Some years ago, I asked the CEO of El Al Airlines at the time, Haim Romano, what his biggest challenge was. “Oil at $200 a barrel,” he answered without hesitation. Oil prices had already reached $150 per barrel and they seemed to be unstoppable. Fuel and labor are any airline’s biggest costs. Romano used to grouse that he had no control over the former and had failed in all his attempts to control the latter.
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Not only did the price of a barrel of oil not reach $200 barrel, for several months it’s been around $30, a development reflected in the financial statements of all carriers, El Al among them.
For the first nine months of 2015, El Al reported figures at a level we haven’t seen for long years. Revenues reached $1.57 billion, a hair below the same period of 2014. But profit from regular activity jumped to $146 million, from just $1 million in the same period of 2014. One can find plenty of reasons for the leap, or one could look at the chart of oil prices.
The slump in oil prices was a boon to El Al (which was privatized in 2004). Did it also help the airline fix its notoriously problematic labor relations?
Quite the contrary. If anything, they were exacerbated. The persistence of two worrying trends spell deterioration for the company in the medium to long term. And when oil prices start to climb again, as they will, the damage will surface in El Al’s financial statements.
When corporate profits rise, workers and managers want a piece of the pie. In this case, the origin of the bump in profit isn’t intrinsic to the company, but exogenous. It isn’t affected by anything that El Al workers, managers or owners do, though it’s nice to take credit for achievements. But the improvement in profit led to pressure for salary raises, hence the labor agreement signed in June 2015 linking profits to wages.
But the pilots wanted more, and they found a work-around to lift their pay. By how much? By tens of percentage points. According to figures bruited about at the company, there are pilots whose monthly wages rose to 160,000 shekels, from somewhere between 70,000 shekels and 80,000 shekels.
How? Under their collective bargaining agreement, El Al pilots cannot be scheduled for more than 85 flight hours per month. They can, however, agree to work additional hours for overtime pay.
In practice, in high season many of the airline’s pilots work between 100 hours and 110 hours a month.
Paid to be a passenger
As for the pay bump: After each flight from Israel to the United States, the pilots are supposed to rest in the U.S. for 44 hours. Several months ago, they demanded that in exceptional circumstances (for instance when a pilot has to replace another), instead of resting for 44 hours and piloting a return flight to Israel, they be allowed to fly back to Israel as passengers, in business class, and be paid for the flight time.
As a result, some flights had eight pilots, at full pay, on board (four on duty, four not). The result was a steep climb in outlay for pilots.
Management got the message that the pilots wanted their share of that cheap-oil bonanza and if a way wasn’t found, the pilots would find one.
Having gotten the message, management decided to deliver one of its own: No, the pilots would not get away with setting their own employment terms, certainly not sky-high ones. So, management leased planes and pilots from foreign airlines in what is known as “wet leasing” in the argot.
Thus some passengers who bought El Al tickers in recent months were surprised to find themselves on a foreign plane with a foreign crew. These crews don’t require a 44-hour stop like their Israeli peers; 12 does the trick. They don’t demand business-class seating.
On the face of it, El Al and its pilots are locked into a fairly standard power struggle. But this particular battle is laying the groundwork for future crises.
First of all, wages that high aren’t sustainable over time, especially after oil prices rise anew. Secondly are issues of service and branding.
El Al, though privately owned for 12 years, is still perceived as the Israeli national airline. It’s seen as an Israeli airline with Israeli pilots, most of whom were pilots in the Israel Air Force. Consumers therefore give the company high marks for quality, for which they’re prepared to pay a premium, just for that “at-home” feeling. When people buy El Al tickets and find themselves on a foreign plane with a foreign crew, they feel cheated and possibly, insecure as well.
Arrangement with snags
The arrangement has its snags and in recent months there have been some pretty onerous disruptions on certain flights; some even had to be canceled because of balky pilots (they claimed illness, a common ploy). Last Wednesday, for instance, El Al transferred four flights to foreign companies and canceled two to Beijing, because it couldn’t get a permit to fly a foreign plane there. The damage to the carrier’s consumers is starting to build up.
Not only aren’t El Al’s pilots reassuring the fretting masses; they make things worse by stating things like, “The company’s pilots are prepared to fly all the flights at this very moment. Since El Al’s management leased in advance five inferior planes with foreign crew, the passengers had to settle for low-cost planes and pilots with unknown training instead of El Al planes and professional Israeli crews.”
By the way, some feel that El Al was never really privatized: It changed hands in 2004, but its corporate culture smack heavily of government, and labor, mainly the pilots, continues to rule the roost. If anything, a recovery by oil prices and drop in El Al’s profits could be helpful from these perspectives; so could trouble on a leased flight, heaven forfend – or genuine negotiations between the company and its workers. The parties need to realize that the collapse in oil prices cannot serve as a basis for policy and the establishment of bad norms that will hurt the company over the years.