RJ CEO SEES A GOOD YEAR BUT CHALLENGES IN 2004

S E C R E T SECTION 01 OF 03 AMMAN 005100

SIPDIS

NOFORN

USDOC 4520/ITA/MAC/OME/PTHANOS
CPA FOR BROWN/MYROW
DEPARTMENT FOR EB FOR WAYNE/MERMOUD

E.O. 12958: DECL: 06/20/2014
TAGS: EAIR BEXP KPRV JO IZ
SUBJECT: RJ CEO SEES A GOOD YEAR BUT CHALLENGES IN 2004

REF: A. AMMAN 3488

B. AMMAN 1471

Classified By: AMBASSADOR EDWARD W. GNEHM FOR REASONS 1.5 (B) AND (D)


1. (C) SUMMARY: Royal Jordanian Airlines (RJ) CEO Samer
Majali briefed ECON/C and SCO on prospects for RJ over the
near-to-medium term during a June 20 courtesy call at RJ
headquarters. Majali believes that despite substantial
challenges to the airline resulting from higher fuel prices
and uncertainty following the turnover of authority in Iraq,
RJ is on track to perform well in 2004, perhaps setting the
company up for a partial privatization in the near future.
He also complained of the long lag time that RJ will face
prior to receiving the 737s that will replace its
short-to-medium range fleet, but held out hope of an
additional Boeing purchase. Majali's insights are useful; he
may however be on his way out as RJ boss. END SUMMARY.

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GOOD START TO 2004, BUT FUEL WORRIES
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2. (SBU) Majali described this year as a renewed chance for
RJ to dig its way out of the hole into which it has fallen
over the past three years. Following the first six months of
2003, and especially the month-long war in Iraq, during which
RJ had had "virtually zero" passengers, RJ has seen a steady
climb in traffic and was now performing substantially better
than average. For evidence of this trend, Majali pointed to
2004 Q1 statistics on seat occupancy on RJ flights (72
percent vs. a usual percentage in the low sixties) and
profitability (a small profit for RJ in the quarter vs. a
usual small loss in Q1 in most years). Majali attributed the
increased traffic (and resultant profit increase) to two
primary factors: a revival in the Jordanian tourism industry
(septel),and a substantial increase in business travel due
to Iraq-related business.


3. (SBU) A significant dampener on Majali's profit
expectations, however, has been the high price of fuel, which
Majali says is "killing the industry." According to Majali,
the crude price swings over the course of the year will
likely mean the difference between overall profit and loss
for RJ in 2004. The surcharge RJ has imposed on tickets
covers only 20 percent of increased fuel costs, and Majali
complains that the Jordan Petroleum Refinery Co. (from which
RJ receives all of its fuel) has given RJ no breaks on price,
"despite the fact that they are getting all of their oil for
free." (NOTE: Even if this statement were pertinent, it is
not entirely accurate - Reftel A)


4. (SBU) The 2004 results take on added importance in view of
RJ's privatization plans. Once slotted for a partial (49
percent) sale to a potential strategic partner, RJ's
privatization was put on hold in the wake of September 11,
when a precipitous decline in tourist traffic made RJ's
balance sheet extremely unattractive to most potential
partners - many of which suddenly found themselves strapped
for cash in any case. With good results in 2004, however,
Majali anticipates that the government will put ten to thirty
percent of the company on the block in an IPO in 2005.

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IRAQ PLANS
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5. (SBU) Longer-term, RJ continues to view its operations in
Iraq as a key portion of its overall strategy. Majali
downplayed the profit that RJ is making on its twice-a-day
Amman-Baghdad flight, but implicitly admitted the substantial
knock-on effects that the route has in increasing traffic on
its other routes. He also talked of RJ's interest in
eventually serving some of the secondary Iraqi airports,
including Basra and Mosul, saying that while there is not yet
enough demand to make them profitable, he expects economic
growth to spur rapid increases over the medium term, assuming
an acceptable level of security.


