Zemedeneh Negatu has advised on numerous deals across the continent, not least the partnership agreement between Ethiopian Airlines (ET) and Asky, the regional airline based in Lomé, Togo, and operating across West and Central Africa.
Despite numerous failures in the aviation sector in Africa going back 40 years, he is still highly confident that the aviation market in Africa is untapped and that ET, an airline he knows well, should be used as a model to replicate in other countries. “Look, 80% of air travel from or to Africa is done by non-African carriers – 80%! So, African carriers only carry 20%. I think that’s telling. We need to fix that. We need to promote African owned and operated airlines which could compete globally.”
Too often, he says, African airlines are vanity projects. But really, one should leave the egos and issues of pride behind and focus on the numbers and making an airline commercially viable.
Negatu sees governance and policy as the main issues affecting struggling airlines. In terms of governance, airlines have simply not been run properly. “This is a low-margin business,” he says, “and every penny counts. Your best run airlines clear 7–8%, and that’s it”. This is why he feels African carriers should partner and not operate as stand-alones. “In Europe, there are four major airline groups. In Africa we have too many tiny little airlines trying to make money operating on their own .”
Saving just 50 basis points on financing costs – and airlines are capital intensive businesses – matters and this is one of the reasons he feels that Asky has benefited from partnering with ET. The airline’s excellent track record with aircraft manufacturers, leasing companies and credit export agencies such as the US Exim bank means that Asky will benefit from considerably lower borrowing costs than a new stand-alone national airline with no track record.
Throughout our interview, Negatu cannot but sing the praises of his national carrier, but he does so with sincerity. “For the last three years in a row, they’ve made more money each year than all of the African airlines combined, in terms of profitability. They’ve grown from about a million passengers 12 years ago; this year they should top 10m. And they’ve gone from about 12 ageing aircraft to almost a hundred new ones with an average age of five years and a four-star Skytrax quality rating, similar to British Airways and Emirates.
“So, they’ve done extremely well. But they are the exception. For instance SAA have struggled. You can’t run a successful airline if you change the chairman of the board every six months, CEOs every two years. I’ve now seen probably seven SAA CEOs over the last 12 years. So, the governance side, I think, is the problem with many African carriers.”
He says that running an airline is a long-term business and irrespective of ownership – Ethiopian is 100% government owned – it needs to be run like a proper business. “The Ethiopian government doesn’t interfere. They let [the management] run it.”
The other issue is that of policy and lack of support. It is still too expensive to operate an airline in Africa, which is why many established and startup airlines are struggling and why we haven’t seen the rise of low-cost carriers. Landing rights in Africa are some of the most expensive in the world. The price of jet fuel is higher than elsewhere. The airport infrastructure is poor and policies are inconsistent.
One of the key reasons he attributes to ET’s success is also the deep pool of local talent the airline can tap into. “ET’s management is 100% Ethiopian. Other than the outstations in different countries, where they have locals, the airline is run 100% by Ethiopians, but they’ve developed that talent pool over the last 70 years. If you don’t develop talent, then you won’t be able to have a sustainable airline. Everybody [at ET] has dyed-in-the-wool aviation experience. They don’t bring in a factory manager to come and run the airline. ET has a world-class aviation academy, and they also have highly skilled MRO [maintenance] staff which is capable of handling the most sophisticated aircraft in the world including the Boeing 787 and Airbus 350. And MRO is a big part of ET’s business.”
And it is because of all these complicated moving parts required to run a successful airline that Negatu calls for more collaboration between the different partners and a more cohesive strategy between the African countries and their airlines. Don’t start an African airline on your own, even if you have money to burn, is his advice to others out there.
What about Nigeria, which has a big potential market and no established carrier? The aviation policies, he says, have been erratic, which has not helped, and the visions of the various administrations over the years have been inconsistent. With a population of almost 200m and less than 10% travelling by air, the potential is huge. And there is no reason why West Africa’s hub should not be in Nigeria. Again, Nigerian carriers should not go alone, but partner with others.
Economies of scale
“In Africa we need to think big like China. Aggregate our markets across borders and create economies of scale to capitalise on the continent’s potentially huge aviation market. For instance last year 585m trips were taken by the Chinese – that’s 1.5 times the entire American population. In the next five to seven years, China will be the biggest aviation market in the world. In Africa, we need to think along those lines. If we have a couple or three big airline groupings, we can build scale. ”
A relative success story has been the expansion of RwandAir, a company whose strategy he worked on some four years back. What were his thoughts on their growth? “Rwanda is one of the more successful success stories in Africa, as a country. They are now replicating the economic success in the airline business. I am pleased to see that they have expanded their route network globally, acquired new aircraft, significantly improved their services and are building a new $800m airport. Obviously, other countries in the region have taken notice and are looking to do the same.”