Opinion

Nationalizing El Al Won't Rescue It From Mediocrity

Without a state takeover, Israeli airline will crash and burn, but the state has been terrible at managing business. One solution comes to mind

David Rosenberg
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El Al workers protesting outside the Finance Ministry, Jerusalem, May 5, 2020
El Al workers protesting outside the Finance Ministry, Jerusalem, May 5, 2020Credit: Ohad Zwigenberg
David Rosenberg

As far as I know, El Al has no plans to start showing inflight movies on overhead screens or have shuttle buses ferry passengers to and from planes. But in another way it is taking a big step back to the 1990s, with the government’s plan to nationalize Israel’s flag carrier.

"Nationalization" doesn’t appear in El Al’s statement this week announcing the terms of the treasury’s revised rescue plan, which is no surprise. Prime Minister Benjamin Netanyahu was once Mr. Privatization and when he was finance minister 17 years ago the government sold the airline. No politician likes to see his legacy undone, let alone be the one undoing it.

Nevertheless, nationalization is what’s in store for El Al because a key part of the rescue plan requires its existing shareholders to buy into a $150 million rights offering. If they won’t – which seems all but inevitable because they would be throwing good money after bad – the government will buy the shares and become the majority shareholder.

The coronavirus has changed the world. Netanyahu was also once known as Mr. Fiscal Rectitude, but the pandemic has given him, like all the others who once believed in small government and limited spending, no choice. Netanyahu has boosted government spending by a massive 100 billion shekels ($28.8 billion), offering grants and loans to any and all who have been hurt by the pandemic, and causing the budget deficit to balloon.

Like busting the budget, Netanyahu has no choice other than to take control of El Al. Passenger air travel has all but evaporated, and unless COVID-19 unexpectedly disappears on its own or a miracle vaccine is developed soon, it will be many years before it recovers. 

The International Air Travel Association doesn’t think airline traffic and revenue will return to 2019 levels for another four years. Social-distancing rules, such as leaving middle seats empty, will make most airlines unprofitable, according to the IATA.

Without the nationalization vaccine, El Al would have succumbed to the coronavirus and that is one fatality Israel can’t tolerate. It’s not just a matter of national prestige or nostalgia. As the last Gaza war showed, when foreign carriers briefly suspended service, Israel is always at risk of losing air connectivity if it doesn’t have its own airline, and we need it. We’re for all intents and purposes an island, since overland travel via our neighbors is impracticable and maritime transportation is only good for slow-moving cargo.

But is Israel trading a quick coronavirus death for El Al for the wasting disease of state mismanagement and control by militant unions, which is the condition of most government-owned companies?

The treasury hopes to set up a mechanism that will keep El Al one step removed from the politicians by putting day-to-day management in the hands of a trustee. That mechanism worked when Israel had to nationalize the banks back in the 1980s, but El Al isn’t the same kind of business as Israeli banks.

Israeli state-owned companies do best, which means their performance is mediocre, when they are confined to the domestic market. Competition is limited or nonexistent, so even a so-so company is not at risk of failure. Insider connections with regulators and politicians helps smooth over managerial blunders by tilting the playing field in favor of state enterprises.

El Al doesn’t have those luxuries. It competes in a global market and since the Open Skies agreement with the European Union went into force in 2013 in the key Europe segment, the competition is fierce. El Al is vying with global airline giants with deep pockets and monstrously efficient low-cost carriers. There isn’t any room for schlepping along. Which is what El Al was doing before the coronavirus struck, even under private ownership.

Open Skies brought a boom in air travel to and from Israel, but El Al was struggling to holds its own in the market. Even with the advantages of being “the nation’s airline” whose cabin crews speak Hebrew and which supplied the tightest security, El Al was losing market share at Ben-Gurion International Airport. In the last two years El Al had been losing money and has been carrying a heavy $2.2 billion in debt.

Nationalization will keep El Al flying, but by itself it won’t rescue the airline from union militancy or mediocre management. 

The union problem is the tougher one. Maybe they will be cowed into submission as the look at the wreckage of the airline industry around them, but my guess they will see the government as a cash cow they can milk with ease. All we can do is hope that the new finance minister, Yisrael Katz, will choose to see them down as he has done on some occasions, such as with the ports' unions.

Bringing in a foreign CEO, much like Teva Pharmaceuticals did when in crisis, could be the other half of the solution. Whether it’s pharmaceuticals or aviation, Israel is too small to have a large reservoir of executives with the relevant experience. Apart from promoting people from inside, where else can El Al source talent? Raiding Israir and Arkia? And with the global industry facing a wave of bankruptcies, it should be a buyer’s market for airline CEOs. El Al should be hunting heads.

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