In a special interview with Dror Marmor at the Globes Business Conference El Al Israel Airlines Ltd. (TASE:ELAL) CEO Dina Ben Tal Ganancia revealed the complex challenges facing the national airline including a shortage of aircraft and spare parts worldwide, high demand from the Israeli public and the need for enhanced security and safety during wartime. She also explained about the high fares, the impact of government assistance, and the rise in profitability.
Before we bring the elephant into the room and talk about fares and competition, let's begin with the situation worldwide. Since Covid, there has been too little supply and too much demand for flights. Should we get used to a new reality?
"We have been terribly focused, naturally, on what is happening in Israel, but for a long time, the world has been unstable since Covid. Schedules have not been schedules, supply has not been supply, while supply of aircraft continues far beyond the horizon of strategic plans.
"We have made up our minds, despite this challenging period, to place orders. If you now ask to order an aircraft from Airbus or Boeing, you will get a slot for 20 or 30 years ahead, and that too after delays.
"The second challenge is not only the planes themselves but also aircraft parts. Virgin Atlantic and British Airways have announced that they are canceling routes because they are also unable to operate their existing fleet in full due to problems with engine supply. You have to understand that in such large factories getting back to full production takes a very long time. It is impossible to fly a plane from home.
"We have a plane that has been standing for over four years because it is waiting for seats. Airplane seats are not from IKEA. If the war had broken out during the Covid pandemic, you would have asked me completely different questions. It is like doing a 10,000 kilometer service on a car with safety above all else. Over the past year, we have managed to make up for some of the shortfalls that were due to Covid, and so we have managed to grow capacity. We started the year with 15%-20% less than we were (before Covid). Through good fortune, the war caught us at a time when we were in the process of improving."
And there is no way to get aircraft from Boeing?
"That's right, neither the (US) ambassador nor the prime minister can help in this case. Like many customers, we are on waiting lists. I don't have a private jet at home. It's not waiting in the parking lot. It doesn't help if the call center says there are no seats, and unfortunately there are those needing life-saving flights or to get to funerals."
During a period when you lost a lot of money, the State of Israel came along and gave El Al very good terms. Perhaps the Ministry of Finance forgot to insert a clause that when El Al returns to profitability it will be payback time.
"I wasn't CEO at the time, but I've been with El Al for 16 years, and if there's one thing I protested against, it was when the idea came up to sell Dreamliners to reduce losses. It could have been a disaster, because without these planes today, we wouldn't be able to operate the company the way it is being run.
"Regarding the aid: the state gave a loan at double-digit interest, invested in a public offering and sold shares at a very significant profit. On the one hand, this fixed us but did not allow for growth, while on the other hand, we managed to streamline. Assets also came from Covid that helped us.
"El Al today is much more efficient. This aid was critical, and all the money was returned. The first thing we did when the company began operating again was to repay the high-interest loan. The state made a great profit from the shares, and El Al stayed around to ensure Israeli aviation.
"The State of Israel has a clear interest in Israeli airlines being strong. Look at what the Americans did during the Covid period: United continued to fly, lost money - but received grants, not loans, to maintain production capacity and fitness of its aircraft. In contrast, El Al did not fly for three months and faced enormous challenges."
"At the start of the war, we issued a profit warning"
"You have to understand that 600 El Al pilots were on unpaid leave and it is not possible to bring them back to full operations in one day. They have to undergo simulations and complex procedures to be fit to fly again. El Al is a publicly traded company and is not owned by the state. The money of the State of Israel's citizens is invested in hedge funds, which invest in El Al.
"We managed to find the balance between our commitment to shareholders and our responsibility to the State of Israel and the Israeli public. El Al is a public company, and all its reports are transparent. Just as during the Covid period, all conditions were against us, we have also faced challenges in the current situation. At the beginning of the war, we even issued a profit warning, because it was unclear where things would develop. This is an unfolding event.
"However, we managed to become more efficient, increased capacity, we have a very strong loyalty club, with about 10% of the credit card market through Fly Card and an average fare increase of 16%, and if you neutralize the shifting of routes and destinations, this is an increase of a little over 10%."
