El Al brought open skies down on itself

Stella Korin-Lieber

El Al had years to improve competitiveness, but found it more convenient to preserve Israel's national carrier as if it were still a protected monopoly.

Could El Al Israel Airlines Ltd. (TASE: ELAL) collapse? Yes, but open skies won't be the reason, but an excuse. El Al had years to improve its competitiveness, but its owners, executives, and workers found it more convenient to preserve Israel's national carrier in stasis as if it were still a protected monopoly, a government company controlled by the special interests of the politicians and unions, which believed that lobbying would save it time and again.

Nonetheless, there are several corrections that the government should make now, in parallel to open skies, especially amending the Restraint of Trade Law, consumer protection laws, and other laws to meet the contemporary conditions in civil aviation to enable El Al and Israel's other airlines to adapt. It is quite possible that implementing open skies will completely change El Al and help the airline, its shareholders and employees, and of course, the public.

In 2004, after endless crises, the privatization of El Al began. A clause in the 2006 Economic Arrangements Law amended the Aviation Services Law, removing the transport minister's exclusive authority over civil aviation. In practice, transport ministers had served the interests of El Al, a government company, which sought to preserve its monopoly.

Then-Minister of Transport Meir Sheetrit, opposed the amendment, but then-Minister of Finance Benjamin Netanyahu pushed it, as did his successor Ehud Olmert, and the Ministry of Transport. The amendment stated that if the Ministry of Transport opposed granting an entry permit to a foreign airline, or to change the frequency of its flights, the number of seats, etc., an inter-ministerial committee would do so. The transport minister would have no automatic majority in this committee, but in practice it merely took over the minister's absolute authority.

The inter-ministerial committee met only once. Because transport ministers had no interest in convening it, to prevent it overruling them, they began approving requests by foreign airlines to increase their flights and seats to Israel. The committee only met when Israir Airlines and Tourism Ltd., owned by Nochi Dankner's Ganden Investments Ltd., requested the right to fly between Tel Aviv and New York. El Al opposed Israir's flights, petitioned the High Court of Justice, claiming that the government had promised it, when it was privatized, not to change aviation policy until Ben Gurion Airport handled 10.7 million passengers a year. Since Israel was a closed market, and decisions were made in El Al's favor, in practice this number could not be reached. The court dismissed the petition.

At the same time, the Ministry of Transport began wooing foreign airlines. Delta Airlines, Germany's TUI and Air Berlin, and other carriers began flying to Israel, resulting in a rapid descent of fares on some routes. In consequence, El Al lost a tenth of its market share and the number of seats to Ben Gurion Airport doubled.

The El Al conservation policy almost collapsed, but many restrictions still blocked a fall in El Al's fares and a massive influx of incoming tourists. For example, low-cost UK-based easyJet plc (LSE: EZJ) makes many flights to Israel, but mainly to Britain. If it wants to fly as a European carrier between Paris and Tel Aviv, it would have to be registered in France as a French company. The open skies agreement with the EU will allow easyJet and its peers, such as Ireland's RyanAir Ltd. ISEQ: RYA, LSE: RYA, Nasdaq: RYAAY), to fly to Israel from anywhere in Europe. The open skies agreement open's Israeli aviation to Europe, since Israel already has open skies with the US under bilateral agreements.

El Al's 4 problems

First, as an Israeli airline, El Al finds it difficult to sign international alliances and cooperation agreements, because of the Arab boycott. Second, the airline is still managed as if it were a monopoly, and even though open skies was a looming storm cloud for years, it never attempted to create other commercial platforms or to adapt to the changes in the global aviation industry. From its Tel Aviv base, it only makes point-to-point flights, even as its peers switched to hub-based operations with complex commercial networks.

Thirdly, El Al has high security costs compared with the airlines it is supposed to compete against. The security of Israel's three airlines - El Al, Israir, and Arkia Airlines Ltd. - costs $120 million a year. Two years ago, the government raised the airlines' share of this cost from the current 70% to 80% when the open skies agreement comes into effect.

The problem is that El Al claims that the figure refers only to direct costs, and does not include other costs, such as lost revenue. The airline claims that the difference is $130 million in fixed costs a year, which is a substantial figure. Obviously, there is disagreement over the number, as there is about the financial value from the sense of security for Jews, both Israelis and in Diaspora, accrued to El Al from its special security, which is a marketing asset. It is also true that, in the past decade, airlines worldwide have had to boost security, for which they bear most of the cost.

Fourthly, keeping traditions has resulted in El Al having surplus manpower. An internal report states that 2,200 of its 6,300 employees are redundant. The cut that nobody dares to speak about - one-third of the workforce - would save $100 million a year. Not to mention the historic employment terms for veteran pilots and other employees, which is a further burden on the airline.

Government failure

Every government ministry has failed to deal with El Al's problematic conduct. Ministers and officials have continued to foster a situation in which the airline's executives have had to beg for regulatory changes, such as amending antitrust laws. The EU and US have gone a long way to protect their airlines by fostering operation and commercial cooperation. US and European carriers sign international code-sharing agreements, which are illegal in Israel. This prevents El Al from signing alliances where possible. Furthermore, airlines have agreements on fares, division of labor, fees, and so on. these airlines operate in Israel under preferential conditions which the EU permits, but Israel bans.

A few years ago, a minor procedural amendment to the Restraint of Trade Law made it possible airlines not to obtain retroactive approval for commercial cooperation from the Antitrust Authority, instead of requiring its prior permission. But the main problems of approving commercial cooperation with airlines organized in international alliances remained in place. Remarks by current Antitrust Authority director general David Gilo and his predecessor, Ronit Kan, about their willingness for further amendments have gone nowhere. Minister of Industry, Trade and Labor Naftali Bennett - the ball is in your court.

Published by Globes [online], Israel business news - www.globes-online.com - on April 21, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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