TO:      Asmarino.com, in response to Ato Yosief Ghebrehiwet’s article “On The  Economic Viability of The Eritrean Airlines”

April 19, 2003

 

 

Eritrean Airlines:  Professional Career for the New Generations

 

During the Ethiopian colonial era, military airplanes left a bad taste in the minds of most Eritrean children born in the 70s and 80s.

 

With the advent of the new Eritrean Airlines, commercial aviation will become a novelty, just like the Internet of today.  The aviation profession will soon again attract the best and the brightest, the youngest and most ambitious sons and daughters of Eritrea.  The technical schools will include new curriculum for aircraft mechanics, avionics, and mainframe maintenance, etc.  The University of Asmara will probably offer new courses in airline management, aircraft engineering, aviation regulation, aviation management, current problems in aviation and aviation law, etc.

 

On April 16, 2003, the majestic “Queen Bee” clipper flight rolled out of a fixed base operator (FBO) facility with fresh Eritrean Airlines livery to the San Antonio airport’s 8,000 feet long runway for a direct flight to Asmara and it made it safely in about 15 hours.  The flight path was a straight line through Miami to Dakar via Khartoum to Asmara International Airport (ASM), which is the shortest route.  The era of a new hope in aviation just started with the first touchdown of the “Queen Bee” at Asmara International Airport. Congratulations! Captains, mechanics, inspectors, flights attendants and trainees who were on board the ferry flight for the historic mission. You did it for the new generations.

 

The above-stated vision and aspirations regarding the airline for the new generations is the mainstream sentiment in the country.  However, on April 15, 2003, I learned in Asmarino.com that there are some individuals who oppose the current trend of aviation development in Eritrea.  One of these individuals is Mr. Yosief Ghebrehiwet (“AtoYosief”) who posted three articles about the new Eritrean Airlines advocating that there should not be an airline at this time, because famine is in effect in the country.  Ato Yosief dismisses a yearlong effort of Eritrean aviation professionals to start an airline as “foolish endeavor”.  He claims that Eritrean Airlines has purchased expensive airplanes at “a stratospheric amount of $200 to $300 million US dollars”.  I have no knowledge of Ato Yosief’s nationality, but he writes as a concerned Eritrean, let us assume he is an Eritrean, for it is his thoughts and poli-tricking that is subject of discussion.

 

I read the articles with great interest they were well written.  I admire the author’s communication skills and his dedication to write long political essays.  I am equally amazed by how people can use the power of the pen to distort facts and scrutinize figures to meet their own agenda and the amount of time they spend to justify gross errors.  I sometimes wonder why is it necessary to waste valuable time, talent and energy arguing for nothing without receiving payment. Or is there monetary incentive behind such cause?  If there is whose interest do they represent?  Let me deal with the facts and tell it like it is.

 

First, some readers may not like the content of Ato Yosief’s articles because of their political implications, but for concerned Eritrean aviation professionals the articles have provided us the necessary ammunitions to work together as a team and seek responsible solutions to country’s aviation challenges.

 

Second, most Internet readers want to know the credibility of the author who provide the information.  They want to know whether the person has actual knowledge of the subject or the substance of the argument is just bookish.  I hope Ato Yosief will drop us a line about himself in his next posting.  For the same purpose, let me provide the readers a synopsis of my trade.  I have been working at a major US airport for twenty years at a management capacity, taught aviation courses (part-time) for 15 year at an aviation university, certified in 1988 as aircraft trader and since then aircraft trading has become my hobby, served as an aircraft acquisition agent with full power of attorney.

 

We will start with Ato Yosief’s article “On The Economic Viability of The Eritrean Airlines”.  In this article Ato Yosief said, “There are two senses in which the launching of the Eritrean airlines could be described as disastrous” and he focuses his analysis on the timing and the economics of the project. 

