The luxury hotels sprouting on the seven hills of the Jordanian capital, Amman, are a false dawn. Five years after the Arab nations signed the landmark peace deal with Israel, the hotels are the only signs of a peace dividend to boost the flagging regional economy.
Against this arid economic climate, Jordan's government is embarking with vigour on the ambitious privatisation of Royal Jordanian Airlines, its 36-year-old flag carrier. The carrier is seeking a strategic partner and equity investor at a time when at least a dozen other carriers are offering their services, each offering some unique selling point, usually based on location and regional market access.
The harsh truth for Jordan's embattled economy is that it has only been put on the map this year by the death of King Hussein, the country's leader since independence.
The task for Royal Jordanian and its advisory team is to distinguish the carrier from the hurd while meeting the government's tight timetable. It aims to sell a 40% stake for $60-80 million and have a partner in place all by year-end.
The sale can differentiate itself on at least two counts. First, there is a drive for transparency in a World Bank-sponsored programme which has already seen the carrier clean up its finances. Second, the government and the airline's senior management are realistic about what they have to offer and, more rarely, what they will have to give up.
Nader Dahabi, Royal Jordanian's charismatic president and chief executive, appears to have quickly shaken the bureaucratic legacy of his time as second-in-command of the air force in his five years with Royal Jordanian. As chairman of the Arab Air Carriers Association he has seen other attempts at consolidation succeed but more usually fail.
He sees the Royal Jordanian sale as a catalyst for consolidation in the region. While advisors and competitors focus on the potential for a partner from Europe, Asia and North America, he sees a solution closer to home. "I would not be surprised if we link with a strategic partner from the region," says Dahabi. "In the long run, airlines from this region will merge for their own benefit."
While Dahabi believes a link with Emirates or Gulf Air provides a sustainable solution for survival, advisors and airline planners have drawn up a hit list of carriers when Royal Jordanian's marketing campaign is launched in late May.
Insiders point to KLM as a clear target, given its positive experience in generating feed from Kenya Airways and the possibilities Royal Jordanian could bring to its alliance grouping.
Lufthansa and British Airways remain on the wish list, while Swissair and its allies would seem to be removed from the running by the planned purchase of a stake in THY Turkish Airlines. But other longshots exist, including Asiana, Cathay Pacific and Malaysia Airlines.
Dahabi's openness may stretch the temper of advisors seeking to promote Royal Jordanian as a possible member of one of the major alliance groupings and keen to focus on Jordan's location as an access point to the Middle East and the potential of its under-developed tourist industry. "If you privatise you have to give up different things," he says. This includes the creation of a different entity - perhaps a pan-Arab carrier - and even dropping the Royal Jordanian name. Dahabi says there is a need to adjust the size of the network and focus on profitable routes. "That network will be influenced by our strategic partner."
A realistic role
Dahabi's enthusiasm for a regional solution has rubbed off on the carrier's chairman, Walid Asfour, formerly Jordan's foreign minister. "Royal Jordanian will remain a national flag carrier, but in a different way," he says. Asfour is content to talk of downsizing the network and adopting a strategy in line with the possible alliance partner, describing the future of Royal Jordanian as "a regional carrier" shorn of its long haul routes to Asia and North America. "First of all we need stability in the region," he says. "Investors are more available than strategic partners."
The Jordanian government launched the latest privatisation effort at the end of 1997, the flagship for the sale of 19 government entities. After establishing an airline unit in its own privatisation arm, the government employed an advisory team last October. Paribas is on the mandate as financial advisor together with strategic aviation consultants SH&E and legal firm Clifford Chance.
"The government of Jordan understands that timing is key to the success of the operation, because it is essential for Royal Jordanian to be brought to the market ahead of other state-owned Middle East carriers," says Jean-Michel Doublet, head of emerging market corporate finance at Paribas
The project is being funded by the World Bank, which has pushed the privatisation of infrastructure throughout the emerging markets - using a model developed for Kenya Airways and then Lloyd Aereo Bolinano.
The key challenge for the airline and its advisors has been to develop a financial restructuring plan and a commercial strategy attractive to potential partners. "Our target is to attack the non-operational costs, that is the interest charges, which have been the main cause of our losses," says vice-president finance Muwaffaq Nawasrah.
Royal Jordanian still bears the scars from the Gulf War and the absence of political stability in the region as the Israeli peace plan has unwound. The contraction in the Jordanian economy last year saw passenger numbers dip from 1.35 million to 1.19 million. Revenue passenger kilometres dropped by 20%.
Sales reached $345 million last year and the airline turned in an operating profit of $28 million, plus $8 million from non-core operations. However, long-term debt dragged the airline into the red with the treasury tracking an annual loss of around $50 million.
Financial restructuring was the key, with the government agreeing on a plan to write off the carrier's $850 million debt burden. The debt has put pressure on Royal Jordanian's cashflow and forced it to renegotiate some aircraft leases, but with the restructuring plan in place in May, potential partners will find a cleaned-up balance sheet.
The plan calls for the removal of $210 million in government debt and another $114 million owed to local creditors, taking the debt:equity ratio to a more comfortable 67%. Local debt has been prepaid with the proceeds from the sale of five Lockheed L1011 Tristars and shares in Sita. Nawasrah says the airline is on track to make a net profit in 1999, its first since 1992. "This may be a turning point in the life of Royal Jordanian," he says.
Peace dividend?
