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Face to Face with Ethiopian Airlines Acting CFO

August 16, 2017

 


 

 

Meseret Bitew

Ethiopian Airlines is the posterchild for airlines in Africa, and proves that state-owned African carriers can be successful. At the Air Finance Africa Summit held in Johannesburg in May this year, Nick Fadugba, summit host and CEO of African Airline Services, spoke to Meseret Bitew about the secret to operating a successful government-owned, African airline, route and fleet expansion, joint-ventures, and long-term strategies. 

 

Ethiopian Airlines is 100% government-owned. Through much of Africa, being government-owned is associated with failing airlines, and yet Ethiopian Airlines is truly successful. How does Ethiopian Airlines make their partnership with government work?

There is a common perception that for any organisation to be successful, it has to be privately owned, but Ethiopian Airlines has proven that this is not the case. The major contributing factor to an organisation’s success is not who owns the organisation, rather it is how that organisation operates, and, in the case of government ownership, how the government is involved. 

Ethiopian has had various types of governments during its 71 years of operation, but in all cases, these governments have behaved in the interest of the airline, even during times of turmoil and domestic hardship. Our government doesn’t want our CEO to spend all his time in government offices. It also doesn’t want to change the airline’s CEO every six months. There is a commitment from government not to intervene in the day-to-day operations of the airline. The government’s role is rather to be involved in the broad strategies and goals of the airline. 

Likewise, the airline management has committed to make the airline successful. I have been with Ethiopian Airlines for the past 31 years, and during this time I have only seen one year where the airline had a negative bottom line. Thus, the commitment to be successful includes the commitment to be independent on a commercial basis. And this requires stability.

Largely as a result of the commitment from government not to intervene, the airline has stable management and leadership. The average number of years of experience with the airline of senior management is approximately 35 years. 

 

Ethiopian Airlines has a board of directors. What role does the board play, and who is on it?

We have two heads of office. Firstly, we have a board. The board consists of government officials, professionals and Ethiopian Airlines staff. On the other hand, the airline also reports to the Minister of Transport. Sometimes decisions first go through the board; at other times the airline deals directly with the Minister. In general, involvement of the board is only with regards to strategy – the ‘road map’, the 15-year Vision 2025 plan, and major expenses, such as the acquisition of aircraft. Other than that, the board will not be involved in day-to-day operations.

Operating in the airline industry requires a road map, and this means planning far in advance. In terms of aircraft acquisition, you need to be looking ten years ahead. The order for Ethiopian Airlines’ A350s, the first of which was delivered in June 2016, was placed in 2008/2009. 

If there is no management stability in the airline, successfully implementing long-term plans is not possible. If the CEO changes every six months, how can that CEO plan 10 years ahead? Furthermore, people in ‘acting’ positions can only concentrate on the short-term day-to-day activities of the airline because they have no assurance that they will be around in, say, 10 years’ time when strategies and decisions are to be implemented and realised. 

So, stability and development of discipline – both within the airline to stick to a plan, and the government not to interfere – is key if an airline is to have an appropriate road map and be successful. Ethiopian Airlines has been successful, because it understands this. Around seven years ago, Ethiopian’s turnover was around US$600-700 million. Currently, it is around US$2.5 billion. Nowadays, in all parameters – in terms of aircraft, bottom line, turnover, and destinations – Ethiopian is the largest airline in Africa.

 

On a turnover of US$2.5 billion, what is your net profit?

Our net profit has consistently been relative to our turnover – and we all know airlines operate to minimal margins. At Ethiopian Airlines, our net profit is about 10% of turnover. So, in 2010, it was around US$60 million; last year, when our turnover was around US$2.5 billion, our net profit was US$265 million.

 

How many aircraft do you currently have in your fleet, and how many do you have on order?

Currently we have over 80 aircraft in the passenger fleet. Ten years ago, we only had around 20-30 aircraft. Thus, the average age of aircraft in our fleet is not representative of the rest of the African fleet, where the aircraft are 20, 30, and in some cases even 40 years old. The average age of our aircraft is around five years. Our fleet is the youngest in the industry.

Amongst others, we have 16 777s, close to 20 Boeing 787s, 20 737-8 NGs, then we have also recently acquired the A350-900s with a number still on order. In the next five years, we are expecting to purchase 50-plus new aircraft: A350s, 787-9s and 737 MAXs.

 

How do you finance these aircraft?

