Antitrust Authority Blocks El Als Merger With Israir

Regulators cite concerns over competition on Eilat route and risk of El Als abusing monopoly over ground security

El AL, on the runway at Ben Gurion International airport near Tel Aviv August 22, 2011.
Ronen Zvulun, Reuters

Israels Antitrust Authority said Wednesday it would not allow El Al Airlines to merge with its smaller rival Israir, citing concerns about competition on the route to the southern resort town of Eilat and the risk of El Als abusing its monopoly on aviation security.

Announced in July, the merger was aimed at giving Israels flag carrier an edge in the wake of a 2013 pact with the European Union that created a surge in air travel and in competition among airlines, particularly low-cost carriers.

Losing altitude
El Al Airlines shares

But the merger was strongly opposed not only by Israels third carrier, Arkia, but also by most of the Israeli travel industry, the Israel Airports Authority, the City of Eilat and consumer groups.

The unfortunate decision shows that the Israel Antitrust Authority, unlike any other authority in the world, chooses to encourage international competition against Israeli airlines while making it difficult for them to compete against giant alliances in world aviation, El Al said in a statement. It said it would weigh its options.

Uri Schwartz, the antitrust legal adviser who was assigned to the case after commissioner Michal Halperin recused herself due to potential conflicts of interest from her previous job as a private attorney, concluded that a merger would have meant El Al never reentering the market and leaving it as a duopoly between Israir and Arkia.

In response, El Al noted Wednesday that it had left the market years ago and had no intention of returning to it even if the merger was barred. To the contrary, if the merger were approved it had planned to buy two new planes to service the route.

The agency also cited concerns that El Al would exploit its monopoly on ground security on international flights for all three Israeli airlines to restrict competition. The carrier provides security services not only in Israel but also for Israeli domestic flights and for international flights to Israel.

Arkia has complained that El Al has abused its security monopoly to delay Arkias introduction of new routes. Arkia asked antitrust authorities in May to investigate; the investigation has not been completed. On Tuesday, Arkia reiterated its accusations in a letter to the authority, citing in particular what it charged was El Als efforts to delay or prevent Arkia from starting a Bangkok route.

El Al denied the accusations.

The antitrust ruling is not only a setback for El Al, whose shares ended down 3.5% at 1.42 shekels Wednesday, but also for the IDB group, the conglomerate controlled by Argentinean investor Eduardo Elsztain.

El Al shares have fallen 60% since their peak in October 2016 as the company struggles despite a booming aviation market. In the third quarter, net profit fell 30% from a year earlier as the carrier lost market share and seat occupancy declined.

Last week El Al announced it was dropping its low-cost Up brand in a favor of a three-tied tourism class on regular flights.

Israir, which flies to 28 cities in Europe, has seen its financial performance improve in recent quarters, with revenues climbing 21% in the third quarter to $129 million and net profit of 2.2% to $10.9 million.

But IDB, which is coping with big debts run up during the era it was controlled by Nochi Dankner, could have used the 154 million shekels in cash it would have gotten from the merger this year.

The merger terms called for El Al subsidiary Sun dOr, which flies to 17 destinations in France, Italy, Switzerland, Greece and elsewhere in Europe, to buy Israir in exchange for $24 million in cash and shares equal to 25% of the unit. Israir was supposed to sell four of its jets to a third party and lease them back, with the proceeds split evenly to repay a loan and pay IDB. IDB had the option of selling the Sun DOr shares back to El Al.