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Growth in a challenging environment

Growth in a challenging environment

Africa’s largest airline, Ethiopian Airlines, is celebrating its 70th anniversary. The pan African airline grew steadily in the past ten years amidst a challenging business environment in the global aviation industry. News of fuel price hikes or outbreaks of war and epidemics in any part of the world wakes Tewolde Gebremariam, Ethiopian Airlines Group CEO, from his sleep in the wee hours of the morning. Tewolde typically works 14 to 15 hours a day, seven days a week. The growing competition from global mega carriers seems to be frustrating the distinguished CEO. Kaleyesus Bekele of The Reporter last week met Tewolde in his office and discussed the milestones the airline has reached and the daunting task of managing a rapidly growing airline in a turbulent environment. Excerpts:

The Reporter: As Ethiopian Airlines is celebrating its 70th anniversary, what are the major achievements?

Tewolde Gebremariam: Seventy years is a long period of time. Ethiopian has registered impressive growth over the last 70 years. I would say the last ten years have seen an exceptionally tremendous growth. The first 60 years were also very important. The first 15 or 20 years were basically formative years, when the airline was managed with the support of TWA (the now-defunct Trans World Airlines). The major milestone was reached in the early 1960s, when the airline brought the first jet service in Africa with Boeing planes 707 and 720. Coincidentally, that was the time when the Organization of African Unity (OAU) was formed. This was a historical moment for the continent when African solidarity and integration were coming together to Addis Ababa to from the OAU. At that time the airline was moving to the next stage, jet service that was then a novelty in the continent.

So it started its leadership in the continent at that time by starting jet service. The introduction of the jet was an industry game changer. The airline continued to lead in the early 1980s again, when it brought to the scene a B767, which was the most modern airplane at that time. Ethiopian was a launch customer Boeing. We were the second airline next to El Al. The B767 was a new machine with modern technology.

The flag-carrier airline was still a leader in Africa in the 1990s with its B757. In 2010, we introduced the first B777-200LR in Africa. With the introduction of the B787 Dreamliner in 2012, Ethiopia caught big media attention, as we were the second country next to Japan to take delivery of the B787.

We continued to grow last year by taking delivery of the first Airbus A350XWB. These were the major millstones. Parallel to these, the number of international destinations and passengers has been growing and the last ten years have seen the airline grow very fast. We are now six years into Vision 2025 that we launched in 2010. Many in the media and some industry analysts doubted our capacity in undertaking Vision 2025. That’s because it was very ambitious in a very challenging environment and people had their doubts internally and externally that it would be achievable.

But now six years later, that doubt is no more in people’s mind because we have already achieved a lot and even exceeded the targets for Vision 2025. Now Vision 2025 gives us the opportunity to grow. It was the right business strategy, which is tested and tried.  As a result of that we are now the largest carrier in Africa.

You must have seen the report by the International Air Transport Association (IATA) that shows that Ethiopian is the largest carrier in Africa in terms of revenue, passenger and number of aircraft. Ethiopia is not the largest economy in Africa but it has the largest airline in the continent. So that shows you the remarkable success of Vision 2025.

The growth of Ethiopian has direct and indirect impact on the socio-economic development of Ethiopia and Africa. That’s because this is an airline connecting the continent with many trading partners in North America, South America, Europe, the Middle East and Asia. We have 95 international destinations and 20 domestic destinations. We are connecting Ethiopia and Africa with the rest of the world with mostly daily nonstop flights. This has a ripple effect on economic development, trade, investment and tourism.

When it comes to cargo services, we are supporting the country’s export and import. Air connectivity is very important. It is essential and a critical driver of economic development as it has been proved in many other countries. I think the airline is doing very well.

Can you tell us about the financial performance of the airline?

In the 2015-2016 fiscal year, which ended in June 2016, we registered a record profit and revenue. One can say that it was a very good year, although it was a very challenging year for the industry. But for Ethiopian Airlines it was a very good year.

We have registered an annual turnover of 55 billion birr and a net profit of six billion birr (USD 273 million). We have carried 7.6 million passengers and 270,000 tons of cargo. When you compare it with the previous year, revenue grew by ten percent, and profit grew by an even larger percentage.

