Navigating through the storms
The COVID-19 pandemic has brought down the airline industry to its knees. Globally, more than 13,000 aircraft are grounded and many airlines have declared bankruptcy. According to the International Air Transport Association (IATA), the global airlines industry would lose 314 billion dollars revenue putting 65 million jobs at risk. IATA estimated that African airlines would lose USD six billion revenue. The biggest aviation group in the continent, Ethiopian Airlines Group, has reported a revenue loss of USD 550 million. The national flag carrier has reduced its operation by 90 percent and grounded most of its fleet. Kaleyesus Bekele of The Reporter sat down with Tewolde Gebremariam, Ethiopian Airlines Group CEO, to discuss the adverse impacts of COVID-19 on the airline. Excerpts:
The Reporter: The COVID-19 pandemic is negatively impacting the aviation industry. How seriously is Ethiopian Airlines affected by the impacts of the pandemic?
Tewolde Gebremariam: The COVID-19 pandemic is creating unprecedented crisis in the world. One third of the global population is under lockdown. More than 1.5 billion students have interrupted their education and are staying at home. People are not traveling and due to the flight restrictions airlines are not flying. This has caused a huge economic crisis that brought down the global airline industry to a standstill. People are losing their jobs. If we look at the US, 40 million people have lost their jobs.
The first victim of the global economic crisis is the airline industry. The hotel and tourism industry is seriously affected by the global economic crisis. In Africa most countries have closed their airspace. There is no passenger traffic at the moment so airlines have parked their passenger aircraft.
Ethiopian Airlines passenger traffic market has evaporated. Only five to ten percent of the market remains. So the airline has parked almost all its passenger aircraft at the Bole International Airport. It is heartbreaking to see all those aircraft parked at the airport.
We have gone through many challenging times like civil war, famine and epidemics like SARS, MERS and Ebola. We have also witnessed the turbulent time in the wake of the 9/11 terrorist attack in the US. But none of them come close to the impacts of COVID-19. This is scary.
COVID-19 has caused a financial and operational crisis on Ethiopian Airlines. Between March and April we have lost 550 million dollars in revenue.
It has been reported that Ethiopian Airline would lose USD one billion?
If we calculate it the amount of revenue that we would lose by the end of the fiscal year in end of June it would be to the tune of USD one billion. Ethiopian Airlines is facing several challenges. We can divide the global airlines in two. Some of the airlines have received state funding to cover their expenses. Other group of airlines had problems and they are unable to stand on their own two feet even before the COVID-19 crisis.
Ethiopian Airlines is not in those two groups. The fact that it did not go bankrupt and did not seek state bailout makes it a unique airline. Ethiopian Airlines did not lay off its employees and it did not cut off staff salary. Several airlines have reduced staff salary. Nigeria’s Arik Air slashed staff salary by 80 percent, RwandAir by 40 percent and Kenya Airways by 35 percent.
What strategy are you implementing to withstand the current adverse impacts of COVID-19?
When we prepared the Vision 2025 growth strategy some ten years ago we were looking at the idea of having diversified businesses. It was a very debatable subject. Some argued that business diversification has caused the demise of airlines. We looked at Lufthansa and British Airways. British Airways had catering business, cargo, MRO (Maintenance Repair and Overhaul), and it also had a hotel at one time.
The then management of British Airways decided to spin of the businesses and to focus on passenger transport as their core business.
On the other hand, Lufthansa expanded its aviation group. Today, Lufthansa Technik is the leading MRO center in the world. Their catering company Sky Chef is also the leading catering company. They have built one of the biggest cargo airline, Lufthansa Cargo. Lufthansa Systems produces flight control system. It has a big market share and we also use their flight control systems. So Lufthansa has become a successful aviation group.
Considering the situation in Ethiopia we have chosen having a diversified business units. That is the pillar of Vision 2025. We have Ethiopian Cargo, MRO, Aviation Academy, Catering and Ground Handling. We have also established Ethiopian Skylight Hotel and ventured into airport operation. We made substantial investment on Ethiopian Cargo and Logistics.
Though it was a debatable subject we believed in having a diversified business units and today we have reaffirmed that it was a right decision. It was a well thought out plan. When the passenger market has come to a standstill, cargo is the market that we could look at.
In March the executive management members sat down and after we deliberated on the unfolding situation we decided that we should focus on cargo operation. When we decided to concentrate on cargo operation, the cargo market boomed. The Chinese market was closed in February and March. As you know the China is the global manufacturing hub. The factories were closed. Goods could not be transported. When the Chinese manufacturers resumed operation most of the goods which was transported by sea came to air transport.
Second, COVID-19 life saving equipment like face masks, hand gloves, testing kits, have to be transported by air because speed was very important. Those who prepared themselves can exploit the market which was created abruptly. With ten B777s and two B737 freighter aircraft Ethiopian Airlines is the largest cargo airline in Africa. We had also built a state-of-the-art cargo terminal at our main hub Addis Ababa Bole International Airport which can handle 1.2 million tons of cargo per annum.
Since March, we were busy transporting lifesaving equipment like PPE from China to Europe, the US and South America. We transported lifesaving medical equipment to France, Spain and Italy. You see our cargo planes in major European airports.
There are giant cargo airlines like Lufthansa Cargo, Turkish Cargo, Qatar, and Etihad Cargo. How did Ethiopian Cargo compete with these giants and won contracts?