It is very convenient that the state helps when it is difficult, but when everything is good, you do not even pay tax on the profits, because you offset those profits, and that is fine because you are a limited company and need to make a profit. Aren't you afraid that the regulator will force solutions on you?
"We have been working with the regulator for a long time, and since the beginning of the war we have been providing them ongoing information. This situation in the aviation sector is very complex. One of the significant problems is the psychological feeling of passengers. A person who bought a ticket on a low-cost airline cheaply finds himself, in the end, paying hundreds of euros more after last minute cancellations or changes. From their point of view, the price has 'jumped' by 100%, and this creates frustration.
"El Al, on the other hand, provides full service including a response, change and cancellation options. This is what customers are looking for today, and we are available for any problem. Where else will you find a place where the CEO and vice-presidents have received direct inquiries by phone - sometimes even from soldiers - from the moment the war broke out? We do this with great love and always try to solve problems and help. We have many new customers who are choosing us.
"I am in favor of foreign airlines returning, we have even been advising them to help with this. El Al operates an entire security and safety 'army.' There is a war in Ukraine - has anyone flown there? I never imagined that I would have to talk so much with the Shin Bet and the Air Force, or that I would have to conduct so many situation assessments and worry about our teams abroad. The fact that this concern remains with me is good."
"In a war, pilots have to be shared with the Air Force"
We saw that fares are a problem that everyone knows about. You published reports for the third quarter with revenue of $1 billion and net profit of $187 million - numbers that no one thought an Israeli airline could reach. You knew that you would be called greedy. Maybe it was forced on you, because in demand versus supply, you can only talk in terms of prices. Aren't you afraid that you will be punished the day after?
"The global situation has been accompanied by fare hikes everywhere. Anyone who thinks that we stopped flying at some point and are now returning to the same point is wrong. For the same reasons I described earlier, the predictions in the world of aircraft manufacturers are that the number of aircraft needs to be doubled in 20 years and old-generation aircraft replaced. The math says that we need to increase by 2,100 aircraft every year, when they are capable of supplying under 1,000 new aircraft per year. Let's cut to the chase - I cannot enlarge the fleet. We need pilots to fly aircraft. Normally, the Air Force produces pilots for us, but in a war, we have to share them with the Air Force. In balancing production and capacity, I can't produce more flights or reserve seats at the last minute. Sometimes, a month or two in advance, there are no seats available. We took action to balance out the situation."
"Let's start at the beginning of the decade - in the first few years we lost a billion dollars. I don't remember you inviting me to talk about it then. It's lucky we insisted on surviving. At the time when we were losing money, the State of Israel gave El Al loans on very difficult terms - at double-digit interest rates. The state also went public and sold at a very large profit. We had set ourselves up with no ability to grow, but we became more efficient. Today, El Al is a much more efficient company. Every shekel the state gave was returned with interest. The shares were sold at a great profit to the state, and here we are. Israeli aviation was here to serve the state."
You have given a gloomy global forecast here, the Israeli forecast depends mainly on war and competition. Do you have some optimism going forward? We saw that some foreign airlines have started to return. Is there a chance that competition will lower fares, and that we will see competition in Israel?
"I applaud my colleagues. I think all of Israeli aviation has done an amazing job and kept the State of Israel in touch with the world. Anyone who thought that maybe Israeli airlines were not needed, on the contrary sees the need to strategically strengthen Israeli aviation even more. They have returned with a very clear technique of buying new customers through price. I see new routes to nearby European destinations, and El Al has also greatly developed Sun D'or, our subsidiary, which is more similar to the other Israeli companies. At the end of a long flight of many hours, people see full service, they want to be spoiled and receive good service and sleep well. These are different products, and this is a different consumer mix that we are here to provide this service."
The Globes Israel Business Conference is held in collaboration with Bank Hapoalim and The Phoenix Holdings, and is sponsored by El Al, Bezeq, Nespresso, Wolt, Dell, the Israel Medical Association, Energean, the Jewish National Fund, BlackRock, Playtika, Meta, Strauss Group, BAZAN Group, and MSCI, with the participation of Mekorot, The Port of Ashdod, and the Israel Innovation Authority.
Published by Globes, Israel business news - en.globes.co.il - on December 3, 2024.
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