One of the immediate victims of the coronavirus crisis is El Al Israel Airlines Ltd. (TASE: ELAL). The persistence of the virus is aggravating the damage to El Al's business and threatening its ability to meet its commitments. Another announcement yesterday by El Al revealed the considerable impact of the crisis on the airline's expected business results.
El Al expects a $140-160 million downturn in its revenue in January-April 2020, $80-90 million of this in the first quarter. The company says that the decline will partly be offset by a reduction of its operating expenses. El Al accordingly predicts at this stage that the effect of the decline in its revenue on its results in January-April will be $70-90 million, including $35-45 million in the first quarter.
El Al says that it revised its estimate of the effect of the coronavirus on its financial results because of the decline in its activity in its destinations in Italy and Japan, and because of the Ministry of Health's recommendations on flights to all destinations. El Al has not yet taken into account the effects of the Ministry of Health's instructions for isolation of returning passengers and the ban on entry of foreigners from additional countries: France, Germany, Switzerland, Spain, and Austria. This makes it likely that the airline's losses will continue to worsen.
El Al added that it was "taking operational and financial measures aimed at cutting its expenses and reducing the decline in its cash flow," and was making "significant adjustments in its activity and its network of routes."
The airline also reports measures "in the area of labor relations," following reports that it was laying off hundreds of employees. El Al also stated officially that it had "contacted the Ministry of Finance in order to obtain support from the State of Israel, and was conducting talks to that end."
As far as is known, El Al hopes to receive government aid in the form of a grant. The Ministry of Finance, however, wants to help El Al by reducing its payments to the Israel Airports Authority, and by bringing forward payments for flight security, which are contingent on streamlining measures that include large layoffs and wage cuts.
Against the decline in its revenue, El Al is benefiting from lower global oil prices, and hence lower fuel prices, and lower expenses in other areas as a result of a reduction in its activity. At the same time, the company (controlled through Knafaim Holdings by Tami and David Borowitz) has substantial fixed costs. Among these are purchase and leasing payments resulting from its ambitious procurement of Boeing Dreamliners, salary expenses, and payments to the Airports Authority. All of these expenses must be paid, even when the airline's revenue declines.
While El Al is capable at present of coping with lower revenue, the continued uncertainty in the global civil aviation market, reflected in lower occupancy of seats on its planes and cancellation of routes and flights to various destinations, is liable to pose a challenge to the company's financial strength that it may be incapable of withstanding.
El Al's balance sheet as at the end of the third quarter of 2019 reveals that most of its debts consist of bank loans and obligations arising from aircraft leases, mostly long term. El Al reported $750 million in bank and other loans and $932 million in obligations from leasing airliners - $2 billion in long-term debt.
In addition, El Al's short-term commitments liabilities at the end of the third quarter of last year were nearly $1.1 billion, including $91 million for leasing aircraft and $262 million in short-term credit and current liabilities. El Al had $200 million in cash.
The state interest and the possibility of aid
One of the key questions now is the aid that El Al may possibly receive from the state. While the state, which holds a golden share in El Al, has an interest in preventing the collapse of El Al, among other things because of the importance of continued operation by an Israeli airline at times of acute security problems, there is an argument that there is no justification for injecting public money into a privately controlled company.
The crisis that has been afflicting El Al in recent weeks, which is expected to affect its activity for quite some time, follows a prolonged period in which the company had trouble achieving good financial results at a time of intensifying competition in the Israeli aviation sector and because of its major aircraft procurement program.
In 2017-2018, as part of its plan for renewing its aircraft fleet, El Al signed agreements to acquire and lease 16 Boeing Dreamliner (787-8 and 787-9) aircraft. El Al says that these airliners are among the most modern in the industry, and put El Al in the "forefront of technology." Besides "improving the customer experience," the aircraft are also expected to help streamline El Al's activity and cut its expenses.
On the way to this streamlining, however, the procurement program is costing the airline a great deal of money. In February, after headlines about the spread of the coronavirus began to appear, El Al reported financing agreements amounting to $247 million for buying two airliners: the seventh and eighth in the program.
Coronavirus shaves El Al's market cap by 30%
El Al's financial reports show that while its revenue remained steady at $1.65 billion in January-September 2019, its loss grew 37% to $28 million during this period, while the company posted a $52 million loss in 2018 as a whole. El Al's share price has dropped by over 30% since the coronavirus crisis began on January 20.
El Al's share price has now fallen by over 80% since reaching a peak in October 2016. In the preceding years, El Al's stock was one of the most successful on the Tel Aviv Stock Exchange, multiplying its value several times over. The decline in El Al's share price has reduced its market cap to NIS 330 million, compared with nearly NIS 2 billion at its peak in late 2016.
The share price of Knafaim Holdings, El Al's parent company, is down 50% since the coronavirus crisis began in January, reducing its market cap to just NIS 130 million.
In addition to the Borowitz family's holding company, another loser from the dive in El Al's share price is Israeli hedge fund ION Asset Management. The fund, headed by Jonathan Half and Stephen Levey, became a party at interest in El Al in November 2018, and holds a stake of more than 7% of the airline, with a current market value of NIS 25 million.
Published by Globes, Israel business news - en.globes.co.il - on March 9, 2020
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