There were some major challenges in the last fiscal year. There was a political unrest in the country and subsequently there were travel advisories issued by some Western countries, which affected the tourism industry. What was the impact of these on the airline?

We are now talking about the 2015-2016 fiscal year. The budget year ended in June 2016, meaning by then we did not feel the impact of the unrest. Of course, the continent has other challenges. Oil-dependent economies like Nigeria, Angola, Cameroon, Gabon, Equatorial Guinea, Chad, Congo Brazzaville, Sudan and Egypt have been very much affected by the sudden decline in oil price. The demand for air travel in these countries has slowed down. The revenue we were supposed to derive from these markets has showed substantial decrease. At the same time, a more difficult challenge was the shortage of foreign currency in these countries, especially in Nigeria, Angola, Sudan and Egypt.

Right now we have more than USD 220 million worth of local currency in these countries trapped for more than a year. You can imagine what that means on our liquidity and cash flow. More than 70 percent of our expenditure is in USD. That has created a very strong challenge in the way we manage the airline. It is still going on.

IATA is working on the release of the blocked fund. The African Airlines Association (AFRAA) is also trying to help. We are also playing our part. We are a big player in Africa. We serve four points in Nigeria – Lagos, Abuja, Kano and Enugu. We are a significant carrier there. So we are trying our best. We hold regular consultations with the government. They release small amounts of money periodically, but we still have significant funds trapped there.

The CEO of Emirates, Sir Tim Clark, threatened to suspend operations to Nigeria precisely because of that.

Well Ethiopian is a pan African airline. We have served Nigeria for many years, both in good and bad times. Ethiopianis as old as Nigeria because we started flying to Nigeria right after the country gained independence. So by de facto we are the national carrier there.  We understand that they have a temporary problem and we are trying to find a common solution. But there are no plans to cut back on our services there.

Weren’t you affected by the political unrest in Ethiopia?

Of course, it had an impact, but not that big. As you can see our revenue grew, our profit grew. That’s because our 70-75 percent traffic is transit. And I think the effect is more on this year than last year. This year we have seen slight reduction of passenger traffic. But it is not that big. We have seen a small reduction on traffic coming to Ethiopia. But over all I would not say that it has affected us very much.

You have introduced a new aircraft to your fleet, the Airbus A350, last June. When you bring in a new aircraft, there are challenges that industry insiders call “teething problems”. Have you faced challenges with this new jetliner?

Fortunately, the Airbus A350 has seamlessly integrated into our service. As a new airplane, there are bound to be some teething problems but we have not felt that. I can say there could be some problems here and there but overall it was a very smooth integration.

You have been comparing the B777X and the Airbus A350-1000 for quite some time now. Have you made any decisions yet?

Our fleet plan is based on mission. First, the mission defines the fleet, that is, the type of airplane. Secondly, we make decisions on fleet commonality. Third, we base our decision on technology. Nowadays, in our Vision 2025 we have formulated that we have to own and operate new and modern fleet for many reasons. Newer and modern planes are eco-friendly because they emit less carbon. They give better customer service in terms of cabin features. They are cost efficient in terms of fuel consumption and maintenance. Of course the cost of ownership is very high because they are new. They are very expensive machines. On balance, they are more attractive to the airline and to the customer. And it enables the airline to deliver superb customer service, making it more valued.

The other issue we consider in fleet planning is the track record of planes. For instance, we have planned that Ethiopian runs these two next-generation airplanes – the B787 and the A350. These are the airplanes of the future. From the narrow body ones, we have selected the B737Max, which is more efficient than the existing B737s in terms of carbon emission, fuel consumption and maintenance.  We are making sure that the airline is on a solid foundation when it comes to fleet.

Having this in mind, the latest version of the B777 is the B777X. The B777 is a very efficient plane. It is going to come with modern technology so we are seriously evaluating it. But what is delaying the evaluation is we want to see the performance of the B787-9, which is bigger than the B787-8 we already have. We have four on order. We want to see the full capability of the A350. We already have the A350-900 but the A350-1000 is coming. Airbus is giving us more details. We have to look into the B777X, and the difference between the B787-9 and also theA350-1000. The B777X is bigger and flies a longer range. But do we need that longer range in our fleet if the B787-8 covers Washington-Addis, and if the A350 covers Washington-Addis as well? The challenge in covering long-range flights from Addis Ababa is the high altitude. We really have to make a very thorough study. That is why it took this long. We are now in the final stage of evaluation, and we are going to decide before long.

