Is it merge or die for Israel's airlines?

El Al, Arkia and Israir planes at Ben Gurion Airport  credit: Danny Sadeh

The Covid-19 pandemic could be the spur for a move that should have taken place a long time ago.

While senior managers at the Israeli airlines, El Al, Arkia, and Israir, are engaged in a fight for survival and in supplicating for state aid to extricate them from the economic pit into which they have sunk, maybe the time has come to do what should have been done long ago, and for which the coronavirus could provide the final push: a merger between the companies.

The obvious move is a merger between the two small airlines, Arkia and Israir, which together could compete more effectively with El Al. Another possibility is to merge either Arkia or Israir with El Al, while the third, and not unimaginable, scenario is to merge all three into one company.

Even before the Covid-19 crisis, which shredded the industry, international and local aviation experts were of the view that there was no room for three airlines in the Israeli market, taking into account its volume and needs. Competition was spurring consolidation in the global industry even before Covid-19 struck, and thanks to consolidation companies have been saved from closure. From the US market to the European market, aviation groups have been forming that together are stronger and more resilient. Local consolidation will enable one company to compete against the foreign airlines, including the low-cost airlines, whose market share at Ben Gurion Airport is steadily growing.

The merger that was rejected

In 2018, the Competition Authority (then known as the Antitrust Authority), decided not to approve a request for a merger between Israir and El Al, via El Al subsidiary Sun d'Or.

The Competition Authority quashed the merger on the grounds that it would harm competition on the Tel Aviv-Eilat route, since El Al would not want to go back to flying the route. For its part, El Al had in any case closed that route in 2013, finding it unprofitable, so that the fear that it would be abandoned to just two airlines (Arkia and Israir) was not a consideration - that had been the situation for years.

Another reason for disallowing the merger was that competition could be harmed from another angle: El Al's security division, which is responsible for flight security on Israel flights at airports around the world, works for all three Israeli airlines. Israir and Arkia send their planned flight schedule to the manager of the security division at El Al every season, in order to obtain a security solution in accordance with the demands of the Israel Security Agency (Shabak). The Competition Authority took the view that if El Al and Israir were one unit, there would be discrimination against Arkia. Arkia, incidentally, did all it could to torpedo the merger.

Business tanks

According to Israel Airport Authority figures, in the peak year of 2019, passenger traffic at Ben Gurion Airport (incoming and outgoing) amounted to 24 million. The share of the Israeli airlines was 31%, with 7.4 million passengers. El Al carried 5.83 million passengers, Israir carried 768,000 and Arkia carried 760,000.

On the Eilat route, Arkia and Israir carried 786,000 passengers, 55% fewer than in the previous year, following the closures of Sde Dov Airport in Tel Aviv and of Eilat Airport. The replacement of Sde Dov-Eilat flights by the Ben Gurion Airport-Ramon Airport route has led many vacationers to travel to Eilat by car instead of by air. These numbers, from a period of peak travel, demonstrate that there is no bar to maintaining one or two merged airlines. In 2020, just 4.5 million passengers passed through Ben Gurion Airport, as traffic plummeted from March that year onwards. The Israeli airlines' share was 26%.

Israir is owned by BGI Investments, which is in turn owned by Rami Levy and Shalom Haim. The company has a fleet of eight aircraft. Two other planes that were leased have been returned to their owners, because of the restrictions on flying and the decline in passenger traffic. Arkia has five aircraft, and it too leases aircraft in accordance with demand, which currently doesn't exist.

Israir employs 300 people, and Arkia 280. A merged company could have a substantial advantage, with a fleet of about twelve aircraft. It's true that many employees would be liable to lose their jobs, but given the airlines' dismal situation, that is on the cards even without a dramatic merger move. Arkia has shed about half its workforce since the coronavirus pandemic broke out, while El Al has shed 1,900 employees, representing about one third of its workforce, and it could soon be laying off hundreds more.

