El Al: Gov't conditions aid on deep cost cuts

El Al plane  / Photo: Yochai Mussi

El Al management's streamlining program contains 1,100-1,200 layoffs and a three-stage recovery.

A 30% decline in El Al Israel Airlines Ltd.'s (TASE: ELAL) share price this year has cut the company's market cap to NIS 330 million, less than the price of one Boeing Dreamliner airplane. El Al, whose existence is under threat in the current crisis, is among the main victims of the coronavirus in Israel, with its activity almost completely shut down and its revenues falling drastically.

In order to continue operating, El Al has asked the state for monetary aid, but the Ministry of Finance budget division is making such aid contingent on an aggressive recovery plan that will save the company hundreds of millions of dollars in fixed costs. Under the plan devised by its management, El Al will lay off 1,100-1,200 workers, 60% of them tenured staff. El Al's management hopes that the Ministry of Finance's consent to the plan will allow the company to begin receiving the aid. El Al is hoping for a $600-700 million loan, to be repaid gradually over 15 years.

El Al has asked for state aid mainly in order to continue repaying the principal and interest on loans and $330 million in leasing fees on planes in 2020. El Al's ambitious procurement program, consisting of 16 ultramodern Dreamliners, involved billions of shekels in liabilities for financing the acquisition. In the long term, these planes are designed to cut the airline's costs and enhance its passengers' flight experience.

80% of El Al's 6,300 workers are already on unpaid leave, and 90% of its 650 pilots are to be part of this. El Al's pilots offered to forego 20% of their salaries, which have in any case fallen by 30% because of the scaling back of the airline's flight schedule. In the immediate future, El Al must pay for maintaining its fleet and the salaries of 1,300 employees to preserve what is left of its activity.

El Al's workers are represented by the Histadrut (General Federation of Labor in Israel). Discussions have been taking place in recent days between their representatives (who have hired Prof. Yaron Zelekha) and management in order to formulate an immediate recovery plan for the company. El Al is due to present a list of those to be laid off to the workers for approval (or for specific changes under certain circumstances).

The breakdown of the talks yesterday led the Histadrut to declare a labor dispute in the workers' name. In the current circumstances, however, in which most of El Al's planes are grounded, the effectiveness of such a declaration is unclear. El Al's collective labor agreement allows it to make layoffs in order to save the company in a situation in which the company is downsizing its activity. The Histadrut announced yesterday that the negotiations had broken down, after management dismissed the streamlining proposals made to it, which the Histadrut said would save $1 billion over seven years.

The streamlining plan by El Al's management, which was drawn up with the BDO firm, has three stages. In the first stage, the airline loses money and will have no real revenue until the coronavirus crisis ends. In this stage, El Al's task is to cut its costs to a minimum. The second stage is recovery - a gradual return to activity and passenger traffic. It is already clear that the situation will not return to normal immediately (disposable revenue is also expected to suffer). This will take at least seven or eight months. The third stage is growth - a return to normal activity and profit, which will put El Al back on its feet. The plan will be brought before El Al's board of directors for approval on Saturday night, and will be presented to the Ministry of Finance on Sunday to fulfill the conditions for receiving the loan, without the workers' consent.

El Al's balance sheet as at the end of the third quarter of 2019 reveals that most of the company's liabilities consist of bank loans and liabilities in respect of aircraft leasing, mostly in the long term. The company reported $760 million in bank and other loans, $932 million in leasing liabilities, and $2 billion in total long-term liabilities. El Al's current liabilities totaled $1.1 billion at the end of the third quarter, $91 million of which consisted of leasing fees and $262 million of short-term credit. El Al reported that it had $200 million in cash at the end of the third quarter.

Published by Globes, Israel business news - en.globes.co.il - on March 12, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

El Al plane  / Photo: Yochai Mussi
El Al plane / Photo: Yochai Mussi
Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018