Out of Africa – the growth of Ethiopian Airlines1 September 2014
Ethiopian Airlines is the most consistently profitable full-service African carrier, however, in an increasingly competitive marketplace, it faces stiff competition from Gulf and nascent African operators. Julian Turner talks to Henok Tefera, Ethiopian Airlines’ vice-president of corporate strategy, communications and alliances, about how the carrier is holding its own, and the steps it may take in the future in regards to its funding model and fare structure in order to compete.
"Africa is rising, and the 21st century is an African century," stated Ethiopian Airlines CEO Tewolde Gebremariam during a recent speech at the Aviation Club in the UK. Few would disagree with his assessment.
The power shift away from mature economies in the US and Europe towards the BRICS nations is well documented, but equally compelling is the reconfiguration of the cultural and economic map of Africa. Home to 20% of global oil reserves, Africa's vast, largely untapped natural resources continue to attract significant foreign direct investment (FDI) from India and China, and this is being matched by domestic investment in critical urban infrastructure. By 2030, 50% of Africans will live in cities.
For Gebremariam and his counterparts in Africa's aviation sector, the most salient challenges are continuing to build a route structure that best serves this new urban class and the continent's growing tourism sector; maintaining significant levels of FDI to fund fleet and infrastructure projects; and dealing with increased competition from Middle East airlines in general and Gulf operators in particular.
"As many commentating in the media report, the Gulf airlines are state owned and as such have total support from their governments in areas such as unlimited finance opportunities, tax exemptions and cheap fuel," says Henok Tefera, Ethiopian Airlines' vice-president of corporate strategy, communications and alliances.
"However, this has been continually contested by the carriers. The Gulf airlines maintained fast growth while carriers from other economies suffered the impact of the global economic crisis," he adds.
"Thus, due to this relentless fast growth in fleet and modern infrastructure, the Gulf carriers have managed to increasingly divert a growing volume of international traffic through their hubs, which, in effect, gradually reduced the importance of transfers at the European gateways."
The past decade has been one of unprecedented growth for Ethiopia. As the third-fastest-expanding economy in the world, the nation on the horn of Africa has enjoyed double-digit GDP growth and visitor numbers are growing by 10% each year, according to the Ethiopian Ministry of Culture and Tourism.
Ethiopian Airlines, established in 1948, constitutes a notable chapter in this ongoing success story, and recently cemented its status as the largest African carrier by revenue and profit, according to IATA.
"Today, the airline carries 5.6 million passengers annually," said Gebremariam in his aforementioned speech in February. "We have a fleet of 63 aircraft with an average age of seven years. Our main hub is in Addis Ababa, our second in Togo, West Africa, and a third in Malawi, where we are starting a new airline.
"Just recently, the airline began a new partnership with the Malawi Government in support of Malawian Airlines, which has started flying with Bombardier Q400 aircraft. The aircraft are managed by Ethiopian.
"Ethiopian Airlines has a 49% stake in the airline, which was set up after the liquidation of Air Malawi. It is based in Lilongwe with its hub at Lilongwe International Airport. The fourth hub will be formed in the Democratic Republic of Congo for Central Africa with 8,000 employees."
Impressive numbers, but how does a completely government-owned entity compete on the global stage?
"Although 100% owned by government, successive Ethiopian Governments, starting from the Emperor times, have allowed the airline to be managed by professional aviation experts," said Gebremariam. "In the corporate governance structure, management and ownership is completely different ,and that is one reason for success. The airline also believes in investing in adequate human resources and infrastructure development investment. We have 1,030 weekly flights, we are a full Star Alliance member and our annual turnover is about $2.2 billion.
"In the past seven years, the airline has grown sevenfold," he continued. "All of this growth consumes a lot of investment, and it may not be profitable, but for an airline like us with no support or capital injection, we have to raise capital from the market in the form of loans - and in order to get credit we have to be credit worthy.
"We have to be profitable. Last year, capacity grew by 15%, the number of passengers carried grew 13%, revenue 50% and operating profit 165%," Gebremariam said.
The Gulf widens
Hearing Gebremariam describe the battle to stay profitable as a state-owned business, you'd be forgiven for thinking that access to funding was the most important hurdle facing Ethiopian Airlines.