In the coming few weeks? 

Not in the coming few weeks; but in a few months’ time.

How is the performance of the A350 when taking off from Addis? How is its fuel efficiency?

So far, we have been using it on the London-Addis route. We are going to see it on the China route as well. We are sure that it will make it to China from Addis. That would be a very good performance. We will test it on the Washington-Addis route. There could be a slight payload reduction and we have not yet completed the analysis. Overall, we are happy with the performance of the A350.

You are also evaluating the Bombardier C Series regional jet and Embraer E190. Has there been any progress on that?

Yes, there has been progress on that. We have been able to narrow our selection down to the C Series and Embraer. And also from Boeing and Airbus narrow bodies. But we want to see if the current market growth that we planned for the C Series or Embraer can grow to the B737 level. Then we may avoid bringing another type of aircraft to our fleet. As you know, new type of plane means you need new training, new maintenance and new spare parts in stock. Therefore, it makes the operation complex.

We are still studying the matter. We have the 78-seater Bombardier Q400 and the next is the B737-800, which has around 150 seats and the Max has 160. So do we need an airplane with100 seats or can we manage that? This is the question that we should answer after some analysis.

The next question is, can we grow the 100-seater market today to a B737-700 120-135-seater? If we can grow the market to the 737-700, we do not need to add any new aircraft to our fleet. If we cannot do that, then we have to continue considering the Embraer and C Series. Since the market is volatile, and growth unpredictable, it is tied up to market growth and market conditions.

You were also evaluating the MRJ and Sukhoi 100.

The MRJ is too small for us. The Sukhoi would be a completely new technology for us.

So you are focusing on the C Series and Embraer?

Yes, we are focusing on the C Series, Embraer and B737 and Airbus.

There are some negotiations that have been going on with the governments of Rwanda, the Democratic Republic of the Congo (DRC) and Uganda to forge some kind of partnership? Any new developments in that area?

The success of Ethiopian Airlines in the past five to six years has attracted the attention of many governments in Africa. They see Ethiopian as a very good role model when they think of establishing or revamping their national carrier. As a result of that, we currently have around ten ongoing projects. Rwanda is one of them.

Of late, we have put this in our strategic plan and decided which ones to prioritize. These are African governments who want to improve their national carrier or to establish a new airline.

We have a project in DRC with Congo Airways. The DRC is going to be our hub in Central Africa. That is already included in our Vision 2025. We are going to achieve that goal. The second one is the partnership with EC Air, a Congo Brazzaville-based airline, which recently ceased operation. It used to be a very good airline, but it is not operating now.  We have maintenance agreement with Cam Air. We are also discussing with Chad to establish a carrier in partnership with the government.

As you know, we have been negotiating with RwandAir. We are doing same with Zambia, Zimbabwe and we have an airline in Malawi. We are also in talks with Mozambique, Botswana and Madagascar. These are the projects that we are working on. We have been contacted by them for support and partnership. We have to prioritize since resources are limited. We have to prioritize in terms of their importance and their fitness and alignment with our own internal strategy. These are the projects going on and of course Rwanda is one of them. We are working with them. We have a total maintenance agreement with them.

You have established a joint committee to work on the partnership?

Yes, we have established a joint committee that works on the details. We also have a training program and maintenance agreement and commercial agreement. But we have not progressed into a wider and bigger partnership because RwandAir is growing on its own and it wants to see the leverage within RwandAir. They have bought A330 aircraft. The discussion is going on.

Some people say that Ethiopian is growing so fast that they fear it could be overstretched in terms of financial resources and trained human capital, and this may eventually affect the quality of service the airline is providing. What is your reaction to this concern?

I think it is a valid concern. But the management is here to address this concern. We have to find a balance. Let me put it this way: Ethiopia as a nation is growing its economy very fast from a low base. We are still a developing country, but we need to move fast since we have to reduce poverty. We have the capacity to do so. The other point is that we live in a very dynamic world. It is a very challenging, volatile and unpredictable world so we have to devise mechanisms to live with that.