For big companies to make a swift turn is a bit difficult. It takes time for giant companies to make a change in their business strategies. The cargo market boom was a sudden phenomenon. Ethiopian Airlines is a flexible company. We have an experienced management team with rich experience and we immediately made the decision to exploit the cargo market. We do not have a cumbersome bureaucracy. If you do not use the opportunity quickly it will go away.
How much cargo did you transport in the past few months?
In March we transported 10,300 tons of cargo, in April 13,600 tons and up to mid May 6000 tons. We transported a large amount of air freight.
Can you tell us the cargo market surge?
The cargo market has increased by 50 percent. It was wise decision for us to focus on cargo and MRO market back in March. We call these business ‘Corona Free’.
We deployed the ten B777s we have but they were not enough to serve the increasing air cargo market. So converted some of our passenger aircraft into cargo. At the beginning we used the passenger aircraft. We load up to 60 tons of cargo in the big passenger aircraft and up 40 tons of cargo in the mid-size passenger aircraft. We load the cargo on the seats. But we feared that it will harm the seats in the long run so after consultations with the aircraft manufacturers, Boeing and Airbus, our engineers took out the seats and made them suitable to carry cargo. We have converted 25 passenger into cargo planes.
Recently, the Financial Times reported that Ethiopian Airlines Cargo came to rescue Latin American countries. What did happen there?
No one thought that an airline from a developing African country would come to serve South American countries such as Brazil and Argentina. But this is what happened. Many people were dying in Europe in March. There was shortage of ventilators. The South American countries ordered for ventilators from China. The ventilators were transported via Europe and the US. While en route to Brazil and Argentina during a stopover in the US for refuelling in Miami ventilators were taken.
So they ordered ventilators to be transported by Ethiopian cargo. These ventilators were transported from China via Addis Ababa to Brazil and Argentina. And they were very grateful.
Is the revenue generated from cargo operation helping you to stay afloat?
Until the COVID-19 pandemic Ethiopian Airlines was on growth mode. After the impacts of COVID-19 began to bite we put the airline on survival mode. We are not working for loss and profit. We are working on cash basis to ensure the survival of the airline.
We are working on cost reduction aggressively. We are reducing our cost as much as we can. We are using the revenue we generate from cargo and aircraft maintenance operations to cover our fixed costs. We are servicing the loans we took for aircraft purchases and we are paying aircraft leases. We are paying salaries. We are reducing costs and covering our fixed costs.
How much is your monthly salary expense?
Our salary expense is around 650 million birr.
To all your 17,000 permanent and contract employees?
Yes, our total monthly salary expense is around 650 million birr. We service our debt and settle aircraft lease payments. In March we decided not to lay off employees and not to cut salaries unless situation is beyond our control.
This is not the US and Europe where you have social well fair payments. So staff lay off is not an easy decision to make. That is our last resort. You do not make it a priority option. We are reducing our cost as much as we can and use the revenue we generate to cover our basic costs. The majority of our income, 85 percent, comes from passenger transport and 15 percent comes from cargo and MRO. The revenue we generate from MRO is not more than one percent. Cargo operation is profitable so the income is minimal compared to the revenue generated from passenger transport.
Is the revenue you generate from cargo and maintenance covering your fixed costs?
Yes, it is covering our expenses.
You have told us that Ethiopian Airlines did not lay off its employees and did not deduct staff salary. On the other hand, it did not seek state funding. How long can it sustain the business?
We are in a very difficult situation. KLM secured EUR 4.6 billion from the Dutch government. Air France has secured EUR 7.6 billion from the French government. US airlines combined received USD 27 billion. No one can tell the right time when the pandemic ends and air travel would resume.
Human beings are born to work, travel and trade. They are not born to be locked down at home. So somehow this problem would be resolved and travel would continue. With the necessary precaution it will restart gradually.
We hope that the air space would be open in July and air travel would resume. But air traffic would not pick up immediately. It would take a long time to recover.
We are struggling to pass this trying time by reducing our costs and focus on other means of income like Cargo, MRO and hotel business to survive. We believe that we will pass through the storms. There will be many casualties in the airline industry. Many airlines will die in the process. Especially in Africa, there will be many casualties. And we will pass through this challenging time and get prepared to exploit the market gaps that would be created due to the causalities.
Have you returned your leased aircraft?
No, we did not return our leased aircraft. But we postponed new deliveries schedule.
If the passenger aircraft are parked at the Addis Ababa Bole International Airport why don’t you return them to the lessors?
We have a long-term lease contract. If we decide to return the aircraft the lessors would fine us for breach of contract. They would charge us the whole lease period so it is better to keep the aircraft.
Didn’t you negotiate to lower the lease rate?
That also didn’t work. Because many airlines have filed similar requests. Many airlines that went bust have returned their leased aircraft. Those who went bankrupt and who are under business protection as part of the bankruptcy administration procedure have returned their aircraft. Since we have not declared bankruptcy we could not do that.
Have you requested for loan repayment reschedule?
We have tried to secure loans from the World Bank, IFC, AfDB and the Asian Infrastructure Development Bank but we have not been successful so far. Because the process is too long and the interest rates are higher.
What about the loans that you took for aircraft purchase from commercial banks?
We are servicing those loans.
Have you asked the commercial banks to reschedule the repayment period?
We have not done that. We do not want to defer on loans. You see Ethiopian Airlines has a commendable credit history. Throughout its 74 year history Ethiopian Airlines pays its loans according to schedule. So now asking for loan repayment reschedule will affect our credit history and we do not want that to happen.