By Neil Denslow
Ethiopian Airlines is facing serious challenges from Gulf carriers intent on taking both its passengers and staff. However, the airline is fighting back.
African Lion|~|Ethiopian2.jpg|~|Ato Girma Wake, Ethiopian’s chief executive.|~|Ethiopian Airlines has long been one of the few profitable carriers in Africa. However, it is now facing increasing competition, particularly from carriers in the Gulf. The airline is responding to this challenge by growing its operations and modernising its fleet, with the aim of dominating traffic both within Africa and from the continent to overseas.
The Ethiopian flag carrier rose to prominence as the first and, for decades, only airline to offer East-West flights within Africa. These services were primarily driven by the then Emperor Haile Selassie’s pan-Africa political ideology rather than profit, and they were significant money losers for many years. Now, however, Ethiopian’s African network is the highly profitable backbone of its operations. The airline serves 24 international African cities from its base in Addis Ababa, and another 20 destinations overseas, including six cities in the Middle East. These long-haul international routes are vital for the carrier, as Ethiopia is not well positioned to be an intra-African hub. Instead, the airline promotes itself as ‘Africa’s link to the World,’ and 60% of its passengers are 6th freedom traffic. “Connectivity is a lifesaver for us,” says Ato Girma Wake, Ethiopian’s chief executive.
In fact, connectivity is more than just a lifesaver. It has actually allowed the state-owned airline to be strikingly successful of late, achieving a profit in each of the last 11 years, except for 1998, when Ethiopia was at war with Eritrea. This run of profits has also been achieved despite the airline operating an extensive and money-losing domestic network. The airline currently serves 30 cities within the country using five Fokker 50s and three DHC Twin Otters. These operations lose around US $10 million a year though, which the carrier has to cover itself with revenues from its long-haul routes. However, Wake says that the growth of business and tourism in Ethiopia means that these domestic services may eventually become a profitable business for the airline. “In the future, we believe they will be our backbone as tourism grows,” Wake predicts.
In the meantime, the airline is facing increasing competition in its present mainstay, long haul routes. This threat is particularly coming from Emirates and other Gulf carriers that are also looking to connect Africa to the rest of the world. “Airlines like Emirates are invading African skies and they are becoming very strong,” admits Wake.
The Ethiopian CEO is well placed to assess the growth of carriers in the Middle East, as he spent 12 years working in the region, including a long stint as Gulf Air’s head of cargo. Wake only returned to Ethiopian, where he had spent the first 27 years of his career, in February 2004, when he was offered the chief executive’s job.
The growth of airlines in the Middle East threatens Ethiopian, as the Gulf is well positioned to act as a hub for travel into and out of Africa. Wake is confident though, that Ethiopian can maintain a strong market share. “Between the Middle East and Africa, there is competition,” he says. “However, we believe that we have the strength from the other side — getting the traffic from Africa.”
The volume of traffic between Africa and the Middle East is also increasing, as the growth of business and leisure opportunities in the Gulf is persuading Africans to come here instead of visiting Europe. “Many Middle East centres are becoming attractive to African shoppers,” notes Wake.
The Middle East also offers a number of attractive employment opportunities, particularly in the aviation sector, which has created its own challenges for Ethiopian. The airline has a well regarded, and profitable, training centre, which provides Ethiopian with a skilled workforce, including pilots, as well as servicing the needs of other African carriers. However, Gulf airlines have also noticed this facility, so they are targeting Ethiopian as a potential source of new recruits to staff their rapidly expanding fleets. “There was a Gulf Air recruitment team in Addis Ababa just the other week,” notes Wake. “And, Qatar Airways is calling my pilots all the time.”
“All African airlines are losing people,” he adds. “But, Ethiopian is losing more as we are closer to the Gulf and have more trained staff.”
In an attempt to plug this drain of its resources, Ethiopian has boosted its salaries by up to 72%. This is still less than airlines in the Middle East can offer, especially as Ethiopia charges 38% tax compared to the zero rate in the Gulf, but Wake feels it is enough to make people think twice about leaving their homeland. “We believe that many people would rather stay in their own country if they are comfortable regardless of the amount of money they may get elsewhere,” he says. “What we are doing is trying to make life easy for them. For them to be able to afford to send their children to a good school, and to be able to have all of the necessities of life in Ethiopia with the type of pay that they get. If they get that, they will live proudly in their own country, rather than go elsewhere,” he adds.
“We have seen that already,” Wake continues. “Some of them, after signing a contract, said ‘no, we are not coming,’ and stayed with us.”
However, while Ethiopian is trying to stop Middle East carriers from poaching its staff, the airline is also building relations with local carriers. Currently, Ethiopian is assessing a range of proposals, covering both cargo and codeshare deals. In particular, Wake says that two Gulf carriers are hoping to add their code to Ethiopian’s Beijing services. However, he is sceptical about the plan, as it would require the service, which is presently flown direct, to make a stop in the Gulf. “Since our flights to China are full, we do not see any merits in it at the moment,” Wake comments. “However, we want to increase our frequencies [to China], and when we do, we may have some open space,” he adds.
The potential rise in frequencies to China reflects Ethiopian’s wider growth plans and its strategy for doubling its passenger traffic over the next five years. Traditionally, the airline has made multiple stops on most flights, but it has now switched to a simple hub and spoke model. This new strategy requires multiple waves into and out of Addis Ababa and higher frequency non-stop services. As such, the airline now makes no more than one stop per destination, and it aims to have at least three flights a week to all of the cities it serves. This though is not always possible because of Africa’s limited market liberalisation.
