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.

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AIRBUS A DONE DEAL
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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.

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A ROYAL WINGS PURCHASE?
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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.

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NOT ALL LOGIC IS COMMERCIAL
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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.

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AN OPPORTUNITY
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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