Even El Al didn't expect such a war windfall

El Al  credit: Dani Sadeh
El Al credit: Dani Sadeh

As foreign airlines deserted Israel, El Al took full advantage. Can it maintain its newfound profitability?

Aviation, as the stock market very well knows, is a volatile industry and subject to outside influences that can send profits either sky high or nosediving, from fuel prices, to exchange rates, to war. Israel’s largest airline, El Al, made losses for half a decade before the Covid-19 pandemic, when it had to cope not just with competition from foreign airlines, but also with a militant union that refused to compromise on the over-generous employment terms of its pilots.

The pandemic, which almost entirely grounded El Al for a long period, almost brought it to bankruptcy and caused it huge losses (about $1 billion in two years). The company needed financial help, and the state was there for it with an injection of hundreds of millions of dollars. At the same time, Kenny Rozenberg took advantage of the company’s plight to become its controlling shareholder (through his son Eli), replacing the Mozes-Borovitz family.

At the same time, El Al itself took advantage of the pandemic, which weakened the power of the employees’ unions, to carry out a substantial streamlining program, cutting its workforce by 20% (to about 5,000 today) and reducing hidden unemployment at the company. Company sources speak favorably of CEO Dina Ben Tal Ganancia, saying that under her leadership the murky atmosphere that prevailed in previous years in relations between the management and the pilots’ union, when flights were sometimes cancelled at a moment’s notice, had cleared.

As a consequence, El Al’s results showed an improving trend in 2022, and this continued into 2023, with a growing share of the market of Israelis flying abroad. No-one, however, imagined the turn the company’s fortunes would take starting from last October, when, in the wake of the war in the Gaza Strip, El Al became almost the sole operator at Ben Gurion Airport, raising its fares and enjoying extraordinary profitability.

That is not what El Al predicted at the start of the military campaign. In mid-October, the company warned of a hit to its fourth quarter results "because of the security situation in the country and its impact on the tourism and aviation industry." A month later, El Al predicted that it results would be adversely affected in the first quarter of 2024 as well (even though the quarter had not yet begun) because of "continued decline in demand for the company’s flights" and "suspension of flights" that had led to "a decline in bookings". El Al’s share price fell by more than 30% in three weeks.

But the trend very quickly changed. The foreign airlines stopped flying to Israel, and in November and December El Al’s market share at Ben Gurion Airport shot up to 80%, which compares with 21.5% in the corresponding period of 2022. So, despite the war, El Al actually carried more passengers in the fourth quarter of 2023 than in the corresponding quarter of 2022, and at higher prices. In 2023 as a whole, El Al’s passenger numbers rose 32.5%. Between the end of October and now, its share price has more than doubled, bringing its market cap to NIS 1.3 billion and the value of Rozenberg’s 48% stake to NIS 620 million.

At the same time, the company has also benefitted from substantial growth in its share of the cargo market at Ben Gurion Airport, from 30% before the war to over 90%. All these factors find expression in the strong fourth quarter financials that El Al released last week.

Rising fares

In January and February this year too, despite the gradual return of some foreign companies to Israel, El Al continued to benefit from dominance of the Israeli aviation market, carrying almost 73% of the passengers in January, although, according to estimates, less than that in February. Rami Levy’s Israir was second for market share in January, with 9.7%, which compares with 3% in January 2023.

At the same time, El Al has been subjected to criticism for exploiting its new status to charge higher prices. For example, business class tickets to New York jumped to as much as $11,000, which compares with $2,500 a year earlier, and the price in tourist class jumped to $2,000, from $850 a year earlier.

"The prices became scandalous," a senior aviation industry source told "Globes", adding, "It’s not clear why the Competition Authority did not even trouble to examine the matter. Very, very high prices that they wouldn’t have dared charge in the past, simply because they could." The source stressed that fares rose "despite the fact that fuel did not become any more expensive, and nor did employees’ pay rise."