However, increased competition from Gulf airlines and nascent African operators now constitutes a significant blip on the carrier's radar. How does Ethiopian Airlines plan to respond to the challenge?
"By all-round product improvement and providing world-class service on board and on the ground," states Tefera. "By opening new and strategic destinations to offer wider travel choices for our customers, providing value for our customers and raising our leadership in the African market using our multihub strategy."
Gulf and Chinese airlines are already reshaping international travel to and from the US. According to the Centre of Aviation (CAPA), a decade ago they collectively operated half a million annual seats to the US - in 2014 that figure is over four million. Gulf carriers such as Emirates and Etihad are also expanding beyond their traditional bases on the East Coast. Emirates is upgrading its San Francisco service to an A380 and Etihad will launch a service to the West Coast hub in November.
For their part, Chinese airlines are extending their reach to the eastern US, with Hainan launching services from Boston, Air China from Washington Dulles and China Southern from New York JFK.
This aggressive expansion drive is further evidence that the balance of power in global aviation is shifting away from Europe and the US in favour of the Middle East and the Gulf states.
"Europe is the oldest and most successful for hub and spoke operations, with airports like Heathrow, Frankfurt, Amsterdam and Paris," said Gebremariam.
"For passengers travelling from South and North America to Europe, Africa, the Middle East and Asia, the only way was through Europe. But now that hub and spoke is moving to the Middle East, and unfortunately and inadvertently, European governments and politicians are helping them move the centre of gravity to the hubs in the Middle East by making it very difficult for airlines to operate in Europe.
"Taxation is one factor, airport congestion is another. As a result, airlines are finding it very difficult to fly to Europe. A third runway at Heathrow has been discussed for years, yet Dubai was able to build Dubai World Central Airport with six runways in short order," Gebremariam said.
"Emission trading is another problem for all of us. Labour unions are very difficult for European carriers, and they also have to compete with the Gulf carriers and small African carriers like us also. The tax regime in the Gulf is different - no tax at all - but knowing this, again there is no remedy for small carriers in Africa and also Europe, so, inadvertently, Europe is helping the Middle East carriers."
Gebremariam also took issue with the way aviation assets are perceived by some governments in Africa, which have historically viewed commercial airports and airlines as essential public utilities, strongly resisting any attempt to wrest their assets and services from state control. At present, 80% of traffic between Africa and the rest of the world is controlled by non-African carriers, as Tefera explains.
"Unfortunately, there are not adequate numbers of viable airlines to cover air transport services for this huge continent," he says. "So far, there is not a unified common aviation policy for the continent, and Africa's airlines are still not cooperating with one another to the desired level. Aviation skills and capability development is still lagging behind, and lack of infrastructure is another bottleneck."
LCCs remain drastically under-represented in Africa thanks, in part, to onerous taxes on fuel and tickets. Airlines are charged higher insurance premiums than established airlines in other countries and leasing costs are also comparatively high. According to The Economist, leasing a five-year-old Boeing 737 may cost a European carrier $180,000 a month - a Nigerian carrier has to pay $400,000.
In addition, Europe's budget-airline boom in the '90s was incentivised by an 'open sky' agreement, but in Africa, little has been done to enforce equivalent legislation. For these reasons, and despite high demand, LCCs only accounted for about 0.2% of international capacity across the continent last year.
Against this backdrop, Ethiopian Airlines' decision not to compete with African LCCs such as FastJet and Fly540 on price, but instead grow its route portfolio and adopt a cost leadership strategy that delivers fast, profitable and sustainable growth, appears, on the surface at least, to be a smart one.
"Africa is a huge continent with so much untapped travel demand," says Tefera. "Thus, LCCs are not threats for Ethiopian Airlines; rather, they are partners to the continent's indigenous intercontinental carriers.
"Ethiopian is continually developing its global reach through its direct services as well as the network of its Star Alliance partner carriers. The critical factor for adding or dropping a route has always been the economic viability of the operation, either now, or in the short and long term.
"Soon, Ethiopian Airlines will link Ho Chi Minh City, Los Angeles, Madrid, Manila, Tokyo and other cities to its scheduled network. We've been developing our network for more than 67 years, and we are still adding new points. Thus, those destinations that were started earlier are enjoying greater success, while the new ones continue to build their business case," he concludes.