

Profit Per PassengerAir Line 2009 2008 2007 2006 2005PIA -388 -527 -343 -411 -376 -409Airblue 663 561 630 591 -108 467.4SAI 552 465 356 381 273 405.4

Revenue per EmployeeAir Line 2009 2008 2007 2006 2005PIA 4082535 4047976 3883450 3861019 3326298 3840255.6Airblue 4026394 3517194 3002442 2417579 1032739 2799269.6SAI 559668 517660 561626 614841 540485 558856

PAX handled per employeesAir Line 2009 2008 2007 2006 2005

III. Factors Affecting Profitability of Airline Industry of Pakistan 31

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PIA 189 192 222 230 231 212.8Airblue 933 922 1019 1152 1022 1009.6SAI 213 234 338 434 443 332.4

Aircraft handled per EmpAir Line 2009 2008 2007 2006 2005PIA 579 537 394 358 356 444.8Airblue 412 381 936 411 367 501.4SAI 434 426 425 392 308 397

Passengers Per FlightAir Line 2009 2008 2007 2006 2005PIA 107 112 127 118 114 115.6Airblue 217 220 210 216 178 208.2SAI 156 169 212 208 193 187.6

Flights per AircraftAir Line 2009 2008 2007 2006 2005PIA 1028 927 693 698 724 814Airblue 1775 1598 1820 1453 1781 1685.4SAI 1007 1015 1049 1186 1098 1071

No. of lost Baggage ClaimAir Line 2009 2008 2007 2006 2005PIA 4093 3721 3997 2354 1917 3216.4Airblue 406 468 417 493 518 460.4SAI 641 713 647 779 848 725.6

Lost Baggage per FlightAir Line 2009 2008 2007 2006 2005PIA 0.0995 0.0979 0.1255 0.06612 0.04905 0.087614Airblue 0.0381 0.0487 0.0434 0.0565 0.0582 0.048980SAI 0.0838 0.0707 0.0853 0.07615 0.0516 0.073501

No. of Cancel FlightIII. Factors Affecting Profitability of Airline Industry of Pakistan 32

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Air Line 2009 2008 2007 2006 2005PIA 187 239 1087 441 329 456.6Airblue 338 254 183 429 89 258.6SAI 1107 944 897 739 684 874.2

Average Flight CancellationAir Line 2009 2008 2007 2006 2005PIA 0.0995 0.0979 0.1255 0.01239 0.049 0.076858Airblue 0.03173 0.02648 0.01904 0.04921 0.00999 0.02729SAI 0.14476 0.1334 0.13208 0.10061 0.09402 0.120974

Operating CostAir Line 2009 2008 2007 2006 2005PIA 98628760000 72084990000 71764150000 79164370000 67075580000 77743570000Airblue 581351000 411805000 417902000 286319000 141149000 367705200SAI 1267179000 1049809000 772820000 712312000 577630000 875950000

Operating Charges per FlightAir Line 2009 2008 2007 2006 2005PIA 2398151 3170452 2398638 2223593 171234 2072413.6Airblue 154572 142928 143482 132842 115849 137934.6SAI 165709 148383 163801 148979 129399 151254.2

Operating Charges per passengerAir Line 2009 2008 2007 2006 2005PIA 22475 28478 18929 18778 15045 20741Airblue 3252 3195 3207 3151 3094 3179.8SAI 3963 3880 3537 3465 3423 3653.6

III. Factors Affecting Profitability of Airline Industry of Pakistan 33

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www.pcaa.com.pk

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www.airblue.com

www.shaheen air international.com

www.secp.com.pk

www.kse.com.pk

www.Google.com

www.airline history.com

III. Factors Affecting Profitability of Airline Industry of Pakistan 35