 

Fact No.1 Ato Yosief estimates the price of B767-300ER at $115.5 to $127.5 million. As Ato Yosief claimed, there is no B767-300ER in production today.  The aircraft is obsolete! All interested airlines or lessors should have placed their orders few years ago.  Eritrean Airlines cannot order one from the factory at the stated price of $115.5 to $127.5 million in 2003 or 2002.  There are only used B767-300ERs in the market at a distressed market value.  Some of them parked in the desert of Arizona (or at FBOs), but not in the assembly line in Seattle.  Let us verify this fact by industry experts.  On April 15, 2003, Alan Pardoe, Airbus, Director of Program Marketing during a briefing in Toulouse said, “Airbus has 100% share of the market (250 seat market) in 2003 after winning 12 orders for the A330-200. No airlines placed orders for 767s this year.” Pardoe added, "It confirms the 767 is obsolete," (Aviation Daily, April 15.).  Mr. Pardoe was right, B767 that Ato Yosief incorrectly estimated at least $115.5 million is out of production and model 7E7 is on its way to replace it.  Airplane value depends on age, current market conditions, maintenance status and previous operator.   Ato Yosief simply assumed that the aircraft Eritrean Airlines acquired as new, which is not.  He does not know the age, type and condition of the airplane Eritrean Airlines is utilizing.  So what he describes “a stratospheric amount” is just a label and cannot be taken seriously.  I guess aviation is not his cup of tea neither is numbers.  If that is the case, what possessed Ato Yosief to use the power of his pen against the 330 Eritreans employed by the airline to deprive them from their livelihood, when he argues against the formation of Eritrean Airlines?

 

Delayed economic recovery and shaky airline industry due to the War in Iraq and fuel hike has depressed further aircraft value in the first three-month of 2003, but the market value of B767-300 and B757-200 as of July 2002 was as described in Table-1 and Table 2 below.  The middle column represents an average value.  In addition to the market value, if an airplane is parked in the desert, it tends to depreciate by 30%.  However, when the owner such as Boeing performs heavy check on parked airplane, the airplane is as good as new, except it costs less.  The used aircraft market in 2003 is considered to be in distress.  In such a situation, the best strategy is to lease the airplane with the option to buy (lock the price at a distress market value now) under progressive lease three-year term.  Since the aircraft is fresh out of heavy maintenance, it is free of all outstanding Ads.  After six months or a year, if the aircraft proves to be productive, then, the leasee exercises the option to buy.  When all these options are available why does Ato Yosief assume that Eritrean Airlines needs purchase new airplanes? 

 

Current Market Value for B-767-300 as of July 2002 (in millions $)

Table-1

Manufactured Date

Low

Middle

High

1986

16.7

19.2

21.1

1988

21.9

25.2

27.8

1990

27.2

31.3

34.4

1992

32.4

37.3

41

1994

37.7

43.3

47.6

1996

48.1

55.3

60.9

            Source: “Aircraft Value News" Aviation Daily by PBI Media LLC. July 29, 2002

 

Current Market Value for B-757-200 as of July 2002 (in millions $)

Table-2

Manufactured Date

Low

Middle

High

1982

10

11.8

13.5

1984

13

15.3

17.6

1986

16

18.8

21.7

1994

28

33

37.9

            Source: “Aircraft Value News" Aviation Daily by PBI Media LLC. July 29, 2002

 

Fact No. 2, all aircraft transactions in the US are recorded and made available to the public in various aviation publications.  AtoYosief did not provide any source that indicates that Eritrean Airlines purchased these airplanes that he came up with estimated value of $200 to $300 million dollars.  What if the airplanes are leased?  Under lease arrangements, monthly payment is about 1% to 1.5% of the aircraft value; would that be considered “a stratospheric amount”?  What if the airplanes are leased under the terms of powered-by the-hour, where the lessee keeps the aircraft for specified period of time and pays only for the hour (s) used during such period?  Could that be considered still “a stratospheric amount”?  Some times airplanes could be made available free of charge for a defined period as an incentive to acquire more airplanes or to test the market.  Ato Yosief did not ascertain the arrangements under which the airplanes are acquired.  He only obtained catalog prices of new airplanes to support his arguments, which cannot be taken seriously to mean anything substantive. 

