Sunday, 17 May 2020

More big losses for El Al Israel Airlines Ltd as the carrier struggles forward, one week at a time.

The coronavirus COVID-19 pandemic could not have come at a more inopportune time for  El Al the Tel Aviv based airline.  It was mid-way through a major upgrade of its aircraft fleet and seeking to stem losses and return to the days of a healthy profit. The carrier had taken delivery of 14 new Boeing 787  Dreamliner aircraft as well as completing an improvement of its narrow-body aircraft fleet. It was slowly expanding its route network in the face of increasing competition whilst its net loss for 2019 stood at US$60. 

Then the pandemic hit, which led to a sharp decline in demand for passenger flights,  countries around the world started imposing entry restrictions and travel bans, including the Israeli authorities who were among some of the first to halt almost all arrivals and instigate very strict rules.  The end result was thousands of stranded people and flight schedules being cut down to zero.  This caused the loss of substantially all of El Al's revenues and created a liquidity problem for the company, which it may never recover from. 

The airline's fuel hedging programme was worthless as no flights were operating and the price dropped through the floor and then some.  With all the flights cancelled, the airline had to refund passengers on a monumental scale, the like of which, it had never seen before.  Therefore the firm had to introduce a number of streamlining or cost-cutting measures, including placing around 90% of its workforce on unpaid leave whilst only reducing the wages of its board and senior executives by 20%.





It arranged the deferral of lease payments for some of its leased aircraft,  ended the wet-lease arrangements for three aircraft and cancelled the lease of two 737-800 aircraft. It also signed an agreement for the sale and leaseback of three 737-800 aircraft that could,  if completed raise US$76 million.

The airline's management have been in negotiations with some banks and the Ministry of Finance regarding a loan of US$400 million, that they want to government to guarantee most of,  yet they have been squabbling over the amount of restructuring and reducing the airline would need to go through before the government would be willing to guarantee such a large amount to a loss-making entity.

In the first quarter of 2020, the airline's loss before tax amounted to approximately US$76.6 million compared to a loss before tax of approximately US$67.7 million in 2018 and a net loss of around US$59.6 million.

The company's current assets amounted to approximately US$486 million, while its current liabilities amounted to US$1,083 million.

This weekend the airline has released its latest results, detailed below.

El Al's CEO, Gonen Usishkin said: "El Al is one of the Israeli economy's most significant corporate casualties from the coronavirus crisis, and for this reason, we asked the Israeli government to assist El Al as most countries in the world have done.  In the last two months, the Company's management team has been working around the clock to implement a series of operational and financial measures aimed to reduce the Company's expenses, maintain its liquidity and allow it to operate. The Company had to halt its main operations, i.e. passenger carriage, in view of the government guidance, and it uses the wide-body passenger aircraft along with the cargo aircraft for extensive cargo operations. We established a streamlining program to allow the Company to operate in the coming years and return to profitability; however, these measures will not be sufficient without the Israeli government support."

El Al's CFO, Dganit Palti said: "We completed 2019 with an increase in revenue and gross profit. The Company reported a loss of approximately USD 60 million, which was also affected by the initial implementation of a new accounting standard. However, notwithstanding the loss, the Company generated unprecedented cash flow from operating activities totalling USD 294 million and completed the year with high cash balances of USD 264 million in its account. In view of the impact of the global crisis that paralyzed the aviation industry, El Al's passenger operations have stopped, and it found itself in a serious cash flow crisis. The Company took many steps to improve its liquidity, mainly by sharply reducing its expenses and suspending investments. Concurrently therewith, we carried out financial transactions to improve the Company's liquidity, inter alia, sale and leaseback of three aircraft. We established a business plan containing profound streamlining measures that are currently in the process of implementation, and we expect the state's decision to provide a guarantee for a USD 400 million bank loan, that will allow the Company to return to growth and profitability."








