Jordanian airline senses sales recovery

06 September 2010

Royal Jordanian is reporting a pick up in demand after a disappointing 2009. New routes and expansion of the kingdom’s airport infrastructure will put it firmly on the path to full recovery

Like airlines the world over, Royal Jordanian, Jordan’s flagship carrier saw its performance figures drop in 2009 in the wake of the global recession and the subsequent fall in international travel.

Passenger numbers fell by 1 per cent in 2009 to 2.7 million. The airline was forced to reduce its ticket prices, leading to a 12 per cent decrease in passenger yield.

Seat capacity was cut by 3 per cent in an effort to further reduce operational costs, but despite this seat utilisation dropped four percentage points to 68 per cent.

Market rebound benefits Royal Jordanian

Hussein Dabbas took over from Royal Jordanian’s outgoing chief executive officer Samer Majali in June 2009 at the height of the crisis. Since then, he has benefited from a partial rebound in world travel markets.

This year, passenger numbers have picked up. In June, Royal Jordanian flew 268,000 passengers, representing an increase of 13 per cent over the same month in 2009. But the airline is still a long way off from a full recovery.

“Numbers are looking better, but only in terms of passenger numbers. Yields are still suffering, so revenue is below what we should be getting,” says Dabbas.

High oil prices also continue to impact the airline’s financial performance.

“Fuel is still draining the airline’s revenues,” says Dabbas. “Fuel costs have gone up from $40-50 a barrel in 2009, to around $80 a barrel and it rarely goes below $72 a barrel. In May 2009, our fuel bill was $8.5-10m and now it is $24m. Fuel is 25 per cent of an airline’s annual budget, so when you have such a big jump it eats up a lot of the yield.”

Numbers are looking better, but only in terms of passenger numbers. Yields are still suffering

Hussein Dabbas, Royal Jordanian

The airline’s financial results for the last year were an improvement on 2008, however, when a loss on hedged fuel prices caused profits to plummet. 

In 2009, the airline’s profit margin increased 5.1 per cent to 8.7 per cent, with the firm posting a profit of $40m compared with a loss of $35m in 2008. Operating expenses declined 19 per cent, which came about mainly from the drop in fuel costs. Royal Jordanian’s fuel bill fell to $213m in 2009 from $404m in 2008. It represented a 28 per cent of the total operational costs in 2009, compared with 42 per cent in 2008.

My philosophy is to be a boutique airline, I don’t aspire to have 120 airplanes and fly to 250 destinations

Hussein Dabbas, Royal Jordanian

In addition to the weaker performance of its commercial travel business, the firm also saw a fall in demand for freight services. Royal Jordanian’s freight revenues decreased $15m to $42m in 2009, a decline of 27 per cent. The total volume of freight lifted dropped by the same percentage and freight yield fell 14 per cent.

Royal Jordian’s net income
Source: Royal Jordanian

But Dabbas says there has also been an improvement in this side of the business this year. “Cargo is the first thing to suffer in times of recession, but it is recovering. We know business is improving because air fares have risen in the US and global cargo figures are improving, although in terms of yield it is still depressed,” he says.

Projections made by industry bodies reflect this improved sentiment. The Montreal-headquartered International Air Transport Association (Iata) is forecasting global cargo demand to grow by 12 per cent in 2010, following an 11.1 per cent decline in 2009.

Middle East airlines frontrunner in global recovery

Iata is forecasting the global aviation industry as a whole will make a loss of $2.8bn in 2010, but Middle East carriers are expected to lead the recovery. The region’s airlines are forecast to see demand grow by 15.2 per cent in 2010, with combined losses shrinking to $300m from $1.2bn in 2009. The strongest international passenger demand growth is predicted for the region with an annual increase of 6.8 per cent driven by the addition of new routes and aircraft capacity by 2011. 

Royal Jordanian cargo business
YearCargo weight (millions of tonnes)Cargo revenue (JD millions)
Source: Royal Jordanian

Despite the forecast recovery, Dabbas says the downturn has made the operating climate for the airline industry much more challenging.

“The industry now realises that it has to make money to cover costs so we watch the competition. If a rival airline lowers its costs then we do too, otherwise Royal Jordanian loses passengers,” he says.

Sharjah’s low-cost carrier Air Arabia recently signed a deal with Amman-based investment company Tantash Group to establish a new budget airline in Jordan to target Europe, the Middle East and North Africa.

