Former Ethiopian Airlines CEO Tewolde Gebremariam. He is a senior strategy adviser for Delta and will be crucial in making or breaking the deal under discussion between Kenya Airways and Delta. PHOTO | MICHAEL TEWELDE | AFP
Former ET boss Tewolde at the centre of KQ-Delta deal
When the Kenyan delegation led by President William Ruto met with officials of Delta Airlines in Washington to discuss a proposal on the sale of national carrier Kenya Airways, a familiar figure sat with the Americans. Tewolde Gebremariam, the man credited with the success story of Africa’s biggest carrier Ethiopian Airlines, sat across the table.
No one at that meeting understands African aviation more than Mr Tewolde, who was the Group CEO of Ethiopian Airlines for 11 years until March this year, when he suddenly retired for “health reasons.”
The Ethiopian is a senior strategy adviser for Delta and will be crucial in making or breaking the deal under discussion between the two airlines, whose outcome will come down to the transaction advisers.
Mr Tewolde, who Delta will be looking up to in the negotiations, buried KQ’s hopes of dominating the African skies, with the latest African Airlines Association data showing that in 2021 ET carried 7,053,000 million, against Kenya Airways’ 1,489,000.
Dr Ruto, when he met the Delta team in Washington DC on the side-lines of the US-Africa Leaders Summit, expressed his desire to sell off the ailing carrier, which posted a half-year loss of about $80 million.
“I’m willing to sell the whole of Kenya Airways,” Dr Ruto said. “I’m not in the business of running an airline that just has a Kenyan flag — that’s not my business.”
Kenya Airways CEO Kilavuka was non-comiital on whether the government was offloading its entire stake, saying that a decision was yet to be reached.
“No decisions have been made. However, we are exploring all possible options that would best address the financing needs of KQ. The government of Kenya, at the beginning of the year, agreed to fund our restructuring. We are implementing this restructuring plan. However, because of changing priorities, GoK has indicated that they would like us to pursue alternative funding proposals. This has therefore necessitated us to look at plausible opportunities for the airline with the full support of GoK,” Mr Kilavuka told The EastAfrican.
If Delta accepts the President’s proposal and acquires the government’s 48.9 percent stake in the airline, it would be the biggest shareholding by a US carrier in a foreign airline. The other shareholders include a consortium of local lenders (38.1 percent) Air France-KLM (7.8 percent) and minority shareholders (two percent).
A deal would give Delta deeper penetration in Africa and increase its options for distributing traffic between Asia and the United States.
On the flipside, a deal for KQ is critical, in light of the shifting competition landscape and Qatar Airways’ ongoing bid to acquire a 49 percent stake in RwandAir.
According to international stockmarket and financial news website Market Screener, Delta’s current largest shareholding is AeroMexico, which it owns 20 percent. Other stakes are 9 percent of China Eastern Airlines, 2.86 percent of Air France-KLM and 2.94 percent of LATAM. This is in addition to shares in other non-airline entities.
Delta’s competitor, United Airlines, owns 8.04 percent of Azul while American Airlines holds 5.83 percent of China Southern Airlines.
But it is early days before one can tell if Delta will bite President Ruto’s hook and how much of KQ it would eventually settle for. The nitty-gritty of any prospective deal will be determined by transaction advisers on both sides of the table. Delta will be burning the midnight oil, conducting due diligence to determine what it deems to be fair value for a stake in KQ.
Although it comes with higher financial obligations, a controlling stake in the carrier would give Delta more leverage in pushing through hard positions when it comes tom issues such as rationalising the headcount.
The question of KQ’s existing debt would have to be settled. One likely option would be for the government to take it off the balance sheet to shore up KQ’s value. Leaving the new entity to assume the debt would significantly lower KQ’s value and make the deal a hard-sell to the Kenyan public, who view the carrier as one of the crown jewels.
Beyond the financial side, they would seek clarity on the Kenyan government’s role in the restructured carrier. Would the government retain a golden share and veto powers and use regulatory instruments to shield KQ from competition? The status of the other shareholders and their agreeability to Delta would also have to be determined.
Whatever price Delta offers, the value of having it on board is not the purchase price but rather in stemming the haemorrhage and new capital that it will bring. An unencumbered KQ will be nimble and better positioned to grasp emerging opportunities offered by a liberalised market and the African Continental Free Trade Area. It will also benefit from Delta’s muscle to acquire new aircraft, lower purchase prices or lease rates, and better finance terms.
Even though it is not a matter of life and death, closing the deal is important to KQ’s various stakeholder groups. Overall, passengers would see a better-quality product, while the taxpayers would be saved the burden of shoring up the airline’s capital base.
