El Al was struggling even before coronavirus

El Al Boeing 787 Dreamliner  photo: PR

Low-cost competition was causing the Israeli carrier turbulence well before the East Asian virus but falling fuel prices may ease the pain.

The coronavirus outbreak is having two main effect on airlines, including El Al Israel Airlines Ltd. (TASE: ELAL). One is a steep fall in new bookings, especially to destinations in East Asia. The virus is also, however, lowering the price of oil, which is in turn lowering the price of jet fuel.

This week, El Al notified the Tel Aviv Stock Exchange (TASE) that its first quarter revenue would be $30 million lower than projected as a result of canceled flights and a halt in new bookings, "mainly for destinations in East Asia." El Al added that it was "monitoring global developments concerning the coronavirus regularly and assessing the consequences for its operations."

Several weeks ago, El Al suspended its flights to Beijing until the end of March. Yesterday El Al suspended flights to Hong Kong until March, extended the suspension to Beijing until April and reduced the frequency of its flights to Bangkok. At this stage, El Al is allowing passengers who booked tickets to cancel or change their bookings without penalty until March 15. This option is affecting occupancy rates; many people do not want to take a risk and are giving up their flights to Hong Kong.

Arkia Airlines canceled its flights on the route to Bangkok several months ago, so El Al is the only airline operating direct flights from Tel Aviv to Bangkok. In two weeks, El Al is scheduled to make aviation history by inaugurating direct flights to Tokyo. Three weekly flights are planned. The Ministry of Tourism will give El Al a €750,000 grant for the new route.

Another route under consideration by El Al is to Melbourne, Australia. El Al is scheduled to operate a test flight on the route in April. If the route is put into operation (which will be a surprise), it will become El Al's longest flight and one of the longest in the world, with a travel time of 18 hours.

El Al says that it expects most of its lost revenue to be offset by "the company's lower operating expenses." In other words, El Al believes that streamlining of its operations will enable it to limit the damage. For example, the price of oil has dropped 20% to $55 a barrel this year (Brent oil contracts), which will also substantially lower El Al's operational expenses.

Even without the outbreak of the coronavirus, El Al's results have worsened in the past two years, mainly as a result of competition at Ben Gurion Airport from low-cost airlines. El Al finished the first quarter of 2019, traditionally a poor quarter for the airline, with a 25% increase in its net loss to $55 million.

El Al's revenue was down 7% to $429 million, and its gross profit fell, but lower expenses enabled the airline to keep its operating loss steady at $53 million. In addition to the decrease in its revenue, which El Al attributed to the timing of the Jewish holidays; the effects of foreign currency exchange rates; and a decline in revenue from cargos; El Al also reported that its market share had fallen from 28% in the first quarter of 2018 to 25% in the first quarter of 2019.

El Al has not yet published its full reports for 2019, but the airline's results in the third quarter, El Al's strongest quarter, also disappointed its shareholders. Net profit was $27 million, down 36%, in comparison with the corresponding quarter in 2018, while revenue inched up 1% to $647 million.

El Al's loss in the first nine months of 2019 totaled $28 million, 37% more than in the corresponding period in 2018, while its revenue was unchanged at $1.65 billion.

El Al, controlled by Tami and David Borowitz through Knafaim Holdings, had 43 airplanes as of the end of September, with an average airplane age of 10 years, in comparison with 13 years in the corresponding quarter in 2018. The company had 6,350 employees.

The share price of El Al, not a leading company on the capital market (listed on the SME 60 index) responded to the company's report with a moderate 1.4% fall on the TASE. Since El Al's most recent results were published in mid-November, however, the share has lost 38% of its value, and 75% in the past two and a half years, pushing the airline's market cap down to NIS 450 million.

Published by Globes, Israel business news - en.globes.co.il - on February 13, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

El Al Boeing 787 Dreamliner  photo: PR
El Al Boeing 787 Dreamliner photo: PR
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