Three days before the government is due to be sworn in, the Finance Ministry said it is finally ready to provide El Al Airlines with guarantees of up to 80% against a $400 million loan the carrier wants to take from Bank Leumi and Israel Discount Bank.
It took a long time for the Finance Ministry to come around to the idea; Israel’s flagship airline was among the first businesses to be hit by the coronavirus and among the last to win any government aid. Moreover, the treasury is conditioning the help on sweeping changes at the airline. That reflects the lack of faith of treasury officials in El Al’s business model and its ability to survive into the post-coronavirus era.
The treasury’s stiff demands can be traced to the conduct of El Al management and staff before the onset of the coronavirus. The airline was heading for a financial crisis that, without the pandemic, would have probably surfaced next year. Treasury officials point out that El Al paid 200 million shekels ($57 million) in dividends over the past five years even though it was spending 1.5 billion shekels to add 16 Boeing Dreamliners to its fleet.
When the coronavirus struck, the shareholders declined to put any capital into the company and unions fought in court to prevent excess money the airline has in its pension fund from being taken out to help the airline. It contends that pilots are highly overpaid and much featherbedding occurs, such as in plane maintenance.
Under the circumstances, sources said, the Finance Ministry didn’t feel obligated to use the taxpayers’ money to bail out the airline. However, a good chance remains that the new government will ease some of the conditions.
Over the last two months in three rounds of discussions, treasury officials have asked the airline to improve the terms of its turnaround plan and increase its proposed annual savings from $50 million to $325 million annually. They have also sought equality with the bank lenders if El Al can’t repay the loan in full, which will carry a fairly high rate of interest of 5%.
In addition, in exchange for increasing its guarantees to 80% from 75%, as the banks are demanding, El Al agreed to add another $50 million to its annual cost savings goal. In other words, the airline will get another $20 million in government guarantees in exchange for making cost cuts over the five- or six-year life of the loans of up to another $300 million.
The plan El Al had presented to the treasury envisaged cutting its 6,500-strong workforce by 2,000, terminating leases on the narrow-body jets it generally uses on European routes, eliminate money-losing routes like San Francisco and Manchester; cancel plans for new routes, like Tokyo, Dublin and Dusseldorf; and reduce frequencies to Europe.
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But now, to meet treasury conditions, El Al must squeeze out no less than $325 million in costs every year. That will require management to axe more employees, cut more routes than it planned and get rid of more planes from its fleet than it wanted to. To make matters tougher for the carrier, many of El Al workers’ committees had gradually come around to accepting the inevitability of deep job and salary cuts, but the stiffer treasury requirements are likely to meet new resistance from them.
El Al shareholders are also expected to do their part. The treasury is demanding that shareholders – the biggest being publicly traded Knafaim Holdings (38%), which is controlled by the Borowitz family, and Pini Ginsburg (8%) – inject 100 million shekels ($28.3 million) into the carrier. However, it’s doubtful that the public, which owns the other 54% of El Al, will be ready to put up its share of the capital after taking big losses on their stock.
Shares of El Al, which fell 4.1% to 71 agorot on the Tel Aviv Stock Exchange on Monday, have fallen by more than 50% in the last six months alone.
Given the risk it is taking providing 1.5 billion shekels in loan guarantees to a company with a market capitalization of just 367 million shekels, the treasury is requesting the capital infusion. However, it is doubtful whether the Borowitz family, whose stake in the airline is worth only 45 million shekels, will be prepared to increase its exposure at a time when the global airline industry is facing such a dismal future.
Another Finance Ministry condition for the loan guarantee isn’t thought to be as problematic as the cash injection. It requires that El Al shares be pledged against the loan and the issue of a so-called phantom option, which entitles the holder (in this case the government) to a cash payment equal to the difference the airline’s current share price and its price when the loan matures.
The treasury also demands that El Al unions agree to the cutbacks in advance; management’s and directors’ pay be cut by over 20%; and various benefits workers get, like free or cut-rate tickets, be terminated.