 

Fact No. 3, in the last ten years, I participated in the startup of seven airline firms in the developing countries.  The required capital in each case was less than five million dollars, because most airline firms lease aircraft during the initial years of their operation (source: airlines submit three-year financial projections before leasing airplanes).  On the basis of these seven airline cases, the only financial requirements were as follows:

-         Payment of  $50,000 dollars with letter of intent or initiation fees

-         First month rent paid in advance

-         Last month rent paid in advance for security deposit

-         Sign an agreement to put away funds in maintenance reserve.  This is a fixed amount per month based on an industry practice to cover heavy maintenance.

-         Insurance was an integral part of national umbrella plan.

 

How do these items add up to $200 to $300 million dollars in AtoYosief’s “voodoo” cost accounting system?  It is impossible to start an airline with that kind of funds in a developing nation’s financial line of credit.  Let alone in the Developing Nations, in the US out of the 4,652 commercial jets currently in operation 43% are on lease and 57% owned. mercial n operationoping Nations, in the USA out of the Yet, Ato Yosief argues “The first thing that strikes us about this project is the sheer magnitude of its cost, especially when compared to the overall annual budget of the nation.”   I guess he skipped accounting 101 in college, because he was in Liberal Arts College busy with poli-tricking.

 

The timing to launch an airline is a business decision rather than a political or humanitarian issue.  After the workshop in Asmara on May 2002, there were several discussions and planning on the subject of establishing an airline, developing business plan, aircraft selection process and other processes that are required to operate an airline as a business.  The overall process may not have been a smooth one. There were differences on certain areas especially, selecting a manufacturer (Airbus vs. Boeing), aircraft type (B727 vs. B757, B767 vs. A330 and a combination of fleet), and finally type of acquiring the aircraft (purchase/lease, power-by-the-hour, hybrid).  After almost ten months of preparation the next logical step is to start operation.  Ato Yosief does not think this is the right time to acquire aircraft at a time of airline bankruptcies, liquidations and airline hard times.  What does this mean?  There are many airplanes parked with no commercially useful function that belong to the major airlines and leasing firms, because there is inflation of airplanes (too many airplanes chasing for less passengers).  According to Boeing’s press release on April 14, 2003, (Aviation Daily)  “Boeing estimates some 800 aircraft have been parked since the Sept. 11 attacks, and expects only about 450 of those aircraft -- all in-production models, plus MD-11s, MD-80s and 737s classics -- to return to service.”  The list does not include B767s, which are not in production (but spare parts will be produced).  What will happen to the rest of the parked B767s and B757s?  Aircraft owners will be forced to sell them so cheap or have them available for part out (spare parts).  When aircraft value is determined by part out this is known in the industry as distressed market.  This is similar to the market conditions in Asmara a few days after Easter Holiday, when the peasants have to take back their unsold animals (sheep, goat, cattle) to their villages because they couldn’t get the right price.  Some peasants may decide to sell their animals at any price because it is too tiresome to take them back (buyers market).  We may recall from the street markets of Asmara that at the end of the day tomato and potato hagglers say “take my produce all for ten cents” (“adei kulen b Aserte”).  That is the situation we had in the aircraft market since mid 2002, except in 2003 due to the War in Iraq, one does not only get ten per “dime” (ten cents), but fifteen per “dime”.  In such a situation, any serious minded businessman will acquire some good airplanes for speculation let alone for utilization.  So the timing to obtain airplanes in 2003 is not only right but also opportunistic. 

