|
More articles about eritrean airlines: |
 |
Let Us Patronize Our
Own National Airlines
By “Herui” Abebe Tecle,
A/Professor of Aviation, ERAU, Miami.
On
April 24, 2003, Mr. Negusse G. Micael (“Ato Negusse”) requested that I provide
additional information pertaining to “the exact manner the GoE acquired its
plane/s?” Ato Negusse was referring to
an article, “Eritrean Airlines: Professional Career for the New Generations”
that I submitted to Asmarino.com via Ertra.com on April 19, 2003.
On
March 25, 2003, Mr. Mebrahtu Habte (“Ato Mebrahtu”), executive director of
marketing with Eritrean Airlines had a press release statement that came out on
allafrica, airlinequality.com, under “Eritrean Airlines”. A similar coverage is
also provided in Shaebia.org, April 17, 2003, “Maiden Flight of National Flag Carrier,
Queen Bee”, in Aviation Daily, May 5, 2003, “Eritrean Airlines Launches
Services with One 767-300ER” and perhaps on most Eritrean newspapers and few
European websites. Ato Mebrahtu, stated
the following:
1)
“The first commercial
aircraft, a Boeing 767-300, is scheduled to arrive in the country by 1
April. The 217-seater is being leased
with the option of purchase from the manufacturer.”
2)
“A second aircraft, a
Boeing 757, will be purchased directly from Boeing before June.”
I
believe Ato Mebrahtu’s message answers the “one question” Ato Negusse had for
me, but if detailed breakout is necessary, I am more than happy to provide the
following for the benefit of other Asmarino.com readers. Thank you, Ato Negusse for the request and
opportunity.
On
November 26, 2002 and February 22, 2003, I had the opportunity to take part in
the B767-300ER aircraft negotiations between Eritrean Airlines of Eritrea (not
the GoE) and Boeing Aircraft Holding Company (“Boeing”) in Seattle. In these negotiations, Eritrean Airlines
invited me to participate and the identification cards issued by Boeing to the
participants read “Eritrean Airlines”.
The aircraft lease proposal was made available to the Chief Executive
Officer (CEO) of the Airline based on the Airline’s merits: sound business
plan, qualification of line and staff management, feasibility study, travel
pattern of its patrons, productive labor force …etc., and not on its
affiliation to the Government of Eritrea (“GoE”).
Boeing
as an aircraft manufacturer offered lucrative package incentives with the
aircraft to Eritrean Airlines. On the
other hand Eritrean Airlines as a startup airliner, needed to establish line of
credit and a working relationship with the manufacturer. Consequently, Eritrean Airlines (“Lessee”)
entered a three-year dry-lease agreement (“the Lease”) with Boeing (“Lessor”). Highlights of the Lease are as follows:
1)
The Lease is classified
as progressive lease, since it provides the lessee (Eritrean Airlines) a low
monthly rental payment for the first year and gradually increases toward the
end of the term.
2)
The Lease also allows Eritrean Airlines a
purchase option after six-month, a year, or at the end of the three-year term
at the prevailing market value.
3)
The Lease has an extra
two-year extension option, if the lessee desires to do so at a new lease rate
that reflects the market value.
4)
The Lease prohibits
Boeing from selling the aircraft to a third party without giving Eritrean
Airlines the first refusal.
In
response to Ato Negusse’s request, the above described are the basic terms and
general conditions on how Eritrean Airlines acquired the B767-300ER (ER stands
for extended range). I hope Ato Negusse
will excuse me if I continued to expand on the subject and provide extra
information and analysis to the rest of the readers within the frame reference
of the official press release.
According
to the Airline’s business plan, senior management considered to buy a B757-200
from Boeing as Ato Mebrahtu stated it.
However, some people assumed that this was a new airplane out of the
production line. Boeing owns several
parking lots full of used airplanes that are trade-ins, return from lease and
repossessed. Boeing wants to move these
airplanes as fast as possible due to the competition with Airbus, the world
leader in aircraft manufacturing at the present time (a position held by Boeing
for many years). The acquisition of the
B757 (narrow-body- 185-seater) or another B767 (wide-body 217-seater up to 250)
is intrinsically related to the success of the wide-body already in place. The
revenues generated from the operation of the first will be used as a down
payment for the second. This is what is
described as self-supporting airline.
