By 2025, ET will be a USD10 billion company

With an annual growth rate of 20 – 25Pct since 2004, Ethiopian Airlines (ET) is the fastest growing airline in Africa. In its seven-decade history, it has earned a name for itself as a leading carrier, unrivalled in efficiency and operational success among its continental competitors. This success was made possible while so many of its African peers have vanished and the few existing ones are on the verge of perishing.
Several factors have contributed to ET’s success. Its CEO, Tewelde Gebremariam, who has worked for the company for more than 30 years, says the key has been good corporate governance and leadership. In connection with the company’s 70th anniversary, EBR’s Amanyehun Sisay, spoke with the detail-oriented CEO to learn more about the growth trajectories of Africa’s largest airline and what’s in store for ET.

Mr. Tewelde, congratulations on the 70th anniversary of Ethiopian Airlines (ET). Let’s start with a brief overview of the major defining milestones of ET.
The big milestone came in the early 1960s, when ET had to move to a jet service – the first African airline [to do so]. This coincided with the decolonisation of several African nations and the formation of the Organisation of African Unity. We were serving most of these independent countries and we were the only airline to cross the continent east to west.

Because of colonisation, the trade relations of many of the African nations were mainly with their former colonisers. [So the next milestone came] in 1973, [when] ET started to fly to China. At that time it was a closed communist country. But ET was among three other airlines in the northern hemisphere to fly there. We introduced a new trade route for Africans to look east – to India, China and others. Ethiopian Airlines was showing the way for Africans early; and today China is heavily investing throughout the continent. Africans also travel to China in large numbers. Ethiopian Airlines operates 28 flights a week there. We have the leading market share between China and Africa, by far more than any other carrier, including Emirates.

I would say apart from the dedicated service of the last 70 years, the Airline has contributed significantly to African economic development.

Today, we command the lion’s share on the continent in terms of market share, network, revenue and number of customers; we fly to 52 destinations across the continent. We connect these destinations to major trading centres around the world. ET can proudly say that it is the only indigenous pan-African airline managed, operated and owned by Africans.

It seems ET made a shift in 2004. Since then, the company has grown faster than ever before. What happened that year?
Yeah, the big change came in 2004. In fact, ET has been growing 20 to 25Pct per annum compounded since 2004.

During the Emperor’s period, the economy was very low; it was a feudal society and Africa was not as liberated as it is today and it didn’t get the opportunity to grow. Then during the Dergue period, the country was at war with itself. The political atmosphere was not good for the airline to grow.

Following the overthrow of the Dergue, the environment changed: peace and stability prevailed and the country started to grow at a double-digit rate. This provided fertile ground for us to grow. Africa was also changing.
In 2004, we said we should be able to grow faster; redesign the network and our strategies.

We came up with Vision 2010, which was to make the airline a billion dollar company. It was tough but by June 2010 we exceeded all the parameters that we set [for ourselves]. We were encouraged by the success, which was remarkable, as the industry was going through big challenges. In 2008, financial crises started and the oil price reached an historic record – USD147 per barrel. This even caused many airlines to close.

By 2010, we registered USD1.3 billion annual turnover, exceeding our plan by 30Pct. Then we decided to scale up the growth momentum and came up with Vision 2025 to make ET a USD10 billion company.

During the planning period of Vision 2025, we were waiting for the 787 Dreamliners and the A350 Airbus. These airplanes are a step forward in all aspects, with lower fuel consumption and carbon emissions.

Let’s talk about Vision 2025 and its pillars.
Vision 2025 is about making Ethiopian Airlines the most competitive and leading aviation group in Africa by providing safe, market-driven and customer-focused passenger services. [It also includes developing our] cargo transport, aviation training, flight catering, maintenance repair and overhaul (MRO), ground services, as well as domestic and regional services. By then our revenue will grow to USD10 billion.

[The plan] has four pillars. Number one is flight renewal and expansion. [For our domestic flights, we use] the Bombardier Q400. It is an economical and comfortable airplane. So we are going to increase their number and usage. Then we have the 737 for mid-range flights; and the 787 replacing both the 757 and 767 for the long range. And the 777 and the Airbus A350 for the extra long range.

