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Ethiopian Airlines: Low Profit, Bright Future?
Addis Fortune (Addis Ababa)

November 7, 2006


By Issayas Mekuria

Girma Wake, CEO of Ethiopian, is convinced that the lower profits showed this year are but a simple bump in the road to real, lasting prosperity. With high oil prices and the necessity to lease aircraft, the drop is just a necessary rough patch, he says.

Ethiopian Airlines, which chose to retain its passengers at the cost of profit decline, pointed to a number of other reasons as well for the 57pc loss from the previous year's profit.

Along with the rise in fuel prices, Ethiopian encountered a significant surge in the number of passengers, from 1.55 million in 2004/2005 to 1.76 million in 2005/2006.

Ethiopian Airlines will become the first to fly Boeing 787 in Africa in 2008

"Instead of losing our passengers to other airlines because of shortage of aircraft, we decided to rent and retain aircraft until the ones we have bought are ready, even if that exposed us to great expenses," said Girma Wake, Chief Executive Officer of Ethiopian, to Fortune.

As a result, Ethiopian's profit declined from 309.9 million Br in 2004/2005 to 133.6 million Br the following year.

For the first time in 60 years, Ethiopian leased four aircraft last year. According to the Airline, Four million dollars in rent had to be paid in two months for the MD-11 aircraft leased from MacDonnell-Douglas.

Ethiopian also paid 154.8 million Br interest in June 2006 for the B787 Dreamliner whose delivery will begin in September 2008, another reason for the decline in profit. Ethiopian signed a 1.3 billion Br contract with Boeing in February 2005 for the acquisition of 10 B787s.

"Believe me, all the expenses we have incurred today signify a takeoff period for the very comfortable passenger carrying capacity we will have in 2009," said Girma.

In 2005/2006 the airline paid 1.86 billion dollars for petroleum, 36pc higher than the previous year. Ethiopian had planned to buy fuel at 67 dollars a barrel for the fiscal year; however, the price topped 78 dollars in the world market. These expenses have increased the expenses of the company by 26.3pc to 5.28 billion Br.

Experts in the airline industry have commended Ethiopian's increased expenditure with 2009 in mind, even if current profit has declined. A source in the consulting firm which produced Ethiopian's 2010 Vision said that the airline has actually performed better than the plan. The budgeted revenue for 2005/2006 was 4.9 billion Br, according to the source, whereas the actual performance was 5.4 billion Br.

"Passengers, particularly Africans who made Ethiopian Airlines their primary choice despite the presence of cheaper airlines, have contributed to this performance," said the source.

Boeing to Supply Simulators to Ethiopian airlines

Girma said that the airline did not deny its service to any passengers who came to it. An owner of a travel agency in Addis Abeba told Fortune that it was appropriate that Ethiopian carried all its passengers at the expense of profit.

Heinz Fengler, a German citizen who came to Ethiopia for the second time on business said that he was impressed by the quality of the in-flight service and by the efficient landing of the aircraft by the Ethiopian pilots.

"From now on I prefer this airline even to travel to other African countries," Fengler said.

Girma firmly believes that his airline is Africa's leading airline in in-flight service. However, he also believes that it is difficult for the airline to realise its wishes with a 44-year-old catering service and when hotels are fully booked, making it difficult for the company to serve its transit passengers.

For the 2006/2007 budget year, Ethiopian plans to carry 2.9 million passengers and earn 307 million Br profit. By 2009 both these figures are projected to double.

"We will grow because we will have the capacity to transport more passengers with our own aircraft," Girma said.

In preparation for that time, Ethiopian has acquired a 43,000sqm plot from the Addis Abeba Administration to begin construction of a four-star hotel this year with a capital of 30 million dollars. Ethiopian will also begin construction of a 12 million dollar catering building and acquisition of materials to match the 787 aircraft with high quality service.

The bright hopes of Ethiopian Airlines are clouded by concerns over what is happening in neighbouring countries. He believes that the 2010 vision will be realised if the talk of war that is heard from neighbouring Eritrea and Somalia does not materialise.

The 60 year old airline employs 4,700 people and owns 21 jets, 23 Fokkers, a DHC-6 and training and spray aircraft. Its capacity is among the least in the global airline industry; but it is one of the largest in Africa with only Kenyan Airways as its competitor.

Aource: AddisFortune
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