Reporter, Ethiopia
October 17, 2009
Ethiopian Airlines is among the best airlines in Africa. The national flag carrier surprised everyone in the African aviation industry when it signed in July 2009 agreements with Boeing and Airbus for the purchase of five B777s and 12 A350 XWBs with a total value of 4.3 billion dollars at least prices. Earlier this year Ethiopian placed firm orders for eight Bombardier Q400 valued at 240 million dollars. In August 2009, the airline again took the aviation industry by surprise when it declared a net profit of 1.3 billion birr, a sharp increase of 165 percent over the profit for the 2008-2009 fiscal year, at a turbulent time. The airline now has 35 aircraft on its order book. It serves 55 international destinations, 34 of which are in Africa. The airline has a 25 percent stake in ASKY Airline, a newly established private airline in West Africa.
Kaleyesus Bekele of The Reporter exclusively spoke to Ethiopian CEO Girma Wake about the airlines’ performance, challenges and other related issues.
Girma Wake has over 40 years of airline management experience in various capacities at the head offices, regional and area offices of three organizations.
Wake has served Ethiopian in a variety of management positions for 29 years. He has worked in various managerial positions including manager space control, area manager Ghana, Tanzania and Germany, as well as director, marketing operations and cargo marketing.
Wake joined Gulf Air in 1993. He was a member of the senior management team of Gulf Air responsible for managing cargo business development in the U.A.E. While at Gulf Air, Wake also worked as head of Gulf Air’s cargo division beginning 2001.
He briefly left Gulf Air to take a position with DHL as regional general freight manager from 1996 to 1998. He rejoined Ethiopian as CEO on 1st February, 2004.
Excerpts:
You surprised everyone in the aviation industry by ordering 17 jetliners worth a total of 4.3 billion dollars. This is the largest order in the history of the airline. It is surprising because you made the order at a time when the global aviation industry is hard hit by the global economic downturn. How did you make it?
Ethiopian is one of the fastest growing airline in Africa. We are growing at a rate of 20 percent. If you look at our passenger traffic, it was 2.5 million in the 2007-2008 fiscal year. This has increased to 2.8 million in the 2008-2009 fiscal year that ended last June. Available seat per km (mil) increased from 12,343 to 13,400. Available tone per km (mil) increased from 2,376 to 2,745. Our passenger traffic is forecasted to grow to three million by 2010. The recent aircraft order is in line with the airlines’ remarkable growth.
Why did you chose the B777-900LR and A350 XWB aircraft?
As you know we were the first African carrier to order the B787 aircraft in February 2005. Delivery date was due 2008-2010. The first two Dreamliners were supposed to be delivered to us in September 2008. But this could not be realized until 2010. So we opted to place an order for five B777 to be delivered by 2010. So, even if the B787 is not ready by next year we will have the B777 aircraft. The B777 is a big twin engine aircraft. It is a 348-seater aircraft which can directly fly from Addis Ababa to Washington or from Addis Ababa to Beijing with full load. The B767 aircraft we have has 230 to 240 seats. It can not fly from Ethiopia to China with full load capacity. We need an aircraft which has more seats.
The A350 is a modern aircraft which has the largest fuselage and can provide better passenger comfort. It uses less fuel, though it can not make a non-stop flight as long as the B777 does.
Ethiopian has never ordered an Airbus aircraft in its 63-year history. You evaluated the A330 previously. You also evaluated the A350 before you ordered the Dreamliners. Why did you decide to buy Airbus aircraft now?
It is true that we evaluated the A330 previously. But our engineers said that its fuel consumption was high. Then we evaluated the A350. Our engineers pointed out to Airbus officials several defects in the design of the A350. They redesigned the A350 not only because of our comments but also because they also have agreed with what ours and other engineers said. They (executives of Airbus) came back with a better design, the A350 XWB. As I said, it is a modern aircraft which uses less fuel. That is why we decided to buy it now.
Your agreement with Boeing for the purchase of the five B777 aircraft is a definitive agreement while the agreement you signed with Airbus for the purchase of the 12 A350 XWB is only a memorandum of understanding. Why is that? When are you going to confirm your Airbus order?
The B777 is an aircraft which had proven its worth over the past ten plus years. These aircraft would be delivered to us by 2010, so the agreement had to be definitive. However, the A350 is still in the drawing board. We have not tested the performance of the aircraft and are relying on what Airbus engineers, are telling us. After consulting with our engineers we asked Airbus officials a number of questions about the aircraft. And they told us that they would be back with the answers and explanations after two months. Then we would conclude the negotiations and buy the aircraft if they satisfy our demand.
