Fifteen foreign airlines have suspended flights to Israel over the past month leaving passengers almost dependent on Israeli carriers El Al Israel Airlines Ltd. (TASE:ELAL), Israir (TASE: ISRG), and Arkia, which can be relied on to carry on flying even during wartime. But Israelis have been surprised to discover that the fares charged by the Israeli airlines have increased compared with the corresponding periods last year, and there has been widespread public criticism.
As a result, on Wednesday the CEOs of the Israeli airlines were summoned to a meeting with Minister of Economy and Industry Nir Barkat. Arkia's delegation was the first to meet the minister, followed by El Al CEO Dina Ben Tal Ganancia who reached agreements on reducing ticket prices to four destinations.
"Globes" spoke to Israir CEO Uri Sirkis shortly before the planned meeting with the Barkat. "I was surprised that I was invited," he said, "Our prices are fair and match the prices usually charged during the summer season."
Sirkis insists that the company has restricted, "Maximum fares so that they correspond to those in 2022-2023. For the past two weeks, a campaign has been underway on prices and we have not been attacked because our price levels are fair. During this period three things happened: there is less supply, there are still no arrangements for children and Tisha B'Av on August 13. So people who were cautious about not flying abroad are flying now and there is a peak in demand that even in a normal year would have pushed prices up."
But you have limited pricing of maximum fares, so you can also intervene in the price rise that results from demand.
"If the Ministry of Economy cared about this, they could make moves that would lower operating costs and allow us to cut the price of tickets - such as helping us in cases where we undertake a wet lease (a situation where the plane and the foreign crew are leased by the company). We pay very high prices for these operations."
"Tourism needs peace and stability"
Since the outbreak of the war, El Al has been at a record high, both in terms of the company's share price and revenue. In contrast, however, Israir is struggling. "For years we have built ourselves up as a tourism and aviation company, and in the current situation there is much less tourism and more aviation," Sirkis explains. "We pay a price for small tourism companies like Diesenhaus, for example, which normally has annual revenue of $80 million. If you look at the results, you see a decrease in revenue, which comes from the merged activity (as an airline and a tourism company), and Israir compensates for this. We don't know yet what will happen in the fourth quarter, but I think we will manage to close a significant part of this gap."
How has the ongoing war impacted you?
"The war has impacts that offset each other. From our point of view, we want peace - tourism is something that requires peace and stability. So it is true that passenger preference at the moment is to fly with Israeli companies and that helps us. We have adopted a strategy of stability - we have not changed our flight schedule since the wave of cancellations and we have not diverted planes to Athens and Larnaca (like El Al). We are sticking to our planned flight schedule. There is a significant increase in the number of passengers. In the second quarter we flew over 300,000 passengers and in the third quarter we are expecting 500,000, which when the workforce remains the same means that profitability has risen too."
Do you think Israelis will learn from what is happening that they should only fly with Israeli companies?
"We see that happening already, and we are very careful with the prices. They are very similar to the summers of 2022 and 2023 and we are not going back on this. We want to show customers who preferred to fly with rivals like Wizz Air that they should fly with us."
"Every Israeli has the right to fly twice a year"
Why do the foreign airlines continue to cancel their flights to Israel, even though there is currently no real threat of an attack?
Sirkis explains, "The aviation industry in Europe is currently suffering from a very large shortage of aviation equipment. This was caused by a chain reaction that started with the Covid on the production lines, both of the planes and spare parts, and continued with a series of problems at Airbus and at Boeing. All these events affected output and export capacity, resulting in a global shortage of aviation equipment.
"Whoever is responsible for business in Europe stands and examines the situation and says, 'On the one hand, I lack planes, on the other hand, there is tremendous demand in Europe, and then there is instability in Israel,' so we have to decide whether to reduce the frequency or cancel flights. The strength of activities is lower than what we have seen previously, and this all stems from this risk management process. Wizz Air is an example of a company that was the second biggest in Israel in 2023 and it still flies to Israel today, but it flies at a much lower intensity. This indicates that it is not afraid to fly, but reduces the scale of activity. This decline of foreign companies will continue even if there is relative calm here, well into 2025."
Avi Nakash, one of the owners of Arkia, said about fares 'Flights are not bread." How do you respond to that?
"That is his opinion. I think that flights have become a basic need. It's true that bread is the most basic product but you can also live without telephones and cigarettes. Today flying is a consumer product in every sense of the word and that's how we also brand it. Even our destinations we call a 'seasonal collection'. We assume that every Israeli has the right to fly twice a year. This is a country where tourism is very expensive, so we offer a much cheaper alternative to people traveling abroad and we see it in our market share, which is rising modestly."
What is the current situation regarding leased planes? How do you deal with the foreign crews and what solutions are there?
"Last year we operated six planes with our crews and another three planes on a wet lease. The foreign crews and the planes were stationed in Tel Aviv and maintained a flight schedule from there. On October 7 and shortly after that they left Israel, and we found a remedy for the problem - we brought in another plane and today we have four leased planes. In my opinion, since the beginning of the security tensions, we have canceled at most 10 flights, and we operate between 40-50 flights per day."
Israir's revenue track
Israir's financial results were received with great disappointment by investors with the share price falling 7% on Wednesday. The results showed a fall in revenue, but improvement in operating profitability and even net profit in the second quarter compared with the corresponding quarter last year. And yet, Israir's share shows poor performance compared with El Al its major rival in aviation in Israel. Since the start of 2024, Israir's share price has fallen 9%, while El Al's has risen 70%.
In the second quarter revenue was NIS 89.3 million, down 15% from the corresponding quarter last year. Israir said the fall in revenue was due to lower demand and activities of subsidiaries, mainly in inbound tourism, due to the security situation following the war since the last quarter of 2023.
However, Israir's gross profit rate jumped significantly to 19.8% of revenue, compared with 12.9% in the corresponding quarter last year. In this context, Israel seems to have found a very profitable income route in the form of "supplementary income," payment for a suitcase stored in the cabin of the plane and services of this type. The company reports that in the second quarter revenue from supplementary products was $6.9 million, reflecting an extra $45 per passenger (on a round trip flight). This adds up to $23-28 million annually.
Israir's net profit rose 44% to $7 million in the second quarter due to the improvement in these profitability rates, despite the decrease in revenue. In the first half of 2024, however, net profit was eroded 19% to $6.3 million, because Israir sustained a net loss in the first quarter.
Published by Globes, Israel business news - en.globes.co.il - on August 22, 2024.
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