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