Location has not been a great salvation for Royal Jordanian in recent years. The failure of a peace dividend to emerge has stagnated the undiversified economy where rapid population growth has not been matched by investment. Initial estimates of buoyant GDP growth have been revised during debt-relief talks with the International Monetary Fund (IMF). The claimed 3% annual expansion has been replaced by an admission that the economy actually shrunk in 1998 but is likely to grow by 1.2% this year and 3.5% in 2001, according to the IMF and is likely to fall further
The airline which is coming to market is a different beast from that which saw its business wrecked by the Gulf War. Sixth-freedom business used to account for up to 80% of traffic, but this has fallen to around 40%. Majdi Sabri, vice-president commercial, says competition has intensified, with British Airways and Lufthansa prepared to overnight aircraft to capture connecting traffic. He says market share remains above 50% and 58% on European sectors. A new yield management system bought from Sita will come fully online at the end of the year.
The ability to maintain market share will also be determined by the outcome of a new regulatory framework being developed for Jordan by Clifford Chance. Royal Jordanian enjoyed monopoly rights on international services and Dahabi wants to see this status maintained for five to seven years.
The labour market has been hard-hit by the fallout from the Gulf War which saw the number of Jordanians working abroad - mainly in the Gulf region - fall from 500,000 to fewer than 140,000. Recent political overtures, notably to Saudi Arabia, may boost the number of workers and frequencies which Royal Jordanian can transport.
The leisure market still accounts for around one-third of total traffic but is hamstrung by the lack of infrastructure development which sees the bulk of tourists continue to arrive from Israel. Major steps are being taken to develop attractions such as Petra and the Red Sea coast around Aquaba.
The leisure market could also be boosted by Jordan's political rehabilitation in the region with improved access to Saudi Arabia to boost the religious tourism to Islam's holy sites on the west bank of the Jordan and Saudi Arabia.
The "friends and relatives" market is hampered by Jordan's tiny 4.7 million population, but marketing initiatives such as the introduction of a two-class service and, rare for the Middle East, no-smoking flights, have boosted average yields.
Restructuring programme
The restructuring programme which started at the end of last year has borne fruit in terms of fleet rationalisation and the trimming of loss-making routes - including Canada, Singapore and Moscow - although executives claim all sectors are profitable. Some sectors have been replaced with a limited range of code shares including with TWA to the USA, Aeroflot to Moscow and Alitalia to Rome.
The fleet has been shrunk from four types in 1994 to just two types by June. Five of the Tristars were sold last year to American Trans Air and the last two are scheduled to leave in June. The airline will add two or three A310-300s to take the fleet to nine and boost A320 numbers by two to five.
This will meet five-year needs though Sabri, vice-president commercial, admits it is sub-optimal. He would rather operate A320s on European routes. "It is much better if we restrict our role to medium and short-haul flights."
Dahabi says the first part of the restructuring has cut through the fat, but more has to be done. The privatisation process has seen the business divided into six business units with non-core businesses - including duty-free sales, engine overhaul and training - set to be spun off ahead of the sale. This will cut 20% of the 5,000 workforce. The Jordanian Government is scheduled to approve the final phase of the restructuring plan, including financial changes, and the the new aviation structure in June. Royal Jordanian officials and their advisors are to start series of roadshows in the early autumn with a view to completing the sale by the end of the year.
The transparency and harsh focus on reality embedded in the privatisation process of Royal Jordanian have the capacity to transform the airline industry in the region.
Rewriting the rules for the privatisation
The airline privatisation process in Jordan has been distinguished by the Government's willingness - spurred on by its World Bank sponsors - to maximise openness and transparency. It has also been willing to remove or rewrite the regulatory hurdles which stand to get in the way of the sale. Andrew Matthews, the partner leading the privatisaiton project for law firm Clifford Chance, says a study of previous sales revealed that such hurdles have caused deals to underperform in the past.
The whole aviation sector in Jordan is bundled up in the Ministry of Transport (MoT), with no formal separation between the airline, the airport and the aviation infrastructure. "If you are going to privatise the airline you have to privatise the regulatory system as well," says Matthews. Clifford Chance has drawn up a new policy to transfer control of the infrastructure into a new executive civil aviation authority with responsibility for the core functions of competition policy and regulatory oversight. This policy is currently being examined by the MoT and includes prescriptions for route licensing, multiple designation and oversight, as well as amendments to existing air service agreements. It is expected to be implemented by July, ahead of the planned sale at the end of the year.
Given its tiny home market, the prospects of new entrants emerging to tackle Royal Jordanian's former monopoly seem distant. But the airline is well aware that in Jordan's entrepreneurial society, there are investor groups willing to take up the challenge. Regional routes are likely to be the first on the list. The development of leisure traffic and Jordan's fledgling tourist market, particularly from Israel, makes sectors such as those from Tel Aviv top Aqaba an attractive proposition. The current Amman-Tel Aviv route operated by Royal Jordanian's Royal Wings subsidiary is already highly profitable.
Royal Jordanian would like to maintain exclusive rights on intra-Gulf routes for seven years and also for three years on European and longhaul routes. "It is a conundrum: encouraging competition while protecting the viability of the airline," says Bashir Abdel Hadi, general coordinator of privatisation at Royal Jordanian. The carrier's willingness to cede parts of its network to fit with better with a prospective strategic partner also opens up the possibility of new longhaul routes being opened to competitors.
The draft aviation plan opens Royal Jordanian to new commercial pressures for the first time. The separation of the airport into a commercial operation will see the airline have to pay its first fees for hangar space, check-in counters and related services, such as the duty-free concession which is likely to be spun-off separately.
Source: Airline Business