-
Key Financial Results:

January-September

2019
2018
Change
Operating revenues
2,178
2,142
2%
Operating expenses
1,835
1,846
(1%)
Gross profit
343
296
16%
EBITDAR
305
260
17%
Profit (loss) before taxes on income
(77)
(68)
13%
Profit (loss) for the period
(60)
(52)
14%
*********
Profit and Loss for 2019:
  • The Company's Revenues. Operating revenues in 2019 increased by approximately USD 36 million, reflecting a growth of 1.7% compared to 2018. Revenues from carrying passengers grew by approximately USD 48.5 million, indicating a growth of 2.5%. This growth is attributable to the increase in passenger revenue per kilometer (RPK) flown by the Company, which was offset in part by the decrease in yield per passenger-kilometer. In addition, there was a negative impact of exchange rates of currencies used in some of the Company's sales transactions, in relation to the dollar. Cargo revenues decreased by approximately USD 13 million due to a decrease in the amount of cargo flown and the decline in yield per ton-kilometer due to a weakness of the global cargo market and the serious competition. A negative impact of exchange rates also contributed to the decrease in cargo revenues.
  • Operating Expenses. Operating expenses decreased by approximately USD 10.9 million in 2019 compared to 2018, for the following reasons:
    • An increase of approximately USD 35 million in payroll expenses. This increase is attributable to new wage agreements, transition of pilots between fleets and negative impact of exchange rates. In addition, approximately USD 8.8 million of the increase is attributable to a decrease in the discount rate of the actuarial liability.
    • An increase in expenses as a result of the growth in operations that was expressed by an increase of 4.5% in Available Seat per Kilometer (ASK);
    • The impact of the implementation of IFRS 16 – Leases, under which the rights of use of leased assets were amortized by approximately USD 92.7 million, which amortization is included in operating expenses, and on the other hand, approximately USD 28 million was diverted to financing expenses attributed to the lease liability, and lease expenses (that were excluded from the application of IFRS 16) of approximately USD 45.4 million were also recorded compared to USD 145 million in 2018.
    • A decrease of approximately USD 43.6 million in jet fuel expenses, as set forth below.
    • An increase of approximately USD 17.4 million in maintenance expenses, which is mainly attributable to expenses charged based on flight hours, in accordance with the agreement for engine maintenance and spare parts repair with respect to the additional 787 aircraft that entered service in 2019.
Distribution of Operating Expenses for 2019:
  • Jet fuel Expenses. The Company's jet fuel expenses decreased by approximately USD 43.6 million in 2019 (reflecting a decrease of about 8.3%) compared to 2018, as a result of a drop in jet fuel market prices and the 4% decrease in the amount of fuel consumed by the Company's aircraft, notwithstanding the 4.5% increase in its Available Seat per Kilometer (ASK) flown by the Company, due to the operation of the 787-9 Dreamliner aircraft, which are more efficient in fuel consumption. On the other hand, the positive impact of hedging transactions was smaller in the reported year, as described below, which partially offset the reduction in jet fuel expenses:
The table below reflects the impact of jet fuel expenses on the Company's results, including the impact of hedging transactions:
$M
2019
2018
Difference
Jet fuel expenses for the period (before hedging impact)
481.5
546.5
(65.0)
Impact of Jet fuel hedging transactions on profit and loss
(1.7)
(23.1)
21.4
Total jet fuel expenses (including hedging impact)
479.8
523.4
(43.6)




