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CAPA Live: Ethiopian Airlines cash positive. 50 flights/week to China

Analysis

African airlines were grounded for the period from Mar- to Sep-2020, and with no aid forthcoming it has been difficult for many airlines. As a result "the African airline industry has been severely damaged".

Ethiopian Airlines could see that there was an opportunity with cargo demand and made a quick decision to build up capacity. That has helped the airline manage its cash flow without any bailout money or borrowing, and without any lay-offs or any salary reduction.

The airline is operating to China with 50 widebody flights a week on average, plus operations to and via Europe with PPE and other medical supplies.

In the absence of meaningful partnerships Ethiopian has been trying to establish hubs in West Africa, Malawi and Chad, as well as with Zambia. They have also established an airline in Mozambique

Talking at the CAPA Live on 10-Feb-2021, Ethiopian Airlines’ Group CEO Tewolde GebreMariam spoke with CAPA’s chairman emeritus Peter Harbison.

Some of the verbatim highlights can be found below.

All countries closed their borders, so that African airlines were grounded from Mar- to Sep-2020. There is no funding available, so the African airline industry has been severely damaged

“The industry in Africa was not in good shape - even before COVID. This is an industry which has been losing money, especially the airline industry, losing money for I would say six, seven years in a row. So airlines were not in their best position when they caught this global pandemic crisis. It was caught in an already very bad shape. Then the COVID has affected African airline industry much more and much worse than the rest of the airline industry and the rest of the world. For a few reasons."

“Number one, I would say that African countries have taken extreme measures in terms of closing borders. So almost every African country has closed its borders, and that has stayed also for too long. I would say between Mar- and Sep-2020. So that has affected African airlines because almost all African airlines were grounded for that long period."

"So especially the fact that we missed the summer peak means a lot in terms of not being able to support the airlines' operations in the continent.

"The other reason is, on the other hand, the amount of coronavirus in Africa is not that bad. But the fear is of Africa having very low and substandard health services, so African countries were very concerned that they will not be able to do support in case health services were to be overwhelmed by the pandemic patients. So because of this fear, they took extreme measures of blocking and closing borders. So that's one reason, and they did it for too long as compared to the rest of the world. Especially Europe and America, which were a little bit more moderate."

“The second one is African airlines did not have the opportunity to look for support from their governments in terms of bailout money, because the African governments and African economies were badly hit by the pandemic. So for almost all African countries, airlines like... very unfortunate that we lost a very big airline, a very good airline, and Air Mauritius and so on. And Kenya Airways has also downsized significantly."

"The third reason is there is no capital market in Africa, so airlines cannot sell bonds. They cannot borrow money from banks or from financial institutions like in Europe and America. I would say it has hit Africa badly, very badly. The industry has been severely damaged.

"We made a quick decision to build as much capacity on our cargo business. Demand was high so we took advantage at the right time.  We have a very strong cash flow. We are still managing our cash flow within our internal resources - without any bailout money or without any borrowing, and without any lay-offs or any salary reduction."

“We have been doing very well in the last decade in our vision 2025. So the decade between 2010 and 2020 has been very good for Ethiopian Airlines both in terms of profitability, in terms of reinvesting our profits for growth and expansion, not only on fleet, but also on the prospector and on human resource development."

"So that has given us a better foundation, a better position to face this challenge. At least in a better position than the rest of our peers. But secondly, I think back in Mar-2020 when everybody was panicking about the pandemic and when the entire industry was grounded, I think we have done very well. A very creative idea was that the cargo business was booming, for two reasons. One, the belly hold capacity was pulled out because passenger airplanes were grounded. On the other hand, PPE and other medical supplies transport was a booming business to support and to save lives in Europe, America, Africa, South America and so on."

“So realising this, we made a very good decision, a quick decision to build as much capacity as possible on our cargo business. We already had 12 airplanes, 10 777 dedicated freighters and two 737 freighters. But we have also makeshift converted our passenger airplanes to cargo by removing the seats. We did about 25 airplanes like that, so that was a significant capacity increase on our cargo capacity at the right time. So the yields were very good. Demand was very high."

"We took advantage of that opportunity at the right time. We've shown agility, speed of decision-making, resilience that has helped us. And still helping us thus far. So we have a very strong cash flow. So we are still managing our cash flow within our internal resources, without any bailout money or without any borrowing for liquidity purposes, and without any layoff or any salary reduction.

"So it is an amazing performance, I would say, but this is because we have developed an internal capacity suitable for any kind of challenge in the last 10 years. So we have done an amazing job. We remain cash positive.”

