Robust amid turbulence
In a very dynamic and turbulent global airline industry Ethiopian Airlines has managed to grow fast in the past ten years. Volatile oil price, terrorism, conflict and epidemic out break are the biggest challenges facing airlines. Stiff competition coming from mega airlines in Europe and the Middle East is a daunting challenge for African airlines. Many African carriers have gone bust and still many others are struggling for their survival. Despite the hostile global environment Ethiopian managed to keep growing and making profit in the past successive years. It has transformed itself into the largest aviation group in Africa and recently the group incorporated the Ethiopian Airports Enterprise and Hotel and Tour Company. Kaleyesus Bekele of The Reporter sat with the CEO of Ethiopian Airlines Group, Tewolde Gebremariam, and discussed the current performance of the airline. Excerpts:
The Reporter: How was the performance of Ethiopian in the 2016-2017 fiscal year?
It was a very good year for us although it was a very challenging year for the industry particularly for the African Airline industry. As you know 2016-2017 is the seventh year in our Vision 2025. Out of our 15-year strategic roadmap we have completed seven years so we are half way through. When we see the strategic roadmap, one can say with confidence that it has been a successful endeavor and in the past seven years we have exceeded all the parameters, the targets and the goals we have put in the plan in every successive year.
Likewise, 2016-2017 was a very successful year. But at the same time we have been tested and tried but fortunately we proved our resilience. In the fiscal year the price of crude oil continued to decline starting from late 2014, 2015, 2016 and part of 2017. That on one side helped us to reduce our cost.
It is also the case that the decline of oil price is a bonanza for airlines.
When you look at it globally, it is a bonanza for airlines because it has declined by more than 50 percent. Globally, it is a welcome event but unfortunately in Africa that has not been the case. Most African oil producing countries have been affected both on fiscal policy implementation and macroeconomic policy implementation. Countries like Nigeria, Angola, Chad, Equatorial Guinea, Gabon, Sudan, Egypt and Cameroon have been significantly affected. To the extent that of some of them were not able to deliver the hard currency exchange that was needed to repatriate our money. The other situation that has highly affected our profitability is the devaluation of local currencies. It has taken its toll on our profitability by affected our cash liquidity. Simply put, our cash is stuck there. Because of this African airlines have suffered.
It has been said that African oil exporting countries spend less on air travel due to the decline in oil price.
Yes, that is what I meant by fiscal policy implementation. Governments’ spending was significantly reduced and that has brought in decline in demand for air travel both in government and private air travel. Tourism was also affected because of sporadic terrorist activities in East Africa, Central Africa and West Africa and in Egypt. There was also significant economic weakness in South Africa which is the second largest economy in Africa. These put together have reduced our revenue. Our revenue has grown but it was not as much as we planned. We saw a revenue growth of ten percent.
It was another successful year. Our revenue grew to 2.7 billion dollars.
Can you give us specific figures regarding your revenue, profit, passenger and cargo transported during the fiscal year?
Our revenue is 2.7 billion dollars. We have carried close to nine million passengers and 338,000 tons of cargo. The profitability is around 230 million dollars. When compared to the significant challenges African airlines have faced, Ethiopian Airlines has seen another remarkable and excellent performance.
Is this a record high profit?
No, the record profit was registered last year. This one is slightly lower than the previous year. But again one can say that it was a remarkable profit margin; much higher than the International Air Transport Association’s forecast.
What about your revenue?
Our revenue grew by ten percent to 2.7 billion dollars. The number of passenger grew by 20 percent; cargo grew more than 338,000 tons so it was an excellent performance. At same time the growth that we have projected in the Vision 2025 has continued. Today we are operating 92 airplanes and have 60 airplanes on order. The other peculiar thing, which we are proud of, is that our fleet average age is less than five years. The global industry average is 12 years. We have one of the youngest fleet in the industry. Both our Boeing and Airbus aircraft are not only the youngest but also the most modern. Few airlines in the world operate both modern fleet from Boeing and Airbus. We have the latest B787 Dreamliner and the state-of-the-art Airbus A350 XWB.
We have been rated the best airline in Africa by Skytrax Airline Awards in customer service. We are the best airline in Africa, according to the African Airlines Association (AFRAA). We have built the largest catering center in Africa, the largest Maintenance Repair and Overhaul (MRO) center, cargo terminal and aviation academy.
You have already mentioned the challenges in repatriating funds from oil exporting countries and there is also the currency devaluation problem. However, you have repatriated some of your funds from Egypt and Nigeria. But there is a big challenge with Angola and Sudan. Tell us about that.
