With the arrival of flight ET504 to LAX, Tom Bradley International Terminal on June 20th, Ethiopian Airlines officially kicked off its service between Addis Ababa and Los Angeles, via Dublin.
The festivities, punctuated with live music as well as traditional Irish and Ethiopian dancing, celebrated the only African based carrier serving Los Angeles. Egypt Air suspended its flight to LA in 2001.
These service additions are part of Ethiopian’s overall strategy to not only expand Africa’s connectivity but also scale up Africa’s share in the global aviation market. By maximizing fleet utilization, Ethiopian Airlines has smartly connected the large Ethiopian and Irish communities in Southern California to their respective native homelands, proverbially killing two birds with one stone.
During the inaugural flight Tewolde Gebremariam, CEO of Ethiopian Airlines talked to Capital’s Teguest Yilma about the future of the airline industry in Africa and other issues challenging the aviation industry. Excerpts;
Capital: Los Angeles is Ethiopian Airlines’ latest addition to its growing number of destinations. What are the financial and competitive implications of the new route?
Tewolde Gebremariam: Direct flights to Dublin and Los Angeles have increased the number of destinations to 87. In Vision 2025, our aim was to reach 90 destinations by 2025. With the addition of Cape Town, Gaborone and Manila, we will have met our goal by July 2015. The fact that we are achieving our target ten years ahead of time shows the remarkable rate of growth.
The number of destinations – especially long-haul destinations – has been growing steadily in the past few years. We always balance short-haul destinations with long-haul destinations, east with west, and north with south. We maintain our connectivity bank system in Addis, with two major bank systems: the morning bank, mostly African destinations, and the evening bank, primarily international flights. Evening flights connect passengers to the Middle East, Asia, Europe and North America. Within 36 hours, international flights return to Addis Ababa and connect passengers to African destinations.
Capital: What is the financial impact of such a growing network?
Tewolde: New destinations increase passengers and revenue. In terms of profitability, a new destination takes time to be developed – it is an investment that eventually pays off. Since we now have a vast network, we are capable of adopting new destinations. This month alone, we have added four new destinations.
Given the current summer peak-season, we have an abundance of passengers – tourists, businesspeople and foreign residents – traveling to our latest destinations: Los Angeles, Dublin, Cape Town and Gaborone.
Capital: Ethiopian is increasing the frequency of flights to its existing destinations such as India and China. How is this affecting business in the long term? Is Ethiopian growing too quickly?
Tewolde: No, because we remain profitable as we grow. Growth involves large operating and capital expenditures. However, the growth of the Ethiopian economy, our relations with international partners and the growing demand for global connectivity in Africa have created a strong market.
By opening new stations outside of Africa, we are connecting all 52 of our African destinations to new routes. It is a matrix of connectivity.
As long as we manage our markets in development consistent with the airline’s overall capacity and revenue, adding new destinations is feasible. Still, we need to be cautious in measuring the number of destinations and the amount of time we spend in developing new routes.
Capital: Has Ethiopian met its profitability projection?
Tewolde: Yes, we have surpassed our expectations. We will have figures to share in July, after the end of this fiscal year.
Capital: What impact has the decline in oil prices had on Ethiopian?
Tewolde: It is a double-edged sword. On one side, it has benefitted us by decreasing the cost of jet fuel, which represents up to 45 percent of our total expenditure. On the other hand, since many African countries export oil, their oil revenues have dropped, slowing economic development across Africa. For Ethiopian Airlines, this has translated into a decline in air traffic within Africa.
On balance, current trends in the oil market have allowed us to cut costs. However, African destinations constitute our most important revenue stream. Our revenue has suffered because oil exporting African nations such as Nigeria and Angola have been negatively affected by falling oil prices. In general, the depreciation of the Euro, low oil prices, and falling commodity prices have damaged African economies.
Capital: Ticket fares on Ethiopian Airlines are said to be higher than those of its competitors. Is there any chance that fares will decrease?
Tewolde: First, I am not sure if they are generally higher. We often match the fares with our competitors. On some routes, fares might be higher to reflect the service we are offering. For instance, Ethiopian flies non-stop from Addis Ababa to London.
Emirates takes you through Dubai, Qatar takes you through Doha and Turkish takes you through Istanbul. There is thus a small premium on the price, which is reasonable, especially for time-sensitive business travelers. However, I think there is room for improving our fare structure within Africa.
Capital: Ethiopian recently purchased six new Boeing-787 Dreamliners. There has been controversy surrounding the quality of the airplanes, which are rumored to have been sitting idle for the past five years with other airlines refusing to buy the aircraft. How do you respond to those allegations?
Tewolde: First, it is a misconception that no other airline was interested in these aircraft. Three or four other airlines expressed their interests during our negotiations with Boeing. In fact, during that period, Air Austral ordered two Dreamliners, while two airplanes from the same batch were sent to Korea and Mexico with VIP configurations.
Of course, since they are heavy airplanes, they were less popular than the regular Boeing-787 Dreamliners. However, we needed 787s and the Dreamliner is our top fleet. It is an environmentally friendly, cost-efficient and comfortable airplane. Ultimately, this is an airplane that pleases everyone in the aviation circle. We have 13 in service, and are very content with their performance.
The Dreamliner features next-generation technology in the aviation industry – it is a step ahead of its competitors. Had we ordered the latest 787s in the market, we would have had to wait until at least 2020. Since we are phasing out the 757 and 767 fleets, we sent our engineers to thoroughly inspect the aircraft and negotiated on the new airplanes. Once our engineers were satisfied, we settled on a great deal, which includes warranties. In the end, despite their heavier frame, these airplanes will help us meet our objectives.
