Ethiopian Airlines, Group CEO on the future of African Aviation

Transcript

Peter Harbison:

(silence)

Peter Harbison:

Welcome very warmly to CAPAlive, to Tewolde Gebremariam, the CEO of Ethiopian Airlines. Great to have you with us Tewolde from Addis Ababa. Welcome.

Tewolde Gebremariam:

Peter, thank you very much. It's a pleasure to discuss with you, and I thank you for giving me the opportunity.

Peter Harbison:

Well, it's been a long time and a lot of things have happened in the meantime. Not all of them good. But hopefully we can end on some positive notes with this. Tell me, Tewolde, to start with, from your perspective sitting in the North of Africa hub, really a major hub between most of Africa and the rest of the world, really, but certainly Europe and Asia, what's the overall situation from an airline perspective in Africa at the moment? In terms of the way the Coronavirus has affected you.

Tewolde Gebremariam:

Thank you, Peter. I think before, as you very well know, we have been following the industry for many years now. So the industry in Africa, the [inaudible 00:02:05] in Africa was not in a 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 is an industry which was caught in a very bad shape. Then even 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.

Tewolde Gebremariam:

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 March and September. 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 able to support the airline's operations in the continent. The other reason is, on the other hand, as you know, the amount of coronavirus in Africa is not that bad. But the fear, the fear 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 of 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 moderate.

Tewolde Gebremariam:

The other one is African airlines did not have the opportunity to look for support from their government in terms of bailout money, because the African governments and African economies were badly hit by the pandemic. So [inaudible 00:05:03] for almost all African countries, airlines like... very unfortunate that we lost [SJ 00:05:11], a very big airline, a very good airline. Air Mauritius and so on. The others like [inaudible 00:05:20] has also downsized significantly. So the third reason is also there is no capital market in Africa, so they cannot sell bonds. They cannot borrow money from banks or from financial institutions like Europe and America. I would say it has hit Africa bad, very bad. Severely damaged.

Peter Harbison:

Now Ethiopian Airlines, you talked about how the other airlines have been unprofitable for several years, or the industry overall. South African Airways is a good example of that, I guess. But Ethiopian Airlines has been something of a standout, or very much a standout by being profitable for many years now. This must really be a much, much bigger setback to you as a hub between the rest of Africa and the rest of the world, really. Basically anywhere to the North in Europe or Asia. I mean, you're still obviously geographically in a strong position. What's been keeping you going and how do you see... we'll talk about that first, but then beyond that, how do you see yourself being positioned when things do start to improve, as they inevitably will? But in the meantime, how are you keeping the cash flowing?

Tewolde Gebremariam:

I think, as you said Peter, rightly, we have been doing very well in the last one decade in our vision 2025. So a 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 human resource development. So that has put us in a better foundation, in 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 March when everybody was panicking about the pandemic and when the entire [inaudible 00:07:49] crowded, I think we have done very well. A very creative idea that the cargo business was booming, for two reasons. One, available the 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.

Tewolde Gebremariam:

So realizing this, we made a very good decision, a quick decision to build as much capacity as possible on our cargo business. We already have 12 airplanes, [inaudible 00:08:36] seven dedicated freighters and 27, 37 freighters. But we have also makeshift this passenger airplanes to cargo by removing the seats. We did about 25 airplanes [inaudible 00:08:53], so that was a significant capacity increase on our cargo at the right time. So the yields were very good.

PART 1 OF 4 ENDS [00:09:04]

Tewolde Gebremariam:

... the right Time. So the yields were very good. Demand was very high. So we took advantage of that opportunity at the right time. So we've shown agility, speed of decision-making, resilience that has helped us. And still helping us thus far. So to answer your question, 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.

Peter Harbison:

I mean, that sounds self-congratulatory, but I think you're actually being modest because you really have done a remarkable job over the years. Are you saying, just to be clear on this, that you've actually been cash positive?