It’s not certain that all the criticism is justified. The decline in the number of airlines flying to Israel narrowed the possibilities for those flying abroad, after a long period in which Israelis had become used to a broad range of prices. Now, the travelling public was mainly left with El Al, which had never been a low-cost airline, and had certainly not priced itself as such. El Al’s pricing method, like that of other airlines around the world, ensures the lowest prices for those who book early, and as time passes and the number of seats available falls, prices rise.

El Al also claims that it has limited the rise in prices, and that without this intervention they would have shot up even more. The company also points out that its average revenue per passenger rose by only 5.4% in the final quarter of last year.

"Everyone knows that the price of a seat doesn’t wait for those who book a ticket at the last minute, certainly when we are the only ones flying," says CEO Ben Tal Ganancia. "Prices have not risen for those who book in advance, and there are those who book six months and even a year ahead. In the end, it’s only a small percentage of passengers for whom the fare has risen, mainly because they booked tickets at the last minute. I repeat that it’s worthwhile booking flight tickets early."

Foreign airlines returning

All the same, it’s clear that the situation will not continue as it has been in the past few months. More and more foreign airlines have been talking recently about returning to Israel, even if hesitantly, as the war continues.

A week ago, it was reported that United Airlines planned to return to Israel in early March, and El Al’s share price dropped 14% the same day, evidence of the premium that the market ascribes to dominance at Ben Gurion.

Turkish Airlines and Pegasus (also based in Turkey), which were two of the main carriers at Ben Gurion, together accounting for 9% of passenger traffic there, are not expected back "until Erdogan decides, and it’s clearly a political decision," an industry source says. Irish low-cost airline Ryanair (6%) "keeps changing its mind, and hasn’t come back yet." Other important carriers in the Israeli market, however, such as Wizz Air (10% of traffic), United Airlines (2.6%), and EasyJet (3%), are expected to resume operations this month.

El Al expects the return of the foreign airlines to be gradual, and to continue benefitting. "When a company announces that it is returning to fly, its plane is still empty, while mine is 80% full," Ben Tal Ganancia said. Another industry source added, "The airlines say they are returning, but their crews are not prepared to stay overnight in Israel. That makes their whole return strange. Airlines from the US will change crews in Europe and then come to Israel and fly straight back again. That will make the whole process cumbersome and lengthen flight times, but prices will presumably fall. There will still be competition again."

El Al recently came out with a special offer for reserve soldiers of 18,000 free tickets (except for airport taxes). Demand was naturally much higher than supply, and tens of thousands of people who tried to book these tickets met with an announcement that "the tickets are sold out." Some claimed that the airline was unprepared for the demand, and that its website quickly crashed.

Cynics will say that this was another way for El Al to attract passengers, since for every free ticket there would be at least one more passenger who would buy a ticket to travel with their partner, and perhaps children as well. As far as El Al is concerned, this was of course a legitimate marketing move, aimed at keeping its market share higher than it was before the war.

On the other hand, El Al is again suffering from the fact that it can’t fly over Arab countries. Only a year ago, it managed to obtain permission to fly over Arab countries on eastward routes, but now it is forced to take the longer route, south of these countries, and, which lengthens flight times by several hours. This of course means considerable extra expenditure on crew hours and fuel.

What will happen to El Al’s share price?

Can El Al’s share price continue rising? The company’s profitability is affected, as mentioned, by external factors such as fuel prices and exchange rates, and analysts regard aviation as a difficult industry to cover, as one of them told "Globes", and some have lost interest in it. Aviation stocks in general, including those of US airlines, are problematic, and have not given investors positive returns over the past decade.

Nevertheless, a former El Al executive believes that the airline is on the right track. Besides complimenting its current management, he says, "El Al has shown in the past that it can make $100 million a year. With correct route management, and hedging of fuel prices and currencies, it’s certainly possible to make decent profits." The question is whether after an excellent year in which the company’s stars fell into line, it can maintain its high profit margins in the coming year. At least for now, it seems to be on course.

Published by Globes, Israel business news - en.globes.co.il - on March 3, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

El Al  credit: Dani Sadeh
El Al credit: Dani Sadeh
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