To support its strategy, Ethiopian is in the midst of modernising its all-Boeing passenger fleet. Having completed the first phase of this plan, the carrier’s short-haul international routes are now flown with five 737-700s and a 737-200, while its long-haul services are operated with six 767-300ERs and four 757-200s. However, the airline is now set to modernise and expand its long-haul fleet after ordering 10 787 Dreamliners.
“Out of the 10 787s we have bought, five of them will be used for replacements of 757s and 767s, and the other five will be for expansion,” Wake explains. “We will be using them across Africa, into Europe, North America and to the Far East, China and Thailand,” he adds.
Some of the retired aircraft are likely to be converted into freighters to support Ethiopian’s growing cargo business. The airline is currently operating a leased 757-200F, but the growth of Ethiopia’s agricultural sector is creating demand for more capacity. As such, Ethiopian has built a new 14,000 m2 cargo terminal at Addis Ababa, and it is to ramp up its freighter fleet, by converting some 757s and also, possibly, its 767-200. “Now that Ethiopia is a major exporter of flowers and vegetables, we have to provide more capacity,” says Wake. “We are therefore converting aeroplanes, and we are also leasing extra capacity.”
The airline is also looking to increase its cargo traffic through cooperation with other carriers. One of the proposals under discussion is from a Gulf airline, and Wake expects this deal to be signed off soon. “I think it will happen,” he says. “We are also discussing a bigger type of cooperation with a European carrier, so we will have to see how that progresses as well.”
In the longer term, Ethiopian also expects to increase its passenger fleet. It is firstly planning to lease four widebodies — either 767s, 777s or Airbus A330s — in the next three years. It is also in talks with Airbus and Boeing about five more widebodies, which will be delivered by 2011. The expansion will allow Ethiopian to boost its frequencies and to also add some new destinations. African cities top the list of potential new routes, along with Seoul, Toronto, Atlanta and, possibly, New York. “For the next two years though, we will not be looking at new destinations,” Wake notes. “We will just strengthen what we have today.”
Ethiopian’s greatest strength, of course, is its African network, and the carrier is striving to develop this. In particular, it is planning to open more hubs within Africa by buying into other state-owned airlines elsewhere on the continent. “If we want to be the dominant African carrier, we need to expand in Africa,” Wake explains.
The first step in this plan is near completion with Ethiopian finalising a deal to buy a 20% state in Ghana International Airlines (GIA), the new national carrier replacing the defunct Ghana Airways. The deal will strengthen Ethiopian’s African base, giving it both more feeder traffic and a hub that it can use to develop a West African network. “We cannot fly to all of West Africa from Addis Ababa, it would not be economical, so it is best for us to work with a regional partner,” Wake explains.
GIA launched services over the summer to a small number of African destinations, and it was set to launch its first long-haul route, to London Gatwick, at the end of last month. Düsseldorf is also expected to come online at the end of the year. Ethiopian is helping to develop GIA in a number of ways, including pilot training. The Ghanaian pilots previous flew Airbuses with Ghana Airways, but GIA is operating an all-Boeing fleet like Ethiopian. “We want to see commonality of equipment with us,” says Wake.
“We have therefore brought over some Ghanaian pilots and they are being trained with us, converted to Boeing aeroplanes. As soon as we have enough of our own pilots, they will return to Ghana and operate [for GIA],” he explains. “We are also providing them with the technical capabilities of Ethiopian Airlines, because if they were to also build a technical facility, it would be very expensive,” Wake adds.
This technical help may also become a profit centre for Ethiopian and GIA. Ethiopian already has a strong third party maintenance business in Addis Ababa, supporting 727s and 737s, and it is looking to replicate this model in Ghana. “Gradually, we will see how to start a technical base in West Africa to cater not only for Ghana International, but for all carriers in that region, including many in Nigeria,” says Wake. “Today, they come to Addis Ababa for their maintenance, but if we took the base there, it would be much easier for them.”
To complete its pan-African network, Ethiopian is looking to buy into a carrier in the South of the continent as well. This plan is still at an early stage, but Wake is confident about finding a partner. “We are talking to two or three different governments, and we are seeing some progress with one. However, it is too early to declare that they will be our partner or else we will chase the others away.”
One reason why Ethiopian has a selection of airlines to choose from as its Southern partner is IMF and World Bank policies. These institutions are forcing African countries to privatise state-owned assets, such as airlines, if they want to receive aid. Wake is not a fan of these two bodies, but at the same time, he recognises that their policies are creating opportunities for Ethiopian. “We have seen a lot of richer countries follow the IMF to the letter and then suffer from it,” he comments. “But now, Africa has no choice. As governments are getting poorer and poorer, they are not able to subsidise national carriers… At some point, the World Bank and IMF restrictions will come in, so they will have to give it up.”
The same also applies to Ethiopia, even though its airline is not subsidised. The country’s government is reliant on World Bank and IMF assistance though, which means that Ethiopian will eventually be sold off as well. “Within five years, we should start something towards privatisation,” says Wake. “I cannot say for certain because the owners are the ones who decide, but I believe we will. The tendency now is towards privatisation, and we cannot be an exception.”||**||