Why the Government Should Exit Royal Jordanian

Major efforts are underway to save RJ from financial ruin. If the government truly wants to help, it should consider selling its remaining stake in our embattled national carrier.

By Jawad J. Abbassi

RJ offers great service. It’s part of the prestigious One World alliance and presents a good choice of onboard entertainment. Its economy seats are spacious and business seats luxurious. Last year, the airline generated JD760 million in revenues, and its 30-plus planes carried 3.3 million passengers, which accounted for more than half of Queen Alia International Airport’s passenger traffic.

Even so, RJ’s balance sheet remains dismal. The company recorded a loss of JD39 million in 2013, following a small profit of JD1.1 million it managed to scrape together in 2012, and a massive loss of JD58 million in 2011. Its cumulative losses are over three-quarters of its capital, and its book value is barely 10 percent of paid capital. Essentially, the losses have wiped out most of its shareholders’ equity. The company has to raise its capital by JD50 million before March in order to stave off liquidation and violation of loan terms it struck with its lenders.

RJ bosses have set out plans to reverse the airline’s fortunes. In addition to the JD50 million capital raise, the airline’s management team plans to raise RJ’s capital by an extra JD100 million by 2018. If successful, this will increase its capital to JD234 million. A capital increase would solve the current major problem of negative working capital and also allow the airline to pay off some of its debt which exceeded JD105 million by the end of 2013. The turnaround plan also includes reducing the number of planes operated by the company to 29 from 32 by the end of 2014. The airline will replace the old leased Airbus 340 and 330 with the newer, more expensively leased Boeing 787s, which are around 20 percent more fuel efficient than the outgoing aircraft. As well as further shrinking RJ’s route network, managers also plan to offer voluntary layoffs for some of the airline’s 4,500 strong workforce.

Lower fuel costs would help as well. Royal Jordanian paid JD284 million for fuel in 2013, amounting to 37 percent of its revenues. In 2010, the last year the airline made a respectable profit of JD9.6 million, fuel costs stood at only 30 percent of revenues. Fuel costs as a percentage of revenues were 40 percent in 2011 and 36 percent in 2012. The government decision to allow RJ to competitively buy fuel on the local market should save it some JD12 million every year. If Brent remains below $100 a barrel for 2014 and 2015, the fuel yoke on RJ would become even lighter.

If this turnaround plan goes well, RJ could follow the path of other regional airlines that have successfully restructured themselves back into profitability and growth. Lebanon’s Middle East Airlines is one example. The recipe includes a rationalized fleet, good service, restructuring routes and dropping chronically loss-making ones, and reducing total headcount.

But should Jordan’s government remain in the airline? Restructuring the airline and raising its capital may be a good time for the government to exit from RJ all together. The government had raised JD185 million when it sold 74 percent of the company in 2007. It was able to privatize RJ after waiving some $1 billion in fuel debts, effectively cumulative losses borne by the treasury. The presence of the government as the largest shareholder has also hindered the streamlining of operations at the company. The government’s best course is to exit the airline fully and allow RJ to be completely privatized through the capital increase required. This would certainly be better than increasing Jordan’s public debt to finance the government’s share of capital increase.

For RJ to attract fresh capital from current and new shareholders, it must show a solid turn-around plan. This plan should certainly include regulatory certainty and visibility on issues related to taxes, route rights, and the ability to restructure RJ’s labor force. This is where government action is most needed: It must provide such regulatory visibility and certainty, as it leaves the airline to chart out its own independent future.