Business Day - June 2018
Ethiopian Airlines is not breaking new ground in its strategy to become the African carrier of choice. South African Airways (SAA) has been there before. The big Africa push began in the late 1990s when SAA started spending lavishly to replace old aircraft and stepped up capacity and routes to African destinations. It even sold off a stake in the airline to Swissair, to give it access to Swissair’s then-extensive network within Africa and Europe.
The take-off, however, did not go according to plan. For example, there were massive hedging contract losses in 2002-03 and Swissair went bust not long after the SAA deal, so the South Africans had to buy back the stake. And even though there was little competition in the African marketplace, it proved tough for SAA. Many of its African ventures were unsuccessful.
Driving the strategy was an imported American team including CEO Coleman Andrews. They saw an aviation landscape that was full of opportunity amid little competition.
However, they did not factor in the difficulties of doing business in Africa, where many plans are sabotaged by political agendas or the antipathy from smaller state-owned carriers towards SA, which dominated the local aviation sector at the time, and the suspicions in many quarters about SA’s perceived hegemonic agenda in Africa.
They included the demise of regional airline Alliance Air, a joint venture between the governments of SA, Uganda and Tanzania. SAA exited its stake in loss-making Air Tanzania after a few years when it realised no value from the deal.
It lost out on a bid for a stake in Uganda Airlines, and a codeshare arrangement with Nigeria for SAA to use the US routes of the defunct Nigerian national carrier ended in acrimony. It also lost the bid to be a strategic partner to a new Nigerian flag carrier to Virgin Atlantic.
Andrews left SAA with a hefty payout that was particularly controversial, given that SAA had begun the slippery slide to where it is now.
In comparison to SAA, Ethiopian Airlines has been a plodder. It has built its business slowly but carefully. As a state-owned enterprise, it has fought hard to keep the government out of operational issues. I once asked group CEO Tewolde Gebremariam how they did this.
"With difficulty," he conceded. However, he said the politicians eventually understood that management independence was critical for success.
After more than 70 years of steadily building the carrier, Ethiopian Airlines has moved into top gear, swiftly building strategic alliances and entering into equity partnerships and management deals across the continent.
Strategic geographical advantage has been a key driver. In Malawi, the airline has a minority stake in Air Malawi, now called Malawian Airlines, and can use the country as a base for Southern Africa operations.
It has an agreement with the government in Zambia to relaunch the country’s defunct national carrier, which ceased operations two decades ago, taking a 45% equity stake in the revived Zambia Airways. It also has an equity stake in the Democratic Republic of Congo’s state-owned Congo Airways.
In Equatorial Guinea and Guinea (in the capital Conakry), it has technical agreements with existing airlines, and in Mozambique it has secured a licence in the recent liberalisation of the aviation sector. It has a 40% stake in ASKY Airlines, which is run out of Togo, which, although little known here, has an extensive network in the central and western regions.
Ethiopia’s appetite for African expansion has allowed several countries to dust off their dreams of owning a national carrier, with the old long buried in a mire of debt and inefficiency.
Chad is among them. Another is Ghana, which has had two failed attempts at a national airline — Ghana Airways went under in 2004 and its successor, Ghana International Airlines, saw its end six years later.
Ethiopia has expressed interest in the Nigerian government’s plans for a new national airline. Nigeria’s record to date in this regard is patchy. Its first national carrier, Nigeria Airways, had some early success but crumbled in 2003 under a mountain of debt. In 2004, it launched a second national carrier, Virgin Nigeria.
This was a partnership between local institutional investors and Virgin Atlantic, which ended acrimoniously in 2010.
Ethiopian Airlines is now Africa’s biggest, serving nearly 60 destinations in Africa and more than 100 cities on five continents. Gebremariam says the airline’s expansion drive is partly to counter the threat posed to African airlines from foreign carriers, which still account for up to 80% of passenger traffic to and from Africa. Locally, the competition has been floundering.
Like SAA, Kenya Airways suffered from poor management, huge debts and political interference. An ambitious African expansion strategy undertaken a few years ago was a catalyst for many problems experienced over the past few years. The airline, which has Air France-KLM as a stakeholder, is not enjoying the lavish bail-outs SAA has become used to, but it has implemented a new turnaround debt-for-equity strategy involving 10 local banks.
Ironically, Kenya Airways’ CEO recently mooted a tie-up with SAA to give both airlines a shot at taking on Ethiopian. The South African government’s resistance to privatisation, coupled with Kenyans’ suspicions of SA’s corporate aggression, makes this an unlikely solution.
However, both airlines could learn a thing or two from Ethiopian Airlines. Despite its ambitious strategies, the airline has cost containment as a major priority. In its 2016-17 financial year it generated $2.7bn in revenue, up more than 11% from the previous year. Passenger numbers rose by more than 18%. A thriving cargo business and technical training businesses add to a growing bottom line. It opened 12 new routes in 2017 and is expecting to do at least that many in 2018.
The history of aviation in Africa, however, would suggest that its new strategy for the continent is risky. It is in partnerships with countries that have an appetite for costly vanity and political projects. Most have tried, and failed, to keep a carrier in the air. It could be the victim of political agendas which, as a minority shareholder in its partners, it cannot control.
However, by all accounts, Gebremariam believes the best way to build a thriving framework of hubs and networks is with the support of other African airlines, not in competition with them. Unless Africans get more involved in their own aviation sector, there will not be an African carrier of note within the next decade, he predicts.
Better air links and cheaper flights are a critical underpinning of the African Continental Free Trade Area and other AU initiatives. But talk is cheap. The sustainability of African aviation is already undermined by politics and uncompetitive costs resulting from dysfunctional operating environments. For example, most countries rely on high landing and other taxes for easy revenues, not seeing the bigger picture.
Ethiopian’s strategy, however, has put it in pole position in African aviation and it could use its continental relationships to make the playing field easier for other local airlines. The lesson Ethiopian Airlines offers is not necessarily how to run a successful state-owned business; it is that a strategic plan and a vision, supported by good business practice and — importantly — by all stakeholders, become the bedrock of operations.
With little of that evident in SA’s public enterprises, such a notion may just be pie in the sky for SAA.
• Games is CEO of advisory company Africa @ Work