INTERVIEW: Royal Jordanian CEO Samer Majali

Amman
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At the same time as he was engineering a financial turnaround at Royal Jordanian, Samer Majali was guiding the carrier to become the first Arab flag carrier to privatise and join an alliance, writes ATI sister publication Airline Business.

It is two days after New Years Day and the always smiling and gracious Samer Majali seems even more content than usual as he shows his visitors the panoramic view of the Amman skyline from his penthouse office. Majali has a good reason to be happy. Royal Jordanian, where Majali has spent his entire career and has been chief executive since 2001, has just completed by all accounts a fantastic year.

In March 2007 Royal Jordanian became the first Middle Eastern carrier to join a global alliance. The year ended with the first successful initial public offering for an Arab flag carrier, with the government generating $232 million for its own coffers through the sale of a 71% share to Jordanian and international investors. The two accomplishments cap a remarkable privatisation and turnaround process which began a decade ago and are the last elements of a vision initiated by the late King Hussein.

“2007 was a pivotal year for us,” Majali says between cigarettes and shots of strong Arabic coffee. “The two big items in 2007, privatisation and joining an alliance, are an achievement for a small carrier in the Middle East in a very difficult neighbourhood.”

With Jordan sandwiched between Israel, Iraq, Syria and Saudi Arabia, regional instability has always been Royal Jordanian’s biggest challenge. The carrier has lost aircraft in wars and been forced to temporarily move its fleet overseas. Instability in the region also forced the government to delay privatisation in 2001.

“We’ve always been between a rock and a hard place,” Majali says. “That’s why we think our privatisation has been so successful – to be able to convince investors to invest in an airline -sitting in an area with so much difficulty.”

But Majali is quick to point out that Royal Jordanian has been able to turn its geographical position from a challenge into an opportunity. In 2002 Majali oversaw a major restructuring of the carrier’s network to focus more on neighbouring markets. Royal Jordanian has since become the dominant carrier in the Levant region and been consistently profitable, making it attractive to oneworld and investors.

“Basically we’ve taken a country of six million people which is Jordan and have extended our boundaries virtually to cover the entire Levant. This is a region of 80 to 100 million people. This is our home market. This sixth freedom traffic is actually third and fourth. We want to make it transparent for someone sitting in Erbil as if he’s sitting in Amman.”

Erbil is one of four destinations Royal Jordanian serves in Iraq, an underserved high yield market which most carriers have not yet re-entered. Its 30 weekly flights to the war-torn country, currently served with wet-leased Fokker jets because their hull value is significantly lower than Royal Jordanian’s Airbus and Embraer jets, makes it the largest carrier in Iraq. “It’s a high risk operation but it’s an opportunity at the same time,” Majali says.

Royal Jordanian is also the second largest carrier in Lebanon and Syria and is the only major Arab carrier serving Israel, another Levant country. It also has a big presence in neighbouring Egypt and Saudi Arabia, with four destinations in each country.

The Levant strategy paid off in part because it has taken Royal Jordanian away from the crossfire of Emirates, Qatar Airways and other Gulf carriers. Majali was quick to recognise that Royal Jordanian couldn’t compete for long-haul traffic against these larger and faster-growing Middle Eastern rivals. It can make more money connecting secondary regional destinations, such as Alexandria in Egypt to Aleppo in Syria, and international to regional -destinations, such as Chicago to Erbil.

“In the 1970s and 80s we developed, probably only in competition with Gulf Air at the time because there was no Emirates and no Qatar Airways, a one-stop service between Europe and the Far East. Airplanes couldn’t fly non-stop so we were in competition with all of the airlines – the European airlines, the Far East airlines and possibly Gulf Air – to carry this Europe to Far East traffic.

“What has happened in the last 10 to 15 years is that -European and Far East carriers started flying non-stop and new Gulf carriers started targeting this market with huge capacity. We had to rethink our strategy. We decided in 2002 to start withdrawing from this market and we started putting in a very strong regional network. We became a regional to regional connector and a regional to international connector rather than an international to an international connector. We replaced low yield, high cost transfer traffic with higher yield, lower cost transfer traffic. That was the basic element of the strategy.”

The strategy shift caught the attention of oneworld, which was keen to increase its presence in the region and add a carrier that was not necessarily the biggest in the Middle East but served all the key points. Majali is proud to point out that Royal Jordanian for now is “the only member of a global alliance anywhere from Austria all the way to Thailand”.

Going forward, Royal Jordanian plans to capitalise on its dominance in the Levant by increasing frequency to existing destinations. Majali is not as interested in growing the network much beyond the current 55 cities. The carrier’s two newest destinations, Budapest and Hong Kong, were only added to improve connectivity with oneworld partners Malev and Cathay Pacific.

“Our primary network expansion is adding frequency, consolidating our position and offering a far better service to the current destinations we serve. We will allow our oneworld partnership to cope with new destinations, especially long-haul,” he says.

Relying on partners to fill out its network is the obvious strategy given Royal Jordanian’s limited long-haul fleet. Until the carrier takes delivery of its first of 12 Boeing 787s in late 2010 it simply does not have the aircraft to add new long-haul services. Majali says its four Airbus A340s are now fully utilised in the summer season to operate its North American network, which includes 16 weekly flights to four destinations. As a result it has had to start using its three recently refurbished A310s, mainly on European and Indian routes, along with A320/A321s on Amman-Bangkok-Hong Kong.

