Airline Economics

Growth Frontiers Dubai 2017 (ME and Africa)

Tewolde Gebremariam
Ethiopian Airlines Group CEO
Ethiopian Airlines
Past, Present, Future
The Leading Airline Group in Africa
 Ethiopian History
Bringing Africa Together for More Than 70 years
Formation of
the Ethiopian
Airlines Group
The Leading including the
Airline Group in EAE
2017
Africa

1st jet service in 2017

1st scheduled Africa 2016
1st African
flight to Cairo B777-200LR
with DC-47 Over 100
international
2012 destinations
2011
Major new infrastructures.
2010 - Biggest Catering facility
1st Flight to - Biggest MRO facility
China 2009 - Biggest Cargo Terminal
1st East-West Africa’s 1st B787
Africa flights

1998 Africa’s 1st A350

1973 Vision 2025

1962 Star Alliance Africa’s Largest Aviation

Transatlantic flight
to NYC, IAD Member Academy
1960

1946
 The Largest Airline Group in Africa
Global Alliance Star Alliance Member
Passengers - 8.8 mil. Passengers (2016/17)
Cargo (Tons) - 338,846 tones (2016/17)
Revenue USD 2.71 Billion (2016/17) unaudited
Current Fleet 92 in service & 60 in order(less than 5.0 years av. Fleet age)
Hubs: Addis Ababa, Lomé, Lilongwe
Management Team Young but highly experienced team with combined aviation
experience of 425 years; average services of 25 years.

Current Destinations - Over 100 international destinations.

(Passenger & Freighter) - 39 Freighter and 19 domestic destinations
Employees - More than 12,000
Ownership - 100% Ethiopian Government
Weekly Flights + 1681 – Weekly flights
+ 240 – Daily departures
Major Accreditation/ Certifications
 Growing, Modern & Young Fleet
Average fleet age of less than 5.0 years

In Service:
19 - B787-8
4 - B777-300 ER
6 - B777-200LR 92
5 - A350-900 in service
6 - B767-300
9 - B737-700NG*
16 - B737-800W* 60
19 - Q400*
6 - B777-200LRF on order
2 - B757-200F
* in total with partner airlines

On order:
30 - B737 MAX 8
19 - A350
4 - 787 – 9
5 - Q400
2 – B777F
 Record Success Vision 2025
Ethiopian is the Fastest Growing African Airline

1219% revenue growth in 10 years time in an industry which lost billions of Dollars
 Record Success Vision 2025
Ethiopian ranked 57th of the top 100 airlines group
by revenue in 2016; up by 6 points (63rd in 2015)

• South Africa Airways…60th

• Egypt Airways……………76th
• Kenya Airways…………..100th
 21st Century is African Century

• 1 billion young population

• Large land mass China
• 6% GDP growth next Decade
• GDP of $ 2.6 trillion by 2020
• 60% of world’s uncultivated arable land;
destination for food security
• Fast growing middle income society
• Untapped natural resources: 42% of world’s
gold; 12% oil; 90% diamond, etc…
• Major FDI destination
 ETHIOPIA, One of the PINEs
(Philippines, Indonesia, Nigeria & Ethiopia) fastest growing economies

Growth &
Transformation Plan (GTP)
• GDP: +11%
• Infrastructure development:
- Road: 64,500 km
- Rail: 2395 km
- Energy: 10,000 MW
- Telecom: 50 million mobile users
• Addis: 1st city rail in Sub-Saharan Africa to have city
train service built by Shenzhen Metro
• Significant improvement in human development
index
• Broad based & all inclusive economic development
 The Largest International Passenger Network in Africa
Oslo

New york

Victoria Falls Antananarivo

Windhoek
6 Billion people living with in 10 hrs
flight radius of ADD

5 Continents, More than 100 International Destinations of which 55 are in Africa

Largest Cargo Operator in Africa

6 - B777F

39 Freighter destinations in 4 continents,

6 wide-body freighters and 2 Cargo Terminals
 Largest Cargo Operator in Africa

Terminal 2

Upcoming Cargo Terminal No 2.

• Automated Cargo Terminal for 600.000 tons per year;
expandable to 1.2 mil.
• Pallet racks for 8500 positions.
• Meat Hanger System
• X-Ray, CCTV, Forklift trucks, etc.
• Half of the terminal capacity for perishables
• ULD Handling System:
• 4 15ft Elevating transfer vehicles
• 990 10ft storage positions
• 30 Workstations, elevating, with integrated scales
 Gender Equality
All Women Functioned Flight
 Recent Major Industry Awards
Recognition Of Our Success

Voted the Best Cargo Airline of the

Ethiopian Airlines has won Airline Received ‘Airline of the Year’
Year from Africa at the 2016 Cargo
Award by the African Airlines
of the Year Award for the fifth Airline of the Year awards
Association (AFRAA) for the
Ethiopian has won SKYTRAX World Airline year in a row, at the 48th AFRAA fourth year in a row.
Award for The Best Airlines in Africa on June Annual General Assembly held in
20, 2017 at the Paris Air Show. Victoria Falls, Zimbabwe.