 

Ato Yosief, commented about the concept of opportunistic moment when the CEO of Eritrean Airlines used it during press release, which gave me the impression Ato Yosief does not live in the land of opportunity.  Let me provide a practical example.  In August 2002, American Airlines was selling about 25 airplanes that they could not use due to the events of September 11.  We contacted American for two airplanes, which were selling then between $750,000 to $1 million dollars.  Just before placing an initiation fee, a group of businessmen approached American head office and offered them $500,000 each for all the 25 airplanes.  We lost the opportunity of purchasing two good airplanes that meet FAA current standards for $1.5 million.

 

Let us see at another opportunity that we experience about three month ago.  An airline in the US that couldn’t meet its financial obligations returned B757 to Bank of America.  The bank hired a former United Airlines aircraft sales person to help them dispose the airplane.  One day I received a telephone call from the acquisition agent (which I new from previous engagement) with an offer of $10 million dollars for the B757.  Eritrean Airlines was advised about the offer, but couldn’t afford $10 million dollars let alone $200 to $300 million that Ato Yosief has incorrectly estimated.  At that time, Northwest Airline had eight airplanes for sell (B727-200 stage III) which were used for domestic markets prior to September 11, for $50,000 each with out engines (engines had to be leased from a third party).  Northwest Airlines still have five airplanes with -7 and-15 engines for the same price, but the ones that can take -17 engines were sold in a matter of days (-17 engines are required for Asmara’s altitude).  The aircraft market value is directly related to the conditions of the airline industry.  When the airlines are closing shops and liquidating assets, the price of airplanes like any other commodity falls apart.  Ato Yosief considers the timing is wrong to acquire airplanes and to start airline operations due to “the sorry state of the airline industry worldwide”.   I seriously question his knowledge of business and his intentions.  I hope that the above-stated actual examples will provide Ato Yosief an idea what some used aircraft cost in the land of opportunity, and he will estimate aircraft value within acceptable margin of error in his forthcoming article; or who ever replaces him from the same school.

 

During the first quarter of 2003, the small nation of Nepal, North of India realized an increased of labor traffic in its Katmandu-Kuala Lumpur (Malaysia) route.  In April, Royal Nepal Airlines (“RNA”) is planning to lease two B757s to increase its operation in the Katmandu-Kuala Lumpur market segment.  Mr. Khanal, Managing Director of Royal Nepal said, “the airline opted to lease rather than buy the aircraft because the leasing market is attractive at the moment, due to a worldwide economic downturn and the spread of the SARS pneumonia across the globe. Buying would be too expensive, and we can't afford this kind of investment,” (Aviation Daily April 21, 2003).  Eritrea is in the same economic conditions as Nepal if not better.  Eritrean Airlines has not done any thing different than RNA, but why are Nepal’s actions considered productive and Eritrea’s initiatives viewed counter productive in the eye of some observers like Ato Yosief?

 

Ato Yosief attempted to exploit the current famine in the country without providing alternative solutions.  Yes, there is famine in the country, but what do you do about it? Most of the aviation professionals that I know are active participants in humanitarian assistance.  The “Queen Bee” clipper flight was a ferry flight with loads of relief supply.  There you go, clear evidence on what an airline can do to the needy.  I wonder why Ato Yosief wants to use the power of his pen against the same people he pretends to care for.  If Ato Yosief, represents an interest group with vested interest in the Eritrean market, he needs to drop the famine and government policy issues, for he serves a different master.  I can understand certain airlines don’t want to see Eritrean Airlines for they know they will lose market share.  That is expected in the business world, but let the market mechanism find the winner.  I beg to differ with Ato Yosief’s line of argument that there should not be an Eritrean Airlines on the bases of some fictitious numbers that he doesn’t even know what they mean.  If Ato Yosief provided the pen and someone produced poor information for him, too bad he sold for the devil and the result is frustration.   

