El Al seeks gov't help for security costs

Airline posts second-quarter loss on increased competition, higher fuel prices.

el al plane 88 (photo credit: )
el al plane 88
(photo credit: )
El Al Israel Airlines reported a dramatic drop in second-quarter earnings Thursday, blaming an "unprecedented" increase in competition and higher fuel prices for its poor performance. The airline also said it has been forced to bear increased security and operating expenses resulting from the security situation and has turned to the government for assistance. "We have asked the government to help us with security costs, which is something we carry on our backs and is getting harder everyday," Haim Romano, president and chief executive officer of El Al, told The Jerusalem Post. El Al swung to a net loss of $15.1 million in the second quarter despite a 2 percent increase in revenue to $429.2m. from $422.7m. in the parallel period last year when the airline posted a profit of $29.9m. The company attributed the revenue rise mainly to its prestige passengers. Gross profit dropped to $65.7m., or 15.3% of revenues, from $111.5m., or 26.4% of revenues last year, while operating loss totaled $5.3m. The airline had an operating profit of $34.9m. in the 2005 three-month period. "Our competition raised its capacity to Tel Aviv by 29%. which is unheard of in the industry that an airline should face such an increase in one quarter. What's more is that it was encouraged by the government and in some cases subsidized by it," Romano said. Higher interest rates, as well as the weaker dollar were also factors that affected the business, he added but believes "rising competition is the real issue we need to tackle." Fuel expenses came to $21.3m., after hedging activities, while the weaker dollar added $12m. to expenses. Analysts said the weak quarter was expected given the profit warning the company issued a month ago. "However, the net loss was much larger than we had forecast for the three months," said Yuval Zehira, senior analyst at investment house IBI. He was hesitant, however, to give an outlook for the rest of the year since it was as yet unknown at what rate tourists would return to Israel after the war in the North. In the longer term, he said, the company should return to profitability by next year as long as fuel prices remain stable. Zehira also maintained an optimistic view on the impact competition will have on the company. "In the near-term, the competition will continue to harm the company but eventually a balance will be found in terms of supply and demand. Competitors won't be so aggressive and the reserve of capacity in Israel will be maintained." The start of the quarter coincided with the April 1 start of the summer season when many foreign airlines were given the green light by the Government to raise their capacities on the Tel Aviv route in an effort to open the market to competition and due to higher tourism demand. The quarter saw some airlines add flights to their schedules (Air France doubled its Tel Aviv schedule to two daily flights from one), while others flew larger planes on the route and new players such as Delta and TUI entered the market. The drop in market share is expected to continue into the third and fourth quarters as the war in the North takes its toll on the tourism industry overall and El Al's passenger count. "It should be noted that there has been a significant drop in reservations and a concomitant rise in cancellations both by Israelis and tourists," the company said referring to the effects of the war. The Israel Airports Authority reported that in July alone, El Al's market share dropped to 37.5% of all traffic into Ben-Gurion Airport from 40.2% in July 2005 as the flow of passengers through the airport dropped 4.8% from year-to-year because of the war. Nevertheless, the airline is sticking to the "El Al 2010" five-year strategic plan it launched a year ago to stimulate growth. "The basics of the strategy are still there - that we can't be a low cost operator and look at the premium market as a very important market," Romano said. Romano, meanwhile, added that the Government was not doing enough to ensure the growth of the aviation industry in Israel. "What we want the government to understand is that the airline industry in the Middle East is very volatile and we need to combine forces to encourage tourism without damaging [the local companies]," Romano said. "No one will gain from the fact that El Al at the end of the day will have to fire hundreds and hundreds of people. It may come to that in the worse case scenario if the situation continues." Romano, who this week extended his contract with El Al until the end of 2010, said the airline will look to stimulate growth by strengthening its activities in key markets, particularly North America and the Far East, by increasing the frequency of its flights and cooperation with other airlines. "Recently, Israel's aviation market has been exposed to ever tougher competition, production price hikes and security crises," Romano said. "We are absorbed in matching our activities to suit changing circumstances, while at the same time maintaining El Al's leading position in aviation."