Thus, by necessity, the second aircraft is bank-financed purchase. This makes sense because; interest rates are
record low in the USA. The size of the
second aircraft will also depend on the short-term demand traffic volume of the
first B767. If there is heavy traffic,
a wide-body will be in place, but if the demand is light as the business plan
anticipated it, a narrow-body will be installed. However, if the demand is not promising, the second aircraft will
be on lease powered-by-the-hour (pay for hours used only) in lieu of
bank-financed purchase. Additionally, a
B727-217C (Super 27) a 175-seater with refurbished P&W new engine aircraft
that costs less than $3 million is under consideration as a standby and for
charter services when the second airplane shows some success. The Airline has a flexible business plan
that is adaptive to constantly changing market conditions. In my view, the plan is customer
driven. When we patronize our national
airline, a wide-body with more legroom and belly cargo space for our goods can
be utilized instead of a narrow-body.
The aircraft of choice may even shift from B757 to another B767 to take
a full advantage of the cross communality of spare parts and pilot
utilization. At the present time, a
wide-body aircraft is relatively cheaper to acquire than a narrow-body. A year ago, B767-200 was cheaper than
B757-200 and B767-300 was about ten million dollars higher than B757-200 as
indicated in the table-1 below. This
year the gap has narrowed down due to significant depreciation of B767s. The depreciation is mainly associated with
United Airlines’ filing Chapter 11 protection, the demise of Ansett Australian
Airlines and overcapacity of B767s especially with three US major airlines
(American 83, United, 55, Delta 120, a total of 258 B767s with no significant
market). The question is can we fill up
the two wide-bodies if we acquire them?
The customers have to answer this question with their advance booking.
Table -1
Semi-Annual Aircraft Value, July 2002 (in Millions US$)
|
B-757-200 |
|
|
Table-1 |
|
Date of
Manufactured |
Low |
Middle |
High |
|
1982 |
10 |
11.8 |
13.5 |
|
1984 |
13 |
15.3 |
17.6 |
|
1986 |
16 |
18.8 |
21.7 |
|
1994 |
28 |
33.0 |
37.9 |
|
B-767-200 |
|
|
|
|
Date of
Manufactured |
|
|
|
|
1981 |
7.9 |
9.9 |
11.9 |
|
1983 |
9.7 |
12.2 |
14.6 |
|
1985 |
11.6 |
14.5 |
17.4 |
|
1987 |
13.4 |
16.8 |
20.2 |
|
1989 |
15.3 |
19.1 |
23 |
|
1991 |
17.1 |
21.4 |
15.3 |
|
B767-300 |
|||
|
Date of
Manufactured |
|
|
|
|
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 |
Sources:
“Aircraft Value News” Aviation Daily
By PBI
Media LLC. July 29, 2002
As
we all know, subsequent to the events in Iraq, US major airlines parked many
airplanes on March 2003, and saturated the airline market. Consequently, negotiation for the second
aircraft was delayed to get better offers from the same manufacturer or major
leasing corporations like: ILFC (owns 600 commercial jets), GECAS (owns 1,110
jets), GATX, Airclaims, Pembroke Capital, Focus Aviation, CIT Aerospace…etc. In simple terms, the first aircraft was
acquired through negotiated business deal and the second aircraft is open for a
competitive bid or whichever method produces greater benefit to the Airline.
On
my own account, I would like to share some thoughts if I can earn the trust and
patronage of other concerned Eritreans to fly with Eritrean Airlines for we
should invest in this enterprise when it becomes public. Investment could be in monetary value or
patronage. When we give our business to
Eritrean Airlines, the airline can improve services by purchasing more
airplanes, increasing routes or adding frequencies for the benefit of the
traveling public. On the other hand,
the airline will hire, train and educate young Eritreans to meet the increased
future demands for air travel. Airline
as a common carrier belongs to the traveling public; if we need to travel, we
should support its development. On the
basis of the current world economy and airline crisis, it is imperative that
foreign international airlines may come and go depending on the profitability
of our market. We should establish and
develop an airline of our own while we have the momentum. As bad money kicks out good money out of circulation
when both are offered at the same time and market (as in the case of nickel
dollar replaced silver dollar; and silver over gold in monetary history), it is
also a fact that in the international airline market, a global airline cannot
flush down a small national carrier as long as the national government protects
its carrier in bilateral agreements. In
international airline competition, the size of the airline is not an
asset. Ticket price, routes and
gateways are the determining factors for airline’s survival. These conditions are set during bilateral
agreements, and often times they are favorable to smaller carriers.
