Analysis |

For Eli Rozenberg, Buying Israel's El Al Was the Easy Part

He assumes ownership of an ailing El Al in the midst 
of a global aviation crisis whose end is nowhere in sight

Yoram Gabison
Yoram Gabison
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The tail ends of Israeli El Al airline aircraft are seen on the tarmac at Israel's Ben Gurion Airport on July 7, 2020.
The tail ends of Israeli El Al airline aircraft are seen on the tarmac at Israel's Ben Gurion Airport on July 7, 2020.Credit: JACK GUEZ / AFP
Yoram Gabison
Yoram Gabison

In the midst of the greatest crisis the modern aviation industry has ever faced, a 26-year-old yeshiva student bought control of El Al Airlines last week. If Eli Rozenberg didn’t need enough of a signal that he was embarking on a perilous journey with Israel’s flag carrier, he might have noted that in the public share offering where he snapped up El Al stock, there were distressingly few other investors.

Even though three of Israel’s leading underwriters led the offering, the Israeli government is guaranteeing 75% of a $250 million loan El Al will now be taking, and the offering valued the airline at a mere $100 million, institutional investors refused to buy in.

Rozenberg, nevertheless, paid 359 million shekels ($105 million) for a controlling 42.9% of the airline. The state bought 13.7%, as it committed to in advance – accounting for 94% of all the shares bought. Tami Mozes Borovitz, El Al’s controlling shareholder until last week, opted out of the offering and saw her stake (held through publicly traded Knafayim) diluted to just over 15%.

It seems that everyone, including an insider like Mozes Borovitz, fully understood El Al’s dire financial state and the prospects of global aviation returning to something resembling the normalcy before the coronavirus struck.

El Al began resuming cargo flights on Monday and plans to gradually roll out limited passenger service starting October 1. But the International Air Transport Association doesn’t expect the world’s air traffic to return to 2019 levels before 2024. A day before the El Al offering, the leaders of the U.S. airline industry held a White House meeting where they sought another round of federal aid amounting to $25 billion.

El Al’s homebase in Israel doesn’t offer much hope for a turnaround anytime soon. Infection rates continue to be very high, even as the country is in a second lockdown. Prime Minister Benjamin Netanyahu’s government has seemingly lost control of the pandemic.

Even as El Al CEO Gonen Usishkin was announcing a resumption of flights last week, he also informed the carrier’s approximately 6,000 employees that unpaid leave would be extended again for the lion’s share of them, this time through the end of October.

Sources close to Rozenberg, whose father Kenny controls a New York nursing home and health care business, expressed optimism. Even the treasury, they say, thinks that between the new ownership and the $150 million in proceeds from the stock offering, the odds that banks will agree to make a $250 million loan are now much better. They may even be prepared to increase it to $400 million.

Eli RozenbergCredit: Ben Horin & Alexandrovitz

The problem that Rozenberg and his team face is the airline’s deep financial problems. At the end of June it had negative shareholders’ equity of $134 million and by the close of the current quarter on September 30, it will probably have grown by several tens of millions of dollars more.

We are waiting to hear whether Rozenberg and his team will adopt the business plan El Al management presented to the banks and the Finance Ministry, and whether the banks will agree to risk close to 1 billion shekels in a borrower whose chances of generating positive cash flow in the short term aren’t good.

The loan will be the first test of the new ownership team. It is critical for another key component of the El Al recovery plan, designed by its management under its previous ownership: the labor accords it signed with four workers committees, which only go into effect once the airline has the loan under its belt.

The agreements are as important to the airline’s survival as the cash it’s raising. They call for axing a third of the payroll, reducing pilots’ pay by 29% and more flexible labor practices. All of these are supposed to save El Al $260 million annually in costs, on the assumption that it returns to 75% of its pre-coronavirus level of operations by the end of the year.

Even if Rozenberg clears these hurdles, he faces two more. The first is that the labor accords may not do the trick, because it’s not at all certain that El Al will have resumed 75% or more of its operations by the end of 2021. The second is the pilots. They took the brunt of the wage cuts in the negotiated agreements, but are expecting something back. In talks with Mozes Borovitz, it was options for a 25% stake in the airline.

The word is that the pilots supported Rozenberg’s bid for the airline almost from the day he announced it. Now is payback time. Not only may the pilots get options, but so could other categories of employees as well. They may seek additional concessions.

In addition, Rozenberg may find that he is deeper in a financial mire than he bargained for with El Al.

By October 1, a little over a week from now, El Al is required to refund ticket holders whose flights were canceled by the pandemic. This amounts to $280 million, of which $80 million is owned to Israelis under the Aviation Services Law (popularly known as the Tibi law). Beyond that, the aircraft leasing companies, to whom El Al has delayed debt repayment of $125 million until next June, may now want their money earlier after El Al gets the proceeds from the share offering and loan.

File photo: El Al plane readies for landing at Ben-Gurion Airport.

Even when nearly all its staff was on furlough and it delayed payments to aircraft leasing firms, El Al still ended the second quarter with negative cash flow of $23 million. It’s not at all apparent that its plans for a gradual resumption of flights will substantially improve its financial situation, all the more so because in the not-too-distant future it will be facing powerful competition from the Gulf airlines Emirates and Etihad.

In Rozenberg’s favor is that the government, which is now a major shareholder, may soon find that when El Al needs more cash, it can’t keep delaying as it did when the carrier first sought state aid last March.

Another daunting challenge Rozenberg faces is replacing the board and top management. In the next several weeks he will need to replace Chairman Yehuda Levy, who is considered close to Mozes Borovitz, and a new CEO in place of Usishkin. Reem Aminoach, the accountant who helped shepherd Rozenberg’s takeover, has reportedly turned down an offer to serve as chairman. Amikam Ben Zvi, who is close to the Rozenberg family, is also under consideration. He worked behind the scenes on the El Al bid and may have a problem accepting the role because of the harsh criticism he faced from the state comptroller over his dealings with the Dan bus company. Finding a management team to take over a business facing such deep problems will be no easy task.

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