Royal Jordanian completes turnaround, resumes long haul growth with Guangzhou and Jakarta

Royal Jordanian completes network restructuring

Royal Jordanian currently operates a fleet of seven widebody and 20 single aisle passenger aircraft to almost 50 destinations. Its network currently consists of only seven long haul destinations, including four in North America and three in East Asia, and about 40 short/medium haul destinations in the Middle East, North Africa and Europe.

2014 was a year of transformation for Royal Jordanian as the airline cut 13 short and medium haul destinations, including all three of its destinations in South Asia and both of its destinations in West Africa. It also suspended seven regional routes in the Middle East and North Africa, including two routes which were taken over by charter subsidiary Royal Wings, and one European route. Two more regional routes were suspended in early 2015 as Royal Jordanian stopped serving both its destinations in Yemen.

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2014 was also a year of transformation for the Royal Jordanian fleet as the carrier took delivery of five 787-8s, enabling the retirement of all four of its inefficient A340-200s and one of its three A330-200s. The only changes to its much newer single aisle fleet were the removal of two of its five Embraer E195s, resulting in a single aisle reduction from 22 to 20 aircraft as 12 A320 family aircraft was maintained along with three E175s.

Royal Jordanian fleet summary: as of 26-Oct-2015

Aircraft	In Service	In Storage	On Order*
Total:	27	0	3
Airbus A310-300(F)	2	0	0
Airbus A319-100	4	0	0
Airbus A320-200	6	0	0
Airbus A321-200	2	0	0
Airbus A330-200	2	0	0
Boeing 787-8	5	0	3
Embraer E175LR	3	0	0
Embraer E195AR	3	0	0

Note: *orders include commitments with leasing companies for new aircraft
Source: CAPA Fleet Database

The five 271-seat 787-8s, which were delivered between Aug-2014 and Nov-2014, has significantly improved the profitability of Royal Jordanian's long haul network. The five 787s are now used on all of the carrier's long haul routes, to London Heathrow and some regional flights within the Middle East. With London, Royal Jordanian has discovered the 787 can be as profitable as the smaller A321 even when carrying only 167 passengers (the capacity of its A321) once factoring in the larger cargo payload and improved operating economics.

Royal Jordanian is back in the black, on track for its largest profit since 2009

The 787s are one of five main drivers to Royal Jordanian's turnaround in 2015. The carrier generated a net profit of about JOD26 million (USD18 million) through the first three quarters of 2015 compared to a loss of about JOD15 million (USD21 million) for the same period of 2014.

Royal Jordanian chief commercial and strategy officer Richard Nuttall discusses how the network restructuring and introduction of five 787-8s have contributed to the carrier's turnaround

Source: CAPA TV

Royal Jordanian is expected to end 2015 with a profit of approximately JOD20 million (USD28 million) compared to a loss of about JOD40 million (USD56 million) in CY2014. The flag carrier also incurred stiff losses in 2013 and 2011, when Royal Jordanian was impacted by the Arab Spring, and was roughly break-even in 2012.

An annual profit of JOD20 million would represent the largest profit for Royal Jordanian since 2009, when market conditions were much more favourable. Royal Jordanian completed an initial public offering in late 2011 but the size of the float has been reduced in recent years and the government again now owns a majority stake in the flag carrier.

Royal Jordanian annual net profit/loss (in JOD millions): 2007 to 2014

Note: JOD is pegged to the USD at an exchange rate of about 1.41
Source: CAPA - Centre for Aviation and company reports

Royal Jordanian adjusts to challenging market conditions

Other main drivers to Royal Jordanian's turnaround include the reduction in fuel prices, the suspension of unprofitable routes, cost reduction initiatives and improved revenue management. The approximately USD80 million swing in the bottom line from 2014 to 2015 is a particularly noteworthy accomplishment as market conditions in Jordan and neighbouring countries have remained extremely challenging.

The deteriorating security situation in Yemen forced Royal Jordan to suspend Aden and Sana'a in early 2015. Yemen was a key market for Royal Jordanian and particularly was a strong contributor of traffic to its US routes.

