El Al's share price up 70% since December

El Al aircraft  credit: Yoav Yaari
El Al aircraft credit: Yoav Yaari

With its prospects ranging from extinction to new opportunities as pandemic-related restrictions are lifted, El Al's share price has been correspondingly volatile.

The share price of El Al Israel Airlines Ltd. (TASE: ELAL) has changed direction in the past two months. After reaching its lowest level for more than a decade in December, because of the coronavirus pandemic and the severe blow that that dealt to the global travel industry, the share price started to climb, and it is now up 70% from that low, at NIS 3.5 (the level it was at in late October last year).

Despite that, the return on El Al stock over the past three years is still a negative 60%, and the company's market cap is currently NIS 560 million, and this after it has raised substantial equity capital in the past two years to improve its financial position amid the effects of the pandemic.

The volatility in El Al's share price is a consequence of the extreme environment in which the company currently operates: on the one hand, the imposition of restrictions on flights in Israel and around the world threatens the company's very existence, while on the other hand recovery in the global tourism and aviation industries creates new opportunities for it. This week, the Israeli government approved substantial relaxations for incoming tourism and flights, due to come into effect at the beginning of March, among them allowing unvaccinated travelers to enter Israel, cancelation of quarantine for unvaccinated foreigners, and cancelation of the requirement for a Covid-19 test before departure for Israel.

Since the forthcoming relaxations were reported, there has been a substantial rise in bookings for flights to and from Israel. El Al plans to restore routes that were halted during the pandemic, such as direct flights from Tel Aviv to Boston.

Additional injections from the state and Rozenberg

The recovery of El Al's share price in the past couple of months has been assisted by the additional aid that the company has received from the state, and from further investment by controlling shareholder Kenny Rozenberg, and also from the reports of a prospective merger with Arkia.

In early January it was reported that that El Al had reached understandings with the Ministry of finance on a further aid plan, following the crisis caused by the outbreak of the Omicron variant of Covid-19. Two week later, the government approved the aid.

On January 23, an agreement was signed on government aid and on investment by Rozenberg, through loans convertible to equity, and also on accelerated payments by the state for extra fuel consumption and maintenance costs resulting from the obligation on the company to install civil aviation defense systems on its aircraft.

Under the agreement, which was completed within the past few days, Rozenberg (who holds 40% of the company) granted El Al further owners' loans amounting to $20 million in total, while the state (which holds 13%), granted aid loans and early payments for the extra fuel consumption amounting to $50 million. These new loans are in addition to previous owners' loans from Rozenberg totaling $50 million, and state loans totaling $7 million.

These sums are not intended to solve El Al's financial problems fully. Nevertheless, they indicate that the State of Israel has decided not to give up on the airline and its usefulness to the country, and that it will act to help it to survive crises when it is the government itself that has made these crises more severe.

$1 billion loss in four years

El Al, it must be stressed, made a net loss of $303 million in the first nine months of 2021, following losses of $531 million in 2020, the year that the Covid-19 pandemic broke out, and $112 million in 2018-2019. Altogether, the company lost nearly $1 billion in four years.

The company's financials show that at the end of September 2021 it had $198 million cash, but also bank loans and short-term credit amounting to $1.15 billion (not including liabilities of $985 million for aircraft leases).

El Al has undertaken to the Ministry of Finance to raise 100-150 million within a short period. It has put up for sale a stake in its frequent flyers club, while retaining control of it.

Talks on a sale of 30% of the club to Bank Hapoalim at a valuation of some $250 million are not close to a conclusion. El Al is examining another possibility for raising loan finance, through the mortgaging of slots (take-off and landing times) that it has at main airports.

The slots that El Al holds are worth tens of millions of dollars, and their value is particularly high in the case of airports where it is difficult to obtain a take-off time that is convenient for passengers and that enables the airline to turn flights around within a day. El Al holds slots at, among other airports, London Heathrow and in New York. With the slots as collateral, El Al will try to obtain a loan of $100 million from a foreign bank.

Under its agreements with the state, El Al is committed to holding a further offering of securities to raise $105 million by September 2020 (after receiving approval for a deferment).

Arkia acquisition subject to collective agreements

At the same time as obtaining a further aid package, El Al's management, headed by Avigal Soreq, has succeeded in reaching a non-binding memorandum of understanding for the purchase of aviation and tourism company Arkia in a merger deal. El Al is supposed to buy full ownership of Arkia in exchange for an allocation of 10-14% of its shares to Arkia's owners, the Nakash family (70%), and the Arkia employees' company Tut Holdings (30%).

The sides have yet to sign a binding agreement, which will depend on the signing of a collective agreement with the Histadrut covering the employees of both airlines. Tut Holdings has not yet officially given its consent to the merger plan, which will lead to Arkia's employees losing their influence on the way the airline is managed.

Once an agreement is signed, the two airlines will face further hurdles, chiefly completion of due diligence examinations at each of them to the other's satisfaction, and obtaining approval from the Competition Authority, which four years ago would not allow El Al's proposed merger with Israir. The road to completion of the deal is thus still long and complicated, but it signal's Soreq's desire to expand El Al's business into tourism packages, charter flights, and domestic flights.

Carrying out the deal in shares will also strengthen El Al's shareholders' equity, and bring it Arkia's aircraft fleet, which currently consists of two Airbus A321 planes and three Embraer E-195 planes. Three of these aircraft are owned by Arkia and two are leased. El Al will be able to continue operating them, or to offer them for sale when the global aviation market gets back to full activity and the surplus of aircraft in the world is absorbed by the rise in demand.

Return to routine

Besides all this is the changing attitude of countries to Covid-19. Instead of lockdowns and restrictions, in the past few weeks more and more countries have been changing their policies in favor of living alongside the disease.

Moreover, the Omicron variant is receding in many countries, and they are restoring life to what it was before the pandemic broke out. This change should have a substantial positive effect on tourism and aviation companies in general, and on El Al in particular.

Published by Globes, Israel business news - en.globes.co.il - on February 21, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.

El Al aircraft  credit: Yoav Yaari
El Al aircraft credit: Yoav Yaari
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