Are the bad air days over?

Royal Jordanian's fortunes appear to be on the up, but it still has its work cut out for it

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By  Massoud Derhally Published  November 5, 2002

|~||~||~|Once named ALIA after Queen Alia, the third wife of the late King Hussein, Jordan's debt-ridden airline Royal Jordanian (RJ) has seen better days. Jordanians, who baulk at the idea of travelling on RJ, cynically refer to their experience as "hit or miss." However, despite its failure to find a strategic investor, a comprehensive restructuring is helping the airline to gradually emerge from a difficult period in its history.

The airline was originally earmarked as one of the core companies in the country's privatisation program, which picked up before 2000, but fell victim to a number of variables, regional and global. The privatisation program, the centrepiece of the government's structural policy agenda, had a good early run.

The privatisation of Jordan Cement Factories in late 1998, the divesting by Jordan Investment Company (JIC) of its shares in ten companies during 1999, and the sale of 40% of Jordan Telecommunications Company (JTC) to a French-led consortium were all steps in the right direction. RJ, which had been suffering since the mid 1980s from deep financial problems, was next on the list.

Things had started to go wrong for RJ in 1988 when the Jordanian dinar dropped in value by 60% as Jordan cut administrative ties with the West Bank, says Samer Majali, chief executive of RJ. The country's foreign currency expenditures were higher than its foreign currency revenues. That caused a loss for RJ in 1988, which could not be covered by the government of Jordan at the time, even though it was supposed to cover all the losses under state law. "The problem was manageable at the time, until 1990," says Majali.

Then, the Gulf War reduced the traffic in and out of the area considerably. In 1990-1991, Jordan was the country third worst hit by the Gulf war after Iraq and Kuwait and the two worst hit sectors were transport and trade.

The major damage happened during the air strikes in January 1991, when RJ's fleet was effectively grounded for at least three weeks. "We were only allowed to bring one aircraft per day in and out of the kingdom," says Majali.

Even after the air strikes finished, the drop in traffic continued. "It took us at least two years to recover the traffic of RJ to pre-Gulf War levels. Our losses at the time were estimated to be in the region of US $120 million," he adds. Again, the government of Jordan did not have the resources to cover the shortfall. That loss, in addition to 1988's currency problems, piled on the debt, which resulted in RJ having to borrow to finance its operations until 1999.

In the second half of the 1990s, the Jordanian government, in co-operation with the World Bank, came up with a plan to privatise RJ by restructuring its debt, which in 1999 amounted to US $650 million in total. The government wiped out 40% of the debt through a paper transaction. "We owed money to the refinery of Jordan, the refinery owed the same amount over the years to the government for the price of petroleum. So in the end it was a paper exercise to wipe out the debt in 1999," says Majali.

That took care of some of the debt; the remaining 60% was given to RJ to handle through the splitting off of five non-core activities: the duty free shop, catering, a training centre, engineering and the engine overhaul facility. They were split from RJ and parked into a holding company called RJ Investments, and the government started to sell them off.

"The government paid off all the local Jordanian debt, which was 30% of the total debt," as a result of the sales, says Majali. "The remaining 30% of the debt is future lease payments on the aircraft and that remains with RJ."
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All in all, 40% of debt was cleared as a government write off and out of 60% remaining, half of it was cleared by the sale of the non-core activities. The remaining 30% rests with RJ.

Following this financial restructuring, Majali claims that RJ is now able to boast a reasonable operating profit and net profit, although RJ does not release formal figures. "That established the fact that without sizeable debt, RJ as a business concerned with air transport in the region can actually make money, and that is very important for the future plans of privatisation," says Majali.

Also following the restructuring, the government issued a special law in February 2001 that turned RJ into a public shareholding company. The airline has now set its eyes on finding a strategic partner to buy up to 49% of the company.

"Our strategic partner would be an airline who would buy the shares from the government, invest in the airline and enter into a marketing alliance with the airline," says Majali.

