Passenger numbers at Tel Aviv's Ben Gurion Airport are at record levels, but El Al Israel Airlines Ltd. (TASE: ELAL) is not managing to benefit. The airline increased its turnover by 2.5% in the third quarter in comparison with the third quarter of 2017, to $642 million, while the number of incoming tourists rose by 6%, and the number of Israelis who flew overseas rose 14%.
The main reason for this situation is competition, especially against the low-cost airlines, and so far El Al has sustained body blows from it. In the third quarter, its market share fell 10% to 23.9%.
The good news is that the price of jet fuel has been falling for two months. Jet fuel is El Al's main raw material. A fall in its price ought to mean improved profitability, but at El Al the good news finds it hard to turn into cash. Somehow, some expense, payment, agreement with pilots, always pops up to take a bite out of cash flow and profit.
Pilots' agreement - good or bad?
El Al continues to cosset its pilots. After over two years of negotiations and a long mediation proceeding, an agreement was reached between the company and the pilots whereby the pilots' aggregate pay will rise by NIS 80 million annually to NIS 635 million. This important agreement, which is valid for six years, does raise the pilots' basic salary, but it also allows the company to benefit from industrial quiet, flexibility, and from the ability to utilize its pilots and planes better. Moreover, the pilots will work longer hours for their basic salaries, so that the amount of expensive overtime hours will decline.
The agreement also means that El Al will be able to plan flights more efficiently, and thus reduce jet fuel consumption. The numbers are big - the saving could reach tens of millions of shekels annually.
Nevertheless, although the agreement carries benefits for the company, it makes no sense that a limping company, with high financial leverage and substantial risk to its business, should pay so many employees so generously. How generously? NIS 620 an hour! That is the figure that emerges from analysis of the agreement. This is the salary level of a CEO or VP in a public company.
In that kind of situation, how is it possible to earn profits, or even survive in such a competitive market? The external threat from El Al's competitors, large as it is, is less severe than the internal threat from its pilots' pay. Beyond the pay figure itself, which will weigh on the company's results, how is it possible to run a company with super-employees and regular employees? It is surely only a matter of time before the regular employee come up with their own demands and try to take a slice of El Al's cash.
True, there are labor agreements, but agreements don't solve the problem of disgruntled workers, or workers with low output. El Al is not just a company of pilots with inflated salaries, it is also a company that a few years ago was obliged to undergo restructuring and streamlining. Only when it becomes a lean and efficient company will it become genuinely profitable, without the need for favors from the price of jet fuel and quiescent employees.
Meanwhile, El Al manages to keep going, and that could continue for a while. But the fear is that this company will eventually reach a point where its very existence is in question, and then, note, the question will probably reach our pockets. El Al may be a private company (controlled by the Borovich family's Knafaim Holdings), but it has a public pedigree. It is the state's flag carrier, and it is vital to the country and its security.
This means that if El Al deteriorates to the point that its future is at risk, it could very well be that the state will save it. In other words, we will foot the bill for the expensive pilots.
Pilots union: "The agreement is based on greater efficiency"
The El Al pilots' union says in response to the criticism that has been voiced of the agreement that the management signed with it that "the agreement is built upon greater efficiency; once it is implemented we will repay the company millions of shekels."
The improved efficiency that the pilots' union talks about results from changes in working procedures that are being implemented in parallel to their pay rise. The most significant element is the reduction in the number of crew members in the flight cockpit: for flights to the US, for example, there will be three pilots instead of four, and for flights to Europe there will be two pilots instead of three. For El Al, this means a dramatic cost cut, not just in the flying hours it pays, but also in peripheral costs such as transport and hotels.
El Al's crew scheduling will also become more efficient. In the past, a third of its flights were not manned in advance, and it depended on calling up pilots as needed and filling holes in the schedule ad hoc. Under the new agreement, flights will be almost entirely maned in advance. El Al will thereby not have to pay supplements to pilots assigned to flights at the last minute.
Published by Globes, Israel business news - en.globes.co.il - on November 26, 2018
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