Tewolde Gebremariam:

Yes, we are cash positive.

Peter Harbison:

Wow. That's remarkable. For essentially a long haul international carrier.

Tewolde Gebremariam:

Yeah.

Peter Harbison:

Let's talk about the Chinese market, which was a very, very big one for you before, of course. You've been in China for longer than almost anybody, certainly anybody in Africa. How's that market going? Obviously they have very significant border controls from a passenger point of view. How are you surviving in that market?

Tewolde Gebremariam:

Very interesting question, Peter, because as you said 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.

Tewolde Gebremariam:

Unfortunately, the COVID situation has devastated the passenger business. So I would say we have almost lost entire passenger [inaudible 00:11:42] between China and Africa. Because right now we are operating once a week 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 cardboard 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, [inaudible 00:12:24] and Wuhan now, where we start [inaudible 00:12:29] Wuhan, freighters, 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.

Peter Harbison:

That's remarkable. You're talking very large frequencies there. Probably 40 aircraft, 40 services a week? Something like that?

Tewolde Gebremariam:

Close to 50.

Peter Harbison:

50, yeah. Yeah. That's remarkable. What's being carried on these services? This is presumably mostly out of China, but what else are you carrying on the freighters and the converted 777?

Tewolde Gebremariam:

Many industrial products, industrial goods, machineries, medical supplies, medical equipment, mobile phones, batteries for mobile phones, and electronic goods of course. IT equipments 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.

Peter Harbison:

So out of [ATIS 00:13:49], you're carrying freight fresh food up to Europe?

Tewolde Gebremariam:

[crosstalk 00:13:54] about 40 flights a week from ATIS, three hubs. Then from [inaudible 00:14:07] the airplanes 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 ATIS. So it's a triangular operation.

Peter Harbison:

It really is a remarkable success story in the middle of the gloom. It's obviously very creative, constantly on your toes. In this process, Tewolde, is the Africa Continental Free Trade Association, Free Trade Agreement, is that being helpful? Is that something functional, or is it really just a wall poster?

Tewolde Gebremariam:

Peter, as you know, we are one of the drivers of the SEFDA. I don't know if you have heard in the news, in the media, that on January 1st, we partnered with the African Union to start the first free trade goods moving from [inaudible 00:15:33], 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.

Tewolde Gebremariam:

So 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 late fifties, early sixties. So the European Union has achieved a lot as compared to the African Union, which is very lagging behind. So in Europe now, 60% of trade is within Europe, six-zero. But here it's only one-six, 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, and so on. Egypt and so on. But then inter-Africa trade is very low. So the SEFDA is going to change that. But huge and daunting challenges ahead of us, because then 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. The Japan-

PART 2 OF 4 ENDS [00:18:04]

Tewolde Gebremariam:

... 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.

Peter Harbison:

That all sounds good, for the future. But in the short term, right now, it's really just establishing and creating the foundations.

Tewolde Gebremariam:

Just started.

Peter Harbison:

Do you think, because of all the setbacks, because of COVID, that that FTA will be accelerated? I mean, it will be in everybody's interest, presumably, to have an acceleration of in traffic and trade.

Tewolde Gebremariam:

Yes. That's we think. 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 within themselves and among their peers in Africa. So that is a big incentive. The second incentive is I think, now that the US administration has changed. We'll see, but before, globalization was having a big setback, and a lot of barriers, a lot of nationalism, a lot of protection. 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 AfCFTA. 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.

Peter Harbison:

Right? Yeah. I guess it's easy to think there have been so many agreements in Africa which have been planned to make a change over the last four or five decades, but they've really gone nowhere. It does sound as if this one has some legs, particularly. Just talking about Ethiopian in particular, in Africa, are you progressing with airline partnerships? You've been looking at investing in other airlines, and really establishing something of a network. How is that proceeding now?

