US embassy cable - 03AMMAN7647

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 007647 
 
SIPDIS 
 
USDOC 4520/ITA/MAC/ONE/PTHANOS 
DEPARTMENT FOR E FOR LARSON 
DEPARTMENT FOR EB FOR WAYNE 
 
E.O. 12958: DECL: 11/19/2013 
TAGS: EAIR, EINV, JO, IZ 
SUBJECT: IRAQ MOT, RJ, AND BOEING MOVE FORWARD ON NEW IRAQI 
AIRLINE 
 
REF: A. AMMAN 6222 
 
     B. AMMAN 5205 
 
Classified By: Ambassador Edward W. Gnehm for reasons 1.5 (b) and (d) 
 
1. (C) SUMMARY: The Iraqi Ministry of Transport (IMOT) is 
moving ahead on a proposal to replace defunct Iraqi Airways 
with a new Iraqi airline that will be majority-owned by 
private Iraqi investors, managed by Royal Jordanian Airways 
(RJ), and receive assistance from Boeing.  The proposed new 
airline would meet the immediate goals of the IMOT and be a 
step towards the achievement of RJ's long-term strategic 
vision of affiliating with other national carriers in order 
to attain the critical mass necessary to become commercially 
viable.  It would also create strong incentives for RJ to buy 
Boeing products as it begins to replace its Airbus fleet. 
The checkered history of the interested Iraqi private 
investors, however, may present a hurdle in the completion of 
the deal. END SUMMARY. 
 
2. (C) Iraqi Minister of Transport Bahnam Boulos, CPA Senior 
Adviser to the Ministries of Communication and Transport 
Darrell Trent, and CPA Adviser Frank Willis held a series of 
meetings in Amman during Nov. 18-19, first with Boeing and 
then jointly with Boeing, Royal Jordanian Airlines, and 
representatives of the Iraqi Khawam family.  The primary aim 
of the meetings was to lay the groundwork for the 
establishment of a new Iraqi national carrier (tentatively 
named Iraqia) owned primarily by Iraqi investors.  This is a 
task that the IMOT is interested in moving forward on at a 
very fast pace, with the goal of flying Iraqi pilgrims on the 
Hajj in January.  The Saddam-era national carrier Iraqi 
Airways has few usable assets and is saddled with substantial 
unpaid demurrage charges for planes parked for ten years in 
Jordan and Tunisia (Reftel A) and an enormous ongoing lawsuit 
filed by Kuwaiti Airways asking compensation for theft of 
Kuwaiti Airways assets.  IMOT has therefore decided to allow 
Iraqi Airways to go into liquidation and start afresh. 
 
3. (SBU) The four-person Boeing team, led by Director of 
International Sales Samir Hanna, had been previously 
contacted by Trent and came well-prepared to the meeting. 
Boeing put forward a high-quality, complete business plan for 
the rollout of the new airline envisioning substantial use of 
Boeing products.  (NOTE: IMOT seems likely to be interested 
in use of Boeing products if only because the ex-Iraqi 
Airways employees who will form the core of Iraqia have no 
experience with Airbus products - Iraqi Airways flew only 
Boeings.)  The plan calls for Iraqia to be launched using 
rented airplanes, which would require only $35 million in 
up-front capital, and both IMOT and the CPA advisers seem 
inclined to follow the plan at least in the initial stages. 
 
4. (C) In order to run a new airline, however, the Iraqis 
will need to partner with another regional airline, as there 
has never been an air service in Iraq organized along 
commercially viable lines and therefore there are no 
personnel with relevant experience.  While several airlines, 
including Kuwaiti Air, or Emirates, have made various offers 
for partnership with the Iraqi national carrier since the end 
of the war, the IMOT has all but settled on RJ.  This is 
partially because RJ has several obvious advantages - 
including a months-long history of operating flights into 
Baghdad and an already existing contract to handle baggage at 
BIAP - but primarily because of RJ's persistence and its 
offer of a clear plan of ways in which it can assist the new 
carrier in ramping up to a launch. 
 
5. (SBU) RJ has proposed several different options for 
beginning Iraqia service on the back of existing RJ 
resources.  One proposal is for Iraqia to become the 
organization chartering the existing Royal Wings flight 
between Baghdad and Amman, rather than the CPA.  Coupled with 
such a change might be the addition of an extra stop in 
either Erbil or Mosul.  Another proposal from RJ is for 
Iraqia to charter RJ planes to fly the Hajj - RJ would be 
willing to make two airplanes with a total of 345 seats 
available for ten days, and calculates that each plane could 
fly three round trips to Jeddah per day, allowing the 
potential transportation of over 10,000 pilgrims over this 
period. 
 
6. (C) Longer-term, RJ would be given contracts to do the 
bulk of the managing work and would likely lease some of 
their aircraft to Iraqia, though RJ's spare aircraft would be 
unlikely to meet demand indefinitely.  Eventually, RJ would 
like to form a strong link between the two airlines - perhaps 
even a merger - but this seems unlikely to the CPA advisers. 
More probable is an eventual marginalization of RJ, with only 
vestiges of their cooperation remaining, such as a 
codesharing agreement and/or joint marketing arrangements. 
In Willis' estimation, RJ is unlikely to be able to buy in to 
the new carrier, if only because it does not have the 
necessary cash and seems unlikely to be able to get it in the 
foreseeable future. 
 
7. (C) The conclusion of the meetings was that RJ and Boeing 
will combine their proposals into a joint business plan for 
Iraqia.  The question of obtaining an RJ-Iraq connection as a 
quid pro quo for buying Boeing (Reftel B) seems to have been 
sidelined for the moment, as IMOT is interested in RJ 
regardless of their use of Boeing vs. other aircraft. 
Nonetheless, it seems likely, given the abovementioned 
preferences of the Iraqis for using Boeing products, that RJ 
will have strong incentives to purchase Boeing aircraft if RJ 
becomes the Iraqia partner. 
 
8. (C) The financing of the proposed new airline is 
potentially the most troublesome part of the deal.  Minister 
Boulos, who will have the final say, prefers that Iraqia  be 
majority funded by private Iraqi investors.  Boulos favors 
the Iraqi emigre Khawam family, whose patriarch resides in 
Amman.  Among other things, the family owns half of Alia, a 
land transport company which is also half-owned by the IMOT. 
The Khawams are also owner of a variety of other companies, 
several of which are at least rumored to have been fronts for 
individuals and government bodies in the previous regime and 
to have participated in sanctions-busting activity.  The 
family's only prior experience with air travel has been their 
continuing ownership of a charter service of two 737s 
operating out of Swaziland.  In addition, the Khawams' offer 
to put up the entire up-front capital for the airline without 
any bank or market financing at all is cause for concern. 
 
9. (C) COMMENT: Problematic financing aside, the deal 
beginning to take shape between IMOT, RJ, and Boeing will 
resolve issues that each participant has focused on intensely 
over the past year.  Apart from the financing issue, 
completion of the agreement seems likely to provoke 
substantial complaints from other interested regional 
carriers. 
 
10. (U) Amb. Trent and Mr. Willis did not have an opportunity 
to clear on this cable. 
GNEHM