Won the Passenger Choice Awards for "Best Ethiopian Airlines has won SKYTRAX World
Airline in Africa" for the third time in a row at Airline Award for Best Airline Staff in
Ethiopian Airlines has won the CAPA ET received “Best Airline to Africa”,
Airline of the Year Award at the 2015 for a second year in a row, and “Best
the Oregon Convention Center in Portland, Africa, for the second time, on July 12,
CAPA Aviation Awards for Excellence,
USA 2016. Airline in Africa” by US Premier
Helsinki, Finland.
Traveler magazine
ET Hub (ADD Bole International Airport) Expansion & Modernization
ET Hub (ADD Bole International Airport) Expansion & Modernization
The Airline Operating Environment

 Unpredictable

 Turbulent
 Highly dynamic
 Too sensitive to
economic cycles
 Airline Profitability in 2017

European
American Airlines Asian-Pacific
Airlines 7.4 B Airlines
Middle East
Airlines
15.4 B 7.4 B
-0.1B 0.4 B

African
Latin American Airlines
Airlines

0.8 B
 Africa : Airline Industry Major Challenges

1 Oil • Persistently high; about

50% of operating cost

2 Taxes & • Governments milking

Charges aviation

• Limited & unable to

3 Infrastructure keep pace
 Africa : Airline Industry Major Challenges
• Too little inter-Africa traffic
1 Lack of Integration • Too little trade & investment
among African countries

2 ICT • Poor ICT infrastructure

3 Immigration No visa waiver among African

countries

4 Tarnishes image of entire

Blacklisting African aviation
 Key Success Factors In Airline Business
Five Forces Affecting Airline Industry Profitability

THREAT OF NEW ENTRANTS

 LOW ENTRY BARRIER
 Liberalization, Aircraft lease options,
outsourcing

BARGAINING POWER OF BARGAINING POWER

SUPPLIERS RIVALRY AMONG EXISTING OF BUYERS
• MONOPOLISTIC SUPPLIERS AIRLINES • INDIVIDUAL POWER
• OEM’s, Fuelers, GDS, Caterers, • Competing for growth, market • Internet, Travel Agencies,
Airports share, etc… Concentration, Excess
capacity

THREAT OF SUBSTITUTES
• High speed Train
• ICT products
 Key Success Factors In Airline Business

Fleet
 Fleet is the most expensive strategic asset of an
airline and hence important focus areas are;
o Fleet Planning
o Fleet selection, commonality
o Fleet management and maintenance
 Marketing Plan ------> Network plan ------> Fleet
Plan ------> Business Plan.
 Financing fleet should be part of the fleet plan and
business plan.
o Finance lease
o Various forms of operating lease
 Fleet Deployment; The right aircraft for the right
mission.
 Key Success Factors In Airline Business

Cost Management
 Focus on cost management is a necessary but
not sufficient condition for any type of airline (Full
service network, LCC, ULCC or hybrid etc…).
 Need for continuous pursuit to achieve the least
possible unit cost is necessary in all types of
airlines.
 Cost Management should not be the domain of
LCC, ULCC or hybrid airlines.
 Full Service Network Airlines management should
also give equal attention to cost management in
all product types.
 Key Success Factors In Airline Business
Leadership/Management
 The late Peter Ducker said Management is the single most important part of
any organization.
 Determines success or failure of any organization.
 The commitment, dedication, passion, energy and experience and skill of
Airline management is the single largest success factor for the airline.

Corporate Governance
 Another maker and breaker of any airline.
 State ownership, private ownership, mix structure of ownership are all
possible practices but in the end what matters most is the operating
environment created as a result of the ownership.
 A healthy involvement of governments is unavoidable and necessary in the
airline business.
 Depending on the economic development stage of the country, Airlines are
strategic assets for any country and long term view of the business is
critically important.
 Airline business not an easy money making business; it is an extremely low
margin business.
 Key Success Factors In Airline Business
Product Differentiation
 Airline product being commoditized long time ago need product differentiation.
 Commodity product is getting increasingly challenging in the industry and thus
customer service has been attracting management attention.

Managing Difficult Business

 The airline business is one of the most difficult businesses in the world.
 Surrounded by monopolistic suppliers but on the other end of the value chain (the
demand side) dominated by almost perfect completion driven by excess capacity in the
market.
 Paradoxical situation: manifested by exponentially rising costs to produce the product
(ASK) but continuously declining price of air travel to the customer.
 The law of inflation is not applying on air ticket prices since they are continuously
declining.
 Key Success Factors In Airline Business
Managing Profitability
 Some airlines are making money consistently like South
West, Ryan Air, Easy Jet, Ethiopian Airlines etc… while most
airlines continuously loss billions of dollars specially when
measured by Economics Profit (EVA) and not an accounting
profit.
 How are continuously loss making airlines getting many
airplanes every year ?
 who is investing in these continuously loss making airlines ?
This the question to the audience ?

Diversity of Financing
 Options ( ECA Guarantees, Structured Finance, the bond
market etc….).
 Overestimation of risk and disequilibrium in the risk and
return equation.
Key Success Factors In Airline Business
Airline Economics
Key Success Factors In Airline Business
Airline Economics
Thank You

The Winning Team