“From growth mode to survival mode” Ethiopian CEO
African Business by Tom Collins
If any African airline is having a reasonable pandemic, it is Ethiopian Airlines. Contrary to many of its regional and global counterparts, Ethiopian Airlines claims it has dealt with the crisis without reducing salaries or asking the government for a bailout (though reports in April suggested that some staff have been furloughed without pay).
At a time when predicted global annual losses of $84.3bn have pushed industry giants like American Airlines and Emirates to seek government support, this seems like nothing short of a miracle. In fact, it has more to do with leadership.
An employee of the airline for more than 35 years, CEO Tewolde Gebremariam says that Ethiopian Airlines’ earlier decision to switch to transporting cargo helped it to avert financial ruin by allowing the airline to maintain half of its income while 90% of its passenger fleet is currently grounded.
“The decision to diversify as much as possible was the right decision because in times of crisis like we are experiencing today, it has become a life-saving decision,” Tewolde tells African Business.
The ability to pivot into the cargo business is possible thanks to the airline’s prolonged investment in the sector, which led to the creation of Africa’s largest and most advanced cargo hub in Addis Ababa.
The decision was taken in March to shift from “growth mode to survival mode”, according to the CEO, leading to the reallocation of capital and resources away from its passenger business.
Building on its cargo fleet of 10 Boeing 777s and two Boeing 737s, Ethiopian Airlines also converted 25 passenger aircraft into cargo planes. “We have been loading cargo on passenger seats,” says Tewolde. “We have been using all means possible.”
Since the shift, Africa’s largest carrier has started shipping cargo to 70 destinations compared to just 10 at the start of the pandemic. Air freight rates spiked during the crisis and have dropped off as capacity returns, but remain about 40-50% above their usual levels. The International Air Transport Association (IATA) estimates cargo will contribute 26% of airline industry revenue in 2020, up from 12% in 2019.
The airline helped to deliver Covid-19 equipment throughout Africa and beyond in Europe, the US and South America. All three shipments of healthcare equipment donated by Chinese billionaire Jack Ma passed through Addis Ababa and were distributed to 52 African countries.
Leveraging on its capacity to fly to 75 countries, it has also generated income through repatriation flights. With Air Canada lacking landing rights in certain African countries, Ethiopian Airlines stepped in to repatriate Canadian nationals from ten countries including Guinea, Cameroon and Sudan. It has offered to repatriate citizens for a range of countries including Nigeria and South Africa.
In addition to maintaining flights, the airline’s hotel business in Addis Ababa has benefited from its designation as one of the capital’s 122 quarantine facilities, providing some support against the devastating drop in tourism and business travel.
Yet despite all these income generating activities, Tewolde estimates that Ethiopian Airlines will lose $1bn in ticket sales by the end of the first quarter in June. While cargo has provided some relief during this period, the airline will struggle if its core business remains on hold for much longer.
“It won’t be enough,” says Chiedza Madzima, head of operational risk at Fitch Solutions, a credit intelligence firm. “There is a focus to increase the share of revenue through cargo, and the longer-term trends for the industry point to that, but the bread and butter for Ethiopian Airlines is transporting people.”
Getting passenger planes back in the sky is therefore the greatest concern for Tewolde, shared by aviation executives around the world. He hopes that 50% of his fleet will be operational by the third quarter but accepts the lack of certainty.
“Forecasting the future has never been easy in normal times and it is even harder now,” he says. “Nobody can tell about the direction of the virus spread and when it is going to stop.”
Reports that China is dealing with a second wave of Covid-19 will likely continue to dampen the industry’s outlook.
Regardless of how the pandemic evolves, the concern for most businesses is how it will affect consumer spending and choices. Even if airlines open routes, there is no guarantee that customers will book tickets.
As the pandemic continues, customers are becoming more cautious about returning to the skies, according to research from the IATA, the global industry body. In April, 61% of candidates said that they would return to travel within a few months of the pandemic subsiding and 21% responded that they would wait about six months. By June, the percentage of travellers keen to board a plane had dropped to 45% and a further 36% said they would wait six months.
How this will affect each individual airline depends on its positioning in the market, specifically the level of exposure to international, regional and domestic flights. Most pundits expect short-haul flights to return sooner than long-haul, and for customers to be less inclined to leave their region.
While Ethiopian Airlines operates domestic and regional flights, its growth strategy is centred on connecting Africa to the world and it may suffer if demand from tourists and business travellers drops. It is also possible that the pandemic will skew the rationale behind its hub aviation model.
As with Emirates and Turkish Airlines, Tewolde’s strategy is based on moving passengers through Addis Ababa, offering two connecting flights at a cheaper price than one direct journey. Customers may now find the idea of transiting in a busy airport less appealing, choosing instead to fly direct as they prioritise health over costs.
“We expect a big disruption to business models in the airline industry,” says Tewolde. “I don’t know if the hub model will go away, but I don’t believe so.”
Although the construction of a new mega-airport on the outskirts of Addis Ababa is little more than an idea at this stage, the plans will move ahead regardless of Covid-19, he says.
Meanwhile, the airline will finish the expansion of the current airport, Bole International, and adapt it to meet Covid-19 safety recommendations. Banking on continuing demand after the pandemic, Ethiopian Airlines must also tread carefully as competition grows in the East Africa region.
Qatar Airways purchased a 60% stake in Rwanda’s $1.3bn Bugesera airport project, which it hopes to build into a leading regional hub. The Doha-based company then purchased a 49% stake in Rwanda’s national carrier RwandAir, which is beginning to flex its muscles in the region. Spurred on by Qatar’s gas-rich government and the pro-business regime in Kigali, the carrier may yet offer serious competition.
Uganda Airlines is also seeking a revival, buoyed by the distant promise of oil money.
“We are concerned,” says Tewolde.“ But we are ready to compete, competition makes us stronger and more efficient,” he adds. It is this attitude that has propelled Tewolde to the top of the industry since assuming the role in 2011. Working 15 hours a day during what he says is a “difficult period”, his passion for the industry is evident.
When asked how he intends to relax after the pandemic, bucking the trend of taking a long holiday, he replies: “reading books about aviation management.”
Source African Business