Libya was also an important market for Royal Jordanian until the flag carrier had to suspend its three Libyan destinations in 2014 for security reasons. Royal Jordanian suspended services to Syria, where it served Aleppo and Damascus, in 2012.

Regional instability also has significantly impacted inbound traffic to Jordan. Visitor numbers to Jordan are down by about 12% through the first three quarters of 2015, including a 26% reduction from Europe, its largest source market, and a 40% reduction from Asia. Royal Jordanian relies heavily on inbound tourism as it accounts for nearly half of total international seat capacity to and from Jordan.

The outbound Jordanian market and expatriate or migrant worker traffic has not been impacted. But these segments of the market are extremely seasonal.

Royal Jordanian has had to increase its reliance on sixth freedom traffic even as it has reduced total seat capacity. Transit traffic typically is lower yielding but Royal Jordanian has been able to improve profitability of its transit traffic by dropping city pairs which had been highly unprofitable and focusing on more attractive markets.

Gulf carrier competition forced Royal Jordanian to drop South Asia and West Africa

Royal Jordanian's three markets in South Asia (Colombo, Delhi and Mumbai) and two markets in West Africa (Accra and Lagos) particularly struggled from a yield perspective. South Asia and West Africa are small local markets for Jordan, forcing Royal Jordanian to rely heavily on transit traffic.

In deciding to pull out of these markets in 2014 the carrier concluded it simply could not compete against the Gulf carriers for sixth freedom traffic. The Gulf carriers have the benefit of much larger global networks and primarily deploy widebody aircraft to these destinations while Royal Jordanian used A320 family aircraft, giving the Gulf carriers a significant unit cost advantage.

Royal Jordanian is now carrying more passengers between Europe and its regional destinations, enabling it to maintain capacity to most of its European destinations despite the reduction in European visitor numbers to Jordan and its exit from the highly competitive one stop Europe-India market. Royal Jordanian is also now pursuing more sixth freedom traffic between Europe and East Asia although this is more a temporary solution as such markets are also highly competitive and typically low yielding.

Europe now accounts for about 26% of Royal Jordanian's international seat capacity while Asia accounts for less than 10%.

Royal Jordanian international seat capacity share (% of seats) by region: 2-Nov-2015 to 8-Nov-2015

Source: CAPA - Centre for Aviation & OAG

Royal Jordanian expands in Southeast Asia

Royal Jordanian currently only operates one daily flight to Asia. Bangkok is served with seven weekly non-stop frequencies, with four of the frequencies continuing onto Hong Kong and three continuing onto Kuala Lumpur.

Royal Jordanian is expanding its network in Asia by 67% and Jordan-Asia seat capacity by about 40% as Guangzhou and Jakarta are added to the network in early Dec-2015. Kuala Lumpur will be upgraded to non-stop with three weekly flights that continue onto Jakarta. Guangzhou will be served three times per week via Bangkok, essentially taking over the capacity that is now used for Bangkok-Kuala Lumpur.

Royal Jordanian one-way weekly seat capacity to East Asia: Sep-2011 to Apr-2016

Source: CAPA - Centre for Aviation & OAG

The expansion of the long haul network is surprising as Royal Jordanian has only just completed a massive restructuring and the airline was initially only planning to resume short haul expansion. But the long haul expansion is logical as it is relatively low risk and gives Royal Jordanian an opportunity to increase the utilisation of its widebody fleet.

The new schedule to Asia will use about two thirds of a widebody aircraft which is currently under-utilised, particularly during the winter months and shoulder seasons. Royal Jordanian currently operates 15 flights to North America during the peak summer months but has only nine to 11 weekly flights to North America the rest of the year.

New long haul destinations typically come with high risk, particularly for a small airline like Royal Jordanian. But in this case the risk is palatable as Guangzhou and Jakarta will be served as tags.

Royal Jordanian aims eventually to serve Jakarta non-stop

Upgrading Kuala Lumpur to non-stop is also low risk as Royal Jordanian is now familiar with the Malaysian market. Royal Jordanian is confident Kuala Lumpur can support a non-stop flight, particularly as it will improve connections to offline markets in Southeast Asia and Australia which are served by oneworld partner Malaysian Airlines.