Boeing has monopolized Ethiopian for the past four decades. The airline has been operating Boeing aircraft for its long-range service. Your cockpit crew and aircraft technicians are familiar with Boeing aircraft. You have Boeing aircraft simulators and the maintenance facility is equipped with Boeing accessories. When you buy Airbus you have to train your pilots and technicians, you will also have to buy Airbus simulators and numerous other accessories. And all these will entail considerable cost for the airline. What did Airbus offer to share the cost?
This is confidential between the two companies. Of course, we will train our pilots, technicians and engineers. We will also build our capacity, which would enable us to undertake day-to-day maintenance service. We will not conduct engine overhaul maintenance for the A350. We will outsource that. We will not conduct the heavy maintenance for the Dreamliners, too. But eventually we will build our capacity.
Almost all of your Boeing aircraft ( B767, 757 and 737), with the exception of the Dreamliners, are powered by the Pratt and Whitney engines. Why did you choose the GE engines for the B777 and Trent engines for the A350 XWB?
These two aircraft have peculiar characteristics. It is only GE engines which are compatible with the B777 aircraft. Likewise, it is only the Trent engine which can power the A350 XWB.
The delay with the Dreamliners’ delivery is costing you dearly because you are leasing other aircraft and this entails cost. Many airlines have cancelled their orders. Don’t you plan to do the same? Will Boeing compensate you for the cost you are incurring because of the delay?
Yes, we are incurring cost because of the delay. As you said we were expecting the first delivery in September 2008. By now we would have at least five Dreamliners. We do not have them and we will not have them before 2010. And our passenger traffic is growing year to year. To meet the growing demand we need additional aircraft. The cost is not only the aircraft lease. We do not get the type of aircraft we need. We do not often find new aircraft that satisfy our demand. At times we are forced to lease old generation aircraft which are not fuel efficient. All these factors entail a huge cost for us.
However, we will not cancel our order. We know that the Dreamliner will be a good aircraft when it comes out. No doubt about that. We will wait. We are an old customer of Boeing. They will compensate us for the cost we incurred. That is stipulated in our purchase agreement. They will pay the compensation when they deliver the aircraft. I do not want to reveal the details.
Early this year you placed eight firm orders for Q400 Bombardier aircraft valued at 240 million dollars to be delivered by 2010. Presently you have an order for 17 aircraft with a total value of 4.3 billion dollars at least prices. People in the industry are wondering where the source of financing is. Where are you getting the fund? Have you secured a loan to finance the purchase?
If you ask me if we have this amount of cash in our accounts, my answer is no we do not. But we will secure a loan guarantee from the US EX-IM Bank and the European Credit Agency (ECA). Then the commercial banks would offer us a loan. We do not have a problem with that. We have a commendable credit history. We have been a reliable customer of EX-IM for the past many years and we have never failed them. We have been closely working with many commercial banks and we have an excellent credit history. We have already received a response from EX-Im. I can assure you that we will secure a loan guarantee from EX-Im and ECA. A number of commercial banks have already shown interest to give us a loan. We will see their offers and we will negotiate. Since Ethiopian is a very profitable airline we have never had a problem in finding a loan-financed purchase. Of all the times, we now have a strong financial position in an unprecedented manner. When you have a strong financial position, securing a loan would not be a problem. Considering our fast growing market, we are confident that we can service the loans with the revenue we make from the new aircraft. By the way, we have paid an upfront payment for placement of the orders both for Boeing and Airbus.
Tell us the amount of the upfront payment you made for each company.
It is confidential.
Can you tell us the names of the banks which have shown interest in financing the purchase of the A350 and B777?
No, I can not tell you that at this moment. Several banks are communicating with us. We will make it public when we finalize the negotiations.
I was informed that the financiers of your Dreamlinners purchase, DVB and ING, recentlly pulled out of the financing deal because of the global credit crunch. Have you approached other financiers?
DVB and ING pulled out of the financing deal as the loan agreement expired before the deliveries of the Dreamliners. As we all know, Boeing had repeatedly postponed the deliveries of the new aircraft. Because of the extended delay of the delivery of the B787s, the loan agreements with the banks expired.
ING completely withdrew from financing aviation businesses in the wake of the economic crisis.
DVB, however, is still willing to renegotiate with the management of Ethiopian on financing options. But it is demanding a higher interest rate and exposure fee, which is at least double of what has been agreed initially. Because of the global credit crunch, it raised interest rates. But it is still interested in financing the purchase of the B787s. It is communicating with us.
