From the moment that the coronavirus pandemic struck, it was clear that the world’s airlines would be treated differently than other businesses – first because they have been so badly hurt by the crisis and second because, at least in Israel, they are regarded as “strategic” companies.
What makes a company “strategic?” It’s one that the country needs to continue to operate. One that is impossible to be without. Israel is an island. Without a functioning airline, little Israel would be entirely reliant on foreign carriers. That’s not something that Israel, given its geopolitical situation, can allow itself. Certainly not Israeli politicians who prefer to fly blue and white when they travel the world.
Add in the fact that El Al Airlines is an iconic company – the airline that flew waves of immigrants to Zion, rescued Israelis in times of danger around the world, flies ministers here and there as well as the president and the prime minister (and his wife). El Al even brought Adolf Eichmann to Israel for trial. It’s a company too symbolic to fall.
Finance Ministry officials had no choice but to fund a way to solve El Al’s financial problems. They also had to consider Prime Minister Benjamin Netanyahu’s ideology, which champions privatization and in no way wants to be associated with its opposite, nationalization. So, one thing was off the table – that the state would rescue the airline and take control of it.
Those whose memories stretch back to 1982 remember when El Al was forced into the hands of a receiver, who operated the airline for many years before it recovered and finally privatized in 2003. Those are not remembered as good years either for the airline or for the politicians, who faced constant pressure from El Al’s management and labor unions.
Banks don’t cooperate
So what did the treasury do when the coronavirus crisis erupted? It sent El Al off to negotiate a loan with the banks, whose credit experts could decide what measures the airline would need to take before qualifying for a loan. The problem is that there was no recovery plan for El Al that would convince the lenders to take a risk by lending it money. In the end the treasury had to guarantee part of the loan. In addition, El Al’s controlling shareholders would inject capital into the business and the airline undertake deep cost-cutting measures.
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Even then, after weeks of negotiations, a government guarantee for 82.5% of the loan and a rescue plan, the banks were still not ready to lend the money. If El Al had borrowed the $400 million it sought, its debt and financial costs would have been so high that it would struggle to ever recover.
The rescue plan wouldn’t be and the ball was back in the court of the government, which sees El Al as a strategic asset that can’t be lost. But how to rescue the airline without nationalizing it? The fact is there was no other option.
The formula officials finally came up with is one that is likely to see El Al nationalized. The airline will make a $150 million right offering of stock, which will be bought by the government if El Al’s existing shareholders don’t buy into it. If there’s zero interest in the offering, the state will end up with a controlling 61% stake.
So the one thing the government was trying to avoid seems destined to happen. If the state becomes El Al’s biggest shareholder, it will be managed by a trustee, who appoints a new board of directors. Tami Moses Borowitz, who now controls the airline, will be shoved to the side.
The trustee’s other main task will be to separate the airline, its managers and employees from the politicians. The government has no interest in nationalizing El Al in terms of managing its daily operations – in other words, it doesn’t want to become the address for lobbying by the workers’ committee on the number of layoffs and pay cuts that are now being negotiated as part of the rescue plan. This was the worry that had deterred the government from getting too deeply involved in the rescue. But can they?
It’s been many years since the Israeli government nationalized companies. The last major nationalization occurred in 1983 when the four biggest banks – Leumi, Hapoalim, Israel Discount and Mizrahi – were taken over by the state in the wake of the bank shares collapse. Then, too, it was widely feared that politicians and officials would entangle themselves in the banks’ business with an inevitably negative impact on the economy.
To solve that problem, the government formed a state-owned company called MI Holdings to serve as a Chinese Wall. Bank directors were nominated by a committee chaired by a retired judge. The politicians were kept out of the process. At El Al, the trustee is expected to fill that role.
Rescue on the cheap
And the cost of the rescue? Just $150 million in equity and the risk it assumes in guaranteeing its share of a now reduced $250 million loan El Al will be getting from the banks.
Treasury officials hope that the package will be enough to enable the airline to exit the crisis in another two or three years, after which the state will sell its shares – hopefully at a profit. Given the state of the coronavirus-battered world aviation industry, that’s an optimistic scenario. In a more pessimistic one, the industry will take much longer to get back on its feet. Investors interested in buying the state’s shares may not be there for some time to come.
The one thing that may prevent El Al from being nationalized is the surprise appearance of a strategic investor who takes on the burden of turning the airline around. In the past, there was one – the private equity investor Ishai Davidi of the FIMI fund. But he pulled back after realizing the difficulties he would encounter dealing with the workers’ committees.
Could the coronavirus crisis cause the unions to become more malleable? That’s a question that should be answered in the next several days. From their point of view, state ownership – even state ownership by remote control – is the best possible option because it’s easier to pressure the government than private investors.
Imagine a situation where the prime minister needs to fly urgently to the United States or Russia at a time when El Al is in the middle of tough labor negotiations with the workers’ committees. Would they refrain from imposing a labor action that embarrasses the prime minister or, worse, create a diplomatic problem?