ch-aviation interview: Tewolde Gebremariam, CEO Ethiopian Airlines

Ethiopian Airlines is Africa’s largest carrier by Available Seat Kilometers (ASKs) ahead of its Star Alliance partners South African Airways and EgyptAir. Unlike its two alliance partners, it has also been consistently profitable for years constantly growing its hub in Addis Ababa providing more connectivity from Africa to the world. Ahead of the delivery of the carrier’s first AerCap financed A350-900 from Airbus’ factory in Toulouse, ch-aviation’s Thomas Jaeger had a quick chat with Ethiopian Airlines’ chief executive Tewolde Gebremariam discussing the carrier’s plans for the A350s joining the fleet, the unique challenges of the African operating environment, expansion plans for additional African hubs and Ethiopian Airlines’ long term planning approach.

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Just like Japan Airlines, Ethiopian has been a very loyal Boeing customer for many years. But now Airbus has managed to lure you to their side with the A350. What brought about this change?

Well, it’s not a change per se, it’s an evolution. When we were small, it did not make sense to diversify. In fact, not only diversify manufacturer, but also to diversify within the same manufacturer.

The number of fleet types should be kept as low as possible because it creates more complexity, and that increases the cost of operations. So, according to our calculations, when we crossed fifty airplanes, and assuming that each type has its own economies of scale, whether the 737, 787 or 777, we would then be free to study any airplane for the missions that we have. Because usually you study the airplane for the mission, but at the same time you also decrease complexity. So when we decided to order the 787 back in 2005, and knowing the mission purpose of the 787 and its size, we realized we also needed an airplane larger than the 787, a modern next generation airplane. It was then we decided to go for the A350. As I mentioned earlier each type has to generate its own economies of scale and that we can realize with the twenty A350s we have on order.

So what are your plans and hopes for the A350? Where do you want to deploy it first?

The A350, in terms of capacity and range, is going to cover most of our longhaul routes to China, the US and of course Europe. In terms of capacity, it is bigger than our B777-200(LR), which is a niche mission airplane. And despite the altitude problem in Addis Ababa (the current airport is 2,400 meters Above Sea Level which presents operational challenges for all aircraft), the A350 performs well there just like the B777. The Airbus is therefore going to replace the B777-200(LR) on some routes given its slightly higher capacity. In our configuration the A350 seats 343 passengers, which is greater than the B777-200(LR) but smaller than the B777-300(ER) which seats about 400.

Ethiopian Airlines Airbus A350-900 – Copyright: Airbus

You have just mentioned the Hot & High conditions at Addis Ababa Bole International Airport. Now, the Ethiopian government is in the process of selecting a site for a new gateway for the capital’s airport. Will the A350, and eventually an A350-900ULR in combination with or without the new airport, make your fuel stops on the way to the United States redundant, or will you have to make them regardless?

That’s a very good point that you have raised. Unfortunately, we have not studied the A350-900ULR or the A350-1000, but even then I don’t think with them in our fleet, I don’t think we could escape our technical stopovers. The B777-200(LR) is the longest range commercial airplane in the world at the moment, but even it cannot make North America without stopping. What we may consider, is looking at how many seats we would have to leave empty in order to make, say Addis Ababa to Washington, D.C. non-stop. But definitely, the next generation airplanes are performing well. So going forward, the plan will likely be a combination of us moving to a new airport which is slightly lower, about 1,900 meters Above Sea Level, and of course new generation airplanes. Maybe a B777-8X can do it.

Talking about challenges, you are the biggest international operator in Sub-Saharan Africa by far. But there are some carriers, such as your Star Alliance partner Turkish Airlines, that are looking to break into this market as well. Is that a significant challenge for you or are they aiming for a different  niche than the one you are currently focused on?

It is a challenge, you are right, Turkish has a big network in Africa. It is not the only challenge, but it could become the main one quite soon. From a more general perspective, Emirates is also a big competitor in Africa, as is Qatar Airways, Etihad, and Air France-KLM. So competition has always been there, and it will continue to be so in the future. Of course its face is going to change. But we are the pioneer airline in Africa, 70 years in service, and we believe that we know the African customer better than anyone else.

In the last few years, you’ve helped establish regional Africa carriers ASKY (in West Africa) and Malawian Airlines (in Southern Africa) as opposed to investing in existing operators. But we understand you are planning to do so, or have already done so, with an equity investment in RwandAir. Can you elaborate on this deal?

No we are still discussing. We have commercial and technical cooperation agreements in place, and we oversee their total care maintenance for them. While we are discussing upgrading that cooperation to a more strategic partnership, we have not yet defined the format of partnership.