Ethiopian has reimbursed more than 13 million dollars to the financiers. So far it has paid 30 million dollars for the new aircraft. It is in a good financial position to finance the Dreamliners’ purchase. There are several other financing options. We just want to wait and see the different financing options submitted by commercial banks.
At the moment Ethiopian is financing the Dreamliners’ purchase from its own coffer. We are also holding talks with EX-Im, Boeing and other financiers. EX-IM is still committed to assist Ethiopian.
Tell us about your company’s financial performance in the 2008-2009 fiscal year.
The net profit Ethiopian made in the 2008-2009 fiscal year increased by 165 percent to a record high of 1.34 billion birr.
In the previous fiscal year the airline earned a net profit of 508 million birr. This year’s net profit and operating revenue are both a record high in the history of the airline.
Our operating revenue increased by 32.8 percent to 12.2 billion birr. In the 2007-2008 fiscal year the airline made an operating revenue of 9.1 billion birr. The company’s operating expense also increased 28.1 percent to 11.2 billion birr. The high fuel cost registered at the beginning of the fiscal year, particularly in August and September 2008, contributed to the surge in operating expense. At that time, the price of a barrel of oil was about 140 dollars.
In the year under review Ethiopian transported 2.8 million passengers registering an increase of 12.3 percent. Last year the airline transported 2.5 million passengers. The company hauled 101,000 tones of cargo, up by 12.3 percent. We now have seven freighter aircraft, the largest cargo fleet in Africa. With the addition of one freighter [soon] the cargo fleet would be eight [the freighter has already arrived]. No other African airline has a cargo fleet and a cargo network like Ethiopian does.
Our operating profit increased from 428 million birr to 974 million birr. This is where we focus. The net profit includes cash collected from the sale of an old aircraft, bank interest and cash earned from the devaluation of local currency [birr]. The operating profit is more important to us. It clearly shows our profitability.
Are you happy with your financial performance? What are the challenges you are facing?
I am more than happy. The overall performance of the airline is noteworthy and rewarding considering the numerous challenges we have had to cope with during the year. The major ones are cut-throat competition in the industry, the global economic crisis, escalating operational and capital cost led by the less than predictable and fluid gyration of fuel prices and the shrinking trends of the market environment.
How are you dealing with the brain drain problem?
Brain drain is a global problem, it is not peculiar to Ethiopian. Carriers in the Middle East and Asia are making huge investments and acquiring new fleet. As a result they are hiring more pilots and technicians from different regions. They are luring away the qualified pilots and technicians from Africa with a better payment [package]. Ethiopian pilots and technicians are the best in Africa. First they started to poach our pilots, when we made salary adjustments they started to take our technicians. Our pilots now prefer to stay with Ethiopian. This year only one pilot quit Ethiopian. This shows that the pilots are comfortable. We made a large salary adjustment to our technicians last year and the number of technicians leaving the airline has significantly declined. However, we can not stop it completely. In July 2009 six technicians left the airline. Last year we lost more than 70 technicians. We hire more than 200 technicians per year. We try our best to retain our staff. But we can not refuse releases for those who still want leave. Even if we pay a salary equivalent to what the Middle East carriers offer, there is one thing we can’t do. For instance, in the UAE income tax is exempted. We can’t do that here. It is the government’s policy, we can’t change that. We try to make our staff happy. At the same time we are expanding our aviation academy so as to admit and train more professionals.
Tell us about your expansion plans.
As you know we have a strong network in Africa We have more than 30 destinations in the continent. In the coming years, we will increase our strong presence in Africa. We will add new destinations and increase the frequencies of the existing routes. We recently launched new services to Abuja, Ouagadougou and Lubumbashi. We have a plan to start new services to Conakry, Maputo and Mombassa. We are also planning to open new routes to Canada and Malaysia. This year we started flying to Kuwait. All the new destinations are fruitful. We also have a plan to increase our frequencies to China.
Most African countries are privatizing their airlines. Ethiopian is 100 percent owned by the Ethiopian government. Don’t you have a plan to sell stake in your airline to a foreign company?
I do not see the problem with state ownership. Ethiopian is a successful, fast growing airline under state ownership. But this is a matter of policy. It is the government which decides to either retain it under its ownership or to partially privatize it. It is not our mandate to decide on that. But if you look at the global trend in the aviation industry eventually selling a stake seems inevitable.
