US embassy cable - 04AMMAN7528

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 007528 
 
SIPDIS 
 
USDOC 4520/ITA/MAC/ONE/PTHANOS 
DEPARTMENT FOR EB FOR WAYNE/MERMOUD 
 
E.O. 12958: DECL: 09/08/2014 
TAGS: EAIR, BEXP, PINR, JO, LY 
SUBJECT: BOEING VS. AIRBUS: WHAT IS GOING ON?? 
 
REF: A. AMMAN 7337 
     B. AMMAN 7336 
 
Classified By: Charge d'Affaires David Hale for reasons 1.5 (b) 
 
1. (C) SUMMARY: The past month of the Royal Jordanian 
Airlines (RJ) Boeing purchase saga has seen an increasingly 
clear-cut paradox.  All available signs point to a clear 
decision by the GOJ, especially including the Palace, in 
favor of a continued RJ relationship with Airbus as sole 
provider of medium-range aircraft (Reftel A).  Why, then, 
does the King continue to insist that he is committed to a 
Boeing 737 purchase?  While commercial logic would dictate 
otherwise, royal frustration, USG pressure, family politics, 
and unrealistic expectations may indeed lead to a purchase of 
737s for RJ subsidiary Royal Wings -- if the Palace, with 
Boeing's help, can somehow come up with the money. END 
SUMMARY. 
 
------------------ 
AIRBUS A DONE DEAL 
------------------ 
 
2. (C) While the particulars of the deal under which RJ will 
lease 10 Airbus A320s and A321s have not yet been determined, 
negotiations between Airbus and RJ are proceeding rapidly 
toward a conclusion, with the full support of the GOJ.  The 
RJ board of directors, according to press reports, "ruled out 
a financial lease" for Airbus A320s and A321s in the 
September 1 meeting at which it decided to go with Airbus 
instead of Boeing.  However, RJ employees have carefully 
worded their responses to queries by the Embassy and Boeing 
rep Peter Ledger, appearing to leave the way open for a 
financial lease (which would give them the option to 
eventually own the aircraft) rather than a straight operating 
lease.  As the King had originally favored a Boeing purchase 
because he preferred that RJ own its aircraft rather than 
leasing all its assets, it would make little commercial sense 
for RJ to close off the option of lease-to-own, especially if 
USG scrutiny of the deal were to fade with the passage of 
time. 
 
----------------------- 
A ROYAL WINGS PURCHASE? 
----------------------- 
 
3. (C) COMMENT: If the Airbus deal is indeed eventually 
intended to be lease-to-own, it will put the prospect of a 
Boeing sale to Jordan even further out of reach than it seems 
at present.  The King and his brother, Jordan's current 
aviation godfather Prince Faisal, however have held out the 
possibility of a 737 purchase by Royal Wings, RJ's subsidiary 
specializing in short-range routes and charter flights. 
Faisal and the King have hinted that Royal Wings might be set 
up as a self-sustaining carrier based at the King Hussein 
Airport in Aqaba, a nice, new facility whose capacity is 
currently significantly underutilized and virtually ignored 
by RJ.  Royal Wings could then help, like Emirates Air has 
done in Dubai, to stimulate tourism to Aqaba merely by making 
it easy to get there. 
 
4. (C) Commercially, it is hard to imagine such a deal making 
sense.  There is a great deal of touristic development 
underway in Aqaba, and a regular, relatively low-priced 
charter service run by Royal Wings between secondary European 
airports and Aqaba could conceivably be profitable.  Ledger, 
however, sees such demand being filled by 717s at best - it 
would be very difficult to fill 737s, particularly from the 
airports envisioned.  Serving major European airports would 
put Royal Wings in head-to-head competition with its owner, 
RJ.  Use of 737s between Aqaba and other Middle East 
locations would be even more difficult to maintain 
profitably, particularly in the face of the massive 
overcapacity currently building in the market and the 
subsidized carriers flying out of the Gulf, who could take 
advantage of King Hussein Airport's status as an Open Skies 
airport (unique in Jordan) to compete directly with Royal 
Wings and undercut its prices.  Use of new Boeings to fly to 
locations in Iraq would, because of the high insurance 
premiums Royal Wings would have to pay on their hull values, 
be prohibitively expensive.  Even if some way were found to 
utilize the new planes effectively, all of the same problems 
that have inhibited the Boeing sale would remain, as RJ would 
continue to handle Royal Wings' maintenance (Royal Wings does 
not have a separate staff for these services).  Virtually 
everyone with whom we have talked - from Samer Majali, the 
CEO of RJ, to the Boeing employees and reps who have been 
working on this deal, to the Director-General of the Jordan 
Civil Aviation Authority - has stated their deep doubts as to 
whether a purchase of Boeings by Royal Wings could ever, 
under any circumstances, be commercially viable. 
 
--------------------------- 
NOT ALL LOGIC IS COMMERCIAL 
--------------------------- 
 
5. (C) Still, the absence of commercial logic does not 
necessarily mean that the King's repeated statements of 
commitment to a Boeing deal are spurious.  Both Faisal, who 
initiated the development of Royal Wings, and the King have 
reasons for going ahead with a Boeing deal.  Faisal has long 
had a problematic relationship with RJ, though Ledger says 
that Majali has had a better relationship with him than did 
his predecessors.  The King, on the other hand, has recently 
grown increasingly impatient with the carrier, which has 
shown little profitability and little growth potential, 
failed to attract a strategic partner for privatization, and 
appears to have no solid strategic plan to change any of the 
above.  Both Faisal and the King appear to feel that RJ is 
not being run as well as it should be, and Faisal, at least, 
appears to be genuinely convinced that a large-scale, 
low-cost, Aqaba-based carrier would be viable.  He may have 
successfully convinced the King of this as well.  Neither 
appears to have confided in Majali. 
 
6. (C) The King has more pressing reasons for wanting to go 
ahead with a Boeing deal, however.  Faisal was recently 
removed from his former position as Commander of the Royal 
Jordanian Air Force and may be moved to a less powerful post 
(Reftel B).  The King may believe that a full-time project 
for Faisal is a good idea.  The King has also, by his 
repeated protestations of commitment to a Boeing deal, backed 
himself into a corner in his dealings with the USG.  Even if 
Royal Wings were to buy two or three 737s, instead of the 
five that the King had committed to buy, the gesture would be 
intended to raise the hopes of Boeing for a long-term 
relationship and soothe ruffled American feathers created by 
his sudden reversal.  $150 million may be a small price to 
pay for achieving the multiple ends of discomfiting RJ 
management and keeping peace both in the family and with the 
USG. 
 
7. (C) This would especially be the case if Royal Wings could 
pay for the planes using someone else's money, and the key 
sticking point for Boeing has been to identify financing to 
cover part of the cost of an RJ Boeing purchase.  The King's 
commitment to a Boeing sale has kept Boeing engaged in 
finding funding sources for a purchase, putting the King in a 
no-lose situation. 
 
-------------- 
AN OPPORTUNITY 
-------------- 
 
8. (C) Based on the above considerations, post suspects 
Boeing still has an opportunity in the medium term to sell 
its aircraft to Jordan.  Whether Boeing feels that such a 
deal is worth its energy, however, is another matter.  737s 
purchased for Royal Wings would likely be a one-off deal with 
little likelihood of acting as a wedge for further RJ 
purchases, would be for fewer airplanes than were originally 
envisioned, and would require a large part of the financing 
legwork to be done by Boeing.  Boeing still appears 
interested in pursuing this option, however, and post 
continues to offer its full support.  END COMMENT. 
HALE