That said, Ethiopian is growing very fast. If you put our growth in the context of African aviation or even global aviation, you will find us among the top in terms of growth. Ethiopian is a member of Star Alliance, a group of 28 airlines from developed and developing countries. If you check the report from IATA you can see that our growth is at the top of the list.

This is by design. In this industry, volume is everything. One reason for that is because airplanes are very expensive. If you buy an airplane for 150 million dollars, you have to fly that airplane for at least 14 or 15 hours a day. In order to be able to fly that airplane that much, you have to grow markets. You have to grow roots and you are compelled to grow. Otherwise, if you are a small airline, you would be relegated to the status of a regional carrier.

So mass is very important. There is always a minimum critical mass to enable you compete with global carriers. Otherwise, you would be irrelevant. No one will take you seriously in the market. This is the compelling reason why we need to grow fast. It is not for the sake of growing. It is not a matter of choice. It is a matter of survival. Unless we grow, we are not relevant in the market. We would not be relevant for partnership. We would not be important for the big carriers. We have to make ourselves relevant. That is why we have the privilege of being a member of the Star Alliance. That is why today African governments depend on us. They depend on our advice and our expertise and they want to partner with us. They go to the extent of asking us to manage their airlines. As we speak, our team is in Nigeria because we have been requested by the government of Nigeria to help in the reestablishment of their national airline. This is one of the advantages of growth.

The other reason is as you grow, and your volume grows, your cost of production goes down. As unit cost of production goes down, then you are able to compete in the market better with flexibility in pricing. You can also manage your cost. When you place orders for spare parts, doing so for two, 10 or 30 aircraft is not the same. There is a significant advantage that you would get because of volume.

The other reason is that Addis Ababa is the political capital of Africa. You have the African Union, the Economic Commission for Africa (ECA) and several other international and regional organizations. The city depends on Ethiopian Airlines for air connectivity. Today, when the African Union thinks of convening a summit, there is no worry because Ethiopian covers almost the entire world. People get here easily and cost effectively. So the city is well-connected with the rest of world. Air connectivity promotes tourism, investment and trade.

Growth is a necessity. Once we establish this fact, then we have to also keep in mind that that growth is manageable. The same question has been asked when we started Vision 2025. But the management of Ethiopian Airlines is very prudent in managing growth. Six years into Vision 2025, we have been able to manage the growth. Was it easy? Absolutely not. It is a very challenging task. But when we see the result today we are satisfied. When you climb a mountain, you feel tired and thirsty on the way up. Once you climb the mountain and reach the top, you would be happy.

Nothing is easy in this world. No pain, no gain. I would say we are managing growth and also we are very careful not to overstretch. We still believe that the airline should continue to grow.  Otherwise, the big carriers would swallow us.

When I joined Ethiopian Airlines 32 years ago, the United Arab Emirates (UAE) had no airline. Ethiopian Airlines is 70 years old while Emirates is 31 years old. If you compare Ethiopian and Emirates, you can see that they have more than 220 aircraft while we only have 82. They are younger than Ethiopian but have grown faster than Ethiopian. This shows you that we have to grow faster because we have not grown as much as we should have in the past 60 years. We only started growing fast in the past ten years. We are really trying to clear the back-log.

In the last ten years we grew faster, faster than Emirates. But they have been growing for the past 30 years. When Emirates was established with three aircraft leased from Pakistan Airways, we had much more aircraft. If you put our growth within this context, you would believe that we have to continue to grow. Etihad and Qatar are 10 years old, but they are growing very fast.

But their governments are investing heavily in the airlines.

Yes they have the money. We do not have money, but we have a talented, well-trained and dedicated workforce. We are very confident and proud of our people.

Critics say that the debt of Ethiopian Airlines is mounting. They question the ability of the airline to repay its loans. What is your take that? How much debt does the airline owe?

This goes with the growth. Debt to equity ratio is a very important measurement for the health of a company. We call it gearing or leverage. Our debt to equity ratio was high but now it is coming down because we are making good profit every year. If you compare it with the industry average, it is mild. Every airline owes some debt. You do not pay cash upfront when you buy airplanes. Even Emirates borrows money.

