New Management, Wage Deal at El Al Could Transform Company

Ishay Davidi will buy the airline - but only if the union agrees that there's a new sheriff in town. This is a model for a nation's emulation.

From Thursday's dramatic announcement by El Al that Ishay Davidi is negotiating to buy the formerly national airline, we may cautiously surmise that Davidi is trying to forge what could turn out to be a historic breakthrough for the Israeli economy.

The letter of understanding signed by Davidi's FIMI Opportunity Funds with the Borovich family, which bought El Al in 2003, outlines a deal in stages.

At first Davidi will pay $10 million for 11% of El Al shares, with $5 million going straight to the airline and $5 million to Knafaim, the firm through which the Boroviches own El Al.

The second tranche is the interesting and groundbreaking part of the deal.

Davidi will inject another $30 million into El Al, raising his overall stake in the company to 35% – but only after a new collective agreement is signed the union.

The letter of understanding leaves not a trace of doubt that this is the heart and soul of the deal: "The company will sign a new collective agreement with its workers on terms satisfactory to FIMI, at its sole discretion."

To understand the significance of this sentence, some familiarity is needed with the history of El Al and its labor culture. Despite having been privatized about 10 years ago, to this day it remains a company where power and control rest with its management and workers' committees. It's always been the workers who dictated El Al's fate, when it was under state control as well as after control was passed to the Borovich family. They dictated a high salary structure for employees, and particularly for the managers and pilots. They defended the employee tenure system. They dictated the culture and character of the entire organization.

Despite having been privatized, El Al isn't much different than the Israel Electric Corporation, the ports, Israel Railways and dozens of other concerns where managers and workers are focused on keeping their workplaces local monopolies – pocketing most of the "monopolistic rent" generated by the company.

Industry sources estimate El Al's excess payroll at about NIS 400 million a year. Many are familiar with the culture of shift work and arrangements used by workers to attain maximum income at minimum effort.

In a move reminiscent of the cellular phone operating companies until two years ago, for the past year El Al's management and workers have fought against the government's intention to take steps in implementing an "open skies" policy that would introduce more competition into local aviation. Such steps would bring down the cost of airline tickets to and from Israel, for the benefit of all the country's residents.

So if Davidi succeeds in bringing about a new collective agreement that significantly lowers the company's labor costs – including the salaries and bonuses given to senior management – and links workers' output and performance with their pay, El Al will become a decidedly different company. It will become much more profitable while also being able to adapt to the open skies arrangement and new competition along its routes.

Davidi's move is therefore revolutionary and can prove that both sides can win: El Al and the public. If it succeeds it can also serve as an example for what needs to be done in many other industries and monopolistic or quasi-monopolistic companies.

Accidental hero?

Throughout the world aviation is considered a particularly difficult business with suffering profits. Major airlines go bankrupt every year while others are often forced into mergers.

"The worst sort of business is one that grows rapidly, requires significant capital to engender growth, and then earns little or no money: think airlines," Warren Buffett wrote to Berkshire Hathaway shareholders in 2008.

There is no doubt that Davidi, a man who until now always focused exclusively on the profitability of businesses he purchased and never bought an asset on the basis of prestige he might gain, has a strong grasp on reality. He knows that "open skies" is still sitting on the government's desk and find its way back onto the agenda, and he doesn't tend to mix national issues or the "public interest" into his professional investment considerations.

But sometimes revolutions can occur unintentionally, accomplished by someone thinking only of his own personal profit. If Davidi does strike a new agreement with the employees of the national airline that brings about fundamental change in the company's management culture, this will turn it into an efficient and competitive organization. It will allow the opening of the local aviation market to competition to be completed. Then, like Communications Minister Moshe Kahlon, he will win the thanks of the public and also prove that other large parts of the economy can be made more efficient.

On the other hand, if – again like the owners and management of the cellular companies – Davidi opens a campaign against open skies, against competition and in support of raising prices, he will destroy the entire reputation he's built for himself through years of work and become just another tycoon living at the public's expense.

Tomer Appelbaum
Yonatan Bloom