FLUG REVUE November 2004: ElAl outlook is optimistic

EL AL IS PRIVATISED

By Shlomo Aloni/SST

Recent positive headlines over El Al's successful privatisation, operating profits and confirmation of its monopoly as national airline have received even more attention in Israel's aviation sector than the usual moans about the effects of the Iraq conflict, aggressive competitors and rising fuel prices. Founded in 1948 and named after the Hebrew term for “heavenwards”, El Al ceased to be in majority state ownership on 6 June 2004. Moreover, the state's remaining stake is set to drop from its present 49.47 percent to a mere 1.1 percent when the private company Knafaim Holding, parent of the successful Arkia, acquires 52 percent of El Al's shares. Successful results for the year 2003, good prospects for first quarter of this year and finally the successful privatisation caused the share price to shoot up by 88% between January and June.

Boeing 777 in ElAl livery

“Israel is a special case,” explained Yoav Levy, vice president for commercial and industry affairs, in an interview with FLUG REVUE, “as the local geopolitics has an enormous influence on tourism. Over 70 percent of our passengers are Israelis. We compete in a relatively small market with many leading airlines which all fly to Israel. The total volume in Israel is only around $5 billion, that is, less than the annual turnover of many big airlines. Despite that, we managed to make a profit in 2003. This was partly due to aggressive marketing and partly to improvements in efficiency.”

At its home base, Ben Gurion airport in Tel Aviv (BGN), El Al competes directly with 40 scheduled air carriers and 50 charter operators. Due to the present situation in the Middle East, passenger numbers fell from their peak of 9.3 million in 2000, to 6.6 million last year. In 2003, 42.5 percent of El Al's revenue was earned at Tel Aviv airport, but in the first quarter of 2004 this rose again to 49 percent as many of El Al's competitors suspended flights.

El Al's main markets are Europe (accounting for 42 percent of profits), North America (37%), the Far East (19%) and Africa (2%). Its six destinations in Canada and the USA, including two airports serving New York, generate almost as much revenue as 32 European destinations. Another region which is equally busy is Asia. The four destinations that El Al flies to in this part of the world generate 19 percent of its sales despite accounting for only nine percent of its services. On the other hand, the situation in Africa is the opposite: seven percent of the airline's destinations contribute only two percent of its revenue.

Traditionally, the state-owned El Al was the only Israeli airline in possession of a concession to operate scheduled services, until in 2001 the private charter airline Arkia won the same rights before the courts. From 2002, Arkia and Israir were allowed to operate scheduled services on 13 routes not served by El Al, until on 1 April 2004 an appeal court confirmed El Al's status as the only scheduled airline and reimposed the old restrictions on its competitors.

“In North America, we are the dominant airline,” Levy notes. “We operate up to six flights a day to the six destinations of New York JFK, Newark, Chicago, Miami, Los Angeles and Toronto. In the summer we deploy the 747-400 and the 777. We also dominate the Asian routes. We are the only airline to fly non-stop from BGN to Bangkok, Peking, Bombay and Hong Kong. However, we are not able to exploit this advantage to the full, as international passengers do not use Tel Aviv as a hub for Asia. On the other hand, we are able to offer Israelis non-stop flights with full service,” says the El Al vice president.

“Ben Gurion” is not a hub airport, so El Al concentrates on direct flights, which at present makes it less attractive to the airline alliances. Instead, El Al has defied the global superpowers of the aviation industry by building up a network of codeshare agreements with some 100 partners, covering flights to 600 destinations.

In Levy's view, the low-fare airlines are unlikely to pose a threat in Tel Aviv: “We are not yet experiencing any pressure in that direction. A flight from here to Europe lasts longer than the flights normally offered by the no-frills airlines. Besides, the passenger numbers are not big enough. This market could sustain four flights a day to Europe, but not twenty, which is what they need for their low-cost concept. If the flying time was not so long and if the numbers of passengers were to increase massively, then of course the no-frills airlines would come at once.”

The German market was the Israelis' fourth biggest in the world in 2003, with 528,364 passengers departing from BGN. Their biggest market is the USA (788,390 passengers from BGN), followed by Turkey (707,720) and the United Kingdom (603,957). The German market was the fastest-growing in 2003, notching up 7.4 percent growth, and is served by seven flights per week to Frankfurt, five to Munich and three to Berlin.

“Two-thirds of our passengers are Israelis – business people, tourists and people visiting relatives. The demand from German Jews is rising steadily, whereas business from Christian pilgrims and tourists is continuing to stagnate. We also operate one flight per week to Frankfurt with a cargo plane. Our weekly volume of freight bound for Germany averages around 1,000 tonnes. In the passenger market overall, last year we carried 150,000 passengers to Frankfurt, 70,000 to Munich and 40,000 to Berlin, clinching 45 percent of the market. We regard the German market as equally important to us, after the USA, as the UK and France.”

