"With expenses and no revenue we face bankruptcy"

Eli Defes

El Al chairman Eli Defes says that time is running out to save the airline, which seeks a $200-300 million state guaranteed loan.

More than a week ago, the management of El Al Israel Airlines Ltd. (TASE: ELAL) submitted another cost-cutting plan to the Ministry of Finance, after being instructed to improve a previously submitted plan. El Al hopes to obtain a $200-300 million loan with a state guarantee. The problem is that time is running out. "By the time a decision is made, there may be no one to give the loan to," El Al chairman Eli Defes told "Globes."

"A plan was presented to the Ministry of Finance that brings the company to a situation in which we would be able to repay the loans we get and the current financing expenses, under the working assumption that the company recovers when the virus situation ends. This wasn't enough. They've had the improved plan for over a week, identical to the format demanded by the Ministry of Finance, and we're waiting for an answer. Time is critical for an airline; it's not a grocery store that closes or opens in three months. The damage from closing an airline is enormous, because the current expenses continue."

El Al hopes that the government sees what's happening abroad, where governments have already injected billions of dollars into airlines, for example in Australia, New Zealand, Denmark, the US, and the EU. "There are companies that are state-owned, like Air India and Turkish Airlines, that have the importance of a national airline in which the government invests billions. There are other companies similar to El Al, which aren't state-owned, but these countries have also reached agreement on support that will enable the airlines to get through the crisis facing us.

"Here, people are gambling that the prime minister will make the decision. He has stated that help must be provided, but is delaying the decision. Neither the prime minister nor the Ministry of Finance realize what shutting down an airline means. Rebuilding one is critical, expensive, and takes a long time. They don't understand that this is a fateful situation and time. The decision-making process and the timing are critical. Making a very good decision very late makes it too late to make a decision."

"Globes": What is the scenario to be taken into account in deciding whether it is too late to accept the financing?

Defes: "I don't believe that El Al will go bankrupt. Before the crisis, El Al's monthly revenue was $200 million - $2.4 billion a year. That has stopped. A company that conducted 35,000 flights now has barely 50-60 flights. No company in the world is capable of lasting for more than a month or two in this situation. In the US, they got aid from the government. It's a matter of days. If the government continues to delay for more than a day or two, the situation can get very bad.

"A company with expenses and no revenue will go through its cash and face bankruptcy and liquidation. We've cut down expenses, put 5,500 people on unpaid leave, we're delaying payments to the Israel Airports Authority, but we'll reach the limit at some stage. In general, a liquidator appointed for a company that can't pay its debt assesses the likelihood that it can recover. There are companies for which there's no need, but here, there is a need. They set up a restarting mechanism, and it has enormous costs."

Maybe the Ministry of Finance is delaying because they are trying to calculate how to divide the assistance pie at a time when the crisis is affecting more and more sectors?

"It's true that they're confused about whom to help first. I'm not ruling out helping industrialists and other companies, but civil aviation is a completely different situation. El Al is a company that performs national missions - by the time they decide to support it, it could be too late."

And this is because El Al is leveraged with substantial loans

"El Al has heavy financing expenses. We've added 16 planes to El Al's fleet - this is a mass of planes all at once, and we're proud of it. Like most airlines, a purchase like this is done with a loan from banks or leasing companies. After all, the amount is significant and the cost is high. Nevertheless, in the economic plan that we submitted to the Ministry of Finance, we meet the flow, and even make a profit. January was one of our most successful months in the past 20 years. We let old planes go, completed conversion and training for hundreds of employees, and started 2020 strongly, with positive results, but then this crisis came."

What other demands is the Ministry of Finance making?

"They want to be convinced, and I agree that this is almost justifiable, that El Al, in addition to its financing expenses, will be able to repay the loan. In the same breath, I say that it's strange for country announcing the closing of its skies to announce compensation and a grant that it's giving in a loan on which I have to pay interest. I'm being penalized by the closing of the skies and also paying interest. We submitted a plan formulated by two accounting firms, we showed that we were stable, and starting to repay all of the loans, together with a change in work processes, cutting down personnel, reopening existing work agreements, and cutting management overhead. All of these measures together amount to tens of millions of dollars that will be a resource for repaying the money."

This situation constitutes an opportunity for El Al for streamlining that it should have carried out before the crisis.

"Every company needs to constantly examine itself. El Al reached a point where it had to change its structure in the volume of work. We reached an understanding with the pilots two years ago after a dramatic event. This agreement is working excellently, with the pilots doing more than could have been expected. We started dealing with the size of the workforce a year ago, when we cut 700 employees, after reaching 7,000. We've developed routes that didn't exist before, and grew by 5%. We developed routes to Miami and San Francisco. Every route we open means 90-100 new employees just in air crews and stewards."

In comparison with airlines having air fleets similar to that of El Al, you have twice as many employees. You can't call that efficiency.