The
current dry-lease agreement with Boeing is completely different from the two
wet-lease agreements experienced in Eritrea before. There is a significant difference between the relatively young
third generation fuel-efficient jets vs. the old gas-guzzler first generation
airplanes (in the case of Red Sea Air, the “Yak-42” is a successful aircraft in
international markets, but limited in performance for Asmara’s high altitude). In a dry-lease agreement, all of the flight,
cabin, and maintenance crews, line and staff management are all “home-grown”
nationals. These conditions make the
new Eritrean Airlines a low-cost operating airline. In the case of wet-lease agreement, the aircraft owner determines
everything and the lessee’s task is to bring passengers. Flight crew, maintenance and management
including fuel and tickets are provided, unless specified in the lease to
reflect AMCI (aircraft, maintenance, crew and insurance).
Alexandra van Marle with Aircraft Economics, “Cloudy Skies” (March/April 2003 issue) wrote an interesting observation and summed up the current market conditions for B767 in the year 2003 as follows:
“One
of the most significant effects on the operating leasing market recently has
been the fall from grace of United Airlines, the US carrier which filed for
Chapter 11 bankruptcy at the end of last year.
The 767 market has been awash with aircraft grounded by United, and
rates are said to have fallen from $350,000 to $200,000 for mid-life aircraft,
a slump of 43%.”
Mr.
Klaus Heinemann, CEO, debis AirFinance in an interview with Airfinance Journal,
March 2003, in an article “Lessors look on the bright side” said the following
about the current market demand for B767 in the Western world. “Maybe the only
surprise is the fall from grace of the 767, which used to be the darling of
investors and analysts. It suddenly
seems to have lost its appeal, which might partly have to do with the A330
aircraft being a strong competitor.”
This is partly true, that the A330 is a major competitor in the 250-seat
market. In my opinion the B777 kicked
out the B767 out of the long-range market and in domestic US market the narrow
body jets have dominated it. Most of
the business travelers look for the B777 that provides sleeperettes in the
first class and slumberrettes in business class. New development in technology of this kind made the B767
affordable for startups like Eritrean Airlines. For instance, UT Finance is advertising a 1984, B767-200ER for
$10 million dollars (asking price, before negotiations). There are several B767-200s for less than
$12 million asking price. I wonder what
they will cost after negotiations. When
prices are so low, a wait-and-see attitude has no room for a businessperson. Certain entrepreneurs have started some
unique airlines: Hooters Air (a restaurant chain) started airline operations
with a B737. On May 3, 2003, Castaways
took off from Miami for Cancun with B727 the first of its “Nude Flights.”
Alexandra
Van Marle said it all, who wouldn’t lease a B767-300 for $200,000 per
month? It is an interesting monthly
rental rate as it is and when a motivated manufacturer offers additional 25%
off the above-stated current industry standard rate is definitely a buyer’s market. This is because the parking lot is full of
airplanes, which is just phenomenal for startups. Aircraft acquired for such
rate is discounted by 68% (43%+25%) from the original rate charged for
the same aircraft prior to the events of September 11. If this is not the time to lease an
aircraft, when will it be?
Richard
Bittenbender vice-president of corporate finance at Moody’s, in an article
“Betting on paper planes” Asset Finance International, October 2001, said, “But
what is important isn’t today’s value, but the value of an aircraft in a year’s
time. If we don’t do it today, a year
or two from now, the airplanes will be expensive again.
Some
Eritrean critics of the GoE don’t feel that starting an airline business is a
development project. With due respect
to their opinion, airline business is an integral part of the transportation
infrastructure development plan. By any
measure air transport is a major economic force and a source of enormous
wealth. At the initial stage, Eritrean
Airlines has employed 330 people. The
earnings of these people become income to others and through the famous
multiplier effect more jobs are created.
Let me sight a practical example.
In 1987, I was assigned to conduct an economic impact study of Miami
International Airport (MIA) to the South Florida Area, for the purpose of
upgrading the airport master plan. At
that time there were 24,000 people directly employed at MIA. However, the direct, indirect and induced
employment amounted to 168,000 jobs related to the airport. Additionally, the earnings of the employees,
and expenditures of various companies located at the airport had a direct and
indirect economic impact worth of about $8 Billion dollars per year in the area. In this case, the airport is the economic
engine of the entire community.
I
have also read that due to high maintenance cost it is not necessary to promote
airline business at the present time given the current drought and famine in
the country. I consider this a valid
point, but it is a matter of opinion.
Drought and famine have their own causes and they seem to emanate from
the agricultural sector of the economy.
Perhaps, if more people are directed to other occupations such as trade,
fish farming and service sectors as the airline is promoting it; that could be
a permanent cure for famine. I will let
the macro economic experts handle this part and wish to focus on the airline
cost aspect of the comment.