Finding such an investor has proven difficult though. Back in 2000, when rumours of possible deals were doing the rounds, things turned sour when the Palestinian intifada started in September.
The violence resulted in a major drop in traffic for the remaining part of the year and RJ ended the year with an operating loss of $1 million and a small net profit of $1 million, according to Majali. "The continuing regional instability has a negative affect on the movement of people in and out of Jordan, plus the general perception of investment in the area prevented us finding a strategic partner," Majali says.

Prior to outbreak of the intifada, RJ went on a road show in the early part of 2000 seeking out possible strategic partners, and according to Majali it approached TWA, Continental, Emirates, and British Airways.

Once that opportunity was lost through external events, RJ began to recover well and that continued throughout the summer until the events of September 11. RJ, like the vast majority of airlines in the world, ended 2001 with a considerable loss. Traffic dropped by at least 30% year on year and the biggest loss was on the carrier's European route, where traffic dropped by 50%. RJ ended 2001 with a net loss of US $15 million on turnover of $215 million, which is less than 5% of turnover.
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If the events of 911 made the hunt for a strategic investor difficult, Israeli incursions into the West Bank in 2002 made it even more so. Although tourism was hit particularly hard between March and May, traffic started to pick up after the siege of Arafat's compound ended in May 2002.

However, a strategic investor is still nowhere to be found. "Compared to its regional rivals, RJ is run fairly well," says James Reeve, a senior economist at the Economist Intelligence Unit. "However, it's still making a small loss and the international airline industry is in dire straits. No one is interested in 'exotics' such as RJ," he adds.

Uli Baur, vice president of Simat Helliesen & Eichner (SH&E), the largest airline consultancy in the world, says the greatest challenge for RJ is the region's instability. "There was a lot of interest from US carriers in RJ," said Baur, referring to the environment back in 2002. Baur points out that RJ is not alone in its failure to find a major investor. Hungary's Malev, Taron of Romania, Bimam of Bangladesh, TACV of Cape Verde and Middle East Airlines were also unable to find takers.

With no strategic partner in site and its debt burden manageable, the new management team is trying to resume the development of the carrier with the resources available. "We formulated a strategy that maintains the current network of RJ. We did not want to make major cuts in the network before the strategic partner is known," says Majali.

All of RJ's development plans are geared to increasing the net value and net worth of RJ, which now has US $80 million in capital lease obligations. The management has phased out the A310, which is not ideal for long range routes, according to Majali, has replaced half of the A310s with A340s and has expanded the fleet to serve other destinations. The airline turned to the Islamic banking arm of Citibank, Bahrain-based Citi Islamic, to raise US $15 million to enhance its restructuring program and modernise its fleet.

The cash strapped airline took the decision to sustain and finance most of the aircraft it brought on an operating lease, while keeping some of its aircraft on a capital lease, which ends in outright ownership. This according to Majali, allows RJ to build up some assets, whilst operating leases does not put too much of a burden on the financial resources of the airline. "It gives us flexibility to move and add aircraft as the need requires," says Majali.

The airline also contracted a consulting firm to restructure its corporate organisation. A study completed by the consulting firm showed that RJ had excess staff and needed to downsize. "The company took the decision to remove 500 staff and that represents just fewer than 20% of the staff in Amman and 13% of staff worldwide," says Majali.

The airline currently has 3,000 employees globally and it claims that RJ's market share has risen to 50% in and out of Jordan. Majali says if the situation remains relatively stable, the airline will end 2002 with a small operating profit. "RJ has a lean management, has trimmed the fat and eliminated some of its business units," comments Baur.
The government now plans to sell all its remaining shares in RJ locally. If it follows through on this and all goes well, the ideal scenario is the airline being 100% privately owned between a strategic partner and individual investors.

The only stipulation, says Majali, is that Jordanians must own 51%. Various valuations have been placed on RJ, which, according to Majali, could go for anywhere between JD 150-350 million (US $220-$514 million.)

Despite the improvements in its situation, RJ still has its work cut out for it. Its greatest challenge for now is to become debt free.
Longer term, once the air transport market is liberalised in the region, service will become an increasingly important differentiator for airlines. Investing in customer service will not only place RJ in a better position to compete, but could also make it more attractive to a potential strategic investor.||**||

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