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Mon 6 Jun 2011 10:29 AM

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Dreamliner’s nightmare

Amman-based Royal Jordanian had hoped ordering eleven Boeing 787 Dreamliners would help it save money on its fuel bill, but rising oil prices and aircraft manufacturing delays have pushed it into the red, says the carrier’s CEO Hussein Dabbas

Dreamliner’s nightmare
Royal Jordanian CEO Hussein Dabbas on the high oil price: “Our budget is based on $85 a barrel and that’s why we incurred a first-quarter loss.”

“It is going to be a very challenging year,” Hussein Dabbas, CEO and president of state-backed carrier Royal Jordanian (RJ) says as he looks ahead towards the end of 2011.

As a volcanic ash cloud in Iceland once again threatens to disrupt air travel over Europe, it is yet another problem to add to the growing list of challenges for the Middle East’s beleaguered aviation bosses.

The regional unrest in Egypt, Libya, Syria, Lebanon and Yemen has already taken a large bite out of Royal Jordanian’s passenger numbers, but soaring oil prices are causing the state-backed carrier the biggest headache.

Oil prices have risen 39 percent in the last year to nearly $100 a barrel and account for around 40 percent of RJ’s operating costs. As a result, RJ’s first-quarter results have slid into the red and it reported a loss of $39m for the first three months of the year.

The price of oil is “already too high,” he admits. “Our budget is based on $85 a barrel and that’s why we incurred a first-quarter loss.”

“We do put in a surcharge, but it barely costs 40 percent of the additional charges,” he says. “We need to find ways of how to manage the extra cost, and we have cost control mechanisms where we are trying everything, including freezing manpower, to be able to at least mitigate the cost of the high fuel price.”

The bulging fuel bill is further compounded by delays in Boeing’s 787 Dreamliner aircraft, which RJ had hoped would replace some of the older less fuel-efficient planes in its fleet.

The fuel-efficient 787 is three years behind schedule, a delay that has caused RJ to lose “huge amounts” in potential savings, he says. “The 787 consumes 20 percent less fuel [than the Airbus 340] so it is a very complicated formula if we are going to start calculating, but it cost us a lot of money.”

RJ, which currently operates a fleet of 32 aircraft, has eleven Dreamliners on order. After a trio of postponements from US-based Boeing, the first aircraft is due for delivery in the first quarter of 2014 with the remaining planes delayed to 2015, 2016 and 2017.

So is Dabbas pushing the American manufacturer to compensate them for their losses? “We are talking to them [about compensation] but the contracts are quite difficult to break, he says. “We have very good relations with Boeing and they are trying their best to help us on many avenues and we are still talking to them actually.”

Despite the first-quarter loss, Dabbas is confident the state-backed flag carrier’s finances are in “good shape” and says it regularly budgeted for a loss in the quieter first quarter of the year and usually recoups any losses in the busier summer months.

However, Dabbas admitted this is all dependent on how the political situation in the region pans out in the coming months.

“To be honest with you it is going to be a very challenging year. If things settle down in Lebanon and Yemen and Syria I think we will see a resurgence of traffic but if it procrastinates then it is going to be a tough year and we hope we will be able to break even for the whole year,” he admits.

“We are a small airline — last year we carried a little over three million passengers, although that’s twice as many as five years ago,” he adds, but, as the airline approaches its 50th anniversary in two years, oil prices and political unrest are not the only issues keeping him up at night.

Europe, in particular, is a source of much irritation for Dabbas, and it’s nothing to do with the Icelandic ash cloud. Jordan has signed an ‘open skies’ agreement with Europe allowing it to fly as often as it likes to any European city.

While European carriers, such as easyJet, have started operating to Amman, Dabbas says it is extremely difficult for RJ to obtain landing slots at the major airports, such as London Heathrow, Paris and Frankfurt.

For example, he says Heathrow is so congested it would cost it up to $40m for RJ to secure a landing slot at the airport, and only if it can find a rival airline willing to give up a slot it already has, as the airport is operating to full capacity.

Another major concern for Dabbas is the EU Emissions Trading Scheme, a 2005 initiative where airlines must pay a fee to counterbalance the carbon dioxide emissions they release while they are flying in EU airspace. Dabbas said RJ could easily be paying up to $5.5m by 2012 to cover the costs of the scheme. “Airlines most likely will start imposing a CO2 tax on passengers,” he warns.

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