Gaza War Kept Tourists Away From Israel

El Al reported losses totaling $40 million in the first quarter of this fiscal year.

El Al's first quarter losses are no surprise to anyone. With incoming tourism down 17% and outgoing tourism down 12%, it's no wonder El Al had 13% fewer passengers in the first three months of 2009 than in the parallel period last year. Fewer passengers, lower average revenue per passenger and the strengthening of the dollar against European currencies resulted in a 26% decline in sales, to $347 million. Operating losses totaled $42.5 million and net losses were $40 million.

El Al CEO Haim Romano and CFO Nissim Malchi estimated that the company lost 150,000 flight segments, or $25 million, due to Operation Cast Lead, the Israel Defense Forces' three-week military operation in the Gaza Strip, which ended January 18, 2009. Revenues from El Al's cargo jets were down 52%, to $19 million, due mainly to the global slump in air cargo transport.

Despite the reduced demand, foreign airlines increased their supply of seats by 9% in the first quarter, and increased pressure to lower prices. El Al responded to the drop in demand by reducing its seat supply by 8%, and was thus able to limit the decline in occupancy rates to just 2%. Flight occupancy in the first quarter of 2009 was 78.9%.

Even so, gross profits plummeted by 65%, to $19 million, or 5.4% of revenues, compared to 11.4% in the parallel. El Al would have been in even worse shape if the dollar had not strengthened against the shekel. The improved dollar exchange rate was responsible for 74% of the $27-million decline in El Al's salary expenses, compared to the parallel. A closer look at the figures, however, reveals that El Al's regular employee complement rose 3%, even as the total number of workers shrank 5%, and revenues shrank 26%. El Al's wage structure apparently needs a total overhaul. Romano believes the company's shift rules are causing unnecessary expenses, as is paying overtime, which is not a common practice at El Al's low-cost competitors.

The collapse of the price of fuel helped El Al reduce the decline in profitability, as jet fuel expenses were $56 million lower in the past quarter than in the parallel quarter of 2008. Malchi says that jet fuel currently costs $57-$58 per barrel, and the 12-month forecast is for an increase to $62-$65 per barrel, so that expense is on the rise again.

El Al has been combating stiffening competition by boosting online sales, which grew to $21.7 million - a 111% increase over the first quarter of 2008. With more online sales, El Al paid 24% less to travel agents, and reduced operating losses by 10%.