29 July 2017

Ethiopia Merges Aviation Industry Despite Monopoly Fear

Photo: East African Business Week
Ethiopian, which is the most successful airline in Africa, already flies to 95 cities around the world.

The merger of Ethiopian Airlines and the Ethiopian Airports Enterprise (EAE) to create the Ethiopian Airlines Group has created a fear of monopoly and conflict of interest in the aviation industry. The merger comes after a regulation was approved by the Council of Ministers on July 8, 2017.

The new Airline Group is authorised with a 100 billion Br capital, out of which more than 31 billion Br is already paid up in cash and kind, the two-page regulation reads.

The process of merging the two public enterprises had been top secret. The international and domestic flight service operators, deputy executive officers and the management team at EAE, and the Ethiopian Civil Aviation Authority had no adequate information that a merger was coming nor were participants in the process, sources disclosed.

A committee said to have been chaired by Sofian Ahmed, adviser to the Prime Minister, with Tewolde Gebremariam, chief executive officer (CEO) of Ethiopian Airlines, leading the technical team of the committee, made a needs assessment and feasibility study that helped draft the regulation, according to Fortune sources.

In rationalising the need for a merger, the report of the committee states that Ethiopian Airlines has credit worthiness and a strong balance sheet to get a loan for its development.

And while there is an opportunity that airports can make profits, EAE headed by Tewodros Dawit has become a burden to the government. It concludes the new Group inheriting the Airline's efficient working system can save the state from foreign loans in building and expanding airports.

The new Ethiopian Airlines Group is established as a federal public enterprise to provide domestic and international air transport services and manufacture and repair aircraft.

Furthermore, the regulation gives the power to this Group to provide airport services to air operators, and construct, expand, maintain and administer airports which were the domains of EAE. It is also the purpose of the Group to provide aviation training services, organise airport service security in the airports' premises, and invest in hotel, recreational and other tourism services, among others.

The merger which was requested and has been pushed hard by the leadership at Ethiopian Airlines, according to close sources, is said to benefit the Airline's business.

Ethiopian Airlines has also confirmed that the new Group can help it provide quality service and cope with the global aviation competitive market in its announcement on the issue, and later in an e-mail reply to questions raised by Fortune.

"It is a national demand and the decision of the Ethiopian government, but we do support the change as it will help the two organizations to develop the aviation sector and create synergy," the message from the Corporate Communications Office reads.

However, the move has created confusion in the air transport sector. Some international and domestic flight operators, as well as aviation experts, fear that the merger could negatively affect the Ethiopian aviation market and the tourism industry. The less transparent approach of the ownership change especially escalated the doubt.

Solomon Gizaw (Captain), owner and managing director of Abyssinia Flight Services, and Dawit G. Egziabiher, partner of the National Airways, who are engaged in domestic flight operation service provision, did not hear about the merger process. As part of the aviation sector, they both feel that the private flight operators should have been consulted or, at least, informed about what was happening.

Even though the establishment regulation states that one of the purposes of the Ethiopian Airlines Group is to "provide services to air operators without discrimination," Solomon and Dawit do not think that it is realistic.

"Two weeks ago, the day the regulation was approved, death on competition in the aviation sector of the country was declared," Solomon said. He believes the government is misinformed.

Dawit for his part adds that the situation does not smell good, there will obviously be a conflict of interest and the move seems to be towards monopoly.

Though the committee's report mentions the primary reason for the merger as the inefficient performance of the Airports Enterprise and that it is affecting the Airline's performance, insiders argue that it might be a financial crisis in the latter that pushed the government to merge the two enterprises.

"Otherwise, if improving the efficiency of the airport operation and making it profitable was the goal, it could have been easy to reform it while maintaining its independence," they argue.

Ahmed Kellow (PhD), an aviation expert and general manager of First Consult, agrees with the idea of reforming the Airport Enterprise instead of merging it with the Airline. He sees a conflict of interest looming that would make the international and domestic flight operators loose the competitive edge in the market.

He also thinks that a decline in competition may lead to flight price hikes which will directly affect the tourism economy of the country.

However, on the other hand, Ahmed also sees that Ethiopian Airlines will benefit out of the merger and it may also positively contribute to technology and work system transfer to the airports' administration.

As the effects may be seen, now a group under the Ministry of Transport is facilitating the transition, setting up the structure for the new Group, and a new board will also be established.

The Ethiopian Airlines Group will comprise EAE, Passenger Airline, Cargo Airline & Logistics Company, Ethiopian Aviation Academy, Ethiopian In-flight Catering Services, Ethiopian MRO Services and Ethiopian Hotel & Tourism Services.

Under the airports' Enterprise, the Group will run the 23 airports in the country, expand them, and build new ones.

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