Look Out El Al, Israir Is the Comeback Kid of Israeli Airliners

There’s no other low-cost carrier like Israir in the Israeli market.

Avi Scharf

As of the third quarter’s end, Israir was the most profitable company in the IDB group portfolio. That’s saying something, given its condition five years ago.

For the year 2010, Israir, Israel’s third biggest airline after El Al and Arkia, posted a loss of $4.8 million. For 2015 it posted EBITDA (profit before tax, depreciation and amortization) of $16.7 million.

In 2011 its debts totaled $130 million, which by 2015 had dropped to $57 million. Its equipment in 2010 was worth $100 million, a figure roughly unchanged – $95 million – at the end of last year. In 2015 the company transported 600,000 passengers, an increase of 60% from the year before.

It’s true that the collapse of oil prices has helped Israir. Another factor may be leanness. Today the company is run out of three offices off a narrow corridor in an industrial part of Tel Aviv. “During my five years at the company we vacated 2,500 square meters of office space. Before we had offices at the airport ... This is all that’s left,” says CEO Uri Sirkis.

Two weeks ago El Al announced talks to merge its subsidiary Sun D’or with Israir, a move Sirkis feels is in keeping with the trend of consolidation in the aviation industry. “It’s hard for small companies to cope over time,” he says.

But there’s no other low-cost carrier like Israir in the Israeli market.

“Our competition isn’t just in the Israeli market. It’s competition over the heart of the consumer, who isn’t just looking at El Al and Arkia but at other options.”

A key point was to grasp that they weren’t selling flight tickets but products, he says. “We don’t just fly to Rhodes, we sell the flight with a hotel booking.”

Consumers can book flights and hotels separately: The whole idea is to provide a more attractive package, he says.

To TheMarker’s remark that somebody will always be cheaper, Sirkis notes that Israir gets good prices from suppliers. “Low-cost is a culture. The meaning of low-cost is that the enterprise has to be operationally very flexible and be entirely devoted to that activity,” he says.

“One of the most important parameters for low-cost companies, for instance, is the time between takeoff and landing. If you have a flight landing now at Ben-Gurion Airport, when can the next flight take off? At non-low-cost companies that time difference is typically an hour and a quarter to an hour and a half. Low-cost companies operate on a 45-minute margin,” Sirkis explains.

For that to happen, the entire operating chain throughout the company has to be on the job, he elaborates.

“You need the pilots to be responsible for getting the planes refueled, and supervise it themselves. You need the air attendants to clean the plane, and keep it clean throughout the flight. You also need to make sure the passengers don’t make too much of a mess – that bread handed out with meals doesn’t disintegrate into crumbs or the snack food you hand out doesn’t stick to the seats, which would require special vacuuming to clean it up.”

Still, when comparing other low-cost carriers to you, they’re a lot more profitable per passenger.

They have a size advantage, Sirkis answers. “RyanAir has 300 jets and EasyAir has 226, while Israir has two.” (Actually, technically it has two big Airbus passenger planes and two more small ATR jets.)

Obviously, explains the aviation executive, a company with 300 planes has more bargaining power than a company with two and can give discounts that Israir can’t.

His personal goal is to stabilize the company and lead it to a condition where it can compete over time, for which purpose it has to reach critical mass. “It could get there through growth, or it could cut corners.”

Cutting back

Meanwhile, Israir did a lot of cutting back, and its workers realized why, which prevented strikes upon the institution of the efficiency measures. Sirkis also insists that the employment terms of the workers are fair and the company, he points out, does not use temps.

Why weren’t the changes made at the company before his arrival?

“I can’t say,” Sirkis says, “When we realized the trend was for flight ticket prices to drop by 20%, we slashed our spending. In the last three-four years, we reduced our costs in practically every quarter. In 2012, Israir had 550 employees. In December 2015, a year in which our activity grew 60%, we had 450 employees. Our goal is to have 400 employees by 2018. At the end of the day what we care about is gross profitability, not so much the number of passengers.”

The company didn’t just fire tea ladies, it also slimmed management.

“When I arrived, there were three layers of management. Now there’s one,” says Sirkis. “The company also changed its business model and turned from an aviation company operating alongside a tourism company into a tourism company with aviation equipment.”

The airline, in effect, stopped operating independently and was merged into the tour operator. And it does not cavil at flying passengers using alien aircraft. In 2015 Israir flew 400,000 passengers on its own planes and another 200,000 on other companies’ planes, says Sirkin. That’s a great feature when crisis descends, because it’s one thing to cancel flights one has booked for the summer, but one can’t cancel a great big plane one has bought, on which one is making interest and other payments to boot that can run to millions of dollars a year.

“When you sell a tour package rather than a flight, dropping oil prices lowers the price of the package by 20%, rather than the price of the flight by 30%,” Sirkis elaborates on the underlying logic. Anyway, thusly, IsrAir adopted the low-cost model.

Life is upsides and downsides. One of those happened last summer, because of Operation Protective Edge, which happened at the height of the tourism season – after the company had changed its business model, says Sirkis. Other airlines suffered from canceled flights and meager bookings, but Israir had committed to hotel rooms abroad and that sort of thing. When the campaign erupted, cancellations arrived, not least because a lot of people were called up for reserve duty, and the company hurt. Other companies may have twiddled their aching thumbs waiting for government compensation, but Israir’s management figured they’d better plan to cope by themselves, says Sirkis.

At that point, Israir was controlled by the IDB group under Eduardo Elsztain, and Sirkis was relieved to learn that IDB had a 10-point plan to help group companies in trouble. “I wish a lot of company owners would do what he did there,” says Sirkis.

Israir was given $5 million to buy a new plane; certain assets were divested, including a Disenhaus-brand outgoing tourism firm; an agreement was reached against the distribution of dividends; and long-term agreements were reached with Israir suppliers, including fuel company Dor Alon, Isrotel Travel Services and more. The agreements were based on scratch our backs today and we’ll work with you tomorrow too, he explains. And the company’s workers agreed to do more for less pay.

“We didn’t cut pay, but people worked harder. In the summer of 2015, the same management team that worked in the airport, that cleaned plane and the same amount of pilots handled a 60% increase in the occupancy of Israir planes,” says Sirkis.

As for changes to come, in 2017 new rules regarding pilots’ rest will be coming into force, which will require hiring, he says. Come 2018, the Open Skies policy will come into full force. No barriers, no nothing: Foreign airlines will be free to fly to and from Israel at will. They can even place planes here, says Sirkis. Competition will intensify and prices will drop by up to 10%, compared with their present level. The company is working on adjusting to these changes, including what he calls a “massive shift” to reducing its manpower and operating online.

Okay, so why hadn’t all this been done earlier? Sirkis ponders. “The only explanation I can give is that I’m paranoid by nature. I look around me, at the market, and say, ‘What do I have to do so bad things don’t happen?’ Since I assumed the market would be opened [to competition], that Open Skies would be implemented ... we entered into deep processes of change.”

Sirkis insists on sharing credit for turning matters around at Israir with others, but before the people at IDB get their pats on the head, let us remember that the airline is now the brightest point of light in the IDB portfolio. Its retail chain Shufersal is doing better, but with profit margins of 2-3% of turnover it’s not going to save the group. Mobile operator Cellcom is doing fine, but so far the regulator is balking at its plan to buy upstart rival company Golan Telecom, which rather frustrates its growth ambitions. As for IDB’s financial operations, three year after Elzstain bought the group, it’s still trying to sell Clal Insurance.