El Al managers get rich, investors don’t

Total amount of salaries and bonuses paid to senior managers since El Al was privatized is more than dividends distributed to shareholders.

Eliezer Shkedi 311 (photo credit: Ariel Jerozolimski)
Eliezer Shkedi 311
(photo credit: Ariel Jerozolimski)
A negative return of 14 percent: that’s the bill presented by El Al Israel Airlines Ltd. to investors who bought shares in its IPO eight years ago The amazing thing is that if you total the salaries and bonuses paid to senior managers since it was privatized, you find that the amount is more than the dividends distributed to shareholders in that period (the NIS 50 million distributed in 2007).
El Al’s previous CEO, Haim Romano, received salary and bonuses totaling NIS 41m.
over five years (an Israel Securities Authority examination later found that some of the bonuses were not properly approved by the board), while investors lost twothirds of their investment in the airline during that time.
This did not prevent the company from signing a generous employment agreement with Romano’s successor, former Israel Air Force commander Eliezer Shkedi, as well. Shkedi is entitled to a bonus of 2% of the annual profit before tax, in addition to a monthly salary of NIS 115,000 and options on 1.9% of the airline’s share capital.
Thus, in 2010, when El Al made a profit of $57.4m., Shkedi’s salary cost was NIS 16.8m., of which NIS 11.4m. was described as a bonus.

Although he decided to transfer half the bonus to an excellence fund for the workers, these salary conditions aroused great resentment among El Al’s pilots, some of whom know Shkedi from their Air Force days.
However, it looks as though El Al will not be paying out success bonuses in the near future. Last Wednesday it reported a $52.6m. loss for the first half of 2011, slightly worse than the loss posted in the first half of 2009, at a time when the effect of the global financial crisis on business was at its height.
El Al’s share price is only slightly higher than it was in 2008, and it seems that investors fear the airline is in for another difficult period.
Apart from global market factors that are affecting the profitability of other airlines as well, such as the high price of oil, El Al, like its Israeli rivals Arkia Airlines Ltd. and Arkia Airlines Ltd. and Tourism Ltd., is suffering from an increase in the number of foreign airlines’ flights to Israel, which sharpens competition.
It is important to remember that in El Al’s case, even in a year in which it makes a loss, its cash flow from regular activities is $130m., which is also the annual depreciation it posts on its aircraft. In the first half of 2011, cash flow fell 43% in comparison with the corresponding period of 2010. But despite this sharp drop, the figure is still high in comparison with the first half of 2009, when cash flow was just $24.9m.
El Al knows it has to take action to stop the slide, and its auditors mentioned in their report the company’s plans to improve its financial results and its cash flow. The plans call for optimization of commercial activities, with close management of the flight timetable, and boosting of revenue from its activities, including those unrelated to ticket sales, expenditure reduction, and other financial steps.
A few weeks ago, El Al announced that it would stop flying to Brazil, and when it published its financials it reported a rescheduling of bank loans so that their duration will lengthen.
However, it is doubtful whether under current macroeconomic conditions (high oil prices and a low shekel-dollar exchange rate), and given the state of the aviation market generally, an internal streamlining plan will be enough. In a situation in which the other Israeli airlines are also not performing well (Israir made a loss in 2010), it seems there will be no avoiding a merger in the local aviation industry that will lead to savings in operating costs.
Last Wednesday, Shkedi commented on recent media reports of a possible merger between Israeli airlines and told Globes: “In the wider world, mergers, acquisitions and alliance agreements are important and happen all the time, and it’s right that such a trend should develop in Israel as well. We are constantly studying and enquiring, and if there is something relevant, it is brought up for discussion.”