The Supreme Court has told Air Marshal Arshad Mehmood Malik to choose between the Pakistan Air Force and PIA.
He cannot hold two posts at once, said the bench, which declared his appointment as chief of the national airlines illegal.
During the hearing on Thursday, a three-member bench headed by Chief Justice Gulzar Ahmed also rejected a report submitted by PIA in the missing plane case.
The court said PIA needs a permanent CEO that will make it into an international standard airline. It should be providing better services to passengers, it said.
Malik has been asked to submit an answer by the next hearing in March. The chief justice said Malik should resign from the PAF and permanently join PIA.