Royal Jordanian believes Kuala Lumpur will ultimately be able to support more frequencies and be de-coupled from Jakarta. Upgrading Jakarta to non-stop is particularly appealing as Royal Jordanian does not have pick up rights for Kuala Lumpur-Jakarta as it does for the Bangkok-Hong Kong and Bangkok-Guangzhou sectors.

Royal Jordanian expects to carry significant local traffic from Indonesia to Jordan as well as regional connecting traffic, particularly to Jeddah.

For Guangzhou, Royal Jordanian plans to rely mainly on China-Jordan traffic as well as passengers picking up the fight in Bangkok. Royal Jordanian is not keen to push connections from Guangzhou or Jakarta to Europe as these are highly competitive markets that are particularly well served by the Gulf carriers.

Royal Jordanian to complete widebody fleet renewal by early 2017

The opportunity to launch non-stops to Jakarta and add frequencies to Kuala Lumpur could come in late 2016 and early 2017, when Royal Jordanian plans to take two more 787-8s.

The two additional 787s will replace Royal Jordanian's two remaining A330-200s, which are slated to be returned in mid-2016. But Royal Jordanian is preparing to add long haul flights even while maintaining the size of its widebody fleet at seven aircraft as it recognises it will need to utilise its 787s more than its A330s.

More flights to Asia is the most logical solution as Asia does not have the seasonal fluctuations that the North American market experiences. Since taking its initial batch of 787s Royal Jordanian has been using its A330s to support peak season flights to North America while under-utilising the aircraft the rest of the year on a small number of regional flights. The carrier has therefore benefitted from having a second older and cheaper widebody aircraft type in its fleet but will not have such a luxury when it transitions to an all-787 widebody fleet.

Royal Jordanian could add Toronto and a new US destination

Royal Jordanian is also considering potential adjustments to its North American operation after it transitions to an all-787 widebody fleet. Detroit could be dropped or tagged with another US destination. Royal Jordanian is also looking to add Toronto and a potential new US destination which could replace Detroit or become its fourth US destination along with Chicago, New York JFK and Detroit.

Royal Jordanian currently serves Detroit with two weekly flights, including two non-stops in peak summer months and a one-stop service via Montreal the rest of the year. Montreal is also served with two weekly flights, including a turnaround fight in summer and a tag with Detroit the rest of the year.

Royal Jordanian also increases Chicago to daily in the summer compared to four or five frequencies in winter and six frequencies during shoulder months. New York is served with three to four weekly flights depending on the time of year. All the seasonal fluctuations mean that Royal Jordanian has nearly twice as much capacity to North America in peak summer months compared to the winter off peak months.

Royal Jordanian one-way weekly seat capacity to North America: Sep-2011 to Apr-2016

Source: CAPA - Centre for Aviation & OAG

The current Amman-Montreal-Detroit route is challenging as Jordanians heading to Detroit need a Canadian visa to transit Montreal. Royal Jordanian is looking at instead tagging Montreal with Toronto, which would become its second Canadian destination.

Amman-Toronto is a larger local market than Amman-Montreal but cannot be served non-stop due to bilateral restrictions. Royal Jordanian already has the traffic rights to continue onto Toronto from Montreal, a more attractive option than maintaining Montreal-Detroit.

If Detroit is dropped entirely it could still be served as an offline market using Royal Jordanian's oneworld partner American Airlines. American, which serves Detroit from Chicago but not New York, is now Royal Jordanian's biggest single partner. Royal Jordanian along with oneworld members airberlin, Finnair, LAN, TAM and Qatar are the only foreign carriers that currently operate from American's terminal at New York JFK.

But Royal Jordanian is also keen to develop a relationship with JetBlue Airways, which could provide additional access beyond New York. Los Angeles and Washington are Royal Jordanian's two largest offline markets in the US.