This has been a very serious challenge. At one time it reached 220 million dollars’ worth of local currency in Angola, Nigeria, Egypt and Sudan. Egypt and Nigeria are the two major challenges. In Egypt, the government devalued the Egyptian pound from six against the dollar to 16. It is a major devaluation and as a result of that we lost a lot of money. But we have been able to repatriate the remaining amount.
How much money was stranded in Egypt?
It was around 20 million dollars. It has declined in value because of the devaluation and I think in the end we repatriated around five million dollars only. We must have lost 15 million dollars because of the devaluation.
Coming back to Nigeria, we have done a good job. We are very grateful to the Nigerian government. We have worked in a very strong partnership especially during the airport closure of Abuja. The Nigerian government had to close the Nnamdi Azikiwe International Airport in Abuja for runway renovation and the only way out from the capital city of the largest economy was through Kaduna International Airport. Unfortunately, not many airlines were interested in continuing their services from Kaduna Airport. But for us it was a continental obligation as a Pan-African airline. We did not abandon our Nigerian brothers and sisters. We decided to continue to fly from Kaduna and we were the first and only international airline to do so. By doing that we were the only connection to the capital of Nigeria to the rest of the world through Kaduna.
That was a significant milestone for the country. If we did not decide to fly to Kaduna there was no other way to connect Abuja with the rest of the world. That was a huge challenge for the Government of Nigeria. We were very happy to work together to solve the problem. We sent our technical and security experts to make an assessment and they found it to be safe to operate. We managed to serve Abuja through Kaduna for a month and a half. This is what African partnership means in practice. It was a win-win situation for both of us.
Because of that partnership the Nigerian government helped us in speeding up the repatriation process. We followed the regular weekly bid for foreign exchange. So that was resolved.
How much money was stranded in Nigeria?
It was more than 100 million dollars. At one time it reached 150 million dollars’ worth of Naira. We have managed most of it and we must have 20 or 30 million dollars outstanding. That is our normal sales operation. We are big in Nigeria.
Angola is a big crisis. We still have more than 110 million dollars’ worth of local currency called Kwanza stranded in Angola. There was an election in August and a new government is taking over. We are very optimistic that the new government will resolve the problem. We are working with the new government.
As you know we have a very strong partnership with our neighbor Sudan. The two friendly countries have very strong bilateral relations. We have more than 30 million dollars stuck there. The Ethiopian and Sudanese governments are working together to find a solution.
Ethiopian has been trying to establish new partnerships with various African countries. There was also an ongoing negotiation with the Nigerian government to manage Arik Air. Can you tell us about these efforts?
Let me explain that from a strategic point of view. As the largest and competent Pan African carrier, we believe that the African aviation development has to change course. It has to change course in such a way that home grown indigenous African airlines have to grow both in number, in market position and financial sustainability. By having that in place, we will be able to balance the market share between African airlines and non-African carriers. The very objective is to balance the market share. As the largest carrier, we are very concerned with the current development of the aviation sector in Africa.
The market share of African carriers has been declining in the last 20 years. African airlines market share in the inter-African market (Africa and the rest of the world) which was 60 percent dwindled to 20 percent. Today 80 percent of the market is controlled by non-African airlines. We believe that it has to be at least 50-50.
The implication is not only in terms of market share. What is happening to African airlines? They are gradually dying. Twenty years ago there were strong African airlines like Nigeria Airways, Ghana Airlines, Air Afrique, Congo (Zaire Air), Zambia, Ethiopian Airlines and East African Airways. But today, although we still have South African Airways, Kenyan Airways, Ethiopian Airlines, Egypt Air, Royal Air Maroc, TAAG Angola, Tunisair and Air Algérie, their number and size did not growth in tandem with the market. The market has grown. That is why we have only 20 percent market share.
If we do not address this and the curve is continuously declining, who knows may be in the next ten years there will be no indigenous African airline. We are very concerned with this development and we believe that we have to contribute our share to turn the curve upwards. This is the main objective. The second objective is although Africa is well connected with the rest of the world the interconnectivity within the continent is still lagging behind. Mobility and air connectivity within Africa is way below the global average.
When you have home grown African airlines – in whatever form – at least successful hubs connectivity within Africa will improve. Today, if we have a hub in Central Africa connecting West and East Africa, the same hub will serve as a connection between West and Southern Africa. It is like what you have in London, Frankfurt, Paris or Amsterdam. The hub business model is still successful in the US and Asia. That is the second objective for establishing multiple hubs.
