Analysis

An Israeli Airline Merger? The Coronavirus Could Make It Happen

El Al, Israir and Arkia stand a better chance of surviving by combining forces. Given the industry’s sorry state, regulators may give the go-ahead

Yoram Gabison
Yoram Gabison
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Ben Gurion Airport, almost empty due to the coronavirus crisis, Tel Aviv, April 19, 2020
Ben Gurion Airport, almost empty due to the coronavirus crisis, Tel Aviv, April 19, 2020Credit: Tomer Appelbaum
Yoram Gabison
Yoram Gabison

Empty airports, jets idled in desert parking lots and airlines knocking on the doors of governments seeking emergency aid. The coronavirus has wreaked havoc on the global aviation industry and Israeli carriers led by El Al Airlines have not been spared any of the pain.

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Israel’s single-use coalition will serve Trump and protect BibiCredit: Haaretz

The focus to date has been on financial aid to El Al, but with the air travel industry in such dire straits and a recovery likely to be long in coming, the way to ensure Israel’s aviation sector survives could be by allowing the country’s three carriers – besides El Al, Israir and Arkia – to merge.

Gil Rosenberg, a partner specializing in antitrust at the Tel Aviv law firm Shibolet, said the crisis may indeed lead Israel’s Competition Authority to revise its stand on an airline merger.

Gil Rosenberg, a partner specializing in antitrust at the Tel Aviv law firm Shibolet, February 25, 2014
Gil Rosenberg, a partner specializing in antitrust at the Tel Aviv law firm Shibolet, February 25, 2014Credit: Oren Dai

A merger between El Al and Israir would enable each side to concentrate on its relative advantages – El Al on long-distance destinations and Jewish communities in North America and Europe; Israir on Mediterranean Basin destinations, where it has shown that it can compete with low-cost carriers.

A merger like this was reached in 2017 under which El Al’s wholly owned Sun d’Or unit was to have bought Israir from its parent company, IDB Development Limited. IDB was to have received $24 million in cash and a 25% stake in Sun d’Or.

The attempt failed after Uri Schwartz, then acting director of the Competition Authority, announced in January 2018 that he opposed it. Schwartz said he had two concerns. One was that the tie-up would cause El Al to stop flying to the southern resort city of Eilat, leaving the route as a duopoly between Israir and Arkia. The other was that El Al would use its monopoly over air security on international flights to squeeze Arkia, Israir’s chief rival.

That doesn’t necessarily have to be the end of the story. Rosenberg notes that under the failing-company doctrine a regulator can approve a merger that wouldn’t have been allowed under normal conditions. The doctrine states that even if the merger might harm competition, it could be approved if the alternative is for one of the firms to fail. Rosenberg recalls two such cases in Israel.

In 2005, Dror Strum, the antitrust commissioner, approved the purchase by Shuferal, Israel’s biggest supermarket chain, of Club Market, which has sought protection from creditors. The takeover was conditioned on the merged company’s divesting 12 stores and subjecting itself to other restrictions designed to minimize the harm to competition.

More recently, Competition Commissioner Michal Halperin gave the nod for a merger of television broadcasters Reshet and Channel 10. Halperin admitted that the merger would reduce competition in the TV industry but citing Channel 10’s financial statements and internal documents provided by it and its rivals, she concluded that Channel 10 would drop out of the market if the merger didn’t go through.

Competition Commissioner Michal Halperin,January 8, 2018
Competition Commissioner Michal Halperin,January 8, 2018Credit: Emil Salman

Halperin set out three conditions for a failing company – that it cease activities in the relevant market if the merger isn’t approved; that there are no other buyers; and that a merger doesn’t undermine the competitive environment more than the company’s disappearing from the scene.

Rosenberg said that Britain’s Competition and Markets Authority adopted the same line when it cleared Amazon’s participation in a $575 million investment in the UK delivery firm Deliveroo last week. The previous May, the CMA had frozen Amazon’s participation over competitive concerns.

What happened in the meantime was the coronavirus pandemic. Deliveroo told the CMA that without the $575 million investment round, in which Amazon would be the lead investors, Deliveroo would have to leave the market because of the lockdown.

Another example of a merger that won approval due to a fundamental change in market conditions was the tie-up between Burger King Israel, which had filed for protection from creditors, and the local Burger Ranch chain. The original merger application had been rejected on competitive grounds, but five years later it was cleared after Burger Ranch got into financial trouble. In addition, other fast-food burger chains had been established, so there was more competition than previously.

Israel’s three airlines were talking about a merger even before the coronavirus crisis broke out and now it has taken on more urgency. Avi Homero, chairman of Arkia, warned three weeks ago that if the three carriers don’t merge none would survive.

Uri Sirkis, Isralir’s CEO, said a merger was critical if the airlines wanted to compete successfully in the post-coronavirus market. However, he said talks about a merger would only begin once the carriers’ survival is ensured by a government bailout and a return to normal operations.

“In the last two decades when we’ve been through the 9/11 disaster, global recession, Operation Protective Edge and now the coronavirus crisis – a major event every five years,” Sirkis said. “Unfortunately, we’re hearing every day about those who have succumbed to the virus and many have died from related ailments. The Israeli aviation industry has suffered and will suffer from related ailments, too, so our ability to survive has been significantly undermined.”

A merger of El Al, Israir and Arkia still leaves open the question of competition on the Eilat route. Sirkis says that issue can be resolved by price supervision.

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