Royal Jordanian reduces its 787 commitment

While North America could see a slight increase in capacity after the sixth and seventh 787 are delivered there could be a bigger opportunity to expand in 2019. Royal Jordanian has pushed back the delivery of its eighth 787-8 to 2019 and also now has options for three more of the type.

The airline initially committed to 11 firm aircraft but as it restructured in 2014 it renegotiated with Boeing to change the last three orders into options. Royal Jordanian's initial preference was to reduce its firm commitments to only seven aircraft but a compromise was reached to move the eighth aircraft to 2019, at which point the carrier may be ready to grow its widebody fleet.

The 787 has provided Royal Jordanian with sufficiently attractive route economics to potentially enable growth to North America. Royal Jordanian chief commercial and strategy officer Richard Nuttall told CAPA on the sidelines of the 7-Oct-2015 World Aviation Summit in Helsinki the break-even North American load factor based on variable costs is about 70% with the A330-200s but is below 50% with the 787-8. (This excludes aircraft ownership costs and also illustrates the importance of adding incremental capacity where possible to boost 787 utilisation rates.)

But the opportunities for expansion in the Jordan-North America market - as well as in the Jordan-Asia market - are relatively limited. These markets may eventually be able to support a fleet of eight widebody aircraft but the initial 11 aircraft commitment was clearly overambitious given Royal Jordanian's relatively small size and the highly competitive landscape.

The regional turmoil that Royal Jordanian has had to deal with over the last four years was impossible to predict when Royal Jordanian decided to order 787s in 2007. But even back then it was clear Royal Jordanian's future would be as a niche player focusing on regional connections, particularly within the Levant, and any aspirations for a large intercontinental network would be far-fetched.

Royal Jordanian takes cautious approach to regional expansion

Long haul expansion will be feasible as long as it is modest and fits in with the overall niche strategy. But short haul expansion is more likely to be sustainable over the long run.

Royal Jordanian resumed regional expansion in Jul-2015 with the launch of Najaf in Iraq and Tabuk Saudi in Arabia. The two new destinations, which gave Royal Jordanian five destinations in both Iraq and Saudi Arabia, are low risk as they are served with only two weekly regional jet flights. (A sixth Iraqi destination, Mosul, remains suspended due to security concerns.)

But overall Royal Jordanian is taking a cautious approach to regional expansion, a sensible approach given the current environment in the Middle East and North Africa region. "Having consolidated we are now going into a growth phase. But with all the uncertainty in the region with the plans we keep them a little bit fluid," Mr Nuttall said. "We will watch what is happening in the region and the timing [for growth] will depend on how things are going."

For now Royal Jordanian does not intend to expand its A320 family fleet, which currently consists of four A319s, six A320s and two A321s. But if market conditions in the region improves it will look to quickly lease an additional aircraft or two.

Royal Jordanian also plans to maintain its fleet of three E175s, which enables it to maintain frequencies on thinner regional routes. But it is looking to further reduce its E195 fleet, which has only 10 fewer seats than its A319s.

Royal Jordanian is also looking to expand its offline network by forging new partnerships and increasing existing partnerships. New deals with Turkish Airlines and Lebanon's Middle East Airlines were forged this year and Royal Jordanian is now seeking to expand its partnership with Qatar Airways. "With the uncertainty in the region it's very difficult for us to be very aggressive with our own growth but we need to grow the offering," Mr Nuttall said.

Royal Jordanian's outlook brightens but it needs to stay the course

Royal Jordanian's turnaround over the last year is an impressive accomplishment as the airline continues to operate in a region torn apart by strife and in an increasingly competitive marketplace. Having downsized its network and renewed its long haul fleet the airline is in a much more sustainable position than it was a year ago. Lower fuel prices have clearly helped but have accounted for less than half of the improvements to the bottom line.

Royal Jordanian now needs to remain nimble and avoid any temptation to accelerate expansion.

It must make sure its current sensible commercial strategy and modest approach to expansion is kept intact. This is particularly important as Royal Jordanian once again sees changes to a management team which has already seen significant turnover in recent years.

While Royal Jordanian now has a brighter outlook it still sits in a relatively precarious position. Maintaining newfound profitability will not be easy.