Table -2
US
Airlines Cost Analysis
Cost Per Available Seat Mile (ASM)
In Cents
Per ASM, 3rd. Q. 2002
|
Expenditures |
Majors |
Nationals |
|
Labor |
3.55 |
2.51 |
|
Fuel/Oil |
1.35 |
1.7 |
|
Rentals |
0.88 |
1.42 |
|
Maintenance |
1.19 |
1.31 |
|
Landing
Fees |
0.24 |
0.25 |
|
Advertising |
0.09 |
0.22 |
|
Food |
0.27 |
0.17 |
|
Commissions |
0.22 |
0.17 |
|
Interest |
0.34 |
0.16 |
|
Average
Cost Per ASM (cents) |
8.13 |
7.91 |
|
Source:
Aviation Daily, based on Form 41 Reports, April 2003. |
|
|
Majors: Alaska, America West, AA,
ATA, CO, Delta, NW, Southwest, United, USAir.
Nationals:
AirTran, Aloha, Frontier, Hawaiian, JetBlue, Midwest Exp. Spirit, World.
In
the airline business in addition to maintenance costs, there are other critical
expenditures including but not limited to: labor (the highest in most
airlines), fuel/oil, rentals, interest, food, landing fees and commissions. On the source of revenue side there is the
most perishable commodity called seat.
In every flight, unsold seat is like a rotten tomato that a grocery
store owner has to throw away. All of
the above-described expenditures are directly related to the revenue generated
by each seat on board the airplane.
This is measured in terms of cost per available seat mile (ASM). In other words, the cost of revenue paid
passenger to transport one mile or kilometer.
Table –2 above shows the average cost per ASM (CASM) in cents. The major airlines in the USA are
experiencing eight cents per seat per mile and the nationals (smaller airlines)
just about the same. Eritrean Airlines
is offering 217 revenue seats in the market.
If all the seats are sold (100% load factor, seats taken/available seats)
at a reasonable ticket price, then the expenses are part of doing business and
we should not worry about high operating costs (which in developing nations
operating costs are relatively low due to inexpensive labor cost. This is where dry-lease kicks in). However, we should worry about unsold
seats. If we want our airline to
benefit the people we care for, we should patronize our own Airline. The Airline business plan indicates that the
airline can breakeven with 60% load factor (that is if 130 seats out of 217 are
sold at every flight or on the average).
Revenue seats sold over 130 seats will start producing profit that
warrants the second airplane and thereafter.
How realistic is the load factor of 60%? Let us take a historical example. During the 40 years of airline regulation in the USA, there was no single bankruptcy case with the major and regional airlines. They were governed by a simple formula that reads:
Profit = Ticket
Price x Load Factor
Cost of Operations
In
this formula profit was set at 10% of ticket price, ticket price was fixed by
distance traveled and load factor was assumed at 55% by the civil Aeronautics
Board (CAB). The only variable that was
not strictly regulated was the cost of operations. When cost of operations increases due to labor, fuel or
maintenance costs; the airlines periodically ask the regulatory agency (CAB) to
increase price of the ticket by the same percentages. So much for the good old days that ended in 1978 in the USA. However, the international market is still
regulated. Routes, city-pair markets,
frequencies and general ticket prices are determined during bilateral
agreements between two civil aviation authorities of the respective
nations.
In
the case of Eritrean Airlines, the 60% load factor is derived from the prevailing
market conditions, but we can infer from the above-stated example that the
entire US Airline industry operated at 55% load factor and survived for forty
years. If our productive forces are
willing to work as a team and customers are willing to patronize the national
flag carrier, the Airline has a competitive cost advantage for a bright
future. In the business world, no one
can make money in the past, let us think forward.
In addition to Ato Negusse’s request for more information, there were many concerned Eritreans who wrote positive responses about the article “Eritrean Airlines: Professional Career for the New Generations” (e-mail comments are available with the Eritrean Aviation Group at Ertra.com, summary of the input will be forwarded to Eritrean Airlines Marketing Department) I want to thank all of them from the bottom of my heart for taking the time to express support. Others who called in and expressed the same: Woldai Beiene, Sara Berhane, Kibreab Zere, Goitom Siele, Fessehaye Beimnet, Amanuel Ambaye, Berhane Asgedom, Kesete Tekle, Stella Asmelash, Tewodros Tesfaldet, Haile Tekle, Negassi Seyoum, Dawit Tekeste, Tesfamariam Ambaye…etc please accept my appreciation for the kind words of wisdom extended to me.