Analysis

If Open Skies Deal Gets Approval, FIMI Might Balk at El Al Investment

If the agreement goes forward, Yishay Davidi’s FIMI, the largest private investment firm in the country, might not carry on with a deal to invest in El Al.

The result of Sunday’s cabinet meeting on the Open Skies agreement, which is due to liberalize air travel between Israel and EU airports, could sting Israel’s three airlines, especially the largest, El Al.

El Al, Israir and Arkia face a possible strike Sunday over the Open Skies pact, but if the agreement goes forward, Yishay Davidi’s FIMI fund might not carry on with a deal to invest in El Al.

A week ago El Al signed the agreement with FIMI, the largest private investment firm in the country, whose full name is First Israel Mezzanine Investors. The deal calls for FIMI to inject $70 million to $75 million for a 46% stake in El Al. At the same time, FIMI signed an agreement that would give the fund a joint controlling stake in El Al with the Borovich family’s Knafaim Holdings, the current controlling shareholder. Together Knafaim and FIMI would hold a stake of about 60%.

The deal with FIMI is conditioned on a new collective labor agreement with El Al’s staff that FIMI would find acceptable. The deadline for the agreement under FIMI’s terms is the end of July, but FIMI probably also included a clause letting the fund back out of the deal in the event of a material adverse change at El Al.

In a television interview Friday, El Al CEO Eliezer Shkedy said a cabinet decision to approve Open Skies might be considered such a material adverse change. The agreement is expected to stiffen competition from foreign carriers.

El Al’s financial reports have also addressed the prospect of an Open Skies agreement, but the airline’s auditors said that since legal and administrative steps for approval of the agreement had not been completed, there had not yet been a material adverse change.

El Al contends that as currently structured, the Open Skies agreement does not let the company fairly compete with the new competition. As an example, it mentioned how the government could help level the playing field by paying the full cost of airline security at El Al.

Last year the government paid 70% of this cost, and the Open Skies agreement as currently drafted provides for that be increased to 80%. Last year, the airline’s total security bill was $33 million. It is also asking that the agreement include landing rights for El Al in Europe that are comparable in value to what foreign airlines have in Israel.

Financially, El Al has been under pressure even without Open Skies. Between 2013 and 2015, the airline is due to repay $342 million in debt, an average of $114 million a year. That poses a challenge to a company whose cash flow from current operations averaged $114 million for each year between 2010 and 2012, while its available cash flow, the net after investment in fixed assets, averaged about $43 million annually over the past three years.

At the end of last year, El Al had a cash balance of $75 million. Therefore the airline’s ability to deal with a material adverse change without an infusion of capital is limited.

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