February 2016 - As big African airlines are grounded in heavy losses, Ethiopian Airlines continues to spread its wings.
An aggressive expansion strategy has helped the state-owned carrier transform itself from a competent regional player to the continent’s leading carrier in just five years.
In a region where most airlines are struggling to break even as they grapple with the collapse in commodities and political instability, Ethiopian Airlines recorded a full-year profit of more than all other African carriers combined, according to data from the International Air Transport Association.
Its performance has meant it has already met most of its goals for its 15-year master plan to 2025 in the first five years.
“The growth rate in the industry is very low — the average could be less than 5 per cent — but we have been growing 20-25 per cent annually compound, in revenue and fleet [size],” said Tewolde Gebremariam, its chief executive.
In the year to June 2015, the company recorded a net profit of 3.15bn birr ($148m), compared with 2bn birr in the same period a year earlier. Based on accounts audited by the Audit Services Corporation, which inspects state-owned enterprises, its operating profit margin was 9.49 per cent, up from 2.14 per cent in 2011 and at a level comparable with the best European carriers. It has also increased its routes to 89, up from 69 in 2011.
Analysts attribute much of this success to the carrier’s benevolent owner, which does not demand dividends and, through state policies, can help keep down labour and financing costs.
The collapsing oil price has slashed fuel costs and the company has also benefited from turmoil blighting its main rivals. Kenya Airways, for instance, launched a big restructuring programme last year, including selling off several of its larger aircraft, which followed the failure of an ambitious expansion plan launched in 2011.
Kenya Airways, which is 26.7 per cent owned by Air France-KLM, has reported losses for the past three years, including $252m in the year to March 2015, the largest in Kenyan corporate history. It has blamed rising competition, terrorist attacks in Kenya and hedging losses for its woes.
South African Airways, which is dependent on government loans and guarantees, has had seven chief executives in three years amid losses that totalled $300m for the three years to March 2014. It has delayed publishing its annual report for the year to March 2015 as it awaits the finalisation of a government guarantee.
“Ethiopian Airlines [has been] allowed to get on with its own business, but at 100 per cent state ownership it can enjoy some benefits that others like Kenya Airways can’t,” says Eric Musau, a Nairobi-based analyst with Standard Investment Bank.
He adds: “They don’t have to pay a dividend and can build up capital. It’s also got much lower labour costs and higher productivity than its rivals.”
But Mr Musau cautioned that this beneficial status would inevitably change as Ethiopia’s economy modernised. “If you have a much more open economy, salaries will have to ramp up. The cost will have to go up at some point and how they manage that will be a challenge.”
Mr Gebremariam says that apart from the government allowing the airline to reinvest all its profits, it does not give any subsidies. He adds the government’s “developmental state” economic management is no different from many other nations. “The Gulf countries do it in their own way, like Dubai, Abu Dhabi and Qatar. China does it in its own way,” he says. “So we do it in our own way. It is not per se government controlled, but I would say government-led development.”
But one director of a rival airline claims Ethiopian Airlines benefits from being able to borrow at very favourable, non-commercial, rates due to its state ownership. “We just can’t compete,” he says.
Mr Gebremariam says his business model is to partly emulate that of Singapore Airlines, another state-owned carrier that has enjoyed government-led development.
“Number one, in terms of being a very successful airline in terms of financial performance. Number two, they’ve created a very strong global brand, especially with the Singapore girl, and this has been achieved in a small market base because Singapore is a city state of 5m people,” Mr Gebremariam says.
The chief executive, who assumed his role in 2011, is not relying on organic growth to boost revenues and has been forging partnerships with other airlines. It holds a 40 per cent stake in Togo-based start-up Asky Airlines and a 49 per cent stake in Air Malawi, which operates as Malawian Airlines.
Now, he wants to compete further afield with carriers in the Gulf and Europe, many of which are looking to the world’s fastest-growing region for expansion.
Gerald Khoo, an analyst at London-based Liberum Capital, predicts that airline competition across the continent will intensify in coming years as the emerging middle class looks to spend rising levels of discretionary income.
“Africa is a growth market overall in terms of GDP per capita and GDP growth. GDP per capita is reaching a critical level that is associated with air traffic growth,” he said.
The Ethiopian government is preparing for this as it starts work on an eight-year project to build a $4bn, four-runway airport on the outskirts of Addis Ababa that will be able to handle 120m passengers a year.
Financial Times
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