We can implement that by working with governments to establish a hub especially in countries located centrally like Zambia, the Democratic Republic of Congo or Congo Brazzaville in central Africa. Geographically, Central African Republic would have been an ideal location to establish a central hub had it not been for the political ordeals in that country. These are the main drivers. That is why we are talking to the Government of Zambia today.
We are in the final stages to sign shareholder contract. Ethiopian Airlines and the Zambian government are about to sign an agreement to establish a new airline in Lusaka, Zambia. We have also got a green light to establish an airline in Mozambique. The Mozambique government invited carriers to establish domestic and international airline based in Mozambique. So we are going to register Ethiopian Airlines in Mozambique as a local carrier.
The other one is Chad. It is going be an airline owned by Ethiopian Airlines and the Government of Chad. Chad is a big country in terms of land mass and is strategically located. That is also progressing well. We have also started negotiations with Air Djibouti. Of late, the socio economic development in Djibouti is very encouraging. China, for the first time, has established a military base in neighboring Djibouti. The major political powers have big military vessels in Djibouti. The country is expanding its seaport and airport. So it can serve as the Dubai of Africa if we do the right thing together.
We have held several discussions with chairman of Air Djibouti and the port. We are going to establish a joint venture on Air Djibouti.
What is your plan in Nigeria?
There has been a challenge in Nigeria. We are not discussing to manage Arik Air. In the initial stage when AMCON (Asset Management Corporation of Nigeria) took over Arik Air there was a discussion to manage Arik Air but it was stopped. And AMCON is now managing the airline and we did not continue our discussion. We are not interested in taking over the airline because of financial and legal complications. But we are very much interested in starting an airline in Nigeria. There are a lot of initiatives at least there are two initiative that we are closely following.
The first initiative is the establishment of a national airline that the Government of Nigeria is undertaking with an international consultant (Lufthansa Consulting Services). We have submitted our expression of interest. On the other hand, we are discussing with private carriers in Nigeria. We may pick one of them and work with them.
But the strategy has to be clarified because we have ASKY Airline in Lomé, Togo and geographically it is very close. We are also working with the Government of Ghana. You may wish to know that the Minister of Aviation was here with her delegation and visited Ethiopian. She has asked us to submit expression of interest and we did so together with a business plan.
Is that to establish a national carrier in Ghana?
Yes, at the end of the day there are some principles in the airline industry. Not every country can establish an airline. It is a very challenging business. Number one, it needs a volume of business. Economies of scale are very important in the airline business. Some countries may not have volume of business to justify having an economically sustainable airline. The second one is capital investment. The airline business is capital intensive. And it is skilled labor intensive. So, not all countries with the ambition to establish an airline can jump in.
Ethiopian Airlines Aviation Group is restructured. The new aviation group amalgamates Ethiopian Airports Enterprise and a Hotel and Tour Services company.
What progress has been made in integrating the new aviation group?
The strategic implication of the merger is again global competitiveness. You have to compete at the global stage and win. In our Vision 2025 roadmap we have realized that we have done extremely well with the airline. We have competed on the global stage and we have won.
But we have not succeeded in transforming Bole International Airport as the best hub in Africa. We have the best airline in Africa but Bole Airport has not progressed and developed in such a way that it can be the best hub in Africa. This has been a drag factor in our strategic direction. As a nation we should address this problem. Among various options the government decided to merge the two government-owned enterprises; but with very clear purpose in mind. We have to improve the customer service across the value chain.
Passengers need a good airline and an airport that it up to global standards. Passenger experience at airports is very important. Passengers need to be connected with the internet in every airport. Digital connectivity at airports is very important, which was lacking at Bole Airport. You want to experience shopping, entertainment and spend your time and money to make yourself comfortable while waiting for your flight.
In that regards, the Addis Ababa Bole International Airport was not up to global standards. Today, in the new arrangement, we have to make sure that the airport experience for the passenger is as good as the on board experience. There are some changes we have introduced and passengers are already feeling the difference. Today, you can go to the airport and can get connected with the WIFI for free.
The other is facilities like toilets, restaurants and duty free shops are being developed.
When we come to the tour and hotel services, there is shortage of hotel rooms in Addis Ababa. The conference tourism is growing and we have shortage of hotel rooms that are in line with global standards. That is why we have a five star hotel which has 373 rooms. The purpose is not to compete with the existing hotels. We are building the hotel to complement the in-house tour service. The hotel will help us offer our customers a tour package – air travel, hotel and tour service. It enables us to be a one stop shopping service. The tourists will be able to buy a package. It will be very easy and comfortable for the tourists to enjoy Ethiopian hospitality. And we would be able to control the value chain.
