Ethiopian Airlines, Group CEO on the future of African Aviation

Transcript

Peter Harbison:Welcome very warmly to CAPA Live, Tewolde GebreMariam, the CEO of Ethiopian Airlines. Great to have you with us, Tewolde, from Addis Ababa.

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

Peter Harbison:Right. Well, it's been a long time, and yes, it is. A lot of things have happened in the meantime—not all of them good. Let's—but hopefully we can end on some positive notes with this. Tell me, tell me, Tawali, to start with, from from your perspective. Tewolde, you're sitting in the north of Africa, a 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, you have been following the industry for many years now. So the industry in Africa, the aviation industry in Africa, was not in a good shape even before COVID You know, this is an industry which has been losing money, especially the airline industry. Losing money for, I would say, what, six seven years in a row. So airlines were not in their best position when they caught this global pandemic crisis. So it is it is an industry which was caught in a very bad shape, and then the even the COVID has affected African airline industry. Much more and much, I mean, worse than the rest of the airline industry in 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, like 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 airlines operations in the continent. The other reason is, on the other hand, as you know, the human cost 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 would not be able to 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. The second one is African countries— I mean, 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 partly hit by the pandemic. So it was very difficult for almost all African countries. Airlines like, you know, it's very unfortunate that we lost SAA, a very big airline, a very good airline, Air Mauritius and so on. And the others like Kenya Airways is also 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. So I would say it has been affected. Very badly. So 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 As a hub between the rest of Africa and the rest of the world, really, basically anywhere to the north in Europe or Asia. Does— 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 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 infrastructure 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 passenger fleet was grounded, I think we have done very well. I mean, a very creative idea that the cargo business was booming for 2 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— I mean, to save lives in Europe, America, Africa, South America, and so on. So realizing this, we made a very good decision, quick decision, to build as much capacity as possible on our cargo business. We already have 12 airplanes. 10 777 dedicated freighters and 2 737 freighters. But we have also makeshift these passenger airplanes to cargo by removing the seats. We did about 25 airplanes at that time. So that was a heavy— I mean, a significant capacity increase on our cargo at 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. We have 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 employee layoff or any salary reduction. So it is an amazing performance, I would say. But this is because you know 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 like 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, are you saying that you've actually been cash positive?

Tewolde GebreMariam:Yes, we are cash positive.

Peter Harbison:Wow, that's remarkable. Absolutely. For essentially a long-haul international carrier. Let's talk about the Chinese market, which was, which was a very, very big one for you before, of course. And 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. Because, as you said, we have been in China since 1973, so close to half a century, and we are among the very senior operators in China. We have also again positioned ourselves in the right strategic position when China starts to invest in Africa heavily, especially in infrastructure. So That has created a long, I mean, a very significant passenger and cargo traffic between China and Africa. So we are right in the, 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 the entire passenger business. 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 cargo side, we are still very big, and it is a very, very significant market for us. You know, 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, Zhengzhou, and Wuhan now. We started also Wuhan freighters and Shenzhen. So we are still 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.

Peter Harbison:That's remarkable. And you're talking very large frequencies there. What, probably 40 services a week? Something like that? Close to 50. 50, yeah. That's remarkable. And so 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 777s?

Tewolde GebreMariam:Yeah, many industrial products, industrial goods, machineries, medical supplies, medical equipment, mobile phones, batteries for mobile phones, and electronic goods, of course, and IT equipment. And so on, and also from Europe, European exports to China, and from China to Europe also Chinese exports. So it is it's a triangular operation: Africa, Europe, China, and Africa.

Peter Harbison:So you're you're out of out of Addis. You're carrying freight fresh food up to Europe.

Tewolde GebreMariam:Yeah, flower about 40 flights a week. From Addis to Brussels and Lege and Maastricht, three hubs. And then from Lege, Brussels, and Maastricht, 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, Colombia, and so on. And 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.

Peter Harbison:This really is a remarkable success story amid all the gloom. Obviously, and very, 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 ACEFTA. And 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 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, and 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 its 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. So when you compare that with Europe, and I want to— I always compare the African Union with the European Union because they are The same age institutions—they were started late 50s, early 60s. 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. Yeah. But here it's only one six sixteen. 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 the intra-Africa trade is very low. The SEFTA is going to change that, but a huge and daunting challenge is ahead of us because the non-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 as 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:I mean, that all sounds good for the for the future, but in in the short term right now, it's it's really just establishing and creating foundations. Yeah. Will will it be? 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 intra-African trade.

Tewolde GebreMariam:Yes, that's what we think, for 2 reasons. Number one, post-COVID, you know, 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 the 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, you know, 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 CFTA 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, right. Yeah, I mean, it's— 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 4 or 5 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, what's— 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 a 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 establish, I mean, 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. So in the absence of that big bang, we have been trying, you know, to establish hubs here and there. Some of them are successful, like Aska 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 Aska in West Africa, because Malawi—I mean Zambia—is centrally located south for Southern Africa. Also a bigger economy, very successful economy, and and also you know relatively successful democracy. So we 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. So it will operate between Mozambique and South Africa and within Mozambique. And Mozambique, as you know, is a very long country. So from one— from north to south is around 3 hours. So that is— I'm very hopeful on that. DRC is a very challenging market, a very large market, but 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 TAG Angola, another big market. As you know, Emirates was there for a few years and then they withdrew. So we want to cooperate with TAG also. We have started some preliminary, I mean, 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's an increase, has been an increasing gap because of South South African Airways' steep decline over the years. Is that market of interest to you?

Tewolde GebreMariam:You know, 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. So when you look at it from O&D to and from South Africa, between Europe and South Africa, North America, 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, very competitive market because every mega carrier in the world 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 made 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 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. So 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 on 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 February. And then the next stage will be to decide on the MAX. What, as you said, as you asked 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 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 address— will fully address the flight control system That was creating a problem on the airplane. But again, as we have always maintained, we will not be among the first carriers to 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. 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, to 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 summer.

Peter Harbison:So when you say summer, you mean what, June, July?

Tewolde GebreMariam:July, I would say.

Peter Harbison:July. Okay. Well, that's a fairly— 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 hub operator as well.

Tewolde GebreMariam: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 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 and in the region. Right, right.

Peter Harbison:So you're firmly a Boeing customer— 787s, 777s, 737s— and that's the way things will stay. Obviously, you've had some very fruitful discussions with Boeing in the meantime too.

Tewolde GebreMariam:Oh yes, we have passed through a very challenging time in our relationship, but now I think we are in better shape. You know, Peter, 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.

Peter Harbison:Really?

Tewolde GebreMariam:We took 2 Airbus A350 and 2 787-900, 4, and then 6, no, 5 Q400. 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 CAPA Live 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— on behalf of the 17,000 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, Tewolde, and it's a great pleasure working with you too. Thank you for the kind words. Good night. Have a good day. Thank you, you too.

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