However, Dabbas says the new airline will not significantly affect his business, despite the fact that European routes were Royal Jordanian’s most popular services in 2009, accounting for 28 per cent of the carrier’s total revenues.

Royal Jordanian is itself expanding its routes and bringing in new aircraft.

“We are launching new destinations next year – Dusseldorf, Berlin, Stockholm and Oslo – markets we haven’t touched on, but boosting frequencies is more important,” says Dabbas.

Currently, Royal Jordanian operates a fleet of 32 aircraft and will take delivery of a new Embraer 175 in October. Dabbas says it will expand at a more steady rate than the growth seen at regional airlines such as Emirates and Etihad Airways in the UAE and Qatar Airways.

Measured growth for Royal Jordanian

“We don’t want to expand every year with five or six destinations, we simply cannot afford it and we don’t have the planes for it. My philosophy is to be a boutique airline, I don’t aspire to have 120 airplanes and fly to 250 destinations. We know what works and will continue with this strategy,” he says.

Over the next 12 months the carrier will increase a number of routes to daily services. “Milan, Barcelona, Geneva, Zurich, Rome will all go to a daily service. This takes a lot of effort on our part. We have to make sure the traffic is there to support the route,” Dabbas says.

As part of this, the carrier plans to continue to pursue its code-sharing strategy made possible by its affiliation with the Oneworld alliance, a global network that brings together 11 of the world’s airlines.

Royal Jordanian also continues to eye new markets, in particular Iraq. It was the first Middle East airline to fly to the country immediately after the war there ended. However, political wrangling has prevented the airline from pursuing its growth plans.

“An open skies agreement was signed between the Jordanian government and the Iraqi government in 2009 that gave Iraqi Airways unlimited frequencies on destinations in Jordan and Iraq,” says Dabbas, “But they asked to freeze the agreement until Iraqi Airways is more stable and in a position to better compete. They believed there was an imbalance between the two airlines, so now we are restricted to four destinations and the present frequencies we are servicing.”

Jordan has established a strong social, political, and economic relationship with Iraq and Dabbas believes that it is only a matter of time until the open skies agreement will be resumed. However, the recent decision by the Baghdad authorities to dissolve Iraqi Airways in light of a long-running dispute with Kuwait Airways Corporation is likely to delay this further. Kuwait is pursuing $1.2bn in compensation for aircraft and spare parts stolen during Iraq’s invasion in 1990.

The success and future growth of Royal Jordanian depends heavily on the country’s airport infrastructure.

Queen Alia International airport in Amman, the airline’s operational base, is currently in the middle of a massive expansion. But with just 14 new bridges scheduled to open by 2013, the infrastructure falls far short of the 26-28 bridges Dabbas anticipates will be needed to support the continued growth of Jordan’s tourism industry.

The tourism sector plays a key role in the country’s economy, with its relative contribution to gross domestic product (GDP) reaching 18.3 per cent in 2009. Visitor numbers have grown sharply in recent years, rising to 7.08 million in 2009 from 4.5 million in 2003.

The new terminal at Queen Alia International is scheduled to open in the first quarter of 2012 and will increase the airport’s capacity to 9 million passengers a year. In 2009, Queen Alia International handled 4.7 million passengers, which represented a 6.5 per cent increase on 2008.

A second phase of expansion will see the terminal accommodate 12 million passengers a year. But it will be carried out only if demand is deemed sufficient.

“My worry is that in four to five years when traffic is expanding we won’t have the ability to meet demand; we will be back in a vicious cycle of overcrowding. It is enough in the short term, but I believe that if you build it they will come. Since we are building a new airport after waiting a quarter of a century, let’s build a bigger one,” says Dabbas.

Consolidation pressures for airlines

Although the travel industry is expected to recover strongly in the years ahead, Dabbas believes the recent economic difficulties will change the way small airlines operate for good.

“For all airlines consolidation is the future. Economic challenges mean that small airlines will find it difficult [to survive] unless they have very deep pockets or the government is supporting them,” he says.

However, Dabbas adds that for the time-being a merger is not on the cards for Royal Jordanian. “We are not moving into any mergers or consolidation at the moment, but I do think that airlines like ours should seriously consider closer cooperation with other airlines to create new hubs and homogenous fleets.

“There are already great examples of how airlines support each other. Exchanging equity does not mean erasing the country flag.”

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