Cash injections and investment

Throughout the crisis, Arkia has tried to promote a merger with Israir. Its chairperson, Avi Homero, even told "Globes" in an interview in March 2020, "I don’t rule out the possibility that El Al, Israir and Arkia will eventually merge." The other two airlines dismissed the idea, but talks took place constantly, chiefly between Homero and Israir management, even before the latter passed into Rami Levy's hands, including on a proposal to merge into a single stock market-listed company.

A merged airline like that, "Israrkia", could offer vacationers flights to Mediterranean basin destinations, and could continue to operate domestic flights to Eilat. But then it would be a monopoly on that route, which would arouse opposition from the Competition Authority. This knot could be untied by, for example, setting a controlled fare, obtaining a binding undertaking from the company to operate the route within the terms of the Competition Authority's approval, and, in the long term, introducing additional airlines on the route, perhaps foreign airlines.

Arkia also aspires to a merger with El Al. Like Israir, El Al too has changed hands during the pandemic, being taken over by Kenny Rozenberg, who has so far invested $160 million in it. Rozenberg is required to invest a further $43 million in an equity offering which has still not taken place, after El Al received an advance of $200 million from the state.

It is not clear whether Rozenberg wants to merge a small airline into El Al , but it is also not clear to what extent he was ready to put his hand so deeply into his pocket the day he decided to become the owner of an airline. In the event of such a merger, the Eilat routes will not be affected, and Arkia could be a complementary product to El Al, which caters less for vacationers.

If Arkia is merged into El Al, there will be no Israeli airline that flies on Saturdays (at least, not openly). On the other hand, Israir could also merge with El Al, and the new owners of the two companies could try to leverage their investment, which for the time being is mainly a source of trepidation. In that case, however, Arkia, the smallest and weakest of the threesome, would have to push for a merger, or disappear.

Incidentally, Israir has also received an advance from the Ministry of Finance, of $16 million, and its owners have undertaken to inject $8 million. Arkia has not received a similar advance, because of legal disputes with the state over the closure of Sde Dov Airport, but it is due to receive a state handout, and that will enable it to keep its head above water for a little longer, but not more than that. Its owners, the Nakash brothers, will be required to inject $8 million, and they are really not keen to invest in a company that as far as they are concerned could be sold for nothing.

The solutions on the table

What is preventing a merger from taking place? First of all, pride and ego. As mentioned, two of the companies have new owners. On the one hand, Rami Levy could swallow his direct competitor, Arkia, and thereby grow. On the other hand, a merged airline will clearly be run from one efficient and lean headquarters, by a single CEO, who will oust the one or two others.

Management will be downsized, and even the logo of one of the companies is liable to be erased. A move like that takes courage in the face of the employees, but in the current state of the aviation industry, a merger could be a lifebelt. It should be mentioned that 30% of Arkia is held by its workers, and they will have to be part of a decision like this.

In the past few days, the managers of the companies and representatives of the Ministry of Finance have been holding feverish talks about how much compensation the airlines will receive. Meanwhile, the Histadrut has declared a labor dispute in the aviation industry, covering all employees of El Al, Arkia, and the Israel Airports Authority, and the pilots at Israir. The dispute was declared because of the fear of mass layoffs at the companies, in addition to those already carried out since the pandemic broke out.

In the end, it was decided that the state will offer the three companies balloon loans for two years. The amounts of the loans will be agreed with each airline, and the controlling shareholders will commit to injecting cash. The ratio between the government loan and the cash injection has not yet been determined.

Instead of light at the end of the tunnel in the form of the August peak period and the Jewish holiday period, the airlines now see only darkness. The pandemic has compelled creative thinking on the part of their managers. It might now compel them to carry out a move that should have happened a long time ago.

Published by Globes, Israel business news - en.globes.co.il - on August 25, 2021

© Copyright of Globes Publisher Itonut (1983) Ltd. 2021

El Al, Arkia and Israir planes at Ben Gurion Airport  credit: Danny Sadeh
El Al, Arkia and Israir planes at Ben Gurion Airport credit: Danny Sadeh
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