Can streamlining and state aid save El Al?

El Al plane at Ben Gurion airport Photo: Michal Raz Chaimovitz

Despite its dire situation, El Al has strong cards in its negotiations over a rescue package with the Ministry of Finance.

The state won't let El Al collapse. That was the instruction that the Ministry of Finance received from the previous government and it remains the guiding principle now - and El Al knows it. The Ministry of Finance wants to rescue El Al with a loan backed up by the controlling shareholder injecting a matching sum. El Al wants a grant.

El Al CEO Avigal Soreq sent a letter to Minister of Finance director general Ram Belnikov earlier this week dismissing his ministry's offer of a $50 million balloon loan convertible to shares and setting out El Al's streamlining plan. This plan involves significantly reducing the airline's fleet from 45 to 29 planes and focusing on the North American market and core destinations in Europe. At the same time as shrinking the fleet, the work force would be cut by 1,500, in addition to the 1,900 employees already laid off over the past year. The Ministry of Finance has yet to respond to this proposal.

To get back onto the runway to recovery as a lean and efficient company, El Al requires a plan that meets all aspects of its competitive needs. The stress on flights on routes to the US, in which planes are fuller and less subject to seasonal fluctuations is the right focus. Regarding Europe, many routes have long ago been conquered by low-cost carriers. However, reducing the number of destinations may harm the loyalty of some passengers, mainly frequent flyers.

The state has a 13% stake in El Al, after last year buying shares for NIS 116 million. The company has $3.3 billion in debt, mainly to banks and financing institutions but the NIS 1 billion debt to customers over canceled flights due to Covid, which was critical for rebuilding confidence in a company that wants to recover, has been covered and now El Al is demanding compensation from the government 'similar to that given to other industries' and has announced a major streamlining plan, which many believe should have anyway happened a long time ago. In 2019, the company had 6,300 employees and a fleet of 45 aircraft, which by the end of 2021 might have been whittled down to 2,800 employees and 29 aircraft.

From El Al's point of view, another loan is not a solution. The company claims that it has not been able to realize its potential because of the health restrictions on travel imposed by the Israeli government and this is true. It is also true that other industries like the hotel sector have been handed government compensation. But the important question is whether government aid will save El Al in the long term, or whether it will just let it keep its head above the water.

In his letter, Soreq details the streamlining plan that he must now present to El Al's workers committee. El Al workers committee chairman Sharon Ben-Yitzhak told "Globes," "While we've been busy forming an agreement for voluntary early retirement for 200-300 employees, the management comes along with this new number.

The workers committee has already declared a work dispute, which will allow them to take disruptive actions, and they won't hesitate to do so. Histadrut transport workers committee head Avi Edri said, "We have just completed layoffs of tenured El Al employees and we are asking the Israeli government to get off the fence and introduce a more flexible furlough scheme for the aviation industry."

As of the end of June 2021, El Al had 2,873 employees including 1,980 tenured employees, 745 untenured employees and 149 employees abroad. An additional 1,400 employees were on unpaid leave. The new planned layoffs would leave the company with 2,800 employees.

What caused the current crisis?

While the aviation industry worldwide is beginning to see signs of recovery, the Israeli airline sector has not, even though it was banking on a boom in the busy summer and holiday season. But in peak season, Prime Minister Naftali Bennett advised Israelis not to travel overseas and returning Israelis from most countries were required to isolate after coming back home. This restriction was lifted on September 3 for fully vaccinated Israelis. On top of all this, the ban on non-Israeli passport holders entering the country remains in force.

What is El Al's financial situation?

The company continues to run up huge losses, amounting to $167 million in the first half of 2021. A 'going concern' qualification continues to be attached to its financial results by El Al's auditors, and there are questions about the airline's ability to meet its debts.

El Al has debts of $3.4 billion, including $1.1 billion in debt to banks. The company's equity deficit has climbed above $300 million and short term cash and deposits available to the airline amount to $190 million, and the company has assets of less than $360 million.

Revenue in the first half of 2021 amounted to $340 million, down 30% from the corresponding half of 2020. Despite the rise in gross loss, the company achieved a sharp cut in financing expenditure, influenced by jet fuel hedging deals, and this helped El Al cut losses compared with the first half of 2020, when losses amounted to $244 million. El Al's losses totaled $531 million in all of 2020.

What are El Al's options?

In addition to streamlining the fleet, El Al is trying to enter potential new markets. Soreq recently told "Globes" that El Al is trying to appeal more to the Arab market, a segment that it has neglected in the past and which currently prefers foreign carriers when flying to Turkey, the UAE, Eastern Mediterranean and further afield. El Al is also making greater efforts to appeal to the haredi market, which also often prefers foreign carriers, when flying to the US, London and Brussels.

Another option is a merger and this is by no means off the agenda. It could be that the reduction in its fleet is preparing the ground for a merger with either Israir or Arkia. El Al with its Dreamliners would fly to more distant destinations, while Israir or Arkia would focus on popular vacation destinations.

Yet another option would be liquidation and restructuring. But this would be unlikely. Controlling shareholder Kenny Rozenberg has invested $160 million so far in the company, and is set to invest more. Rozenberg attached a letter to the one Soreq sent to Belnikov, in which he reiterated his commitment to El Al and recounted that he had already invested $163 million in the airline and that he would stand by his obligation to invest a further $43 million.

Is there any demand for used aircraft?

The challenging plight of the global aviation industry means that the market is flooded with used passenger aircraft for sale, while many that were leased have been returned to their owners. El Al is also striving to cancel its leasing agreement, while trying to sell part of its Boeing 737 fleet.

El Al's fleet of 45 aircraft includes 27 that are owned and 18 that are leased. The company has 15 Dreamliners, of which eight are leased. These will not be sold.

El Al also has six Boeing 777-200 aircraft with an average age of 18 years that are unlikely to find buyers. At best El Al will get several million dollars for them for parts and scrap. The company also has eight 737-900s with an average age of 6.6 years and 16 narrow bodied 737-800s - six owned and 10 leased. These are used for flights to Europe and their average age is 17 year. The value of such a used plane is $20 million.

It's hard to see a low-cost carrier which uses the 737 narrow-bodied planes by such old aircraft, which are not efficient in terms of fuel consumption and as a product to be offered to passengers. They may find use if converted to cargo planes - a sector which is currently booming.

Published by Globes, Israel business news - en.globes.co.il - on September 24, 2021

Copyright of Globes Publisher Itonut (1983) Ltd. 2021

El Al plane at Ben Gurion airport Photo: Michal Raz Chaimovitz
El Al plane at Ben Gurion airport Photo: Michal Raz Chaimovitz
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