Will Israel’s Airlines Survive the Arrival of Low-cost Carriers?

With discount competitors such as Ryanair and Wizz Air likely to open base of operations in Israel in the future, local airlines may face the same fate as that of Italy's Alitilia that recently went bankrupt

An Israeli flag is seen on the first of Israel's El Al Airlines Boeing 787 Dreamliner jets, Ben Gurion International Airport, near Tel Aviv, Israel August 23, 2017.
AMIR COHEN/REUTERS

Could we be seeing the beginning of a big shakeout in the world airlines industry, in particular in Israel where air traffic has grown but airfares have fallen and competition is intense?

The British low-cost carrier Monarch collapsed two weeks ago, leaving hundreds of thousands of passengers stranded. Air Berlin, the discount airline that is Germany’s second-biggest carrier, said Tuesday it is filing for bankruptcy in August. Alitalia went bankrupt in May and this week the Italian government agreed to inject 500 million euros into the troubled carrier before selling it.

Each of the airlines had its own reasons for failing. Monarch was hit hard by the collapse of the sterling and from the loss of profitable routes. Air Berlin was weighed down by debt of 1.2 billion euro ($1.34 billion) while state-owned Alitalia has struggled against the low-cost competition.

“It’s a matter of good management,” said one Israeli aviation source who asked not to be identified. “It was just a coincidence that three companies failed one after the other. I don’t think others will be following.”

But others in the Israeli air travel industry aren’t so sure. Although air travel to and from Israel is at a record high – thanks mainly to the Open Skies aviation reforms Israel signed with the European Union in 2013 – the industry has been surviving on a diet of low energy costs and low interest rates that won’t last forever.

Flying low

Sparked by tensions in Kurdistan, Brent crude, the international benchmark, rose by 1.3% on Monday, to $57.91 a barrel. Oil prices have been edging up since July and are now well above their early-2016 lows of less than $30 a barrel.

“A lot of airlines are relying on today’s low oil prices. I don’t want to be a prophet of doom, but if oil prices were to return to the level they were about five years ago, they would have no right to exist. They would raise airfares and cut routes,” said Ofer Chodorov, a partner on the travel firm BTC.

Uri Sirkis, CEO of the Israeli carrier Israir, sees a lot of small threats on the horizon. Besides fuel prices, there is the rising costs of pilots from new rules due to go into effect that demand rest time for them. Intense competition has prevented airlines from adjusting prices to reflect their costs.

“Today interest rates are low but they’re going to rise. The low price of fuel has brought new players into the market and encouraged airlines to add routes because the risk is relatively low,” said Sirkis.

One senior aviation source, who asked not to be named, said the industry is suffering from complacency.

“The market is crazy right now, not in balance. I think we’ll see another failure or at least financial difficulties for airlines. They’re shooting in every direction with the aim of capturing more market share. What’s happening now is crazy and I don’t see how in the long run they can fly at the prices they now offer,” he said.

Alitalia’s problems point to the future of Israeli aviation. Its home base, Italy, is Europe’s sixth-biggest airline market, with 160 million domestic passengers annually. As Italy’s flagship carrier, Alitalia had traditionally been the dominant airline, but last year the unthinkable happened: Ireland-based Ryanair outflew it, flying 15.4 milion people to Alitalia’s 14.3 million.

“The airline changed the rules of the game and Alitalia can’t compete with it, just like El Al Airlines can’t compete with low-cost airlines here in Israel. It has a different cost structure,” said Sirkis.

One small example of these new rules is the role of airfares in revenues, Low-cost airlines are often happy to sell tickets at a loss because they know they can make money offering services at a fee because of the barebones seats they sell flyers. The airlines make money by charging for checked luggage, getting a reserved seat, food and drinks on board and the like. The aviation research firm IdeaWorks says these ancillary services have now become major revenue sources for low-cost carriers, with combined revenues growing to $28 million last year, 13 times the level in 2007. For Wizz Air they account for 39.4% of all revenues and at Ryanair 26.8%.

Veteran airlines have tried to copy this strategy, including Delta Airlines, British Airways and Alitalia, although not on routes to and from Tel Aviv (only Air France offers that option).

In the same vein, El Al, Israel’s flag carrier, tried to meet the low-cost competition head on, with its low-cost Up brand flying five routes launched four years ago. But it’s not clear Up is making money.

“How can El Al fly its planes with the business model of a traditional airline, with the same high-cost maintenance crew, pilots and flight attendants, and offer low-cost airfares?” asked one industry executive.

And the threat is only emerging now. Before Open Skies, low-cost was a minor part of the Israeli aviation scene, but its share of the market has been growing steadily so that in 2017 it will account for 14% of all air travel to and from Israel, flying 1.4 million passengers. That’s big, but small compared to the global market share of 28% last year for low-cost airlines; in Europe, they control nearly a third of the market.

Skirkis predicts that sometime in 2018 or 2019 low-cost carriers like Ryanair and Wizz Air will set up operations bases in Israel, including locally based aircraft and crews, and will fly sources of routes. That’s when the last phase of Open Skies kicks in.

“It’s a completely realistic scenario and then what happened in Italy will happen here,” said Sirkis.