Private Equity Fund Withdraws Offer to Buy Controlling Stake in El Al

Airline’s failure to reach new labor agreement thwarts FIMI deal and batters company stock.

FIMI, the private equity fund run by Ishay Davidi, on Thursday withdrew an offer to buy a controlling stake in El Al Airlines, saying the carrier had failed to reach the new collective bargaining agreement with employees that FIMI had made a condition of the deal.

FIMI had said a month ago that the chances of the acquisition going forward were slim unless EL Al’s management reached an agreement that would enable the airline to reduce its losses and even return it to profitability. Nevertheless, the El Al share price plunged by as much as 9.3%, to NIS 52.60, on the Tel Aviv Stock Exchange Thursday, causing trading to be briefly suspended. Shares of Knafaim Holdings, which controls the airline, were up 2.3%.

FIMI agreed in principle in February to invest $75 million in El Al for a 46% stake in the airline and to form a controlling group in El Al with Knafaim, which owns 39% of the carrier. But the deal was contingent on the airline signing a new labor accord with employees that met FIMI’s approval. FIMI has twice extended its deadline for El Al to reach an agreement with workers, most recently in late August when it gave the carrier an additional 45 days.

Since the beginning of 2008, El Al has accumulated losses of $158 million and has a net debt of $500 million. Going forward, the airline is expected to be hurt by increased competition after the Open Skies agreement with the European Union begins to go into effect next summer. The agreement will drastically lower barriers to competition for European and Israeli airlines flying direct routes between Israel and destinations in EU member states.

A new labor accord that also includes significant cuts to the salaries and bonuses of senior management as well as the linking of pay to performance would greatly increase El Al’s profitability while making it better able to adapt to the more competitive atmosphere that Open Skies is expected to introduce.

El Al's last collective bargaining pact was signed in November 2008 and expired at the end of 2012. Subsequent talks under way since November broke down in February after FIMI said it intended to invest in El Al. The unions said they wanted to see how the deal would shape up.

Some of El Al's financial troubles are due to overstaffing. As of the end of 2012, the company had 5,775 employees, 3,785 of them with seniority rights that makes it both difficult and costly to lay them off. Management estimates the surplus manpower costs the airline NIS 400 million annually.

During the labor negotiations earlier this year, the trade unions representing company employees made several demands with significant financial ramifications. These include rolling back executive salaries to their levels of a decade ago, before El Al’s privatization, and raising employee pay by 12%, adjusted for inflation, over a period of four years.

Moti Milrod