60% are on financial lease, with the remaining 40% on operating lease. This is largely thanks to our government ratifying and implementing the Cape Town Convention – we were the first country to do so. This gave us a financial advantage, as it allowed us to get discounts on our financing. So, as far as I’m concerned, not ratifying the Cape Town Convention is equivalent to throwing money away every year. Since signing the convention, Ethiopian Airlines has had no trouble obtaining financial leases when we go out into the market. Furthermore, the government acts as guarantor for the finance.

In terms of protecting ourselves against fluctuations in interest rates and currency, because we operate to a number of countries around the world, we use this as an opportunity to deal in different currencies to build in natural hedging.

 

Does Ethiopian Airlines receive any government subsidies? 

Not at all. There is an agreement between the government and the airline. Firstly, the airline has played its part. And by that, I mean that it has upheld its commitment, because it doesn’t receive government support, to be profitable all the time. And, again, the government has committed not to intervene. So the two exist peacefully: the government does not affect the airline – and the airline does not affect the government.

 

Recently airlines in Africa, for example Kenya Airways and SAA, have reduced their number of flights to Asia, whereas Ethiopian Airlines has increased flights to Asia. Why is this?

The current international economic trend – economic development and movement – is moving from West to East and from North to South, so increasing flights to the East – to China – makes sense. In our case, we operate four daily flights to China, with the 777, to four different cities, with more routes planned. 

Flying to China is a key route for the airline. I don’t know why airlines would reduce frequencies to China – there must be something wrong with the airline. Or, maybe the airline is not well-positioned to operate the route. 

Fortunately, Ethiopia is well-positioned to link the East with the UK and USA. So, we want to develop this network more. Also, if you draw a straight line between China and Brazil, it goes right through Ethiopia.

At the end of the day, an airline’s job is to transport people, so we must focus on the major populations, and try to cover the Middle East, India and China.

 

Let’s look at Ethiopian’s African network. Ethiopian Airlines pioneered East-West traffic on the African continent. Now, it seems that Ethiopian’s strategy is to build hubs within Africa to overcome the barriers to air travel.

Ethiopian Airlines is hopeful that governments around Africa will ratify the Yamoussoukro Decision (YD) soon so that we will be able to operate in any African country, as required. Unfortunately, very few countries have signed the YD and so it is difficult to operate routes in Africa. Interestingly, some African countries are more open to European carriers and countries than they are to other African operators.

In the past, African airlines were carrying 40-50% of the African market. Currently only 20% of passengers travelling within Africa are being carried by African airlines. Ethiopian Airlines wants to co-operate with other African states and support other African airlines to grow air travel within Africa and protect the African market for ourselves.

However, because of the barriers in Africa, Ethiopian Airlines is planning to develop regional hubs. We started a joint venture in West Africa in 2010 with Asky in Lomé, Togo, which is working well, and we have another with Malawi Airlines. We are willing to work with bigger countries, but if these big countries are not willing to work together to establish a hub to develop aviation in the region, we will go to those that are co-operative. In addition to it being a voluntary agreement, the government must commit not to intervene with the running of the airline. 

This is working in West and Southern Africa to develop regional connectivity, but there is a vacuum in Central Africa, where we are still looking to establish a partnership.

 

Royal Air Moroc formed a joined venture with Senegal Airlines but it didn’t last. Similarly, in the ‘90s SAA formed an alliance with Ghana – it didn’t last. SAA formed an alliance with Nigeria – it didn’t last. Why do you think these other ventures didn’t work, while yours are?

The problem stems from the agreements that were made from the start. We initially started in West Africa with Ghana, but when we did due diligence, we realised that our plans weren’t aligned. The airline must be run on a purely commercial basis. If, from the start, the government is willing not to intervene in the airline operations, not to get involved in employment processes, not to affect your schedules, routes and so on, then there is an opportunity to form a partnership. Establishment of a clear road map and vision that is agreed upon at the start is imperative, and that vision and agreement must be honoured. 

Furthermore, both parties must acknowledge that operating an airline is a marginal business and building a route network and profit takes time. For example, our China routes are now the backbone of Ethiopian Airlines. When we started operating those routes, they were loss-making. It’s been the same with our routes to West Africa, such as to Dakar and Bamako. Those routes required development. For the time being, they may be a cost, but they will yield a profit if there is appropriate planning and a clear road map and vision from the start.

If there is a problem from the start, the airline will be disappointed.

 

Ethiopian Airlines has seen rapid growth. When other airlines in Africa have expanded very quickly, they have faced problems. What safeguards does Ethiopian Airlines have in place to prevent it experiencing a similar fate?

As I have said, it requires having the right road map and sticking to it, as well as having strong corporate governance – which is a challenge in Africa. In the case of state-owned carriers, that comes back to government agreeing to leave day-to-day operations to the airline.

 

 

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