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Winning the challenging times of the aviation industry

Saturday, 19 July 2008

Despite a turbulent year for the aviation industry with soaring oil prices, Ethiopian Airlines has registered a record high performance in the just ended financial year. The airline’s overall revenue during the budget year had hit a threshold of over 9.5 billion, the amount being a record high in the history of the 62-year-old national carrier, and close to the target the airline set earlier for 2010. In addition to this achievement, the number of passengers Ethiopian carried during the reported year attained its lofty level of over 2.5 million. Capitalizing on its decades-old established stronghold networks in Africa and expanding its reach globally by establishing a code-sharing agreement with the world’s major operators such as Lufthansa, the airlines is evidently on its way to extending its status from being one of the top airlines of Africa to a significant global player in the aviation industry. Behind the astute management leadership that from year to year takes the airline to a heightened level is the Chief Executive Officer (CEO) Girma Wake, who, for the last four years, was serving the airlines at the stated capacity. The CEO spoke with The Reporter’s Hayal Alemayehu regarding the airlines' performance during the just ended financial year and related issues. Excerpts:      Spiraling oil price has long become a real-time challenge for the aviation industry, with some operators finding themselves out of business this year and others forced to cut back some routes. How did Ethiopian perform during the current fiscal year? Except for the last quarter of the year, during which time the oil price soared to its lofty level of over USD 140 per barrel, the overall performance of Ethiopian Airlines during the 2007/2008 financial year turned out to be better in general. In fact, the airlines has registered a record profit in its history during the stated fiscal year. I can not tell exactly how much we secured in profit as the books are not closed yet, but I know it is going to be a record high for the 62-year-old airlines. The number of passengers Ethiopian served during the just ended financial year reached over 2.5 million, which exceed that of the previous by over 20 percent. The airline’s revenue during the same year reached over 9.5 billion birr, an amount close to the target set for the year 2010 and that surpassed that of the previous year by over 2.5 billion birr. So, with the hard work and dedication of Ethiopian employees, the astute leadership of the management team, the stronghold networks Ethiopian established particular in Africa, the airlines was able to register record results in many of its performance parameters during the said fiscal year. That performance makes it sound that the airlines will during 2008/2009 make it above the target set earlier for 2010. Our forecast for the year 2008/2009 is 2.9 million passengers and 11 to 12 birr revenue. 2008/2009 is expected to be a more challenging year. If fuel prices continue to grow unabated, it will be very difficult to achieve that target. But we are hoping that the price will come down, and there are some indications that it is starting to do so. We hope that by the end of September it will go down to a reasonable level, if not to what it used to be last year or the year before. What about the soaring oil price that is affecting the performance of a number of airlines. How threatening is that for Ethiopian? The increase in oil price is going to be a challenge for Ethiopian as it is for other airlines operating around the world. Our fuel cost for the year is way above that of the previous one by over one billion birr. If the price keeps going up unabated it will definitely affect our performance, particularly our profit margin. On your keynote message carried in the latest issue of Selamta, the Ethiopian quarterly magazine, you have given much emphasis to the importance of the code-sharing agreement Ethiopian entered with Lufthansa this year. And I have learnt that Ethiopian is on its way to become a member of Star Alliance, where Lufthansa, United Airlines and other major carriers are members. What does that move signify? At the moment we are dealing with Star Alliance carriers. We have already entered a code-sharing agreement with Lufthansa. We have the same agreement with South African Airlines, which is another member of the Star Alliance. We are also negotiating with the United Airlines and other Far East carriers on similar agreements. Gradually, we will be paving the way to join the Star Alliance. This [code-sharing agreements] will improve our market reach. It is a seamless feeding of one another’s service and selling one another’s service as if it is their own.  The code-sharing agreement with Lufthansa, which has one of the largest networks in the world, will put us in a position to offer daily flights to our customers from our Addis Ababa hub to Lufthansa’s hub in Frankfurt with convenient forward flight connections to many other destinations around the world. Likewise, the arrangement offers passengers from Europe the most convenient and direct access to Ethiopian’s extensive network throughout Africa and the Middle East. Such alliances are becoming the rule rather than the exception in the aviation industry in keeping with the growing stride towards globalization. Ethiopian has been doing very well with the passenger service. And with the country’s exports steadfastly increasing over the last few years, there looks to be a promising market for Ethiopian air cargo service as well. Ironically though, the airline says it is losing tens of millions of dollars in the cargo business. How come? Any business you started will not deliver profit next morning. There is an investment time. We have been rendering the cargo service for many years but the present mode of expansion we are planning is new to Ethiopian Airlines. Aside from that the oil price hike highly affects the air cargo business. If the price of fuel during the ended budget year was at its level of the previous year, we would have made profit form our cargo operation. But, unfortunately the price of oil went high at the time we invested in our air cargo operation. I believe that the cargo service will gradually start paying off and we consider the present loss as an investment. I have learnt that the airline has submitted its future air cargo