But there are also other initiatives in the region. We are also in talks with Congo Airways, a new initiative by the DRC government. Uganda is also planning to restart their national carrier, same in Zambia and Zimbabwe. We are talking with all of them because we look at it from a homegrown, indigenous African airline’s point of view. The market share today between African airlines and non-African airlines, or foreign airlines, is highly skewed in the latter’s favour at 80/20. We believe that it should be, at the very least, 50/50. It used to be 60/40 maybe thirty years ago but now at present, it has tilted to 80/20.

Overall, local African carriers’ market share across the continent is declining but we want to reverse that. We want to help Africa’s airlines grow in the African market.

Ethiopian Airlines Boeing 737-800 in Zurich – Copyright: Tis Meyer – planepics.org

How do you hope to achieve that? By using a similar model to the one you applied at ASKY and Malawian where you can provide the services and economies of scale that they would otherwise not obtain?

Right. That’s how we are trying to convince most of them, because the airline business is 1) highly capital intensive, and 2) highly skilled-labor intensive. But even with a combination of the two and access to economies of scale, you still need minimum critical volume to run a viable airline.

And you have reached some of that critical mass now in Lomé and after the flights to Brazil, you have now started your first long haul route to the US from there. Are you planning to eventually build up Lomé to a level where it can sustain its own connections to Europe. I remember right, at one point, you had a Beirut flight for sale, but that did not work out. Do you think you Lomé and ASKY have the critical mass now to expand?

Yes, that is the plan because we are looking at expanding the regional network there in order to support intercontinental flights to Brazil, New York (and more US gateways), and eventually Europe.

Is that a general template for your regional hubs? That Lomé and Lilongwe will each have their own longhaul flights?

As competition intensifies, we may start thinking about direct flights from these points. That will put us a step ahead of the competition in the market. So the customer may get a direct flight from Lomé, from Malawi, and maybe even a direct longhaul flight from the DRC or Rwanda.

One of your bigger markets is Nigeria, where Ethiopian will shortly become the second largest carrier there because Emirates is curtailing its capacity there. How worried are you about the scarcity of foreign currency  turning Nigeria into an African version of Venezuela from an airline perspective?

We are all highly concerned. Even IATA is concerned. But Nigeria is very big market for us; we fly to four cities there – Lagos, Abuja, Kano, Enugu. Nobody else flies to Enugu except us so we have to find a way to manage the current crisis. While some airlines are scaling back, for us it is too big a market to neglect. We have huge challenges there, but you have to find a way to address that. So we will continue to fly to Nigeria.

Ethiopian Airlines Boeing B767-300ER – Copyright: Tis Meyer – planepics.org

Turning to East Africa. The situation there has obviously changed quite a bit with Kenya Airways in financial trouble and scaling down. In Tanzania, you have Precision Air and Fastjet neither of which are doing very well. Taking all of this into consideration, do you think that you’re going to be able to profit from the void left in the East African market, and have you seen any significant increase in traffic volumes in Kenya and Tanzania as a result of the aforementioned carriers’ troubles?

First I should state that East Africa is in better shape than the rest of Africa, considering the low commodity prices, especially oil. East African countries are not dependent on oil or mineral exports, so because of that they are in better shape right now; the region has great potential. Coming back to low cost carriers, I have always maintained my position, even five years before Fastjet started. I could be wrong but I don’t see how that model could work in Africa because of the challenges there. I mean, the low cost model is very successful in the US, Europe, and now in Asia, and it will be also successful in Africa, eventually. But now is not the right time because you have a number of challenges to contend with: Fuel prices are still very high, higher than the rest of the world, airport charges are very high, there are no secondary airports etc.

Going back to your question, I don’t see a vacuum in East Africa. We have traditionally been very strong there, it’s our region, and while competition is there, it is probably on a different scale and scope. Kenya Airways, for all its woes, is still strong there and their restructuring program is working well for them. Overall, I believe there is enough market share for all of us, these countries and their markets are really growing, and they have better macro-economic stability, peace and better governance. There is also a lot of investment in infrastructure, Chinese investment mainly. So I think connectivity is going to grow, not as much between the countries there, but more with the rest of the world.

We are not heavily exposed to the inter-city/intra-Africa market, so I think I don’t see any unique opportunity or challenges emerging. But we will have to continue positioning ourselves, and we have to adapt our services to meet growing demand. The B737 is very well suited to the region, we believe, and even though there may be some markets there where there is a little bit of overcapacity, we are doing just fine.

