What Doesn't Fly On Saturday May Not Fly Off The Block

Throughout the market turbulence that has rocked most international carriers in recent years, Israel's national air carrier, El Al Israel Airlines, managed to remain profitable. Its high 72% load factor, sustained by heavy transatlantic tourist traffic, cushions many blows that have battered rivals. Now, however, El Al has hit a rough patch of its own. Fare-slashing competition on Atlantic routes that account for nearly half of revenues cut profits by 66% last year, to about $10 million on revenues of just over $1 billion. "It's been like the Wild West since the third quarter of last year," says El Al President Raphael Harlev.

The timing's bad, too. On June 6, the Israeli government approved a plan to sell 51% of El Al, estimated by Israeli investment bankers to be worth $200 million to $300 million, on local and foreign stock markets. "All the big Wall Street investment banks are interested in taking part in the sale," says Zeev Holtzman, managing director of the Tel Aviv investment bank Giza, the local representative of CS First Boston Group Inc. But he cautions that the airline industry's depressed state will lower the value of the offering.

More than just El Al's fortunes are at stake. The sale of the flagship company is part of an ambitious Israeli privatization drive that brought in $1.5 billion in 1993 and aims to raise a similar amount this year. But in March, an attempt to sell housing construction company Shikun U'Pituah fell apart, and offerings were postponed for three companies that were to be sold only on the Tel Aviv market, where stock prices were falling during most of this year. In mid-June, Joseph Nitzani, director of the Government Corporations Authority, which oversees privatizations, planned to travel to the U.S. to look for a buyer for 15% of Israel Chemicals, which already has 40% of its shares trading on the Tel Aviv market, and to explore the prospect for selling Bezeq Israel Telecommunications with an initial U.S. offering. But an El Al flop would set the privatization campaign reeling.

READY AND WAITING. To ready El Al for its sale, planned for late 1994, the government will remove the airline from receivership, a status imposed 13 years ago after massive losses because of labor unrest, and appoint a board of directors. By that time, industry conditions may have changed--for better or worse. Harlev, a former air force general, predicts profits this year between $5 million and $20 million.

Partly offsetting the current fare wars, passenger traffic has increased by 12%, spurred by the Mideast peace process, which is attracting tourists to Israel, and by a surge in travel abroad by Israelis taking advantage of the low fares. At Tel Aviv's Ben Gurion airport, traffic is up 20% so far this year over last year's record pace. But foreign carriers and charters have been making inroads at the expense of El Al, whose share of the traffic dropped to 40% last year, down from 45% in 1992.

El Al has other problems, too, such as its heavy dependence on low-fare tourist traffic, along with handicaps that are unique. Under pressure from Orthodox religious groups, it does not fly on the Sabbath and on Jewish holidays--a restriction estimated to cost $40 million in profits annually. "Our profits would have been four times higher last year had it not been for the Sabbath ban," Harlev says. El Al also is saddled with the industry's highest security costs, totaling $55 million annually, of which the government pays 80%.

Both issues will have to be settled before the airline is sold. Once the government is reduced to a minority shareholder, Transport Minister Israel Kessar said recently, it will no longer have a say on Sabbath flights. But the government will no doubt have to continue picking up the security tab.

To boost revenues, El Al is looking east. With the easing of Mideast tensions, travel to and from Asia is increasing. In the past year and a half, the airline started flights to China, India, and Thailand, and it hopes to add service to Seoul and Hong Kong this year. For El Al, the peace dividend is new routes and a sharp increase in traffic. But it has a downside, too: more competition from carriers eager to capture chunks of El Al's growing home market.

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