The second pillar of Vision 2025 is human resource development. Ethiopian Airlines has always believed in human resource development. That is why we have invested more than USD100 million in our Aviation Academy, to make sure we are self-sufficient. And also to support the continent in terms of skilled manpower, which is a huge challenge.

The third pillar is infrastructure expansion and we are very well into that, with over half a billion dollars in investments so far.

The fourth pillar is the implementation of the best systems, policies and procedures.
We are very confident that we will keep on the growth at a scale and a better rate of growth that we have achieved mainly because the infrastructure is there, the institutional arrangement is there.

Five years into the plan, where does ET stand in terms of achieving its goals?
Many industry experts and the media said that Ethiopian Airlines would not meet its objectives because the plan is too ambitious, particularly in terms of human resources and finance. So five years in, I would say we have proved to the world that the plan is not a nightmare.

We planned to have 64 airplanes in the first phase of Vision 2025 (i.e., by 2015) and now we have 76 airplanes. We have exceeded our expectations in number of passengers, revenue and profit. We planned USD2.4 billion in revenue and achieved USD2.5 billion.

Do you think ET will become a USD10 billion company ten years from now?
No question about it. Because the [first] five years [of the plan] have shown us that we can surpass the goals we set for ourselves. [However,] it is very difficult, since the competition is getting even tougher.

But we have a proven, tested and tried business model and strategy and also we have the capability to rally all our employees towards the goal with unity of purpose and direction. This is very important. It is not a few people in the company who are managing Ethiopian Airlines today; it is the entire population working as one team.

We are going forward. I agree with you that it will be tougher; maybe one can say that the low hanging fruits are already achieved.

You changed your motto to ‘The New Spirit of Africa’ a few years ago. What necessitated that?
Yeah, in 2011 we changed our motto from ‘Bringing Africa Together and Closer’ to ‘The New Spirit of Africa’. This is a very strong message to the rest of the world. We are telling the world that Africa is changing. [The continent] is not all the bad publicity that we used to have in the 20th century. Africa now has better governance, peace and security, and better macroeconomic management.

The continent is attracting more foreign direct investment. It is rich in natural resources; it is rich in agriculture potential; it has the largest untapped arable land for agriculture. So if the world is looking for the source of natural resource deployment, it is in Africa.

Of course it has its own share of problems, but in the 21st century, it is changing. So [the new motto] is meant to show that fundamental change happening across the continent.

Human resource experts say diversification has merit in a talent pool. I don’t know if the same can be said of the aircraft pool. I see that you have so many identical airplanes.
We don’t want to diversify our aircraft portfolio; we want to make sure that we have flight commonality. This gives a superior efficiency in training, maintenance and spare holding. Aircraft diversity increases costs for the Airlines and increases inefficiency.

Ethiopian Airlines trains the human resources of other airlines. Additionally, it also sends its trained human resources to serve in different airlines in Africa. Don’t you worry that someday these airlines could be major competitors?
Competition is good and will always be there whether we develop it or not. We should not be scared of competition as long as it is on a levelled playing field for the competitors.

For African airlines, [one may be] bigger than the other, but we are all small when you look at it from a global perspective. Our combined market share is only 20Pct of the African air traffic. Non-African carriers control 80Pct of intercontinental air traffic between Africa and the rest of the world. This shows that indigenous African carriers are not strong.

Some 20 years ago our market share was 40Pct. The curve is going down, so we have to address this. We have the responsibility to develop aviation in the continent. For small countries trying to develop a national carrier, it won’t be an easy task because the business needs the institutional arrangement, the infrastructure and manpower base. So they are not going to make it unless we help them. This is because the airline business is volume driven; economy of scale is a very critical success factor.

