IRAQ MOT, RJ, AND BOEING MOVE FORWARD ON NEW IRAQI

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 007647 SIPDIS USDOC 4520/ITA/MAC/ONE/PTHANOS DEPARTMENT FOR E FOR LARSON DEPARTMENT FOR EB FOR WAYNE E.O. 12958: DECL: 11/19/2013 TAGS: EAIR EINV JO IZ SUBJECT: IRAQ MOT, RJ, AND BOEING MOVE FORWARD ON NEW IRAQI AIRLINE REF: A. AMMAN 6222 ¶B. AMMAN 5205 Classified By: Ambassador Edward W. Gnehm for reasons 1.5 (b) and (d) ¶1. (C) SUMMARY: The Iraqi Ministry of Transport (IMOT) is moving ahead on a proposal to replace defunct Iraqi Airways with a new Iraqi airline that will be majority-owned by private Iraqi investors, managed by Royal Jordanian Airways (RJ),and receive assistance from Boeing. The proposed new airline would meet the immediate goals of the IMOT and be a step towards the achievement of RJ's long-term strategic vision of affiliating with other national carriers in order to attain the critical mass necessary to become commercially viable. It would also create strong incentives for RJ to buy Boeing products as it begins to replace its Airbus fleet. The checkered history of the interested Iraqi private investors, however, may present a hurdle in the completion of the deal. END SUMMARY. ¶2. (C) Iraqi Minister of Transport Bahnam Boulos, CPA Senior Adviser to the Ministries of Communication and Transport Darrell Trent, and CPA Adviser Frank Willis held a series of meetings in Amman during Nov. 18-19, first with Boeing and then jointly with Boeing, Royal Jordanian Airlines, and representatives of the Iraqi Khawam family. The primary aim of the meetings was to lay the groundwork for the establishment of a new Iraqi national carrier (tentatively named Iraqia) owned primarily by Iraqi investors. This is a task that the IMOT is interested in moving forward on at a very fast pace, with the goal of flying Iraqi pilgrims on the Hajj in January. The Saddam-era national carrier Iraqi Airways has few usable assets and is saddled with substantial unpaid demurrage charges for planes parked for ten years in Jordan and Tunisia (Reftel A) and an enormous ongoing lawsuit filed by Kuwaiti Airways asking compensation for theft of Kuwaiti Airways assets. IMOT has therefore decided to allow Iraqi Airways to go into liquidation and start afresh. ¶3. (SBU) The four-person Boeing team, led by Director of International Sales Samir Hanna, had been previously contacted by Trent and came well-prepared to the meeting. Boeing put forward a high-quality, complete business plan for the rollout of the new airline envisioning substantial use of 
Boeing products. (NOTE: IMOT seems likely to be interested in use of Boeing products if only because the ex-Iraqi Airways employees who will form the core of Iraqia have no experience with Airbus products - Iraqi Airways flew only Boeings.) The plan calls for Iraqia to be launched using rented airplanes, which would require only $35 million in up-front capital, and both IMOT and the CPA advisers seem inclined to follow the plan at least in the initial stages. ¶4. (C) In order to run a new airline, however, the Iraqis will need to partner with another regional airline, as there has never been an air service in Iraq organized along commercially viable lines and therefore there are no personnel with relevant experience. While several airlines, including Kuwaiti Air, or Emirates, have made various offers for partnership with the Iraqi national carrier since the end of the war, the IMOT has all but settled on RJ. This is partially because RJ has several obvious advantages - including a months-long history of operating flights into Baghdad and an already existing contract to handle baggage at BIAP - but primarily because of RJ's persistence and its offer of a clear plan of ways in which it can assist the new carrier in ramping up to a launch. ¶5. (SBU) RJ has proposed several different options for beginning Iraqia service on the back of existing RJ resources. One proposal is for Iraqia to become the organization chartering the existing Royal Wings flight between Baghdad and Amman, rather than the CPA. Coupled with such a change might be the addition of an extra stop in either Erbil or Mosul. Another proposal from RJ is for Iraqia to charter RJ planes to fly the Hajj - RJ would be willing to make two airplanes with a total of 345 seats available for ten days, and calculates that each plane could fly three round trips to Jeddah per day, allowing the potential transportation of over 10,000 pilgrims over this period. ¶6. (C) Longer-term, RJ would be given contracts to do the bulk of the managing work and would likely lease some of their aircraft to Iraqia, though RJ's spare aircraft would be unlikely to meet demand indefinitely. Eventually, RJ would like to form a strong link between the two airlines - perhaps even a merger - but this seems unlikely to the CPA advisers. More probable is an eventual marginalization of RJ, with only vestiges of their cooperation remaining, such as a codesharing agreement and/or joint marketing arrangements. In Willis' estimation, RJ is unlikely to be able to buy in to the new carrier, if only because it does not have the necessary cash and seems unlikely to be able to get it in the foreseeable future. ¶7. (C) The conclusion of the meetings was that RJ and Boeing will combine their proposals into a joint business plan for Iraqia. The question of obtaining an RJ-Iraq connection as a quid pro quo for buying Boeing (Reftel B) seems to have been sidelined for the moment, as IMOT is interested in RJ regardless of their use of Boeing vs. other aircraft. Nonetheless, it seems likely, given the abovementioned preferences of the Iraqis for using Boeing products, that RJ will have strong incentives to purchase Boeing aircraft if RJ becomes the Iraqia partner. ¶8. (C) The financing of the proposed new airline is potentially the most troublesome part of the deal. Minister Boulos, who will have the final say, prefers that Iraqia be majority funded by private Iraqi investors. Boulos favors the Iraqi emigre Khawam family, whose patriarch resides in Amman. Among other things, the family owns half of Alia, a land transport company which is also half-owned by the IMOT. The Khawams are also owner of a variety of other companies, several of which are at least rumored to have been fronts for individuals and government bodies in the previous regime and to have participated in sanctions-busting activity. The family's only prior experience with air travel has been their continuing ownership of a charter service of two 737s operating out of Swaziland. In addition, the Khawams' offer to put up the entire up-front capital for the airline without any bank or market financing at all is cause for concern. ¶9. (C) COMMENT: Problematic financing aside, the deal beginning to take shape between IMOT, RJ, and Boeing will resolve issues that each participant has focused on intensely over the past year. Apart from the financing issue, completion of the agreement seems likely to provoke substantial complaints from other interested regional carriers. ¶10. (U) Amb. Trent and Mr. Willis did not have an opportunity to clear on this cable. GNEHM