Amount of jet fuel consumed (in millions of gallons)
237.8
247.3
(9.5)
For further information about jet fuel hedging, see Section B below. For further information about the impact of derivative financial instruments on the financial statements, see Note 18 to the financial statements.
  • Selling Expenses. Selling expenses decreased by approximately USD 1.3 million compared to 2018, mostly due to a decrease in distribution costs that resulted mainly from a decrease in the average base commission payable to agents and a change in the mix of distribution channels. On the other hand, advertising expenses increased as a result of launching new destinations.
  • General and Administrative Expenses. General and administrative expenses increased by approximately USD 6.8 million compared to 2018, mainly due to an increase in expenses for legal actions, an increase in information system maintenance expenses and a reduction in the rights of use of leased assets in accordance with IFRS 16, which were offset in part by a decrease in consulting expenses.
  • Net Other Revenues (Expenses). Net other revenues (expenses) amounted to approximately USD 12.5 million and consisted of capital gains from the sale of one aircraft and engines as well as inventory surplus, compared to 2018 in which an income of approximately USD 14.0 million was recognized as a result of the sale of aircraft and engines along with insurance receipts for a 767 aircraft that was damaged and removed from service.
  • Net Financing Expenses. Net financing expenses amounted to approximately USD 81.0 million, compared to approximately USD 28.8 million in 2018. This increase is mainly attributable to the implementation of IFRS 16 that resulted in interest expenses on lease liabilities totalling approximately USD 43.6 million and an additional expense of approximately USD 2.7 million for exchange rate differences as a result of a balance sheet exposure to lease liabilities that are denominated in non-dollar currencies (mainly shekel). In addition, during the period there was an increase in loan interest expenses, mostly due to the increase in the amount of loans taken by the Company to finance the 787-9 Dreamliner aircraft that the Company acquired.
  • Loss Before Tax. Loss before tax amounted to approximately USD 76.6 million compared to a loss before tax of approximately USD 67.7 million in 2018.
  • Tax Benefit. The Company's tax benefit amounted to approximately USD 17.0 million, compared to USD 15.6 million in 2018, as a result of the increase in loss before tax.
  • Net loss. The Company's net loss after tax amounted to approximately USD 59.6 million compared to a loss of approximately USD 52.2 million in 2018.
Profit and Loss for the Fourth quarter of 2019:
  • Operating Revenues. In the fourth quarter of 2019, operating revenues increased by approximately USD 25.0 million, reflecting an increase of about 5.1% compared to the fourth quarter of 2018. Revenues from carrying passengers increased by approximately USD 25.6 million, indicating an increase of 5.8%. The increase is attributable to the growth in passenger revenue per kilometre (RPK) flown by the Company and the increase in yield per passenger-kilometre, both for the reasons set forth above, which were offset in part by the decrease in the negative impact of exchange rates in currencies used in some of the Company's sales transactions, in relation to the dollar. Cargo revenues decreased by approximately USD 1.5 million (about 4.4%) in the fourth quarter of 2019 compared to cargo revenues in the fourth quarter of 2018, mainly due to the decrease in yield per tonne-kilometre and the negative impact of exchange rates that was offset in part by an increase in the cargo amount flown.
  • Operating Expenses. Operating expenses increased by approximately USD 10.2 million, reflecting a growth of about 2.3% compared to the fourth quarter of 2018. The change is attributable to the following reasons:
    • An increase of approximately USD 16 million in payroll expenses compared to the fourth quarter of 2018, mainly due to new wage agreements and transition of pilots between fleets, and as a result of an increase in the actuarial liability.
    • An increase in expenses as a result of the growth in operations that was expressed by an increase of 5.7% in Available Seat per Kilometer (ASK).
    • An increase in engine maintenance expenses.
    • A decrease of approximately USD 9.4 million in jet fuel expenses, as set forth below.
    • A decrease as a result of the implementation of IFRS 16 that diverted approximately USD 8 million to financing expenses (the majority remained in expenses for amortization of rights of use of leased assets that are included in operating expenses).
  • Jet Fuel Expenses. In the fourth quarter of 2019, the Company's jet fuel expenses decreased by approximately USD 9.4 million compared to the Company's jet fuel expenses in the fourth quarter of 2018, mainly as a result of the decrease in the amount of fuel consumed by the Company's aircraft, notwithstanding the 5.7% increase in its Available Seat per Kilometer (ASK), primarily due to the continued entry to service of the 787-9 Dreamliner aircraft, which are more efficient in fuel consumption. In addition, fuel expenses were positively affected by the drop in jet fuel market prices.
The table below reflects the impact of jet fuel expenses on the Company's results, including the impact of hedging transactions
$M$
2019
2018
Difference
Jet fuel expenses for the period (before hedging impact)
113.1
124.1
(11.0)
Impact of Jet fuel hedging transactions on profit and loss
0.3
(1.3)
1.5
Total jet fuel expenses (including hedging impact)
113.4
122.8
(9.4)