Capital: Ethiopian is also purchasing aircraft from Airbus. Where are you on that?
Tewolde: Yes, we have ordered 14 Airbus A350s, which we will receive next year in June. We have started training our staff on the airplane and are helping them understand its aerodynamics. The aircraft is currently in the Entry into Service (EIS) phase.
In total, we have eight Boeing-787s, 25 Boeing-737s, 14 Airbuses and two cargo planes in line.
Capital: Ethiopian Airlines is currently managing Malawian Airlines and ASKY Airlines in Togo. How is the partnership going?
Tewolde: Ethiopian is now the largest airline in Africa. With that comes the responsibility of being a leader in the continent. In building airlines such as ASKY, we are working towards two major targets.
First, we are realizing our objective of having hubs in all four corners of Africa. Second, we are developing connectivity within the continent. For instance, ASKY is now solving a major problem for West African passengers. In the past, travel between neighboring West African countries required transit through Europe. An hour-long flight between Côte D’Ivoire and Togo would have required traveling to Europe. We are therefore continuing to address this issue, especially considering the demise of West African airlines such as Air Afrique, Nigeria Airways and Ghana Airways.
Our work in West Africa with ASKY not only increases connectivity, but also helps the region in terms of its socioeconomic growth. Within five years, ASKY has reached two million passengers with seven airplanes and 22 destinations. That is impressive for a startup carrier. Connectivity is a major issue in the continent: road transportation is underdeveloped; rail transportation is almost non-existent. People depend on air travel for all sorts of intra-continental activities.
Capital: What are the major challenges in the aviation industry, especially within the African context?
Tewolde: Fuel is always a challenge. We pay at least 21 percent more for oil in Africa compared to the rest of the world. Taxation, transportation and other fees make fuel very expensive to acquire. That is a unique challenge for African carriers. Even though around 20 African countries are oil exporters, they are forced to export crude oil to foreign refineries, and import processed fuel.
Another major issue is that the Yamoussoukro Declaration has not yet been implemented. We therefore cannot fly between African countries as freely as we would like to.
Infrastructure development is also a significant challenge. In terms of air navigation, air traffic control and route development, there is still a lack of adequate infrastructure across the continent.
Finally, taxation on airline tickets and services is a major problem for African carriers. Some African governments have the misconception that air travel is for the rich. But how else are you going to travel from Ethiopia to the DRC? To Nigeria? To South Africa? The only way is air transport – it is an essential public transportation service. Unfortunately, it is not treated as such. The African aviation industry is subject to excessive levies, fees and taxation. This renders the industry fragmented, even though volume-driven economies of scale are essential to an airline’s success.
Capital: What about human resources?
Tewolde: Overall, human resources are a major problem in Africa. We are in a good position in Ethiopia because we have our own large academy – the Ethiopian Aviation Academy is the largest in the continent. Currently, its capacity is around 1,000 trainees per year. We also train cabin crew, technicians and pilots for other African nations.
Capital: Ethiopian has been very successful, especially in terms of volume growth. What is the recipe for success that Ethiopian would share with other African carriers?
Tewolde: In my opinion, the main factor is human resource development. We have highly qualified and dedicated employees who believe that the airline is their own. They upgrade their skills to match new aviation technology. And in order to do that, we depend on our own academy. Thus, human resource development and self-sufficiency are crucial to sustained growth.
In addition, our corporate governance is also another decisive factor. It is government-owned and professionally managed by aviation experts. Most of us in the management team have grown within the airline. I, myself, have been with the airline for 30 years. The management team is emotionally invested in the success of the company, with most members having been a part of Ethiopian for decades. Our governance should serve as a great example for other African carriers.
Another success factor for Ethiopian is its brand presence in Africa; most Africans passionately regard Ethiopian as their continental carrier.
We are also a very cost-conscious airline. In the aviation business, profit margins are thin and the cost of error is high. It helps to always keep costs in mind.
Finally, the geographic location of Addis Ababa gives us somewhat of a competitive advantage. We are located at the juncture of the Middle East, Europe, Asia and Africa – it is the best gateway into Africa. On the other hand, Addis Ababa’s high altitude puts us at a disadvantage. We can fly non-stop from Washington DC to Addis Ababa but not vice versa because the altitude prevents us from taking off with a full tank.
Capital: The launch of Vision 2025 stirred skepticism, with critics arguing that it was too ambitious. Despite the pessimism, Ethiopian has managed to meet almost all of its targets a decade ahead of time. What is the company’s next vision? Will it be bolder?
Tewolde: Yes, it will be bolder because Africa is growing. Africa is a massive continent with over one billion people. However, it is still underdeveloped, with a huge potential for growth. I see Africa today as the China of the 1980s. Given Chinese environmental and labor cost trends, Africa is on its way to take over. Countries such as Ethiopia that have a conscious and visionary strategy of industrial and manufacturing development will lead that growth.
Despite the size of the continent, Africa’s share in the global aviation market is still too small. If you look at that as an opportunity, there is a lot of room for growth and for scaling up.
In Ethiopia, aviation represents an important job market for an increasingly educated and young population. We have the ability to export skills in return for foreign currency through remittances, while our young brothers and sisters are placed in high paying jobs around the world.
Moreover, expanding connectivity will facilitate the inflow of investments, trade support and tourism. Tourism, in particular, is a sector with a considerable potential for growth in Africa. Each year, over one billion people travel as tourists around the world, although Africans represent only fifty three million of those. Africa has the opportunity to take advantage of its many historical, cultural and natural attractions in order to stimulate tourism.
As such, I see Ethiopian acting as a catalyst for the socioeconomic development of Africa.