Ethiopian Airlines Seeks Saudi Fuel Lifeline as Costs Threaten Its Expansion

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Ethiopian Airlines’ effort to tame its largest operating pressure has taken it to Saudi Arabia, where the carrier is preparing a three-month fixed marginal price fuel deal less as a bet on cheaper fuel than a bid for certainty.

The contract comes after fuel costs increased from 40pc to 56pc of its operating expenses within a year, tightening the financial framework for a carrier with a 117-aircraft order valued at about 30 billion dollars. For Ethiopian Airlines Group (EAG), the arrangement is a short-term shield against an energy bill that is too large and volatile to leave it exposed to the market.

Mesfin Tassew, the Group's chief executive officer (CEO), has depicted the problem as "structural."

"Operating costs in Africa remain high compared with Europe, where airlines benefit from wider competition in ground handling, maintenance and airport services," he told Fortune. "In Africa, limited competition leaves carriers exposed to higher charges across the aviation supply chain."

Fuel now accounts for about 31.4pc of the industry’s total cost base. Airlines are raising fares and cargo rates to absorb an expected 70pc year-on-year jump in jet fuel prices, a surge forecast to add 100 billion dollars to the industry's aggregate fuel costs.

Data on the volume and cost of fuel Ethiopian Airlines uses are hard to come by. However, industry analysts state that fuel is one of the Airline’s most decisive cost pressures, consuming an estimated 2.2 billion dollars to 2.4 billion dollars a year. With the global average jet fuel price last year at around 90 dollars a barrel, analysts estimated the Airline, with a fleet heavily skewed toward large wide-body aircraft such as Boeing 777s, 787s and Airbus A350s, used about 3.2 billion litres of jet fuel last year.

Ethiopian Airlines has examined domestic alternatives, including a project with the Ethiopian Mineral Corporation (EMC) to produce sustainable aviation fuel (SAF). The effort stalled after foreign partners waiting to secure the financing required. According to Mesfin, the government should prioritise policies that incentivise domestic fuel production if the Airline’s growth is to be sustained.

The Saudi arrangement is framed as a hedge against volatility, while domestic SAF projects remain economically unviable due to a lack of project finance.

Ethiopian’s aircraft order is expected to be finalised in December this year. Larger wide-body aircraft are not expected to arrive for up to eight years due to global delivery delays, while smaller aircraft may be delivered two years after orders are placed. The CEO disclosed that financing will be arranged either through lease contracts or loan agreements.

According to Aaron Munetsi, who represents the Airlines Association of Southern Africa and is preparing to retire from an industry where he has spent his working life, an airline of Ethiopian’s size may consider hedging. But he cautioned that crude oil volatility makes financial hedges risky.

"A fixed marginal price supplier contract is more practical because it can provide security of supply regardless of price swings," he told Fortune.

Munetsi argued that fuel security should not be left to airlines alone. Aviation delivers benefits across the national economy, making jet fuel a matter of public interest.

"Governments should take responsibility for reliable fuel access and protecting operations from shortages or price shocks," he said.

The pressure is not limited to fuel, however. According to Munetsi, billions of dollars' worth of orders and delivery delays of up to eight years force African carriers to protect their market share with the aircraft they have. He proposed a fleet-management strategy under which airlines continue operating aircraft 25 years or older, provided they undergo rigorous D-checks that return them to what he called “brand new” technical condition.

He urged regulators to relax age-based restrictions on African airlines to help them cope with backlogs and constrained replacement cycles. African airlines operate on margins of about 0.40 dollars per seat, "leaving little room to absorb higher fuel prices, taxes and airport charges."

"The remedy lies in governments cutting taxes and fees while dismantling state-owned monopolies dominating airport services," said Munetsi.

Munetsi identified maintenance, repair, and overhaul (MRO) bottlenecks as a cost driver. Ethiopian Airlines’ MRO facility, which he described as world-class, could lead to a segmented specialisation model across the continent. Under it, Ethiopian might focus on landing gear while partner hubs in South Africa and Egypt handle engines and other components, reducing reliance on costlier facilities in the Middle East and Europe.

Willie Walsh, director general of the International Air Transport Association (IATA), set the Ethiopian case against a broader continental backdrop. In an opening briefing at the IATA annual general meeting held last week in Rio de Janeiro, Brazil, he set his expectations on traffic on the continent to grow by 10pc this year despite high operating costs.

Walsh urged that implementing an open skies agreement is critical to unlocking that growth. He also pointed to Africa’s potential to lead in synthetic fuel production, citing its natural resources and relatively low-cost renewable energy. Yet he called Africa one of the world’s highest-cost operating environments, with elevated fuel prices, taxes and airport charges weighing on carriers.

Despite the pressure, Walsh believes African airlines are still expected to remain profitable this year. Globally, traffic is projected to grow by 2.1pc, or 3.5pc if the impact of the Middle East conflict is excluded. Airline revenues are rising, but a 100-billion-dollar increase in the global fuel bill, bringing it to 350 billion dollars this year, is eroding much of the gain.

According to Walsh, net profits are forecast to fall from 45 billion dollars in 2025 to 23 billion dollars in 2026, with margins narrowing from 4.2pc to about two percent, levels he called “wafer-thin.” He warned that the year will be difficult for carriers recovering from the pandemic, as well as for Gulf-based airlines. However, passangers demand remains resilient, with 86pc of travellers expecting airfares to move with oil prices and nearly half planning to spend more on travel this year than last.

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