"There are data that we don't know how to compare; it's apples and oranges. For example, other companies do maintenance through outsourcing. I'm not denying that there was excess personnel in the margins, but this was not excessive, and we managed to eliminate some of it. We let 700 employees go, and we'll let another 600 go - the renewal of the air fleet has made this possible. The maintenance and operating costs are cheaper for a Dreamliner. For example, while a jumbo jet undergoing a periodic checkup is missing from the fleet for a month or two, a Dreamliner doesn't need a checkup in the first two years, and a checkup after that takes seven days. All of this saves money, and that's what we're aiming at. Letting employees go is painful; some of them are in families that have worked at El Al for three generations. We're letting people go at age 62. If we don't let 1,300 employees go, we won't be able to protect the remaining 6,000."

The El Al workers' committee presented a cost-cutting plan to "Globes" that will save $750 million over five years. It contains a 5% across-the-board salary cut, a waiver of bonus flights for five years, and more. They claim that you rejected it in bad faith.

"The cost-cutting mechanism presented by the workers that you're describing is accurate. They agreed to waive assets that were alienable assets in their work agreements for the sake of strengthening the company. I appreciate that, but it fell apart because of something that could have been solved - changes that have to be made in work processes."

Are you referring to outsourcing?

"No, I oppose outsourcing. I don't believe in this approach. It's right for some sectors, maybe in computers and technology. In an industry like ours, however, it's like poking the workers in the eye. What I'm referring to is changing old work habits. For example, there's a work process that requires two workers to sign for a plane; we want one to do it. This has been approved by the Israel Civil Aviation Authority and the International Air Transport Association. Most airlines are now doing this. There's also moving transferring manual work to computers as something that frees up workers. The workers opposed these changes."

Minister of Transport Bezalel Smotrich sent a letter to the minister of finance clearly asking for priority for Arkia and Israir - a $25 million loan for each of them before giving aid to El Al. He stated that an Israeli airline could be founded with 10-15 airplanes on the day following the crisis. This is very strong medicine.

"I spoke with him about it. I have to say that he's very alert and sympathetic to the sector. He explained that what he said hadn't been worded accurately. According to him, he realizes how fateful the situation at El Al is, and doesn't feel that Israir and Arkia can replace El Al. He asked that they be given the few millions that they need, and then to focus on El Al afterwards."

Defes again stressed the importance of time. El Al is running out of time, and the company, as CEO Gonen Usishkin also wrote in a letter to the employees, faces a threat to its existence.

"As it always does, the Ministry of Finance wants more. When it needs something from us, they want it by tomorrow, but when you need something, it comes a year from now. There are many opinions in the Ministry of Finance, each of which is pulling in a different direction. Director General Shai Babad should take the lead in this matter and let the prime minister make the decision. Any more waiting causes damage," Defes said.

El Al is a private company, and it has owners. Like other industries, it's not unreasonable to expect the owners to save their business.

"This is a question of scale. It's not a grocery store. Why does the state help industrialists every year, and certainly in a crisis? After all, you can buy everything from China, and at a lower price. Why don't they shut down agriculture and buy tomatoes from Turkey? It's also cheaper. The country needs to maintain businesses, because businesses pay taxes to the state. El Al pays hundreds of millions of shekels a year in taxes. During the period of the loan, we'll pay NIS 5 billion in taxes. So let them give up on El Al, and Turkish Airlines or Wizz Air will fly Israelis from here, and their countries will profit.

"At normal times, no week goes by without us performing national missions for the state, and I can't talk about this. Who will do this? I'm not talking about rescue missions for Israelis; I'm talking about security things. A country that doesn't want to keep a national airline is a country that has failed."

Is a nationalization model being considered? Having the state own part of El Al? In Italy, the government nationalized the airline in order to save it.

"There's no such thing as part ownership - you can only nationalize it completely, meaning a majority interest or full ownership, and I'm not in favor of it. It's not the state's job to manage businesses. On the contrary; the trend is to privatize businesses. The state managed banks and companies like Koor, and they collapsed, because the state doesn't know how to manage. It should supervise and support, but not manage businesses. In nationalization, the state takes a risk. Alitalia has been up for sale for two years, and Italy injected money into it every month in order to prevent its collapse, because it wanted an airline. There were no buyers, because an airline is a risky business in an era of competition and open skies. The state took this on itself after injected money into Alitalia every month to keep it going. El Al didn't get a penny from the state. It got no support, and asked for nothing."

Maybe there should be a push to merge the Israeli airlines in the current crisis.

"The civil aviation industry is moving towards meters. Lufthansa is a group that amalgamates five or six airlines. In a huge country like the US, there are now four airlines left after airlines were swallowed up. A merger is a way of maximizing competitive strength. We wanted to merge Israir, a tourism and travel company, into us before. We wanted to combine forces and take advantage of each company's strength. The state said no because of flights to Eilat. We promised that Israir would keep the same volume of flights to Eilat, and the Israel Competition Authority still refused. It's still under consideration and on the agenda, and it will be right to expedite this measure. There's no reason for several companies to have the same overhead, instead of combining forces."

What is your working assumption for how long it will take the crisis to end?

"The Ministry of Finance's working assumption is that certain flights will start operating in June or July, and we're assuming a few months after that. We did a simulation of recovery for the airline, what the expected occupancy rate is, so we assume that it will be 30% in June and 40% in July. We tried to calculate the ticket price according to occupancy. The conclusion is that recovery will take at least a year, so only in July 2021 will activity reach the level of July 2019."

Published by Globes, Israel business news - en.globes.co.il - on March 27, 2020

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