Majali is happy to focus on growing regional routes because he sees Royal Jordanian’s position as the leading carrier in the Levant as “fairly defensible in the short-term”. Iraq Airways is struggling to reactivate aircraft, Syrian-air is unable to expand due to US sanctions against Syria, and Palestinian Airlines “is dead in the water at the moment”. Lebanon’s -Middle East Airlines is profitable but is much smaller. El Al does not serve any Arab countries except Egypt, which leaves Royal Jordanian as the only carrier connecting Tel Aviv with several Middle Eastern markets.

Dominance in the Levant helped Royal Jordanian return to profitability in 2004 after several years of losses. The carrier turned a $22 million net profit in 2004, followed by a $29 million profit in 2005. This dropped to $9 million in 2006, due to the war in Lebanon and bombings in Amman in late 2005 which scared away tourists in early 2006. But Majali says profits recovered in 2007 to 2005 levels, boosted by revenues from oneworld, relative peace and improved connectivity at Amman.

Not surprisingly Royal Jordanian’s success has captured the attention of other small to medium-sized Arab carriers who are thinking about copying Royal Jordanian’s strategy of privatising and joining a global alliance as they struggle to fend off large Gulf carriers. But Majali warns it is not as easy as it looks: “It takes time to privatise. It doesn’t happen overnight. We had to have a strategy in place. We had to think of where our market is and invest in it. Each carrier has a different case. There is no formula.”

He adds: “The problem in the Arab world is you have these ‘have not’ countries and ‘have’ countries. We’re all opening the skies between us but these ‘have’ countries still use their carriers as instruments of national policy. They are going after market share and trying to get passengers to travel on their carrier. The airlines in the ‘have not’ countries have to privatise much faster because the countries can’t support them anymore from a financial point of view. These airlines are at a disadvantage.”

Majali points out that in Egypt, Kuwait and Saudi Arabia governments are now trying to privatise their flag carriers but they have already opened up their markets to new entrants. In Jordan the government has kept the market closed, with Royal Jordanian holding an exclusive concession on all its routes through 2010. New carriers are free to launch but are currently limited to Jordan’s 50 unused bilaterals, markets which are generally not commercially viable.

Of course privatisation did not come easily in Jordan either. Royal Jordanian was supposed to be one of the first government-owned companies to be privatised when Jordan first introduced in the 1990s a policy to privatise all large institutions. The carrier’s privatisation was initially delayed because of debt problems, which were fixed through a financial restructuring at the end of the last decade. The first stage of privatisation was then concluded in February 2001, when Royal Jordanian was registered as a public shareholding company. But the important second phase, involving the transfer of shares to the private sector, was -frozen following the September 2001 terrorist attacks and the subsequent Iraq war.

The regional situation gradually improved and in 2006 the government decided to finally proceed with the second stage. Work started in January 2007, following the appointment of Citigroup as lead consultant. The project was then fast tracked, enabling the offering to be completed in less than one year.

“What was helpful was the airline was already set up for privatisation,” Majali says. “What happened is we used the five years since 2001-2002, while privatisation was frozen, to prepare us for the day when privatisation happened. We were ready to be privatised from a technical point of view.”

He adds the fact Royal Jordanian’s non-core assets, including its maintenance, training and catering businesses, were sold off earlier made the process of selling the airline easier. “The process from the government point of view in terms of getting all the approvals was also very quick because we were already a public shareholding company.”

At the urging of Citigroup, the government also revised its privatisation strategy last year to pursue a straight IPO rather than a strategic investor. The government’s original 2001 privatisation plan involved selling a 49% stake to another carrier and retaining the remaining 51%. “Once Citigroup was appointed, their recommendation was that we don’t settle for a strategic partner. Their report was very complimentary in terms of the turnaround that has been accomplished and the company has been transformed over the last five years from a semi-governmental entity into a private sector company. In addition, in the meantime we became members of oneworld. From a network synergy and marketing point of view we don’t have one strategic partner, we have nine.”

The government decided to only retain a 29% share, including 3% for the armed forces. The 71% now listed on the Amman stock exchange includes 10% held by Jordan’s -Social Security Corporation and 8% which has been set aside for employees. The rest are held mainly by international investors. Majali estimates that currently just over 55% of the shares are Jordanian owned, surpassing the 51% required for bilateral reasons. The M1 Group, a Lebanese firm with aviation investments in Africa and Europe, is the largest -single private shareholder with a 19% stake.

Majali says privatisation will help Royal Jordanian access capital markets, become more efficient, expand further and drop “the stigma associated with being government owned”. He adds: “Strategically even though we had an excellent relationship with the government over the last six or seven years, they being the 100% owner, it was a sort of don’t call us we won’t call you arrangement. Don’t come to us for assistance and we won’t interfere in any operations. We were tasked obviously to prepare the company for privatisation. But that was it. It was a fairly healthy relationship moving forward plus the removal of all subsidies in the meantime, any sort of government assistance direct or indirect.”

Now that Royal Jordanian is private, profitable and a member of oneworld it seems Majali’s job is finished. But he insists there is still work to be done and you can never rest easily in this business. Royal Jordanian’s headcount has shrunk from 5,700 to 4,000 over the last seven years while the carrier has doubled in size, but Majali says more changes to Royal Jordanian’s corporate culture are needed to focus more on productivity. Job security needs to be tied to performance. Deserving employees need to be rewarded while underperforming employees need to be penalised. “We’re still not there yet,” Majali says.

This is perhaps the legacy of a proud government institution that had its king as one of its pilots. A picture of Hussein and his successor, King Abdullah, hang prominently in Majali’s office. The spirit of Hussein will always be with Royal Jordanian, but following the achievements of 2007 it is ready to move to the next chapter. “For us it’s the beginning of a new phase in Royal Jordanian’s development and a new phase in its history.”

This article was first published in the February issue of Airline Business magazine