Taking Stock / The Boroviches Ignore Buffett

Here's a question for you: How many times bigger is United Airlines' market cap than El Al's? Hint: United is the second biggest airline in the U.S. Second hint: It has 65,000 employees, which is 10 times the number the Israeli airline employs.

Here's a question for you: How many times bigger is United Airlines' market cap than El Al's? Hint: United is the second biggest airline in the U.S. Second hint: It has 65,000 employees, which is 10 times the number the Israeli airline employs.

Stymied? Here's a third hint: Both the preceding hints are misleading.

The answer is 0.3. Yes, El Al is worth three times what United Airlines is on the stock market. United, which is sheltering under a court umbrella, is in extremis. But its market cap is not unique. Delta Airlines, the third largest carrier in the U.S., has 77,000 workers and is trading at $900 million, which is just double El Al's value on the Tel Aviv Stock Exchange.

America's skies are a bloody battlefield for the carriers, this is true. But the valuations of Europe's airlines are no more impressive. British Airways, Lufthansa and Air France trade at values of $4 billion to $5 billion, which is less than Israeli data security company Check Point Software Technologies, or roughly equal to the valuation of Bank Hapoalim and Bank Leumi together.

But these are giant companies! you protest. Their revenues come to tens of billions of dollars a year, their fleets are worth billions more, their brands are international and they have tens of thousands of employees!

A favor for a friend?

Yes, but when it comes to making profits, aviation is one of the worst businesses around. Warren Buffett, the world's best investor, often warned the faithful to steer clear of the airlines. "If there had been a capitalist down there at Kitty Hawk, he should have shot down Orville and saved us a lot of money," he once quipped. From the day the Wright brothers took off to today, airlines have made zero returns for investors, he explains.

That may explain why in June 2003, the day El Al hit the stock market, institutional investors sneered at the stock, even though the airline was floating at the insulting price of $55 million.

Only two people decided to gamble big-time on it: Dedi and Izzy Borovich, the owners and managers of Knafaim-Arkia Holdings, which is Israel's second largest aviation company.

This week the Borovich brothers completed their takeover of El Al, converting stock options and raising their interest from 22 percent to 52 percent in exchange for NIS 60 million.

It will be just a matter of time before somebody grouses to the press that Bibi or the treasury or the cabinet or some fat-cat sold the national airline to another fat-cat for a mess of pottage. Another privatization designed to benefit some well-connected family.

Nice story. Too bad it's total nonsense and everybody in big business knows it.

El Al, a flying turkey

Nobody outside aviation but the Boroviches, with the exception of Yitzhak Tshuva, would touch El Al with a barge pole the day it went public. They all accepted Buffett's tenet that it's a bad business encumbered with debt, militant labor committees and a history of lousy financial results.

Just ask Nochi Dankner. A few days before the El Al offering, a special team that his group company Discount Investment Corporation set up to examine whether to invest in the carrier filed its conclusions. Answer: No, don't touch, it's expensive, risky.

Ignoring his own team's report, Dankner thought to get into El Al together with the Boroviches, but the brothers decided to go it alone. They evidently had their reasons.

Now Dankner is sorry. So are all the other big players as they sit on the ground, enviously watching the airline's stock take off. How could we have missed that? they moan.

Just three months ago Lev Leviev started talks to buy out Koor Industries' shares in Knafaim, the latter being the Borovich company technically taking over El Al.

Leviev scorned the El Al offering, which priced the airline at $55 million. A year later he was scrabbling for Knafaim shares, though El Al's valuation had soared to $360 million. Like Dankner, he wound up outside the deal after failing to reach an understanding with the Boroviches about sharing the management.

Right now, investing in El Al seems to be the deal of the Boroviches' lives. But there's one pleasure they'll be denied. They won't be able to boast a year or two down the line that they took a faltering government company and made it fly.

That is because the company they're receiving from chief executive Amos Shapira ended its last year as a government company with a quarter-billion shekel profit, and a cash flow from operations of NIS 750 million.

When Shapira came to El Al two years ago, the pilots fell over laughing. They called him the "diapers director" because in his previous incarnation, he'd managed diapers manufacturer Kimberley-Hogla. Worse yet, he was the first alpha dog at El Al who hadn't ever flown a plane, or at least been an army general.

Only in Israel would people think diapers aren't big business, or that you need wings or at least a generalship in your history to run an aviation company.

Diapers maker Kimberley-Clark is one of the most respected companies in the world. And Shapira proved to the pilots and politicians who unthinkingly appoint all those generals to the government companies that management and marketing are just that, management and marketing. It doesn't matter if you're pitching baby undies or plane rides.

A plan bites the dust

The dramatic upswing in El Al's results forces the Boroviches to dust-can one of their secret pet plans for El Al: to take over the company, declare it a walking corpse and demand that the banks forgive or reschedule some of its debt. Too bad, but with a cash flow of NIS 770 million that won't fly.

But let's maintain a sense of proportion. Aviation remains a risky business and El Al's manpower problems are far from resolved. The Boroviches and Shapira have plenty of challenges ahead.

What's sure is that from now on, everybody - investors, regulators and politicians - has to realize that El Al is not some special economic basket case that merits discounts and exemptions and relief because it's the "Jewish airline" that can't fly on Shabbat and holidays, or because of its tremendous outlay on security. It is a business. With the right management, it can make money. With bad management, it will crash.