Israel Aerospace Signs Recovery Accord With Union

State-owned defense maker will lay off 730 employees and make other cutbacks; invest savings in marketing, R&D.

Ariel Shalit

After years of delays, Israel Aerospace Industries and the representatives of the state-owned defense company’s workers signed a cost-cutting agreement yesterday. The deal is expected to save the company some $130 million annually through layoffs and other measures.

The two sides agreed to 730 layoffs out of a total workforce of 15,730 at the end of last year, through voluntary early retirement and enlarged severance-pay offers. They also agreed that employees retiring over the next several years would not be automatically replaced.

The union also agreed to help IAI reduce labor costs through reduced overtime, vacation time and other reductions and to wait three years before receiving wage increases or other benefits to which they will be entitled under the next public sector wage agreement.

The agreement will enable the company to lower overheads, end job duplication and exercise greater flexibility in moving staff between departments.

In return, IAI management agreed that the savings would be invested in marketing and research and development. Ten middle managers have already been laid off as part of IAI’s wider recovery program to cut back spending on management overheads and outside consultants.

“This is a major breakthrough for the management of IAI. We believe it will generate savings of $130 million annually,” said Ori Yogev, director of the Government Corporations Authority, which in responsible for IAI.

The agreement comes amid mounting financial difficulties for the company, which has a long and storied history in developing state-of-the-art weaponry but has been beset by poor management and high costs.

Its problems were highlighted again last week, when the company reported a 5.5% reduction in sales in the second quarter to $877 million, while net profit shrunk to just $6 million, or 0.7% of sales. IAI’s orders backlog also fell to $8.5 billion, while cash flow was negative.

Sales to Europe more than doubled to $1.63 billion from $724 million last year. But after three years of growth in Africa, IAI’s 2015 sales dropped almost 50% to $163 million, down from $318 million in 2014 and $223 million in 2013. Sales to Asian countries – by far Israel’s biggest regional market – declined to $2.3 billion from just under $3 billion in 2014.

IAI is undertaking a broader recovery program to refocus the company from its loss-making civilian business to defense, as well as to end duplication. Civilian sales account for about a quarter of revenues.

IAI told the Tel Aviv Stock Exchange, where its bonds are traded, that it expected to take a charge of $150 million to $250 million spread out over the next several years to cover the costs of the reorganization and staff downsizing.

Joseph Weiss, IAI’s CEO, said yesterday’s agreement would ensure the future of IAI. “We are in the midst of a generational change and adjusting the mix of human capital that will help develop the business of the company, while we’re working on retaining our human knowledge resources and passing the baton,” he said.

Ehud Nof, secretary of the workers committee at IAI, lauded the agreement but faulted the government for failing to come to the financial aid of the company as it had for other state-owned arms makers.

“The price we are paying for this growth agreement is steep,” he said. “Nevertheless, we’re confident the accord will enable the company to become stronger, invest in new technologies and grow as Israel’s biggest and most important high-tech company.”

IAI reiterated its expectation that the treasury would cover the costs of the layoffs, but government sources have said in the past that the company should cover them itself and that it should conduct an initial public offering if it needed to raise capital.

Management warned earlier this year that IAI would sink into the red this year unless it made big cost savings. The company had sought to lay off 1,200 members of staff.

The company will face an additional crisis if Washington sticks to its demand that all military aid it gives Israel be spent in the United States.