In a bid to keep Israel’s flag carrier competitive in an era of huge growth and sharper competition in aviation, El Al Airlines said on Sunday it had reached a preliminary agreement to merge its Sun d’Or unit with the smaller carrier Israir.
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Under the agreement, El Al will buy Israir from the IDB group, which is controlled by Argentinian investor Eduardo Elsztain. IDB will get cash of no more than $24 million plus a 25% stake in the merged company.
The price doesn’t include Israir aircraft, which the company is expected to sell to a third party and lease back. Failing that, El Al will have to buy the planes for at least $70 million.
In money terms, the El Al-Israir deal is relatively small, but it is critical to Israeli carriers’ ability to compete in the aviation market created by Israel’s Open Skies agreement with the European Union. El Al shares ended 2% higher at 3.28 shekels (94 cents) on the Tel Aviv Stock Exchange.
The 2013 pact, which is being implemented in stages, has enabled a surfeit of new airlines to enter the Israeli market and given Israeli carriers, which include Arkia as well as El Al and Israir, more access to European destinations.
The result has been huge growth in air traffic in and out of Israel – April traffic alone was up 25.9% over the same month a year earlier – as well as lower airfares. El Al has struggled to compete with the hottest part of the market – the low-cost airlines, like Easyjet, that offer cheap, no-frills services.
El Al’s Up brand was launched in 2014 to meet the low-cost challenge but it hasn’t expanded its routes and destinations and has been judged a failure. By contrast, Israir under CEO Uri Sirkis, has transformed itself from an airline into a tourism company and has seen its passenger loads climb sharply. In May, they were up 37% year on year, although with just 2.3% of all the traffic in and out of Ben-Gurion International Airport it remains a small player. Sirkis is expected to become the CEO of the merged companies.
El Al’s Ben-Gurion share is close to a third, but foreign airlines are tough competitors and it faces a big increase in costs if its share declines to under 30% for an extended period, as happened in April when it sunk to 27.7%. The law entitles airlines with more than a 30% share of Ben-Gurion traffic to a 20% discount on fees and right now El Al is the only airline enjoying that cost advantage.
The agreement comes after 18 months of negotiations, but it faces several hurdles before it can be completed.
One is the Antirust Authority, which will have to balance the fact that El Al is already the dominant airline at Ben-Gurion and the fact that it is facing huge competition from the growing number of foreign airlines plying routes to and from Israel. Antitrust Commissioner Michal Halperin is recusing herself from the decision because she previous advised El Al before taking office.
An opinion prepared for the airline by Menachem Perlman, a former antitrust economist, argues that the two carriers don’t really compete because El Al services scheduled routes while Israir is like a low-cost airline.
The two airlines are counting on the backing of the Transportation Ministry for the merger. Tourism Minster Israel Katz has been the driving force behind Open Skies and has promised the reform won’t hurt Israeli carriers.
Labor unions present another obstacle. Although the pilots union on Sunday gave its backing, labor-management relations at El Al have been poor over the past year and employees are suspicious of any move management makes that could threat their jobs or conditions.