El Al's main competitor on the route from Israel to Germany is Lufthansa, which in 2003 was the biggest foreign airline in BGN, with 332,000 passengers, up by seven percent on the previous year. Lufthansa fills one A340 and one 747 every day with passengers departing from Tel Aviv but, compared with the Israeli airline, has seen its share of passengers with connecting flights in Germany drop to below 50% of all the passengers The Israelis maintain that their share is around 63 percent, but Lufthansa claims it is only 35 percent.

Nevertheless, it was quite a surprise when El Al finished the year 2003 with earning before interest and taxes (EBIT) of $27.5 million and a profit of $6.4 million. After three years of losses, turnover rose to $1.167 billion in 2003 (up from $1.1 billion in 2002), and passenger numbers rose to 2.55 million (compared with 2.47 million the previous year) – and this was despite the fact that the overall volume of traffic passing through BGN had dropped back slightly. El Al's seat utilisation for 2003 was 75.7 percent, better than many of its competitors. With an EBIT of $14 million and a net profit of $9.6 million, the results for the fourth quarter of 2003 were the best quarterly results for ten years. This trend was maintained into the first quarter of 2004: with an EBIT of $9.7 million and a net profit of $4.5 million, this was the first time that the first quarter of the year had posted a profit for five years.

Cargo accounts for a quarter of the airline's revenue. In 2003, 172,000 tonnes of air cargo were carried, compared with 166,000 tonnes in the previous year. A fifth, weekly cargo connection to Shanghai is being added to the existing routes to Bombay, Colombo, Hong Kong and Seoul, which are experiencing particularly dynamic growth at present time.

Because public life comes to a standstill on the weekly Jewish Sabbath, only the El Al freighters and chartered aircraft owned by its subsidiary, Sun d'Or, are allowed to take off on Saturdays. All El Al passenger aircraft are forcibly rested, in accordance with a government order imposed on the national carrier in 1982. Once the airline has been privatised, this restriction will no longer apply, although the ruling is likely to continue in force until at least December, when the next tranche of shares changes hands. This extremely sensitive issue will be left to the new owners to decide. At first sight, the weekly suspension off flights on the Sabbath might appear to be a major disadvantage. However, if the airline were to cease to observe this day of rest in a big way, the ultra-Orthodox Jews might impose a total boycott of the company out of protest, which could reverse the upward trend in revenue.

El Al's charter subsidiary, Sun d'Or, was founded at the end of the 1970s in the wake of market deregulation so as to compete with the private start-ups, Arkia and Maof. At first it used the operating licence and code LY of its parent company, but since 2000 it has been flying under his own code, 7L, and has its own operating licence.

As of the end of 2003, El Al's total workforce, including its maintenance arm, El Al Maintenance, numbered 5,410. Personnel costs accounted for 18 percent of total costs in the first quarter of 2004, slightly down but constant. Other cost factors were fuel (25%), airport charges (16%), depreciation (10%), transit costs (8%), onboard catering (5%) and “miscellaneous costs” (12%). This latter category includes the hefty security costs. Having at one time been plagued by terrorist attacks, today the airline is regarded as an industry model for the world in the matter of the passenger protection. Even during economic downturns, the company has never skimped on security. On the other hand, whereas previously the costs of surveillance were entirely borne by the government, since 1 January 2003 the proportion paid by the government has fallen to 50 percent. This has meant that the airline has had to increase its expenditure on security accordingly. As vice president Levy explains, “Wherever we fly to, we insist on applying our uncompromising passenger handling standards. Despite this, we prefer to promote El Al as an airline with a particularly good price:performance ratio, rather than as the best protected in the world.”

As of the end of 2003, El Al's fleet consisted of 30 aircraft, all Boeings, with an average age of 12.5 years. Whereas the state-owned airline has not so far bought any Airbuses out of political consideration for the USA, this could change in the future. Of the five types in service (737NG, 747-200, 747-400, 757/767 and 777) the 747-200 is urgently in need of a replacement, whereas the retirement of the 757 and 767 fleets could be stretched over a number of years. The five 737-700/-800's were delivered in 1999, the four 747-400's between 1994 and 1996 and the four 777's between 2001 and 2002. Whereas in the past El Al could have been counted on to be a Boeing 7E7 customer, this decision will now be left to the future owners. Whether Airbus has a chance is not yet clear. At present El Al's strategy seems to suggest that the 747-200's could be replaced by a smaller type that would offer higher frequencies. “The age of our fleet is not unusual for the industry,” says Levy, “but we are debating our renewal options. I don't believe that the A380 would fit into the Israeli market, not even on the New York route. If we operated the A380, we would have to reduce the number of flights. Whereas top of our customers' wish lists are flight frequencies, followed by low fares, frequent-flyer clubs and, last of all, service.”

From page 32 of FLUG REVUE 11/2004

Last updated 13 October 2004

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