Monday, April 02, 2012

Royal Jordanian expects merger with larger carrier: High fuel prices, competition and sluggish economy squeeze earnings

Amman: Royal Jordanian Airlines, a member of the British Airways-led Oneworld alliance, said a merger with a larger carrier is inevitable as high fuel prices, competition from local rivals and a sluggish economy squeeze earnings.

While Amman-based Royal Jordanian, founded in 1963 and one of the Middle East's oldest airlines, has no concrete plans for a transaction, it views consolidation as "a must," Chief Executive Officer Hussein Dabbas said in an interview.

"We are looking and reviewing options and talking to airlines to see when the time is right for us to do something," Dabbas said yesterday. "With the pressure we are seeing from mega-carriers around the world, whether European or regional, to continue as we are is going to be a difficult game to follow."

Airline earnings will likely drop 62 per cent to $3 billion this year, equal to a 0.5 percent margin, the International Air Transport Association said last month.

Royal Jordanian had a loss of 57.9 million dinars in 2011, versus a 9.6 million dinar year-earlier profit, as traffic was hurt by political unrest in the region and competition from Gulf-based rivals including Emirates, Etihad Airways and Qatar Airways.

Right synergies

"It's a very difficult business environment and if airlines can find the right synergies, they should look at merging their operations and consolidating," Dabbas said by telephone. "This is the trend of many airlines around the world now."

Royal Jordanian shares rose as much as 3.5 per cent to 59 qirsh before trading at 57 qirsh on the Amman exchange.

The carrier joined Oneworld, which includes AMR Corp.'s American Airlines, in 2007, becoming the first Middle Eastern recruit to one of the three major global groupings.

Willie Walsh, CEO of International Consolidated Airlines Group, the parent of British Airways, has said he's eager to expand the company and that mergers will most likely happen between existing alliance partners. Dabbas didn't say if a transaction involving another Oneworld member was most likely.

Among Middle Eastern airlines, Etihad has the active acquisition policy, increasing its stake in Air Berlin, Europe's third-biggest discount operator, to 30 per cent and buying 40 per cent of Air Seychelles.

Carriers worldwide are being squeezed as earnings shrink. Barcelona-based Spanair collapsed on January 27, followed that week by Hungarian national carrier Malev, while Kingfisher Airlines of India may lose its licence amid cash shortages and AMR itself has filed for Chapter 11 bankruptcy protection.

Royal Jordanian, which scrapped more than 1,300 flights in 2011 due to low demand during the Arab Spring and euro crisis, has abandoned four routes this year and cut frequencies on others. Dabbas said he's examining all remaining destinations with a view to either reducing capacity or stimulating traffic.

Still, the carrier is looking at adding services to Algiers, the Ghanaian capital Accra and Lagos in Nigeria, and the CEO said there are signs of improvement in Arab markets as political unrest eases.

Passenger numbers grew at least 20 per cent in each month of the traditionally slow first quarter, which while unprofitable was "much better" than last year.

"We're not shrinking but we're consolidating," Dabbas said. "Where we see room for improvement we'll move there, and where we see the move is fruitless and useless we'll pull out."

Fleet size

The carrier operates 32 aircraft, mostly from Airbus, with two A310 wide-bodies to be retired this month and seven of its older A320-series single-aisle jets due to be swapped for newer versions of the same type later this year. The first five of 11 Boeing 787 on order will arrive in 2014, the CEO said.

Royal Jordanian is also looking at raising equity over the next two or three years, Dabbas said, adding that many of the company's problems stem from it being "very under-capitalized."

The airline has 84.4 million shares outstanding, including a free float of 28.2 million, Bloomberg data. The examination of a capital increase already has investor approval and a decision to go ahead could be taken before the end of 2012, the CEO said.


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