Mr Tewolde, who Delta will be looking up to in the negotiations, buried KQ’s hopes of dominating the African skies, with AFRAA data showing that in 2021 ET carried 7,053,000 million, against Kenya Airways 1,489,000.
He led the Ethiopian flag carrier for 11 years, with success reflected in its exponential growth from $1 billion annual turnover to $4.5 billion; from 33 airplanes to 140 currently, and from three million passengers to 12 million (pre-Covid). Under his leadership, the airline grew manifold, building over $700 million worth of vital infrastructure, a big hotel, cargo terminal, MRO hangars and shops, aviation academy and full flight simulators.
It was during Mr Tewolde’s leadership that Ethiopian overtook Emirates to become the biggest connector between Asia and Africa, as well as within Africa. It became Africa’s top airline in both passenger volumes and fleet size.
Early this year, before his sudden retirement, he announced the signing of a memorandum with Boeing — with which ET has had a longstanding partnership — for the supply of Freighters. Under the deal, the listed aerospace company will supply five 777-8 Freighters, the industry’s newest aircraft said to be the most fuel-efficient twin-engine. Mr Tewolde said the agreement would help ET meet its expanding global cargo demand from its hub in Addis Ababa and position it for long-term sustainable growth.
“Consistent with our history of aviation technology leadership in Africa, we are pleased to sign this memorandum of understanding with our longstanding partner Boeing, which will make us join a select group of launch customer airlines for the fleet,” he said.
“In our Vision 2035, we are planning to expand our cargo and logistics business to be one of the largest global multimodal logistics provider on all continents. To this effect, we are increasing our dedicated freighter fleet with the latest technology, fuel efficient and environment-friendly airplanes of the 21st century.”
Ethiopian Airline maintained high profits during the better part of Mr Tewolde’s tenure. It defied the Covid-19 storm to post a six percent growth in net profit from $133.4 million in 2019 to $140.93 million in 2020, according to the annual report for the 2019/2020 financial year.
Its operating revenues increased by six percent from $2.2 billion to $2.34 billion, and operating expenses went up by one percent to $2.07 billion from $2.05 billion during that year.
The airlines’ borrowing rose by 25 percent to $63.35 million from $50.48 million, and its working capital dropped from negative $147.17 million to negative $408 million.
ET’s total assets rose by 61 percent from $4.47 billion to $7.21 billion, in the period under review. According to the African Airlines Association (Afraa) 2021 annual report, the continent’s airlines posted a cumulative loss of $2 billion in 2020 due to the Covid-19 pandemic.
ET’s cargo services cover more than 120 international destinations around the world, with both belly-hold capacity and dedicated freighter services.
Mr Tewolde grew capacity from 8.3 million seats in 2012 to 14.8 million in 2021, after a dip to 11.8 million in 2020. The airline’s reach grew to 114 destinations from its hub in Addis Ababa, from 75 in January 2012.
Ethiopian Airlines has a presence in six African countries through a management role or strategic partnership with the local carriers, seeking to revive their ailing national carriers.
Before his retirement, Mr Tewolde had announced the airline’s plans to restart operations with Ethiopian Mozambique Airlines after terminating the service in May on the back of the Covid-19 pandemic impact on aviation. Besides the Asky in Togo, ET also has an interest in Malawian Airlines and Chad-based Tchadia Airlines, and has a management contract with Ceiba Intercontinental in Equatorial Guinea.
ET plans to set up an airline in Nigeria, and has signed an interline agreement with Johannesburg-based Airlink, which allows passengers to have seamless travel on a single ticket on any of the two carriers’ networks.
Pan African Airline
If Kenya sells off the carrier to Delta, what happens to the proposed pan-African airline deal with South African Airways?
Mr Kilavuka said the KQ funding proposal complements the pan-African airline group formation.
“The Pan-African Airline Group is a project among African airlines to consolidate the aviation sector in Africa, in order to provide customers with the best possible benefits and connectivity for the growth of Africa.
It is also critical to the realisation of Single African Air Transport Market (SAATM) and the Africa Continental Free Trade Area (AFCFTA) initiatives, both of which will open Africa’s skies, boost trade, tourism and promote the growth and value of aviation throughout the continent,” he said.
On whether KQ would increase its US routes and services, Mr Kilavuka said his expansion plan is based on commercial viability of prospective routes.
“Delta Airlines as part of SkyTeam is a strategic partner of Kenya Airways, with over 20 codeshare points in the US. Any expansion for Kenya Airways in the US is complemented by this arrangement,” he said.