On the other hand, collectively a group of African countries can have a major airline. That is why we are not [focused on developing] airlines here and there but [rather on developing] hubs. So in our multiple hubs strategy we are expanding the Addis Ababa hub to West Africa with ASKY Airlines in Togo. I think we have successfully developed that airline; it is close to six years in service now. We have seven airplanes covering 22 destinations and carrying half a million passengers per annum. This is a big success.

And then we are starting a new initiative in Malawi. We are trying to grow the southern African hub. [We are also developing a hub] in the central African region. It could be in Rwanda with Rwandair because we are working on a strategic partnership with possible equity ownership. It could also be in the Democratic Republic of Congo.

Some suggest that Ethiopian Airlines should consolidate with other successful African carriers, like those of Egypt, Kenya and South Africa. What are your thoughts on this?
Yes, industry experts talk about consolidation, which I don’t agree with. Consolidation may make us stronger and more profitable, which is an immediate economic gain. But at the macro level it will make us even smaller.

When we merge, we would reduce routes to avoid duplication. We fly to Accra; Kenya Airways flies to Accra, even South African [Airways] flies to Accra. Then three of us are flying to Accra. So the rule of thumb in economics is instead of all of us flying to one city, maybe one can fly on behalf of the others. It has tremendous immediate gains but again when you look at it from the market share perspective, it will only shrink us from 20Pct to maybe to 10Pct.

The airline business is extremely sensitive to volume of activities because it is highly capital and labour intensive. And the costs are fixed, by and large. So the larger the fixed cost component of the total cost, the larger the volume you need to spread your costs so that your unit cost gets smaller.

That is why Emirates is doing very well. It is an aggregator of the entire global traffic through Dubai. Their strategy is to take passengers from any point in the world to any point in the world with only one stop in Dubai. It is an extremely successful business model.

So what I think makes more economic sense is commercial cooperation, like the purchase of big-ticket capital items, sharing services and so on. For instance, ET keeps an engine worth USD30 million for the Boeing 777. Kenya Airways also keeps the same engine in Nairobi as a spare. So Nairobi and Addis being so close to each other can share. This kind of cooperation can be helpful.

Africa is a large land mass; it’s also a fast-growing continent. This calls for multiple hubs and Ethiopian Airlines is doing that.

You have 43 aircraft that have been ordered, including 14 A350 Airbuses. This must have put a lot of pressure on ET financially. Additionally, the US EXIM bank has stopped supporting you in purchasing new aircraft from Boeing.
If you have of a sound balance sheet, then creditors will be happy to lend you money. I agree that it is a huge challenge to finance the growth in general, including flights and infrastructure. Together, we have close to half a billion dollars invested in the Aviation Academy, MRO, cargo, and catering.

The catering complex we will inaugurate in a couple of months will produce 80,000 meals a day. So half a billion dollars is already invested [in that project and others]. We will also build the largest Chinese restaurant in Africa because we are targeting Chinese tourists to Ethiopia and the rest of Africa.

If our balance sheet is sound, finding finance will not be a big problem. So far, a lot of global commercial banks are coming directly to us to finance our growth.

ET has grown enormously in international flights. But the same cannot be said of its domestic flight services. In 1952 ET flew to 21 domestic and six international destinations. Now ET has 19 domestic and more than 90 international flight destinations.

Correct, that is the case, but it is the way you look at it [that matters]. In the 1950s, we were serving these domestic destinations with small airplanes carrying only 16 passengers once or twice a week. It wasn’t a public service because there was no economy of scale and the company was not making a profit.

Secondly, you can only carry 16 lucky people between point A and point B. We changed the business model recently with the Bombardier Q400, which can carry 78 passengers. So when we fly seven times a day between Addis Ababa and Mekelle with the Bombardier and Boeing 737, we are carrying close to a 1,000 people a day. Flying six times a day to Bahir Dar, five times to Dire Dawa and more daily flights to Axum, Gondar, and Lalibela all provide us more opportunities to serve domestic flights. So the number of destinations has not grown much, but the number of people has significantly increased because we fly more frequently with larger aircraft.

Our domestic market is growing 39Pct per year while the international market grows 20 to 25Pct. Domestic is growing faster. The intensity, the capacity and the frequency are completely different.