We have around 50 frequencies a week to China and also we carry cargo from Addis Ababa to Europe with some going on to North and South America, and some continue to China with European exports, and then back to Addis

“We have been in China since 1973, so close to half a century. We're among the very senior operators in China. We have also gained position ourselves in the right strategic position, when China started to invest in Africa heavily, especially in infrastructure. So that has created a very significant passenger air cargo traffic between China and Africa. So we have been right in that middle, and we have the largest market share between China and Africa."

“Unfortunately, the COVID situation has devastated the passenger business. So I would say we have almost lost our entire passenger business between China and Africa. Because right now we are operating a once weekly flight to Shanghai with a lot of restrictions. So I would say the passenger business is gone. So we will see when it recovers."

"But on the cargo side, we are still very big, and it is a very, very significant market for us. We have daily dedicated freighters from Shanghai, and 10 dedicated freighter flights a week from Guangzhou, and more than daily from Hong Kong. Then Chengdu and we've started freighters to Wuhan now, and Shenzhen. So we are still a very, very large operator in China.

"Between China and Africa, China and South America, and China and Europe. So it is a very strong market for us in cargo, close to 50 frequencies a week."

“We are carrying many industrial products, industrial goods, machineries, medical supplies, medical equipment, mobile phones, batteries for mobile phones, and electronic goods of course. IT equipment and so on.

"Also from Europe, European exports with China, and from China to Europe also, Chinese exports. So it's a triangular operation, Africa, Europe, China, then Africa."

“We have about 14 flights a week from Addis to Brussels, Liège and Maastricht, three hubs. Then from Liège, Brussels and Maastricht the planes continue either to South America and North America, because we do also business for Inditex, you know the parent company of Zara.

So we have dedicated freighters for them operating to North America, Mexico, Columbia and so on. Some of the flights also continue to China with European exports and then some back to Europe, some back to Addis. So it's a triangular operation."

We are one of the drivers of the AfCFTA (Africa Continental Free Trade Agreement). We have partnered with the African Union to start the first free trade goods moving from eSwatini to the rest of Africa. Hopefully it will improve the inter-Africa trade

“We are one of the drivers of the AfCFTA. On 01-Jan-2021 we partnered with the African Union to start the first free trade goods moving from Swaziland, now it is called eSwatini, to the rest of Africa as a show of commencement. So it is a very huge, significant milestone, and it has been ratified by most African countries. It has been officially launched, and we are very optimistic about it. So hopefully it will improve the inter-Africa trade, because right now the inter-Africa trade is in very, very low volume. Because out of the total trade between Africa and the rest of the world, only 16% is within Africa. So 84% is with the rest of the world, with China, Europe, and so on."

“When you compare that with Europe, and I always compare the African Union with the European Union because they are the same aged institutions. They were started in the late 1950s, early sixties. So the European Union has achieved a lot as compared to the African Union, which is lagging behind. So in Europe now, 60% of trade is within Europe. But here it's only 16%. So you can compare how much we are lagging behind. But African countries have a lot to trade among themselves. Some of them are agricultural exporters. Some of them have slightly better industrial exports like South Africa, Nigeria, Egypt and so on. But then inter-Africa trade is very low. The AfCFTA is going to change that. But there are huge and daunting challenges ahead of us because tax barriers are challenging."

“So I hope African countries will face those challenges and make progress. That is the hope of everybody in the continent. And Ethiopian Airlines, as I said, we are one of the drivers, and we are actively participating there. And we think that trade will generate traffic, both in cargo and passenger, within Africa. We are still the largest network within Africa. I think right now we have about 23% market share within Africa. So we see quite a bright future, especially after the coronavirus recovery."

“The free trade agreement will be accelerated for two reasons. Number one, post COVID the African countries will be searching for opportunities of trade, not only with their traditional trading partners in Europe and China, mainly, but also among themselves and among their peers in Africa. So that is a big incentive."

"The second incentive is that now the US administration has changed; we'll see, but before, globalisation was having a big setback, and a lot of barriers, a lot of nationalism, a lot of protectionism. So in the midst of that situation, maybe African countries will fall back to their continent. So that's also another incentive for the success of the FTA. And also the currency issue. So African countries will have to find means of exchanging trade between and among themselves with their own currencies, because pegging with the Dollar, pegging with the Euro, has also been a challenge.

Tewolde GebreMariam Group CEO Ethiopian Airlines speaking at CAPA Live, 10-Feb-2021

In the absence of meaningful partnerships we have been trying to establish hubs in West Africa, Malawi and Chad and also with Zambia. We have also established an airline in Mozambique

“To make real progress in terms of collaboration, consolidation, and also creating the critical minimum volume to find economies of scale, it would be much better if the existing airlines can work together, can cooperate, can establish meaningful partnerships. That would have been the right way to go, and that would have been economically beneficial for everybody in the continent. But unfortunately that is not possible. Well, at least thus far it has not happened, for many reasons."

