El Al Israel Airlines made a little history this week. After four years its share price passed the 1-shekel mark, capping an 83% increase over the last month. On Tuesday it solidified its move into shekel territory, climbing 8.6% to close at 1.11 shekels (29 cents).
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That’s still far from the share’s record high of 3.90 shekels at the end of 2004, and it assigns the flag carrier a market value of a mere $147 million. Still, it’s an impressive run for one of the Tel Aviv Stock Exchange’s least interesting stocks.
The story behind the stock is the sinking price of oil, which should once again contribute to a big drop in costs when the company publishes its second-quarter report. The airline’s third-quarter statement should look particularly good, considering that a year ago the Gaza war ruined the tourist season.
The price of oil fell an average of 44% in the second quarter from a year ago to $57.80 a barrel. With the airline spending $703 million on jet fuel last year when oil averaged $99.50 a barrel, that brings hefty savings. Still, El Al hasn’t enjoyed the full impact of falling oil prices because, like other airlines, it hedges its fuel costs.
Moreover, the effect will decline over the course of 2015. At the end of the first quarter, the last for which the airline has reported, 36% of its fuel needs for the next 12 months were hedged. Because El Al was able, as far back as last December, to hedge fuel prices at $70 a barrel or less, the impact of hedging will moderate from first-quarter levels.
Yair Shani, investments manager at IBI Israel Brokerage & Investments, said the market was repricing El Al shares on the assumption that low energy costs would be around for a while.
Ironically, this will be one of the effects of the Iran nuclear accord, which should start bringing more Iranian oil onto global markets as sanctions are lifted. Meanwhile, a slowing Chinese economy should moderate demand.
As airlines go, El Al is a gas guzzler. Because so many of its routes are to distant destinations like North America and the Far East, 49% of its revenues were eaten up by fuel costs in 2014, a sum that exceeded profits by a wide margin. Typically fuel costs amount to 35% of the price of airfare, but in the first quarter that figure fell to 28%.
A flight to New York from Tel Aviv uses 100 tons of fuel, so the $400-a-ton price drop this summer, compared with a year ago, amounts to a profit of $100 a ticket, assuming the plane is full.
El Al has other factors going for it. The Open Skies agreement with the European Union, which has increased competition but made flying more popular, has benefited the airline on its European routes. So has the weak euro, which has fallen more than 12% this year and has tempted Israeli tourists.
Competition has meant reduced airfares, as El Al competes with a slew of low-cost carriers. In the second quarter, the airline’s revenue per passenger declined, but lower fuel prices have more than compensated for that, sources told TheMarker.
A new labor agreement promises the airline a summer — its peak tourism season — free of strikes and job actions.