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Ethiopian trade skirmish

Airlines are national businesses that sometimes fly internationally

Gulf News

I have spoken before about the antiquated system that governs air transport. You may think that it is more than a little wonkish to worry about such things. You may think it, but not if you are Etihad Airways.

Etihad have been refused access to Addis Ababa, the capital of Ethiopia. This is despite the fact that the governments of Ethiopia and the UAE have a memorandum of agreement in place, and despite the fact that Etihad has previously flown to Addis pursuant to that agreement.

Now, having apparently agreed to allow flights to recommence, and having issued the necessary operating permit, that authority has been pulled by Ethiopia. Etihad, and its passengers, have had to make other arrangements.

Did you see the layers of complexity in all of this? First there is a Memorandum of Understanding between the two governments, Ethiopia and the UAE. It was agreed pursuant to the Chicago Convention of 1944. The MoU agrees how much capacity can be flown between the two countries. The market does not decide this, the carriers that are taking the risk do not decide this, the governments of Ethiopia and the UAE do.

To its credit, this creates its own industry, with each airline, airport and other interested party lobbying the government on each of these agreements. That is the only upside.

Once the inter-governmental MoU is agreed, the UAE then designates airlines to use some or all of that capacity. The airlines will need to be ‘substantially owned and effectively controlled’ by nationals of the UAE. There is no official definition of what substantial ownership and effective control might look like, so it is a case-by-case thing – or more accurately, a country-by-country thing.

Each country is different. The USA strictly limits foreign ownership to 25 per cent of voting shares and 49 per cent of non-voting shares. The UK has no limit, preferring the board of each airline to do what it thinks necessary if its route rights are threatened. That is a good approach, because it recognises that this is a two-way street.

First, the designating country must designate and then the other country must accept that designation. So, having been designated to operate this capacity by the UAE, Etihad then has to obtain an operating permit from the Ethiopian side before it can start operations.

As we have seen, that permit can be pulled; even once the airline has started selling tickets and entering into obligations.

In the scheme of things Ethiopia refusing Etihad access may not sound like much. It is not an all-out attack on the UAE by Ethiopia; it is not even a trade war. But it is a trade skirmish. Because make no mistake, it is all about trade. Ethiopia fears that Etihad will take passengers from Ethiopian Airlines. That is notwithstanding that Ethiopian is one of the very first airlines in the world to fly the brand new Boeing 787 aircraft.

They have a point. A very narrow point.

There is no question that Africa’s airlines do not have parity with airlines from other countries that also fly into Africa. For north-south flights, non-African carriers fly about 60 per cent of the passengers. For east-west traffic, that number is nearer 75 per cent of all passengers. This worries Ethiopian Airlines, and it seems Ethiopia itself.

For a very long time, we saw airlines being used as an arm of the state. There was much national pride in having your flag at distant airports – so much in fact that many states were prepared to continue to fund extremely unprofitable airlines to ensure the flag kept flying. Generally, those days are gone, but not completely.

I hasten to note that Ethiopia is not to accused of this. Ethiopian Airlines is a very fine airline with a wonderful reputation and brand new B787 equipment. It is a good airline with good people.

So why did they withdraw the operating permit? It is hard to think that there is anything other than short-term thinking at play. Etihad, with its network of on-ward connections over Abu Dhabi to Asia and other points is a serious competitor for Ethiopian Airlines. It is also a force for trade, development and growth for Ethiopia, but Ethiopian Airlines is unlikely to see it like that.

For as long as we continue with the treaties and practices that make up the Chicago Convention system Ethiopian Airlines, like every other airline, cannot establish hubs outside of their home base country and to develop into true world trading forces. Airlines are national businesses that sometimes fly internationally. They are not international businesses. If you think that hyperbolic, think about the resistance Gulf carriers are facing trying to develop into Canada.

Ethiopian Airlines has convinced Ethiopia to rely on the very instruments that are slowing down development and growth, the Chicago Convention system, and to hide behind its terms. The irony is obvious.

Andrew Charlton is Managing Director of the Europe-based strategic advisory, government and public affairs firm, Aviation Advocacy.