“So in the absence of that big bang we have been trying to establish hubs here and there. Some of them are successful like ASKY in West Africa. Some of them are not that successful because the markets are very small, like Malawi and Chad. We are now on the final stage in Zambia, which we think will be another success story like ASKY, because Zambia is centrally located for Southern Africa. Also a bigger economy, very successful economy. And also a relatively successful democracy. So we are very hopeful on that.

"And we have also established an airline in Mozambique, that is also now positioning itself as a very good foundation now that airlines in South Africa have problems. It will operate between Mozambique and South Africa, and within Mozambique. And Mozambique, as you know, is a very long country, from north to south is around three hours. I'm very hopeful on that."

“DRCongo is a very challenging market. A very large market, but it has been challenging for us. We are still discussing, and we hope we'll succeed to establish a hub there. We are now also talking to TAAG Angola, another big market. As you know, Emirates was there for a few years and then they withdrew. So we want to cooperate with TAAG also, we have started some preliminary, initial stage discussions. So in a nutshell, I think I would say we have a better opportunity now, for post-COVID recovery, because we are internally strong to go and form partnership with governments, with airlines. And also there is a vacuum created in many pockets in the continent, so I think we are in the right position."

South Africa is a very different market.

“South Africa is a very different market. South Africa is a big market. When you take the total market of Sub-Saharan Africa, 40% of Sub-Saharan Africa market is in South Africa. So it's a huge market.

"But in terms of serving as a hub, the geographic location is not suitable. So it is O&D, to and from South Africa. When you look at it from O&D, to and from South Africa, between European and South Africa, North America and South Africa, Asia, and so on, it's a big market. So for one to succeed in that market one has to be inside South Africa."

"But at the same time, let's also face it that it is a very competitive market, because every mega-carrier in the world already is there. European carriers, Middle East carriers, Delta in the US, and so on. So for us, the only way we can look at it as an opportunity is if we can cooperate with South African Airways. And to be honest with you, that has been a challenge so far. We are still discussing, but I would say it has not met the expected progress.”

We have made a thorough analysis of the [Boeing 737] MAX, technically, operationally, commercially, and we decided to continue with the airplane. We may be able to start flying the airplane by Jul-2021.

“We had that tragic accident. Now it is proved beyond reasonable doubt that the reason of the accident was the design defect of the airplane. Many investigations have proved that. Boeing has also signed a deferred prosecution agreement with the US government."

"So, first and foremost, for us is to settle the claims that we have with Boeing. We are almost at the final stage. It has taken us about 10 months to reach an amicable settlement. So I would say we will settle that in the month of Feb-2021. And then the next stage will be to decide on the MAX - what do we do in the future?

"We have been concerned about the airplane, but now it has been cleared by the FAA in the US, by EASA in Europe and Canada and so on. We have been also following up through our experts, technicians, engineers, and pilots. They seem to be satisfied that the modifications will fully address the flight control system that was creating a problem on the airplane."

We will not be among the first carriers to fly the airplane because we are an airline that has been severely affected by the accident

“But again, as we have always maintained, we will not be among the first carriers to fly the airplane because we are an airline that has been severely affected by the accident. So we need to take time to convince our pilots, our crew, our technicians, and also our passengers that this airplane is safe beyond any reasonable doubt. So, as a result of that, we have made a thorough analysis, technically, operationally, commercially, and we decided to continue with the airplane because we have the 737NG, about 20 of them.

"So that means we are committed to the airplane. So we have also explored our options. So diversifying to another airplane in that category is not economically feasible for us, as long as the airplane is good. So our final decision is to continue with the airplane continue with our order. But again, we have to discuss also on how we achieve that objective going forward. So I would say that we may be able to start flying the airplane by Jul-2021."

“My sources at Boeing are telling me that the airplane has so far done about 30,000 flights or something like that. And the reception by passengers has been good. There were not a significant number of passengers who declined to fly on that airplane. So we will build on that in the next few months, by June, July, then it will be [a universally accepted airplane all over the world, which will be easier for us to convince our passengers here in Ethiopia, in the region."

“It's very interesting in the last one year, we must have taken 10 new airplanes when not many airlines were taking delivery of airplanes. We took two Airbus A350 and two 787-900, and then five Bombardier Q400.”

To view the full session via the on-demand replay, register for CAPA Live here

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