Royal Jordanian ditches turnaround plan in bid to survive

Published: 13 August 2020 - 2:58 a.m.

In November, Aviation Business interviewed Stefan Pichler, CEO of Royal Jordanian, to learn about how the airline had successful begun to implement a turnaround plan which had seen the carrier get on-track to desired profitability.

In 2019 the airline achieved a profit for the first time in years, securing JD10.4 million ($14.7 million) in net profits after tax, compared to a JD5.9 million ($8.5 million) net loss in 2018. Operating profits increased 174% between 2018 and 2019 thanks to a low-cost, high-revenue strategy that combined the best elements of the budget and legacy models.

Six months later, Pichler’s turnaround plan hit the Covid-19 roadblock, plunging the airline back to square one. Jordan’s main airport, Queen Alia International, ceased international flights in mid-March, causing revenues to evaporate.

Revenues generated by airlines in the Jordanian market will fall by at least $700 million (52%) compared to 2019, according to the International Air Transport Association (IATA). Royal Jordanian incurred a JD25.5 million ($36 million) net loss in Q1 this year due to a 19% drop in passenger numbers and 22% decline in turnover. And Pichler reckons the impact will be felt even stronger in the remaining quarters of 2020.

“We were on target until the end of February this year,” he says wistfully. “Suddenly, more than 90% of your revenue breaks away.”

Frustratingly for Pichler, he has had to set an entirely new target and the turnaround plan has had to be completely reset: “It was all going in the right direction. We were improving our load factor, we were fighting off EasyJet and Ryanair, we had great revenues, we reduced unit costs by up to 4%. And then suddenly our priority now is cash preservation to survive. We had [in July] maybe 8% to 10% of our workforce working, mainly those operating our cargo and repatriation flights.”

Pichler’s battle to pull the airline through the crisis and Royal Jordanian’s fight for survival is of course not unique to the market. The coronavirus crisis and ensuing travel restrictions dealt fatal blows to a number of carriers. But few businesses have had to change strategy and focus so dramatically, from one extreme to the other. The challenge is tough enough for carriers that had high levels of liquidity before the crisis; but for the recovering Jordanian carrier the hurdle is higher still.

But undeterred, Pichler is focused on the carrier’s new set of goals and immediately set to work to reach them. He explains that Royal Jordanian will begin to reboot its network at the end of the third quarter and start of the fourth. The airline will open “a couple of routes” from August and aim to resume around 10 before the end of 2020, Pichler says.

“Basically, we will probably end 2020 with around 40%, if that, of our capacity. What we try to do is to manage our fixed costs. We have managed to lower our monthly cash outflows significantly; it’s now about a third of normal operations. Of course, it’s not sustainable because you can ask lessors to delay payments but in the end you have to pay, for example. Our plan now is basically that by 2023 we will have a demand and capacity offering which is more than 2019. The recovery will last through 2021 and 2022.”

While Pichler has set a timescale for recovery, he assumes that traffic streams will come back in a staggered manner. He forecasts that domestic and short-haul flights – people travelling to visit family – will return much quicker than holiday and long-haul travel. Similarly, business travel will take longer to come back, he thinks. This trend could weight on Royal Jordanian, given that much of its pre-Covid business came from European tourists, who are expected to take more local holidays over the next couple of years.

Imagining what the airline industry will start to look like as the market wades into the recovery period, Pichler predicts that there will be an oversupply and overcapacity in the sector. Partly blaming lingering travel restrictions, he envisages low load factors, even when carriers start to open up their networks more fully.

In spite of the over-demand, the sector could also see low fares designed to stimulate the market. Naturally, blunted revenues during the recovery period will make it doubly hard for airlines to fly profitably and meaningfully and start to pay off the government bailouts that so many have received.

Pichler notes matter-of-factly: “It’s survival of the fittest. Some [carriers] will face further issues and there will be further consolidation. Those who can manage a bit better, who have a better balance sheet and more cash, will last longer.”

Royal Jordanian itself has had to go cap in hand to the Jordanian government, which is also part owner of the company. The airline recently told its shareholders that it cannot survive the coronavirus crisis without state support. Chairman, Said Darwazeh, noted in a June trading update that the airline needs “direct and indirect” support from the government in order to overcome the crisis.

While Pichler envisages Royal Jordanian being back on-track by 2022, the business will continue to operate at a smaller size for the remainder of this year and next, and that will likely include the carrier’s fleet. He notes: “We have lease contracts that run out and we will probably stick with a smaller size in 2022; although we will aim to expand our revenues and profits. In 2022 we should be able to get back to a good profit level, even if we are a bit smaller. Right now our major concern is getting rid of capacity. We will have to see further down the line [what happens to the fleet’s size]. With the current low fuel price you can operate less efficient aircraft, the difference is not as big when it comes to costs.”

Perhaps the only good thing to have come out of the coronavirus pandemic for Royal Jordanian is its impact on European competitors, who had prior to the crisis, been expanding into Jordan. With Air France, Ryanair and EasyJet reducing their networks, Royal Jordanian is in theory able to command more routes between Amman and Europe. Pichler predicts that in the immediate aftermath of Covid-19, airlines in Europe will continue to focus on their core routes and revenue streams, which might open the door to some opportunities for Royal Jordanian.

It is perhaps this opportunistic thinking which is partly responsible for Pichler’s success at various airlines over the years. Specifically appointed by boards to turn carriers around, Pichler is indeed a valuable asset for Royal Jordanian during the current crisis. Casting his mind back to his experience of other crises in the aviation industry, Pichler mentions his time at Thomas Cook when the September 11 attacks took place in the US.

“9/11 happened and tourist demand collapsed by 80%,” he said. “Out of five tourists, four stayed at home. This was a tough time. It’s a similar shock now but it’s lasting much longer. You see the same kind of things and we know what we need to do. It will change the landscape, you will have further consolidation, the bigger guys will become more powerful and some of the smaller guys will disappear.”

Royal Jordanian may be considered among ‘the smaller guys’ in the market but with Pichler behind the helm and with a proven ability to boost profitability against all the odds, Jordan’s national carrier stands a chance of emerging from Covid-19 as a stronger player on the Middle East scene. That is providing of course that the government is willing to back the airline.

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