BOEING VS. AIRBUS: WHAT IS GOING ON??

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 007528 SIPDIS USDOC 4520/ITA/MAC/ONE/PTHANOS DEPARTMENT FOR EB FOR WAYNE/MERMOUD E.O. 12958: DECL: 09/08/2014 TAGS: EAIR BEXP PINR JO LY SUBJECT: BOEING VS. AIRBUS: WHAT IS GOING ON?? REF: A. AMMAN 7337 ¶B. AMMAN 7336 Classified By: Charge d'Affaires David Hale for reasons 1.5 (b) ¶1. (C) SUMMARY: The past month of the Royal Jordanian Airlines (RJ) Boeing purchase saga has seen an increasingly clear-cut paradox. All available signs point to a clear decision by the GOJ, especially including the Palace, in favor of a continued RJ relationship with Airbus as sole provider of medium-range aircraft (Reftel A). Why, then, does the King continue to insist that he is committed to a Boeing 737 purchase? While commercial logic would dictate otherwise, royal frustration, USG pressure, family politics, and unrealistic expectations may indeed lead to a purchase of 737s for RJ subsidiary Royal Wings -- if the Palace, with Boeing's help, can somehow come up with the money. END SUMMARY. -------------- AIRBUS A DONE DEAL -------------- ¶2. (C) While the particulars of the deal under which RJ will lease 10 Airbus A320s and A321s have not yet been determined, negotiations between Airbus and RJ are proceeding rapidly toward a conclusion, with the full support of the GOJ. The RJ board of directors, according to press reports, "ruled out a financial lease" for Airbus A320s and A321s in the September 1 meeting at which it decided to go with Airbus instead of Boeing. However, RJ employees have carefully worded their responses to queries by the Embassy and Boeing rep Peter Ledger, appearing to leave the way open for a financial lease (which would give them the option to eventually own the aircraft) rather than a straight operating lease. As the King had originally favored a Boeing purchase because he preferred that RJ own its aircraft rather than leasing all its assets, it would make little commercial sense for RJ to close off the option of lease-to-own, especially if USG scrutiny of the deal were to fade with the passage of time. -------------- A ROYAL WINGS PURCHASE? -------------- ¶3. (C) COMMENT: If the Airbus deal is indeed eventually intended to be lease-to-own, it will put the prospect of a Boeing sale to Jordan even further out of reach than it seems at present. The King and his brother, Jordan's current aviation godfather Prince Faisal, however have held out the possibility of a 737 purchase by Royal Wings, RJ's subsidiary specializing in short-range routes and charter flights. Faisal and the King have hinted that Royal Wings might be set up as a self-sustaining carrier based at the King Hussein Airport in Aqaba, a nice, new facility whose capacity is currently significantly underutilized and virtually ignored by RJ. Royal Wings could then help, like Emirates Air has done in Dubai, to stimulate tourism to Aqaba merely by making it easy to get there. ¶4. (C) Commercially, it is hard to imagine such a deal making sense. There is a great deal of touristic development underway in Aqaba, and a regular, relatively low-priced charter service run by Royal Wings between secondary European airports and Aqaba could conceivably be profitable. Ledger, however, sees such demand being filled by 717s at best - it would be very difficult to fill 737s, particularly from the airports envisioned. Serving major European airports would put Royal Wings in head-to-head competition with its owner, RJ. Use of 737s between Aqaba and other Middle East locations would be even more difficult to maintain profitably, particularly in the face of the massive overcapacity currently building in the market and the subsidized carriers flying out of the Gulf, who could take advantage of King Hussein Airport's status as an Open Skies airport (unique in Jordan) to compete directly with Royal Wings and undercut its prices. Use of new Boeings to fly to locations in Iraq would, because of the high insurance premiums Royal Wings would have to pay on their hull values, be prohibitively expensive. Even if some way were found to utilize the new planes effectively, all of the same problems that have inhibited the Boeing sale would remain, as RJ would continue to handle Royal Wings' maintenance (Royal Wings does not have a separate staff for these services). Virtually everyone with whom we have talked - from Samer Majali, the CEO of RJ, to the Boeing employees and reps who have been working on this deal, to the Director-General of the Jordan Civil Aviation Authority - has stated their deep doubts as to whether a purchase of Boeings by Royal Wings could ever, under any circumstances, be commercially viable. -------------- NOT ALL LOGIC IS COMMERCIAL -------------- ¶5. (C) Still, the absence of commercial logic does not necessarily mean that the King's repeated statements of commitment to a Boeing deal are spurious. Both Faisal, who initiated the development of Royal Wings, and the King have reasons for going ahead with a Boeing deal. Faisal has long had a problematic relationship with RJ, though Ledger says that Majali has had a better relationship with him than did his predecessors. The King, on the other hand, has recently grown increasingly impatient with the carrier, which has shown little profitability and little growth potential, failed to attract a strategic partner for privatization, and appears to have no solid strategic plan to change any of the above. Both Faisal and the King appear to feel that RJ is not being run as well as it should be, and Faisal, at least, appears to be genuinely convinced that a large-scale, low-cost, Aqaba-based carrier would be viable. He may have successfully convinced the King of this as well. Neither appears to have confided in Majali. ¶6. (C) The King has more pressing reasons for wanting to go ahead with a Boeing deal, however. Faisal was recently removed from his former position as Commander of the Royal Jordanian Air Force and may be moved to a less powerful post (Reftel B). The King may believe that a full-time project for Faisal is a good idea. The King has also, by his repeated protestations of commitment to a Boeing deal, backed himself into a corner in his dealings with the USG. Even if Royal Wings were to buy two or three 737s, instead of the five that the King had committed to buy, the gesture would be intended to raise the hopes of Boeing for a long-term relationship and soothe ruffled American feathers created by his sudden reversal. $150 million may be a small price to pay for achieving the multiple ends of discomfiting RJ management and keeping peace both in the family and with the USG. ¶7. (C) This would especially be the case if Royal Wings could pay for the planes using someone else's money, and the key sticking point for Boeing has been to identify financing to cover part of the cost of an RJ Boeing purchase. The King's commitment to a Boeing sale has kept Boeing engaged in finding funding sources for a purchase, putting the King in a no-lose situation. -------------- AN OPPORTUNITY -------------- ¶8. (C) Based on the above considerations, post suspects Boeing still has an opportunity in the medium term to sell its aircraft to Jordan. Whether Boeing feels that such a deal is worth its energy, however, is another matter. 737s purchased for Royal Wings would likely be a one-off deal with little likelihood of acting as a wedge for further RJ purchases, would be for fewer airplanes than were originally envisioned, and would require a large part of the financing legwork to be done by Boeing. Boeing still appears interested in pursuing this option, however, and post continues to offer its full support. END COMMENT. HALE