El Al Israel Airlines Ltd. (TASE:ELAL) is struggling to justify the gap between their situation, as they perceive it, as a company that operates at maximum output and goes above and beyond to enable Israelis to fly, and the public's perception of it as a company exploiting the unique situation created by the war in pushing up airfares.
"What do you think our share of passenger traffic at Ben-Gurion Airport is?" El Al CEO Dina Ben Tal Ganancia asked participants in the investor conference yesterday after the airline published its third-quarter reports. "Most people think it is 80%-90% but the truth is that it is 44%." She also called on the state to try to bring foreign airlines back to Israel, claiming that this is not a statement made for the sake of it, since El Al simply cannot meet demand.
In its third quarter results El Al once again broke its own records. The company reported a 44% increase in revenue, to a record of more than $1 billion in a single quarter, and a 3.6-fold jump in net profit to $187 million. The record results are due to the summer, which is peak season in the aviation sector, but mainly due to the war that has led to El Al becoming the dominant carrier to and from Israel.
Asked by "Globes" about the jump in airfares, Ben Ganancia said, "The criticism is understandable. We raised fares much less than everyone thinks (El Al says there has been a 16% rise in average revenue per passenger). But the alternatives, the entire world of low-cost, for example, does not currently exist at Ben Gurion Airport. People willing to fly at odd hours, or receive less good service, cannot do so now. Book tickets early, even a year in advance."
Following public criticism of the surge in fares, El Al has for some months been implementing a policy of limiting maximum fares on flights. A senior company executive explains that "Our choice is between bad and worse. The result of the fare cap is that for a month and a half now, there have been no negative articles about us on high fares, but the other hand there are no airline tickets available until the end of the year, even to the four destinations with fixed fares."
El Al, controlled by Kenny Rozenberg and managed by Ben Tal Gnancia, operates flights to four destinations at fixed prices: Larnaca ($200); Athens ($300); and Vienna and Dubai ($350). For the other destinations, according to El Al, the maximum prices (economy class flight return fare) are $640 to Eastern Europe, $660 to Western Europe, $880 to Paris and London, $1,690 to East Asia and $1,900 to North America.
The result of the fare hikes are reflected in El Al's revenue from passenger and cargo flights to the US, which jumped 63%, to $1.1 billion in the first nine months of 2024, compared with the corresponding period of 2023, before the war. The company's revenue from flights to Europe jumped 36% to $1.2 billion (almost half of El Al's revenue), and for Asia and Africa there was an 11% increase. In total, El Al's revenue in January-September rose 42% to $2.5 billion, while net profit jumped more than fivefold to $411 million.
The reason for the significantly higher jump in revenue from flights is twofold: the same four destinations at fixed prices, but also the fact that El Al flies 43% of Israelis to Europe (compared with 21% before the war). On transatlantic flights, where competition is almost non-existent today, El Al operated 90% of flights (compared with 35% before the war).
Offsetting losses
El Al's strong results have generated impressive cash flow of $800 million since the start of 2024, which explains how the company had the money to recently bid to buy control of credit card company Isracard, although it swiftly backed out. The company now has $1.2 billion in cash, and its equity, which was negative until two quarters ago, now stands at $371 million.
Despite El Al's big profits, the state will still not see taxes from the airline in the coming quarter, as it did recognize tax expenses of $58 million in the quarter, but did not pay because it is still "carrying" losses of hundreds of millions of dollars from the 2020 Covid crisis.
El Al notes in its reports that the results in the fourth quarter will be very good, but not as good as the third quarter, and says, "Despite the increased demand as mentioned, and due to the company's capacity limitations, the company expects that in the fourth quarter of 2024 there will be a decrease in the company's operations in terms of available seat kilometers (ASK) relative to the current quarter." In the same quarter last year, the company earned $40 million.
Executive salaries to jump
Near the publication of the financial report, El Al summoned a shareholders' meeting to approve salary hikes of hundreds of thousands of shekels for two senior executives - Ben Tal Ganancia and chairman Amikam Ben-Zvi. If the meeting approves the salary increase, the company's CEO's total salary cost will jump about NIS 930,000 to NIS 6.8 million, and the chairman's salary cost will increase to NIS 5.1 million, up NIS 900,000 from his present salary. <>Ben Tal Ganancia's base salary increase will jump by about 25% to NIS 150,000 per month, linked to the consumer price index, and the chairman of the board of directors' salary will also jump accordingly, as Ben-Zvi's salary is 90% of of the CEO. Like last year, the company is seeking to grant both executives equity compensation in the form of options, worth NIS 1.1 million to the CEO and NIS 830,000 to the chairman.
These two salary increases will be added to the bonus increase revealed by Globes that the executives will receive, amounting to more than NIS 500,000 each. As a result, the CEO's annual bonus will be NIS 3 million, and the chairman's bonus more than NIS 2.4 million.
Buy recommendation from Leumi
El Al is currently traded at a market cap of NIS 3.45 billion, after the share price has risen 200% over the past year. The main beneficiary is controlling shareholder Kenny Rozenberg who has earned NIS 1.1 billion on his investment after making a major gamble during the Covid pandemic.
Two days before El Al's financial results were published, Bank Leumi published an analysis of El Al's stock. Leumi sees a 37% upside, mainly due to the jump in the company's cash. They claim that the result is that, according to the current pricing of the stock, the value of El Al's operations has shrunk (in parallel with the increase in cash) and therefore its value should continue to rise.
El Al's market share is expected to decline, this is almost a consensus in the market, and yet, as mentioned, Leumi analysts' recommendation is "Buy" due to the large amount of cash the company has accumulated, and the assumption that its results in the "return to normal" will not be worse than before the war.
Published by Globes, Israel business news - en.globes.co.il - on November 21, 2024.
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