El Al will need to shrink to receive state aid

El Al CEO Gonen Usishkin Photo: Sivan Faraj

The airline seeks a $350 million loan from Discount Bank, 75-80% guaranteed by the State of Israel.

The feverish discussions between the management of El Al Israel Airlines Ltd. (TASE: ELAL), the Ministry of Finance, and Israel Discount Bank (TASE: DSCT) (which, unless there is a last minute change, will be the bank that makes the loan to El Al under the terms of government aid), are leading towards a dramatic cut in the scope of El Al's activity, in accordance with projections of a shrinking of the aviation industry in general following the coronavirus crisis.

The demands from El Al, which will again have to deepen its streamlining measures, are to reduce its activity by 25% for the next two years and present annual cost savings of $300-350 million.

El Al, headed by Gonen Usishkin, seeks a $350 million loan, 75-80% of which will be guaranteed by the State of Israel, to be repaid over six years.

Discount Bank starts from the assumption that the entire aviation industry will decline substantially for at least the next one to two years, and that El Al will therefore have to reduce its activity accordingly. The measures expected range from cutting a quarter of its flight schedule (foregoing routes that it was about to launch) to a reduction in the volume of food produced by its Tamam Aircraft Food Industries unit, in accordance with the fall in the number of passengers it will serve.

El Al will need to adjust its aircraft fleet, and instead of the 45 planes it currently operates (which was meant to grow to 48), the fleet the day after is expected to consist of 35-38 planes, among them 16 Boeing Dreamliners, the cargo planes (El Al recently converted two 777 aircraft from passenger to cargo configuration) and narrow-bodied aircraft for short-haul routes. El Al will probably prefer to retain and renovate the aircraft that it owns outright, even if they are old, and to part with aircraft for which it is paying to finance companies.

The challenging part for El Al will be the manpower cuts it will have to make. It is believed that it will have to expand the number of layoffs it had planned, of both temporary and permanent staff, from 1,400 towards 2,000 employees of all ranks, including in senior management, out of its total workforce of about 6,360. This will be difficult not only because it means parting from many employees and leaving hundreds of families without a breadwinner, but also because the company has been in dispute with the workers committee since the current crisis began.

No talks between the sides are currently taking place, and after El Al puts together the list of those to be laid off, it will need to reach agreement with the workers committee, or at least receive a green light to save the company, before it can obtain the sign-off on the loan it has been waiting for since the coronavirus crisis broke.

Alongside the headcount reduction, which will include layoffs among El Al's 650 pilots, there will be a pay cut for those earning what is defined as high salaries. The workers committee's approval is critical for obtaining state aid. Both the Ministry of Finance and Discount Bank will want to see El Al on a track of positive relations with its employees as it undertakes a challenging recovery process.

Published by Globes, Israel business news - en.globes.co.il - on April 20, 2020

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

El Al CEO Gonen Usishkin Photo: Sivan Faraj
El Al CEO Gonen Usishkin Photo: Sivan Faraj
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