Are you integrating Ethiopian Airports Enterprise with the aviation group?
Yes, we are integrating it. But we are going to maintain it as a business unit with their own management. We are training the staff. We have put more than 500 people in our aviation academy at one go and we are training them in customer service, airport experience and value system of the group. The integration so far is going very smooth.
You are also eyeing state-owned hotels to own and manage them.
Well that mandate is not in our hands. As a corporate entity and an asset of the nation we want to contribute our share to bring those hotels up to the global standards; particularly, the Addis Ababa Hilton and Ghion hotels. Through time their standard has been challenged. You can see the rating they have. These hotels are very precious assets. So when the government decides the strategic direction, we are ready to take over and integrate them to our hotel services.
The Ministry of Public Enterprises recently put up a list of hotels that are going to be privatized and Hilton is among the list. Are you going to bid?
We are a state-owned enterprise so we cannot bid. If it is going to be a privatization process, we are not going to be there. But we can partner with private developers. The most important thing is to move fast to renovate expand and bring these hotels up to the global standards.
Ethiopian has made significant investment in its cargo division by building a state-of-the-art cargo terminal, ordered new B777 freighters and changed its name to Ethiopian Cargo and Logistics Services. What does the cargo and logistics division plan to achieve?
The growth in air cargo is going in accordance with the Vision 2025 roadmap. We are the largest cargo operator in Africa with six B777 and two B757 freighters and we have two more B777 on order. We are competing with Middle Eastern carriers in cargo. That is why we have built a large state-of-the-art cargo terminal with its own ramp facility which can accommodate seven airplanes at a time. It is a significant investment. When we see the development of air cargo in Africa and the socio economic development in Africa, particularly the socio economic development in Ethiopia, we realized there is a huge gap in the logistics sector.
Ethiopia is building industrial parks. Three have been built and seven more are in the process. This will transform the economy significantly. I firmly believe that this is going to be a game changer in the Ethiopian economy in terms of industrialization. Industrialization without equivalent global standards logistics will be a failure. We learnt this from China, Europe and the US. In China most of the development is around the coastal areas.
If we see the Hawassa, Mekelle and Kombolacha industrial parks (Dire Dawa and Adama are coming) they produce significant amount of products for export. The manufacturers should get a global standard logistics services. If it is a high value and time sensitive material, they may use air transport. If it is low value and long time deliver service, then they can use sea transport. We believe that the logistics sector is lacking. It is under developed. I know there are a number of initiatives to develop the sector. We want to contribute our share. We are going to enter the logistics service in Ethiopia.
Are you going to synergize your strategy with Ethiopian Shipping and Logistics Services Enterprise?
At the moment we are not aligning our strategy because the Ethiopian Shipping and Logistics Services Enterprise is working on multiple initiatives to upgrade their services up to global standards. We are working on our own. The manufacturers and exporters will have choices. There will be a competitive service.
Are you collaborating with the Industrial Development Corporation?
Yes, unless we revolutionize the logistics sector the manufacturing sector will not be competitive.
How can Ethiopian support this sector to grow?
We are establishing a joint venture logistics service with DHL. We are making significant progress. Once the joint venture is up and running we are going to serve the industrial parks. Our main location will be Addis, industrial parks and major export areas.
Ethiopian has built residential houses for its employee and is in the process to deliver the houses to its employees, but there has been a delay. Tell us about that.
It is a very important project. As you said it has faced a lot of challenges. Today, I am very happy and relieved to say that the project is ready. In the month of October we are going to deliver the houses. I would like to thank the people who participated in this project. I appreciate their patience, effort, passion and energy because we have gone through a lot of challenges. We are going to handover 1,300 houses to our employees.
Housing is a significant concern for any person in the country and the biggest problem in Addis. So our 1300 employees will take over their houses this month. It will help us retain our staff. Talent retention is very important. Ethiopian Airlines is as good as its employees, period!
We are heavily dependent on our employees. We have to maintain that to grow the company. All the plans that I have been talking about could not be materialized without our employees. We have to retain our talented, passionate, energetic and dedicated staff.
We have phase two housing development project. But have a big land there so we will have phase two. God willing we are going to build about seven thousand apartments. We are going to build high end apartments. The plan for phase two is progressing very well. We are going to start registration very soon. That area is going to called Ethiopian village.