Matching the growth of the Airlines with the human resource needs must be challenging because developing the human resource in a high-tech industry like aviation takes a lot of time and effort. These days, I see a lot of young people in almost every aspect of the airline business. However, the more you progress and acquire sophisticated technologies, the more you need senior people.

You are right. But it is like the chicken or the egg. So you prepare people, you take care the whole time and then you will start to grow. But by then the world has already progressed way ahead of you. This is a very competitive business and size really matters. Had we had not grown at the rate that we grew, we wouldn’t have joined the Star Alliance. We were too small for them for many years.

This is a challenge that worries me every single day. About 65Pct of our employees are under five years of service. It is a huge challenge. But you know, as long as we have our own Academy and are able to teach these young, vibrant, smart boys and girls the latest aviation technology in the Academy, we will continue to make it.

In 2010 we had a serious shortage of aircraft technicians. But we came up with a strategy to train [new people] in large numbers and today we have more than 2,000 aircraft technicians. They not only support Ethiopian Airlines, but [other African airlines as well].

So I agree with you it is a challenge. The senior skilled people are retiring and are fewer in number, so the ratio between youngsters, juniors and seniors is fast shrinking. That gives you a huge challenge in maintaining the corporate culture because we are adding more than a thousand new young men and women from the university every year. It has an advantage because you have young and energetic workforce, but in terms of maintaining the corporate culture it has its own challenge.

With ET growing fast and creating new jobs, have you created a system where everyone has equal opportunity for growth?
ET is an equal opportunity employer committed to diversity and fairness. When we hire we have to make sure that we give equal opportunity to every region in Ethiopia. We used to hire only from Addis Ababa. But for the last five years we have been hiring from all regions. Of course we have qualification requirements that cannot be compromised, but everyone should have the opportunity to compete. And once they join, they can compete wherever within the company. So at ET your growth is entirely in your hands.

ET has become a national pride. Yet, the same cannot be said for other public institutions. The company has a lot it can share about building a system of efficiency. I know you are a board member of a few public corporations. How are you contributing to building an efficient public sector?
I wouldn’t say that we have contributed enough in that regard. Personally I am very busy here. But we are discussing institutional arrangements in areas like corporate governance, human resource and performance management to share experiences. Some institutions have gone a good distance in this regard.

Last year must have been a bonanza for ET. On one hand you received 15 international awards. Not only that, but oil prices remained low the entire year.
Well, President Harry Truman once said that he was looking for a single-handed economist. Because economists usually say ‘on one hand there is this thing; and on the other hand there is that thing’. You are right, oil prices remained low for the whole year, and it was a bonanza.

Unfortunately, there are two sides to the equation. On the cost side it gave us an advantage, since 40Pct of our expense is jet fuel. We enjoyed a huge cost reduction in one year that we continue to enjoy. Even then, although the international price of jet fuel has come down, in Africa it is still way up. The law of gravity doesn’t work in African pricing. So if price goes up once, it remains there.

Besides, there is another side to the equation many don’t notice. African courtiers that produce and export oil were hit very hard by the price decline. Angola, Nigeria, Equatorial Guinea, Gabon, Sudan, South Sudan, and Chad suffered very badly. Their currencies were devalued beyond reasonable expectation. Now, we are not even able to remit our money because there are foreign exchange problems in these countries. For instance, we have more than USD42 million in Angola.

Looking ahead, what are the major areas where you think ET needs to improve?
I think we have to work hard as we grow faster and bigger. We have to make sure that we are always [fit] in terms of infrastructure, flight, human resource and systems.

Systems are very important because they bring all these resources together. When I say systems I mean policies, procedures, working culture and the entire platform. Today the airline is fully automated; the goal is to make the airlines completely paperless in the coming year – to be a ‘green’ airline by not using paper. These are platforms that will increase our efficiency and our business and enable us cope with the growth that we are planning. EBR

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4th Year • May 16 2016 – June 15 2016 • No. 39