6. (SBU) Majali complimented the professionalism of the new
Iraqi Minister of Transport and the new Iraqi Airways (IAC)
president - the fourth since the end of the war. He
expressed frustration, however, with the uncertainty
surrounding the end of the CPA. For example, Majali noted
that he had been repeatedly told that RJ will no longer be in
charge of baggage handling at Baghdad International Airport
(BIAP) after June 30. However, he has been told just as
frequently that RJ's successor (IAC) is not ready to take
over the job. Further on in the post-transition era, Majali
expects bruising negotiations with IAC over use of the
Jordan-Iraq air routes. Majali says that RJ agreed at the
beginning of the month to pay "nominal" royalties to IAC on
its Amman-Baghdad flight (according to the IAC country
director in Jordan, RJ will pay IAC US $15 per Amman-Baghdad
one-way passenger, but not retroactively). Majali appears to
believe, however, that this is a stopgap and that IAC will
soon be back for a bigger piece of the pie. On a positive
note, however, he knows of no missiles fired against any
aircraft coming into or out of BIAP in the past three months.
All the same, he is trying to keep RJ's profile low, and
recently refused an interview with a U.S. newspaper on the
Amman-Baghdad flight.

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U.S. CODESHARE
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7. (SBU) Another long-term step forward by the airline is the
impending conclusion of its codeshare agreement with America
West airlines, which Majali believes should take place within
the month, after the visit of an auditing team from America
West and applications by both RJ and America West for
antitrust waivers. The agreement will strengthen RJ's direct
routes from Amman to New York (JFK) and Chicago (O'Hare). It
does not however provide any further support to RJ's other
major routes (primarily to Europe). Majali also does not
expect to be able to get a substantial percentage of the
heavy USG traffic traveling to (and through) Amman until such
time as RJ is able to fly to Washington (to which America
West does not fly). For these reasons, RJ is continuing to
actively pursue membership in the Star alliance (United,
Lufthansa, etc.),and to a lesser extent, OneWorld (American,
British Air, etc.). It has written off SkyTeam entirely
after repeated instances of obstructionism by Air France.

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BOEING PURCHASE
--------------


8. (SBU) SCO raised the planned RJ purchase of five Boeing
737 aircraft (to replace RJ's aging medium-range A320 fleet -
Reftel B),and Majali replied that a seven-person team from
Boeing was currently working out the details of the purchase
with RJ staff. He reiterated his frequent complaint about
the difficulty in getting a quick delivery time for purchased
aircraft, saying that the decision by Boeing to throttle back
production to such a large extent in the wake of September 11
had left a serious backlog of aircraft orders and resulted in
higher leasing prices for Boeing aircraft - major
disincentives for airlines wishing to purchase or lease
Boeing aircraft. Majali expects to receive only two 737s
next year, and he said that he is considering elimination of
only one A320 from the fleet in order to make the RJ fleet a
bit larger until the other three 737s are delivered in 2006.
Delivery dates of the four leased 737 aircraft are unknown,
as the lessor has not yet been selected


9. (SBU) Majali also noted that RJ is looking to increase the
extent of its regional service due to the rise in
intra-regional tourism in the Middle East, and that it
therefore plans to expand the fleet of its short-haul
subsidiary Royal Wings. RJ is considering purchase of one or
more Boeing 717 aircraft to fill this need, though other
regional jet manufacturers are in the running as well.

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COMMENT
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10. (C) RJ is quickly approaching a point of decision, after
which it will be expected to sink or swim. The long overdue
privatization of the line is increasingly viewed as an
anomaly in a generally successful GOJ privatization program,
and pressures are building up from several directions for
Jordan to be opened to free competition. Not brought up at
the meeting, but worthy of mention, was last month's GOJ
pledge for a full Open Skies policy at all Jordanian airports
by 2007. In a market with increasingly cutthroat competition
from a larger and larger array of regional airlines (some
heavily subsidized by their home governments in the Gulf),RJ
will need a much more streamlined business model to remain
afloat, let alone expand. The airline is betting heavily on
its operations in Iraq to provide it with a base of
profitability and a competitive advantage, but events there
seem likely to quickly diminish RJ's advantage on these
routes.

11. (S/NF) RJ's final lunge towards sustainable profitability
as a private company will likely happen without Majali,
however. The 25-year RJ veteran appears to be on his way
out, the victim of too many disappointing years and too
little initiative in reforming the company. In a meeting
with the Ambassador, King Abdullah noted that he had secretly
contracted with a consulting firm - without informing RJ or
his brother Prince Faisal, the "godfather" of aviation in
Jordan - to undertake an outside review of options for the
company. That the King would take such a step is indicative
of his deep dissatisfaction with the company's performance
and his belief that radical measures are required to remedy
the situation. Jordan's civil aviation sector will likely
see substantial transformation over the coming 2-3 years.
GNEHM