The question now is the proportion of debt to total asset. Right now our debt to equity ratio is two to one, which is considered safe. We are always concerned but we are managing it. We are using the loans to buy new aircraft and build our infrastructure.  Debt is not a problem as long as we are able to pay it back. And Ethiopian Airlines has a very good credit history. When we issue a request for expression of interest, 10 to 15 banks come, willing to finance our fleet expansion. This is because we have a strong balance sheet and excellent track record.

How much is your debt now?

It is in the range of two billion dollars but we are managing it. And you must remember that Ethiopian Airlines is changing the image of this country. It is also helping the export sector, promoting tourism, trade and investment. Had it not been for the airline, we would not have such a successful horticulture industry. Before the inauguration of the Hawassa Industrial Park, we started flying to Hawassa. Ethiopian is the leading foreign currency earner. Today we have close to 12,000 employees. A few years ago, we had only 4500. We have created high-quality jobs. Job creation is a daunting task for Ethiopia and the rest of Africa. So you need finance for your growth.  Internally, it is a challenge but we are managing it.

Are you comfortable with the 2-1 debt to equity ratio?

Yes we are. It is manageable.

How is the competition other airlines? Turkish Airlines has put Africa at the center of its growth strategy. The three Middle Eastern giants – Emirates, Etihad and Qatar Airways – have recently dominated African skies. Most African carriers have gone out of market. South African Airways and Kenya Airways are struggling for survival and they are shrinking in size. How is Ethiopian managing this stiff competition? What is the way forward?

It is tough. The competition is getting very, very tough. We are competing with European, Gulf and American carriers. I must tell you that we have not seen such a stiff competition in our history. This year it is very tough. I would say we are in a price war in Africa, sometimes to the extent of confusing the public. And that goes for all of us. The carriers you have mentioned and Ethiopian Airlines sometimes change prices twice a day. It is crazy. What does it mean? It is eating our revenue. It is affecting us seriously. Our revenue is not growing as much as we want. Especially this year, there is reduction in global airline industry yield. These carriers are putting more capacity in Africa than ever before. This is capacity dumping. The African continent is not ready for this.  The Yamoussoukro Declaration (African open skies agreement) is very slow moving. Inadvertently, some African countries are more open to foreign carriers than African ones.

We are struggling on our own. Fortunately for us, our hard work – with a bit of luck – is paying off. But going forward, it will really be quite challenging. It is not only the stiffness of the competition that is killing us; it is also the unevenness of the competition. Some of us are powerful in terms of money. Some of the carriers have support from behind. The competition is not even.

We are managing under difficult circumstances. Getting access to capital is a challenge. Now, with the new US administration, we do not know what would happen to the US EXIM Bank. We do not yet know the impact of Brexit on European credit agencies. What does it mean to us? We may not be able to finance new airplane purchase. This is a big challenge for us. It is easy for our competitors to raise capital from their home market, but we are in a very challenging environment.

How has the travel ban announced by President Trump affected your operation to the US?

Three of the seven countries included in the ban are in Africa. Two of them are our immediate neighbors, Sudan and Somalia. It will have an impact but in a short period of time we have not felt the impact but I would say the confusion is more problematic for us. There has been some confusion. There was a ban and a judge has suspended it. We do not know what would happen. The confusion has been more disruptive than the ban itself but the ban of course will affect us.

Have you noticed decline in passenger traffic because of the ban?

Not yet, because most of our flights originate in other countries. We have not seen a significant decline. We have seen cancellations from IOM (International Organization of Migration). Booking for a group of refugees going on a resettlement program has been cancelled canceled.

You have initiated a new program that encourages local vendors. Ethiopian Catering buys USD 100 million worth of products annually and only ten percent of that is sourced locally. Can you tell us about this program?

We have to change that. We are taking it as an internal challenge. We have to make sure that we source from the domestic market. By doing so, we can save foreign currency. We can create jobs for Ethiopians. We can develop the agro- processing industry to a higher level.