Let’s talk about the domestic Ethiopian market- For the first time since the sector was liberalized, you are now facing competition. We see you’ve managed to get two of your Fokker 50s flying again with one of your competitors. Do you see it as a crisis or as an opportunity? If more carriers start flying domestically it might increase traffic volumes and provide you some revenue streams as well?

I don’t know. For the time being, we haven’t seen any real competition. The domestic market will grow by 39% this year, so it’s a growth market, and we are adequately catering to it with Bombardier’s Q400. But there are significant challenges for new entrants because the domestic market is a not profitable one owing to the very low fares charged; the average price is less than US$100. But for us, the domestic market has always been cross-subsidized by our international network.

Ethiopian Airlines Boeing B767-300ER – Copyright: Tis Meyer – planepics.org

Ethiopian invests a lot in training its management team and by encouraging young talent to rise through the ranks. What can other African airlines and companies learn from you given the way you have managed to build such a sustainable succession plan for so many years?

I think one can see it in many ways, but the way I see it is the first priority is a long-term plan. As I told you before, aviation is a highly capital intensive business which requires a very highly qualified skill and labor base. So if these are the foundation for success in the industry, then a long-term plan is critical to a sustainable operation. You cannot run this business quarter to quarter; you cannot run this business with an annual plan. You need to think in terms of much longer timeframes.

Of course this is also a very volatile, unpredictable, and complex business so plans need to be flexible and changed very frequently. But even then, in the midst of a very complex and ambiguous business environment, you still need to have an eye on where you are going. In fact, we have a 15-year plan – Vision 2025 – in place which helps us remain clear on where we are heading as an airline.

In our case, we want to generate US$10 billion in revenue by 2025, operate 150 airplanes, fly to more than 120 international destinations, and carry 22 million passengers. Once you have the objective, you should then figure out how to get there. We have overarching strategies that are very clear. We are a cost-leader airline, meaning we use a cost-leadership model, as opposed to a low cost carrier business model. We operate a full service, global standard business model, where we aim to realize the lowest possible unit cost in the industry which then enables us to freely compete in the market.

Our strategy also hinges on us being a four-star airline with five-star service with multiple hubs.

So we have four pillars, the first is the fleet, and the second is human resource development, the third is infrastructure, and the fourth is systems. We have already discussed the importance of the fleet. But human resource development is another ball game altogether. If you are located in Europe or America, you can always go to the market and hire the right staff on the market. But in our region, those skilled professionals are not always available on the market. The little that we have in the continent is continuously migrating to the developed world, in particular to the Gulf. So we have to rely on our own training, that’s why today we have the largest aviation academy on the continent which provides us with fully trained pilots, technicians, cabin crew, sales and marketing teams as well as customer service staff.

And then the infrastructural aspect. In total our aviation group has a total of seven distinct business units. If you are an airline in Europe, you don’t have to worry about cargo terminals, catering facilities, or training. MRO you can outsource. In our case, we are a fully self-sufficient airline. We have the largest cargo terminal now on the continent, and we are in the process of building a new facility capable of handling 600,000 tonnes per annum. That is just the first phase, the second phase will allow us to handle an additional 600,000 tonnes per annum, giving us a total handling capacity of, 1.2 million tonnes per annum. This is equivalent to the cargo terminals at Amsterdam Schiphol, Singapore Changi or Hong Kong. On the MRO side, we have five maintenance hangars, as well as engine and component shops while our catering unit will soon inaugurate the largest catering facility in Africa, which can produce 80’000 meals a day.

The overall strategy here is that while this infrastructure is there primarily for Ethiopian’s needs, it is also there to generate additional revenue by selling services to 3rd parties as well.

And then you have Systems bringing the infrastructure, catering, MRO, human resources etc together. By systems, I mean the policies, procedures and processes, global standard practices, and global standard information and communications technology we have in place to ensure everything is properly coordinated and overseen. Today the airline is fully automated, back office and front office. In the next fiscal year, we are aiming to make it completely paperless.

I think this achievement has been made possible thanks to longterm planning and to skilled, experienced leadership. That’s why most of us in the leadership team today grew up with the airline. Personally, I have been with the airline for 31 years which more or less mirrors that of my colleagues. So we know the business, we know the environment. We have overcome a lot of challenges in the past which gives us a tried, tested and true leadership team.

And I think this is the message that other African carriers, or even other African companies should learn.

Ethiopian Airlines Training Center – Copyright: Ethiopian Airlines

Thank you very much.

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