Eilat flights issue holds up Israir-El Al merger


Israir CEO Uri Sirkis: If Israir wanted to halt its flights to Eilat, it would not wait for the merger.

The Antitrust Authority plans to complete its assessment of the merger between El Al Israel Airlines Ltd. (TASE: ELAL) and Israir Airlines and Tourism Ltd. in the coming days, and by the end of the month at the latest, sources inform "Globes." The Antitrust Authority is currently considering several antitrust barriers that may prevent the deal or require El Al to fulfill conditions in order to complete it. Antitrust Authority legal advisor Advocate Ori Schwartz, who is evaluating the deal, is not ruling out the possibility that the Antitrust Authority will oppose it.

The IDB Development group currently controls Israir. Under the deal agreed last July, IDB Development will transfer full ownership of Israir to El Al subsidiary Sun d'Or in exchange for an allocation of 25% of Sun d'Or's shares, while El Al will retain a 75% stake in Sun d'Or. The value of the deal is $24 million.

At a recent convention of the Israel Tourist and Travel Agents Association, El Al CEO David Maimon expressed optimism about approval of the deal in January. The ranks of the opponents of the deal have swollen, however. Among them is Arkia Airlines Ltd., which argues that there is a risk of discrimination against it in security for flights, a service provided by El Al for all Israeli companies. There are many who have voiced concern that there is a risk of damage to competition on the route to Eilat, including travel agents and providers of vacation packages, the Israel Airports Authority, the Eilat municipality, and recently also the Israel Hotel Association.

The main issue being considered by the Antitrust Authority is the possible termination of Israir's internal flights to Eilat, thereby making Arkia an official monopoly on the route, but security services are also an issue, as well as the preference of Israeli passengers for Israeli airlines, for reasons of security or patriotism. For the Antitrust Authority, the risk of one of the three companies operating on the route terminating its flights is liable to reduce competition.

Flights to Eilat: Will Arkia become a monopoly?

Arkia currently accounts for 70% of the domestic flights on the Tel Aviv-Eilat route. Passenger traffic on the route is projected to total 1.4 million in 2017, the same as in 2016. The Antitrust Authority has asked El Al for clarifications on the operation of Israir's route to Eilat, and is also considering what will happen if El Al reduces Israir's flights to Eilat , as well as the opposite scenario of El Al deciding to operate actively on the route itself, after having briefly operated flights to Eilat in 2010-2013.

"The Hotel Association opposes approval of the merger as long as structural conditions have not been set that will ensure the continuation of competition on domestic flights to Eilat, at least on the current format, in terms of price and availability of flights," Hotel Association director general Yahel Ben-Ner wrote in a statement sent to the Antitrust Authority. Her position was seconded by Eilat Mayor Meir Yitzhak Halevi, who sent his own message to the Antitrust Authority expressing strong opposition to approval of the deal. He asserted that cancellation of Israir's route to Eilat would be "destructive." Haveli is aiming at a commitment to at least maintaining the current daily flight schedule and frequency for a minimum of 25 years. Whether it is realistic to require a business company to commit to such a long period, however, is questionable.

"Israir will continue flying to Eilat, and there is no intention of doing anything else," El Al stated in response. "We have no problem about making such a commitment if it is necessary to obtain approval from the Antitrust Authority." The company added, "There will be no reduction of activity to Eilat. On the contrary; we will consider expanding it, insofar as the supply of hotels in Eilat can support it. Israir is the smallest competitor on the route, and will also be able to benefit from El Al's support, which will encourage competition on the route. In contrast to El Al, Israir is a company that specializes in flights to Eilat, and will therefore continue operating them." Responding for the first time to objection to the deal, Israir CEO Uri Sirkis told "Globes," "Israir is in the midst of purchasing a third ATR airplane, and is recruiting and training pilots to absorb this aircraft, which will be used to increase frequency on the route to Eilat. At the same time, we have expanded our workforce in Eilat. If Israir wanted to terminate its flights to Eilat, it would have no need to wait for a merger; it could do so now. The route to Eilat is profitable, and our plans are to increase our market share on the route to 40% or more."

The opposite concern, that El Al will resume its activity on the route, is based on past experience. El Al's former move in this direction was designed to exploit incoming tourism on continuation flights from Europe to Eilat, rather than target Israelis. El Al offered flights from Ben Gurion Airport to Eilat at $20 for tourists and NIS 100 for Israelis. El Al terminated its activity on the route in 2013, citing security concerns and a change in the flight path demanded by the Israel Civil Aviation Authority.

The prices of internal flights to Eilat - $100 (NIS 350) in each direction - do not reflect a competitive market, certainly in comparison with the prices of overseas flights, following the entry of low-cost airlines into Israel. Every so often, the Ministry of Transport mentions the possibility of opening the domestic aviation market to competition from foreign carriers. The idea is to encourage companies like Wiz Air and Ryanair to operate flights to Eilat from Ben Gurion Airport. On his recent visit to Israel, British Airways CEO Alex Cruz stated that his company would consider operating domestic flights in Israel through its new low-cost brand. Another company considering flights on this route is Russian airline Aeroflot.

The Antitrust Authority is trying to clarify whether there is a chance that El Al will resume flights on the Eilat route without the merger, and if such a chance exists, that may tilt the scales towards opposing the deal. At this stage, El Al is not giving the Antitrust Authority what it wants. Informed sources said that El Al had told the Antitrust Authority that it had abandoned the route to Eilat, on which it had formerly operated, because it was not worthwhile, and had no intention of resuming these flights at this stage without a merger with Israir.

Published by Globes [online], Israel Business News - www.globes-online.com - on December 19, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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