expansion strategy to the government and that the government will support that program. What does that involve? We have basically submitted the air cargo service strategy to the relevant government body. The strategy calls for the expansion of Ethiopian air cargo network to Europe, the Far East and within Africa. The strategy indicates that we require at least three B757 and four MD-11 freighter aircraft for the expansion program. This will also keep up with the growing exports of the country which rely on air cargo service for shipment. Currently we have two B757 freighters and made an arrangement for the acquisition and lease of two MD-11 freighter aircraft, the first of which will be delivered early next year. In the meantime we have leased two B747 which will be returned by the time the MD-11 freighter aircraft arrive. We do have a plan to acquire two more MD-11 which we have yet to discuss with the government. We also plan to erect a new perishable commodities center, as the existing facility built a year and some months ago already become smaller to accommodate the growing export merchandises which rely on air cargo business. The number of airlines operating to and from Addis Ababa Bole Inernational hub is increasing from a few to more than fourteen over the last few years, with most of them flying en route networks Ethiopian pioneered and established and the competition is getting more severe. How threatening is that for Ethiopian. Competition is always good and healthy. Whenever there is competition it keeps you on your toes. You work harder and improve your service. If there is no competition you take it for granted that the market is yours. We do welcome competition. The whole world is open to everybody else and in fact we expect even more and more competition. In the meantime we will have to grow stronger and improve our own cost structure and service delivery. And when a competitor comes, it does not only take some of your customers. It will bring you new customers as well. When the new carriers come to our country they will bring their own clientele and new tourists as well. Investors will be attracted to and invest in countries where major international carriers are flying to and from. And more and more new tourists will come. And we have seen this happen. Before Emirates started operating in Addis Ababa we were operating one flight a day to Dubai. Today we are operating two and sometimes three flights a day to that destination. So I think this will be good for the country and the airlines as well. Competition could be good as you said but then the playing field matters. There are Middle East carriers reportedly subsidized by their respective oil-rich governments which fly en route networks Ethiopian established for a lower fare? Yes, their muscle is much stronger than ours. With oil price going up they will always benefit. But I believe we have our own strength too which they may not have. We rely entirely on our own staff, while they rely on the expertise of varies nationalities. I believe there has to exist a level playing field. There are times when a level playing field may not be there. But the world has never been a level playing field and we can not entirely expect the case to be so for us. We have to fight in whatever way we can. We have our own advantages and we will use that. Two aircraft manufacturers were short-listed from six international companies which submitted their proposal to supply Ethiopian smaller passenger planes for domestic flights. What was the result? We are on the final stage of the evaluation. How many planes are you planning to acquire for the domestic operation?   It will depend on which types of airplanes we choose and what combination we use. It could reach up to seven airplanes. Can you tell us the two aircraft manufacturers short-listed? They are the Bombardier of Canada and the ATR of the French-Italy aircraft manufacturer. How will the delay of the B787 dreamliners delivery affect Ethiopian? Were you having some compensation talks or deal to avoid possible setbacks that emanates from the delay? The delivery of the first dreamliner is postponed to December 2009 from September 2008, which is a 15-month delay. With the original schedule, we were expecting the delivery of the first two B787 dreamliners in 2008, three dreamliners in 2009, three dreamliners in 2010 and the last two dreamliners in 2011. The delay will affect our planned growth because our planned strategy for that growth took into consideration the dreamliner jets as a core fleet for Ethiopian operation to major international destinations. The delay will pose a lot of challenge to us. Because of the delay, we have leased one B767 about a month ago, two B757 last week, which, according to our schedule, will take us until the next summer. If the market continues the way it has been growing and if the fuel price decreases, we may be required to acquire one or two more aircraft. If the fuel price remains high we will not lease any more. But these aircraft are not as customer appealing and fuel efficient as the B787 dreamliners are, and fly less range. That means we had to resort to something we had not bargained for. In our agreement with Boeing there is a compensation provision for delay. But that compensation is insignificant compared to the cost Ethiopian incurred from the delay. We can cancel the order and get our money back but that is not what we want because we believe in Boeing and the relationship we have with them. Ethiopian has been a client of Boeing for many years. The loyalty of Ethiopian Airlines to Boeing is fully recognized by the US aircraft manufacturing giant. They do look at us as a valuable customer. With that relationship we believe that Boeing will in one form or another accommodate us to get a possible solution that can help us address challenges caused by the delay of the dreamliners. We will be meeting with Boeing at the end of August. I am sure that there will be some room where Boeing will support Ethiopian. What could that possibly be? It is going to be a negotiation and we can not tell in advance what that support will be. We are spending money to lease airplanes. They may be able to chip in that, they may provide us with some tools we require or provide our staff with training. They may support us in one form or another given our loyal working relationship. But that is yet to be discussed and negotiated.

 

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