Tewolde Gebremariam:

We have mixed feeling, Peter, on this. To make real progress in terms of collaboration, consolidation, and also creating the critical minimum volume to find economies of scale, it would have been much better if the existing airlines can work together, can cooperate, can stablish meaningful partnership. 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.

Tewolde Gebremariam:

So in the absence of that big bang we have been trying to establish hubs here and there. Some of them are successful like ASCA in West Africa. Some of them are not that much 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 ASCA in West Africa, 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 in 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.

Tewolde Gebremariam:

DRC 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, 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.

Peter Harbison:

That sounds very interesting. Obviously there has been an increasing gap because of South African Airways steep decline over the years. Is that market of interest to you?

Tewolde Gebremariam:

South Africa, Peter, 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 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.

Peter Harbison:

Yeah. That sounds like a very nice understatement of anything to do with South African Airways. Tewolde, let's conclude on the very difficult topic of the 737 Max. We all know the troubles you've been through with that. You still have 25 orders of the 737 Max. How do you see the future? Are you going to be operating that in the near future? Are you going to take all those aircraft on? How are you talking to Boeing about this?

Tewolde Gebremariam:

Yes. First, Peter, yeah, 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-

PART 3 OF 4 ENDS [00:27:04]

Tewolde Gebremariam:

So first and foremost for us is to settle the claims that we have with Boeing. We are almost on the final stage. It has taken us about 10 months to reach at an amicable settlement. So I would say we will set them that in the month of February. And then the next stage will be to decide on the max. As you ask me, what do we do in the future? We have been concerned on the airplane, but now it has been cleared by the FAA in the US by ESI in Europe and Canada and so on. We have been also following apps 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.

Tewolde Gebremariam:

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 as you know, about 20 of them. So that means we are committed to the airplane. So we have also explored our possibilities, 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 is 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 summer. Next summer.

Peter Harbison:

So when you say summer, you mean what? June? July?

Tewolde Gebremariam:

July, I would say.

Peter Harbison:

July. Okay. Well, time is passing very quickly. That's fairly close. Do you think there'll be passenger acceptance? I mean, not just in Ethiopia, obviously you're a Harvey operator as well.

Tewolde Gebremariam:

My sources at Boeing are petting me that the airplane has so far done about 30,000 flights or something like that. And the reception of passengers has been good. There were not 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 universally accepted airplane all over the world, which will be easier for us to convince our passengers here in Ethiopia, in the region.

Peter Harbison:

Right, right. So you're firmly a Boeing customer 78's, 777's, 737's. And that's the way things will stay. Obviously you've had some very fruitful discussions with Boeing in the meantime, too.

Tewolde Gebremariam:

Yes, we are passed through very challenging time in our relationship, but now I think we are in a better shape. Peter, it's very interesting in the last one year, we must have taken 10 new airplanes when not many airlines were taking very view of airplanes. We took two Airbus A350 and two 787-9004, and then six, no five Bombardier Q400.

Peter Harbison:

Tewolde It's an absolute joy talking to you again after all this time. And I must say, I'm delighted to hear that you've been doing so well in such incredibly trying times. Congratulations on that. And certainly look forward to talking to you perhaps in a couple of months on CAPALive and just see how things are panning out this year. But thank you so much for being with us and the best of luck to you.

Tewolde Gebremariam:

Thank you, Peter. Let me also take this opportunity to thank you for your support. You have been supporting us in all aspects, all the time. And I really appreciate it on behalf of the 70,000 employees at Ethiopian Airlines, I thank you very much for your support.

Peter Harbison:

It's our pleasure.

Tewolde Gebremariam:

And looking forward to working together.

Peter Harbison:

Thank you very much to Ali and it's a great pleasure working with you too. Thank you for the kind words. Good night.

Tewolde Gebremariam:

Have a good day. Thank you.

Peter Harbison:

Thank you. You too.

PART 4 OF 4 ENDS [00:32:24]

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