I think everyone in the Middle East aviation sector was surprised when Stefan Pichler confirmed recently that he had stepped down from his role as CEO of Royal Jordanian. His retirement is a loss for the regional aviation scene as a whole but for Jordan’s flag carrier the move will be sorely felt.
Under Pichler, Royal Jordanian returned to the black in 2019 for the first time in years, securing JD10.4 million ($14.7m) in net profits after tax, compared to a JD5.9m ($8.5m) net loss in 2018. Operating profits increased 174 percent between 2018 and 2019 thanks to a low-cost, high-revenue strategy that combined the best elements of the budget and legacy airline models.
Then, of course, the Covid-19 pandemic hit. In Q1 2020 alone the carrier incurred a JD25.5m ($36m) net loss due to a 19 percent drop in passenger numbers and 22 percent decline in turnover.
Before he left at the end of September, Pichler set the wheels in motion for a fresh restructuring plan designed to put the airline on a stable footing beyond the coronavirus crisis. During the pandemic, Royal Jordanian has managed to reduce its costs significantly – by up to two-thirds – as a result of lay-offs and outsourcing certain business functions. As it stands, the airline is understood to have enough liquidity to carry it through to around January 2021.
So where does this leave Jordan’s 57-year-old national airline? Chairman Said Darwazah will step in as interim CEO until a replacement can be found, but it is crucial that Royal Jordanian finds a long-term leader as soon as possible.
Route to recovery
If Royal Jordanian is to survive beyond January it will require two things: direct financial support from the government and to shrink further. It will be difficult for the airline to continue operating at its current size due to the challenges in rebuilding its network and recovering revenues in a post-Covid market that is likely to be dominated by budget airlines offering lower fares than legacy carriers can afford in a bid to stimulate markets.
What is more, if and when Etihad and Emirates launch new routes to Israel following the UAE’s normalisation of relations, it could be difficult for Royal Jordanian to compete on certain Asian routes. Regarding the European market, competition from the likes of Ryanair is already extremely stiff and Royal Jordanian will have a hard time reclaiming market share from the main low-cost carriers if they decide to resume their focus on the Middle East.
Royal Jordanian’s new CEO will inevitably have to reassess the company’s workforce size, too. It is likely that the airline’s fleet, which currently stands at 26 aircraft, will also have to be reduced. Fortunately, Royal Jordanian’s fleet of modern and efficient Boeing 787s places the airline in a good position to run profitable US routes once demand recovers.
Secondly, the airline will need the help of the Jordanian government. Revenues generated by airlines in the Jordanian market will fall by at least $700m (52 percent) compared to 2019, according to an estimation made by the International Air Transport Association (IATA) earlier this year. Royal Jordanian’s leaders have previously said that the airline cannot survive the coronavirus crisis without “direct and indirect” support from the government. Most administrations – particularly in the Middle East – have shown in recent months that they value their airlines, which are for many countries in the region a symbol of national pride.
Tourism – and by extension aviation – will be an essential component in the rebuilding of economies in the region next year and Jordan will be no different. No government can realistically bank on foreign low-cost carriers alone for tourism given that they can leave a market as quickly as they arrive as they prowl between destinations in a continuous hunt for profits. One would hope that Jordan’s incoming government, which will be decided in next month’s general elections, will come to the conclusion that a national airline is vital for accessing lucrative markets and boosting the economy.
If we assume that the government understands the importance of Royal Jordanian, of which it owns a majority stake, the airline could emerge from the crisis on a very different path to the one it entered on. Providing the new CEO follows Pichler’s restructuring plan, the airline is likely to be a smaller, leaner carrier serving a select number of key destinations. We could even see the carrier adjust its model slightly to become the kind of boutique airline that Gulf Air became recently in a bid to compete in a Middle Eastern market dominated by highly successful low-cost carriers and behemoth super-connectors.
Regardless of which path the airline’s new leadership decides to take, the fact remains that the business will need cash to implement any kind of turnaround plan. Royal Jordanian finds itself in the same position as so many other airlines in the market in that its future is dependent on government sentiment.
The question, then, remains: Will we see the loss of one of yet another airline or an exciting rebirth adding even more colour and competition to the Middle East aviation market?