 

Ato Yosief does not stress heavily on the issue of famine, but he condemns the project as something that “focuses on a narrow group of population - the Eritreans in Diaspora-” Additionally, Ato Yosief blames geographic location of the country not conducive for airline business.  This is where he shows his weakness in marketing concept as well.  It is normal for an airline to have a targeted market.  The business travel group, the time-sensitive group, leisure travelers, etc are all marketing strategies that are established in the industry.  If he means that the Eritrean market is too small, I would ask him small for whom?  For Lufthansa who is flying six days a week, Egypt Air, Saudia, Yemenia, etc.  Are these airlines flying to Eritrea to socialize if there is no market?  These airlines are bringing mostly Eritrean nationals.  Eritrean Airlines has the natural right and freedoms of air to participate in this venture, which Ato Yosief calls it a “foolish endeavor”.  I wonder who is feeding these uncultured words to Ato Yosief’s pen, for most Eritreans are respectful when they acquire the power of the pen.  I have read similar argument from the Ethiopianist school of thought that Eritrea is too small, not economically viable to be a nation, etc.  Ato Yosief is regurgitating the same phrases in the pretext of an airline.  Time will tell that Eritrea Airline may make Massawa the gateway to the Red Sea basin.

The last airline that I participated in the preparation of business plan belongs to Haitian nationals, a carrier that is still trying to get landing rights to Port-au-Prince in Haiti.  They couldn’t get landing rights to their own country for the same reason that Ato Yosief is advocating.  Some of the reasons given to the airline are:  Haiti is the poorest country in the Western Hemisphere, authorities don’t want to upset the major carriers currently serving the country, Haitians have never operated an airline on their own before, there is no market for all the carriers, etc).  On the contrary, American Airlines have daily flight from Miami to Port-au-Prince, Air France, ALM and Air Jamaica operates to the same city from Miami, yet the regulatory agency in Haiti advises to their own nationals that the market from Miami to Port-au-Prince is saturated.  At least the Government of Eritrea is allowing nationals to operate an airline.  So which policy is supposed to be acceptable?

 

Ato Yosief discredits the government policy for getting involved in airline business.  Well, it is true that the government policy encourages investment in the airline business to provide employment and other associated services to the nation.  The government may have advance the initial required limited capital, since the business sector is not ready to take the initiative at this time.  As time goes on, I strongly believe that the airline should be self-supporting and revenue generating enterprise.  As indicated before the success or failure of the airline depends mainly on the internal and external components.  Airlines in any country serves the privileged few of the population - those who can afford to fly – so there must be aviation trust fund that is separate from the public fund collected from non-aviation public in the treasury.  The only product airlines sell is the service.  The users of that service must pay for services provided and the revenues earned by the airline must not support public schools or roads.  The airline must develop its own aviation school, infrastructures including airports, runways, and airways in cooperation with the Civil Aviation Authority.  The government’s aviation policy is shaped by the airline(s) of that country and not the other way around as Ato Yosief put the picture up side down.  In Eritrea, it seems we are heading in the right direction, or are consciously approaching it.

 

On a final note, Ato Yosief in his article visits Ethiopian Airlines and describes it as airline with long history of airline operations, known brand name, etc and yet currently operating at lose.  All of the leadership and staff of Eritrean Airlines were major contributors to Ethiopian Airlines and they know the airline inside out.  Few months ago, Ethiopian Airlines ordered state of the art new B777s.  If the airline is running on the red, how can it afford such an expensive purchase?  Talking about millions, has Ato Yoief ever checked the cost of ET’s new order?  I believe famine is till in effect in Ethiopia.  I wonder if AtoYosief have ever written against Ethiopian Airlines?  Or perhaps, there is some thing he wants to tell us, which is Ethiopian Airlines is having hard times, so, Eritrean Airlines should not try airline business.  Well, in business, one man’s lose is another man’s gain.  There is no business without risk; I believe Eritrean Airlines is entering the market with a calculated risk.  Thus, for better or worst, Eritrean Airlines have started scheduled operations on April 17, 2003.  It is a known fact that Eritreans tend to do better during hard times.

 

By “Herui” Abebe Tecle, A/Professor of Aviation ERAU.