Now we have taken this initiative. We call it increasing local content. Unfortunately, agri business in Ethiopia is under developed. We are working with the ministries of industry and agriculture – especially in the Oromia Regional State – to improve the capability and competency of local producers. We have to increase both productivity and quality. The aim is not to benefit only Ethiopian Airlines. We want to build the capacity of local producers so they can be competent enough to export their products on the global market.  We are helping them to export to the Middle East. We are taking it as a large-scale undertaking. We are also working with the Oromia Regional State and I hope that in a short period of time we will increase our local source.

Are you working on employee satisfaction? We hear complaints from Ethiopian pilots who are unhappy with the remuneration of expatriate pilots. They say that foreign pilots earn more than local pilots. What is your comment on that? Flight attendants also complain of low wages and benefits.

I would say remuneration is always relative. Today, Ethiopian’s rewarding system is higher than other institutions in the country. In terms of competing with the rest of the world, I can say that we are not there yet. We have a lot to work on. But reward or remuneration takes into account cost of living. The cost of living in Ethiopia and the cost of living in other countries is not the same. A dollar here and a dollar in Abu Dhabi do not have the same purchasing power. You have to also consider that.

But I would say the management is doing all it can within the available means to improve remuneration package. The compensation package is not only salary. The compensation package includes ticket privileges, subsidized food in our canteen, health insurance, transport and housing allowances, and the like. Probably, we are the only company in Ethiopia that is building houses for employees. We are building 1,200 houses. It is 85 percent completed and it will be inaugurated in the next five months. We are starting phase two and plan to build 7,000 houses and apartments for our employees. This shows you that the airline takes good care of employees. When you put it as a package, we are above the average national standard. But we have to continue to improve.

When it comes to pilots, we have foreign pilots. But you know it is very difficult to compare apples and oranges. We train Ethiopian pilots in our aviation academy free of charge. This is one of the few places in the world where you get training free of charge, and it costs close to USD 100,000 to train one pilot.  You have to also consider this. And when they move from one plane to another, it costs like 30,000 to 40,000 dollars. So it is a different package. We also have expat pilots that we hire from the global market on contractual basis. Their employment contract is completely different from Ethiopian nationals’. It is very difficult to compare the two, but at the end of the day there are a lot of calculations and if you go by that, the foreign pilots are not earning more than their Ethiopian counterparts.

Cabin crew are also complaining about low wages.

Is my salary enough? It is not enough.

It that when comparing it to the salary of the CEO of Emirates, Sir Tim Clark?

Well, leave alone Tim Clark, you can compare it to the pay of the CEO of Kenya Airways. It is not comparable. I do not talk about salary when I meet airline executives because I am embarrassed. I am not working here for money. It is a unique national obligation. It is a national duty for all of us. There may be some concerns here and there, but in general, we all are happy that we are working for our nation. We are serving our national carrier and making a difference. When we see the airline grow and become successful, we get satisfaction that money cannot bring.  I work 14 hours a day including Saturdays and Sundays. I do not have enough time for my family. But when I see the results, I am very happy.

Yes we hear that you work for long hours and hardly meet your five kids. Do you sleep well? How is your health?

Yes, I am fine. It is a very challenging task. The airline industry is a very challenging industry. I am not exaggerating. You wake up in the morning and you do not know what you would hear. War may break out in any part of the world. Certain air space may be closed. You have to design a new route. When you wake up one bright morning, the price of oil has gone up. Your cost structure is completely changed. You have to draw a new business plan. Or an epidemic may break out, like Ebola, SARS, MERS or Zika. You may have political unrest in any part of the world. All of these affect us.

You have new aircraft coming in, and integration is a big challenge. Currency devaluation is a challenge. Weather is another big challenge. These days the weather has become unpredictable. You can list all the problems. It’s not that they happen once or twice a year. They could happen every single day and that is a big challenge. But at the same time it is an exciting job. It is not boring.

There is a rumor circulating that you are planning an early retirement. Is it true?

I have not thought of that because I have unfinished job. It is tiresome and challenging but we have unfinished job. We are right in the middle. Vision 2025 is a 25-year strategic road map. Six years have gone, and nine more remain. I want to continue contributing as much as I can until I am completely tired. I do not have such kind of thoughts at the moment.