If ever an airline deserved a change in fortune, it is Royal Jordanian. Once the premier airline of the Middle East, the Jordanian flag carrier has been buffeted by circumstances beyond its control for longer than anyone cares to remember. Change is in the air, however, with privatisation once more under way, in a move which the carrier hopes will recapture its past commercial success, if not exactly all its former glories.
If it succeeds this time, the privatisation would represent the end of a long road. The story dates back to 1997 when the Jordanian Government originally announcing a broad privatisation programme, with the sale of the country's flag carrier as its centre-piece. A year ago that process appeared to be getting into gear (Airline Business, June 1999). The carrier had already carried out a major restructuring and five non-core units were earmarked for sale. The next step was to bring in foreign investment and a strategic airline partner. The aim was to have the partner in place and to sell a 40%stake by the end of 1999.
In the event, the timetable lengthened as the political approvals process and the carrier's debt restructuring dragged on. However, senior officials are now optimistic that the sale is back on course and believe that a strategic partner could be on board within the next 12 months. The roadshows held during 1999 had already sounded out possible foreign partners in the shape of Continental Airlines and British Airways as well as the ill-fated KLM/Alitalia grouping. Nearer to home, the Emirates Group and Gulf Air were also included.
The delay has also given Royal Jordanian time to start seeing the benefits of its restructuring plan. It ended 1999 with a respectable net profit of $34 million on sales revenue of just under $360 million, marking a turnaround from the $7.5 million net loss chalked up in 1998, thanks largely to its huge accumulated debt.
Reduction of the debt mountain has been a priority and this was the main stumbling block when privatisation was first mooted. With the airline's debts at around $750 million, it was feared that the Jordanian Government would have to pay out cash before reaping the benefits of the sale of shares.
Almost $300 million of the debt was with the Jordan Refinery, itself the beneficiary of government funds for the purchase of crude oil. In the end, the government offset the debts of the two companies in a "paper exercise".
Local debts, mainly to banks, the national social security corporation and various suppliers, are being covered by the proceeds of last year's sale of the carrier's five Lockheed L1011s to American TransAir. The sale of telecommunications shares in SITA will also help.
The remaining third of the accumulated debt, comprising lease payments on aircraft, will remain with the airline, to be serviced through operating revenues.
Leaner organisation
By the first quarter of next year, Royal Jordanian will be a slimmer, more focused organisation, says Samer Majali, vice-president for passenger services. Five non-core divisions - the duty-free shops at Amman's Queen Alia International Airport, training, catering, engine overhaul and engineering maintenance divisions - have been or are being sold.
First to go was duty-free which went to a Spanish operator in August for an undisclosed figure. Management control was expected to be transferred soon after. A decision on the training division was scheduled for October, says Majali, followed by the other three divisions at intervals of two months.
Non-core sales
a major step towards privatisation was taken with the core business in August when the Jordanian Parliament approved the annulment of the 1963 law under which Royal Jordanian had been formed as a public utility. This has paved the way for its transformation into a private company, as of now wholly-owned by the government.
In the second phase, the company will be restructured to ensure it is run at arm's length from the government. "In reality, Royal Jordanian already runs this way," says Majali. "We have to in such a competitive environment. The assumption is that we will get a strategic partner sometime within the next 12 months."
On offer will be a 40-49% stake and management control as an option. "It amounts to a minority stake and de facto control of the company," says Majali. "The company will run under this arrangement for two to three years. Hopefully then the shares will start to appreciate in value."
The third phase, the sale of the remaining government shares, has still to be determined. Proposals include a stipulation that 50% of the company must be held by Jordanians, and that shares should be given to employees.
Majali believes that there will be little problem in attracting a foreign partner. Financial control at Royal Jordanian has always been tight, he says, especially over the past two to three years. There has been a 10% across-the-board drop in staff over the last two years. He concedes, however, that the company has been unable to invest in the automation technology needed to turn this reduction to its full advantage.
The airline, he argues, has other attractions too - strong technical expertise and a well-developed passenger route network of 48 destinations plus an all-cargo operation. "We would prefer an airline partner where we could benefit from their size and route network, one that could achieve a bigger network by investing in us," says Majali.
With its small base market, Royal Jordanian relies on transit for 55% of its traffic. Its Amman base is promoted as the natural hub between East and West, and Royal Jordanian competes well on point-to-point services with good departure times and capacity. The expanded fleet includes nine Airbus A310s, five A320s and two old Boeing 707 freighters. The latter, however, are soon to be replaced by A300s.
"There is light at the end of the tunnel," he says. "We're looking to regain our position as a leading Arab carrier."
Source: Airline Business
