El Al: Cleared For A Profit Takeoff

Deep cost cuts and a tourism rebound have lifted the airline into the black

These days, hot airline stocks are a rare commodity. So with sky-high jet-fuel prices, a huge security bill, a dicey neighborhood to operate in, and years of losses, El Al Israel Airlines Ltd. would hardly seem like a smart investment. But since last June, when the Israeli government finally got around to privatizing the national carrier, the stock has skyrocketed by over 300%.

El Al is such a hot property that it has even generated some takeover buzz. Israel ``Izzy'' Borovich, the CEO of Knafaim-Arkia Holdings Ltd., a small charter airline, is a sophisticated local investor with a reputation for turning around companies. When investment bankers a year ago were telling investors to steer clear of the El Al initial public offering, the 63-year-old Izzy and his twin brother David snapped up the airline's shares and options. Early this month, they exercised options worth nearly a quarter of El Al stock. By yearend the brothers plan to increase their stake to 52% if they receive approval from Israel's antitrust commissioner to exercise their remaining options. In that case, for a mere $68 million, they will have gained control of a company with a current market cap of nearly $300 million. Industry insiders say the Boroviches are studying options such as a merger between El Al and Arkia, or an alliance with a foreign carrier. ``Consolidation is taking place in the airline industry worldwide, and there is no reason it shouldn't happen here,'' says Izzy.

Whatever they decide to do with the airline, the Boroviches will certainly be acquiring a smooth-running operation. At the time of the IPO, El Al was dealing with the aftermath of the September 11 attacks, the war in Iraq, and the SARS epidemic. There were also problems closer at home: the intifada; the Jewish state's worst-ever recession; and a budget crunch in Tel Aviv. The government was in no position to bail out the airline. ``While U.S. airlines were getting $9 billion in [post-September 11 aid], our government actually slashed its participation in El Al's security bill,'' says CEO Amos Shapira. To unload its 100% stake, the government offered just 15% of the shares at 14 cents each, selling the rest as options for 1 cents to 3 cents.

By the time of the offering, however, a turnaround was under way. Shapira, the 55-year-old former boss of Kimberly-Clark's Israel operations, had taken the reins in March, 2002, and immediately embarked on a cost-cutting binge. The airline saved $500,000 in fuel costs in 2003 by cutting the number of engines used to taxi on the runway. It cut travel agent commissions from 9% to 7%, trimmed 200 jobs, and reduced wages by 8%. El Al's once-feisty unions went along, knowing their jobs were on the line. One area spared was security -- a topic El Al refuses to comment on.


Shapira's efforts paid off handsomely. Wage costs have dropped to 22.6% of revenue, compared with 30% or more for Europe's big carriers. On May 21, the airline announced a $4.5 million profit on record revenues of $302 million for the first quarter, traditionally its slowest. Indeed, 2004 is shaping up to be one of the carrier's best years ever. Tourism to Israel is up by 75% so far this year, a record number of Israelis are going abroad, and the economy is turning up. ``We're looking conservatively at a $39 million profit if jet-fuel prices remain at their current high levels,'' predicts Yuval Zaira, an industry analyst at Israel Brokerage Investment (IBI), in Tel Aviv.

The competition is not sitting by idly. Foreign carriers have been adding capacity and upstart charter company Israir introduced three weekly flights to New York in June. But El Al is the sole carrier offering direct flights to the Far East, a growing market for tourism and business travel. It also dominates the local cargo business, which accounts for a quarter of revenues. El Al, commercial success? It's nice to see some things change in the Mideast.

By Neal Sandler in Jerusalem

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