Amount of jet fuel consumed (in millions of gallons)
54.8
55.6
(0.8)
For further information about jet fuel hedging, see Section B below. For further information about the impact of derivative financial instruments on the financial statements, see Note 18 to the financial statements.
  • Selling expenses. In the fourth quarter of 2019, selling expenses increased by approximately USD 6.1 million compared to the fourth quarter of 2018, mainly as a result of an increase in advertising expenses and higher distribution system orders due to the growth in operations. The increase in selling expenses was offset in part by a decrease in the commission rate.
  • General and Administrative Expenses. In the fourth quarter of 2019, general and administrative expenses increased by approximately USD 5.4 million compared to the fourth quarter of 2018, mainly due to an increase in amortization expenses related to software and a further increase in the provision for legal actions.
  • Net financing expenses. In the fourth quarter of 2019, net financing expenses amounted to approximately USD 20.7 million, compared to approximately USD 7.4 million in the fourth quarter of 2018. This increase is mainly attributable to the implementation of IFRS 16 that resulted in recording interest expenses on lease liabilities in the amount of approximately USD 12.1 million and an additional expense of approximately USD 0.3 million for exchange rate differences due to a balance sheet exposure to lease liabilities that were denominated in non-dollar currencies (mainly shekel).
  • Loss before tax. In the fourth quarter of 2019, loss before tax amounted to approximately USD 41.2 million, compared to a loss before tax of approximately USD 41.5 million in the fourth quarter of 2018.
  • Tax benefit. In the fourth quarter of 2019, the Company's tax benefit amounted to approximately USD 9.8 million, similar to the tax benefit recorded in the fourth quarter of 2018.
  • Net loss. In the fourth quarter of 2019, loss after tax amounted to approximately USD 31.5 million, compared to a loss of approximately USD 31.6 million in the fourth quarter of 2018.
Balance Sheet as of December 31, 2019:
  • Current Assets. As of December 31, 2019, the Company's current assets amounted to approximately USD 486 million, indicating an increase of approximately USD 69 million compared to their balance as of December 31, 2018. This increase resulted mostly from an increase in cash and deposits balances and further increase in trade receivables, which was offset in part by a reduction in the other receivables item (mainly receivables for renovation of leased engines). 
  • Current Liabilities. As of December 31, 2019, the Company's current liabilities amounted to USD 1,083 million, indicating an increase of approximately USD 68 million compared to their balance as of December 31, 2018. A major part of the increase is attributable to the implementation of IFRS 16, for which current maturities of lease liabilities totalling approximately USD 93 million were included. In addition, there was an increase in prepaid revenues from the sale of airline tickets, an increase in the actuarial liability for employees and further increase in trade payables. On the other hand, there was a decrease in short-term credit and current maturities of loans, a decrease in other payables and further decrease in the balance of derivative financial instruments. 
  • Working Capital. As of December 31, 2019, the Company had a working capital deficit of approximately USD 597 million compared to a deficit of approximately USD 598 million as of December 31, 2018. Current liabilities as of December 31, 2019, included loans totalling approximately USD 62 million that were taken to finance advance payments on two 787-8 aircraft (of which USD 31 million were repaid by means of long-term financing obtained upon receipt of one of these aircraft); liabilities to employees for vacation pay in the amount of approximately USD 59 million, which are expected to be paid upon retirement but are classified as a short-term liability in accordance with accounting principles. In addition, an amount of approximately USD 248 million constitutes prepaid revenues from sale of airline tickets that, in the ordinary course of the Company's business, is not repaid in cash but through the provision of future flight services. In view of the implications of the coronavirus crisis, and particularly considering the suspension of passenger flights from March 2020, a portion of the said amount is required to be repaid in cash. Moreover, the change in the working capital is mainly attributable to the initial implementation of IFRS 16 in 2019, following which current maturities of lease liabilities totalling approximately USD 93 million were included in current liabilities and were offset by the decrease in the current maturities of long-term loans. As of December 31, 2019, the Company's current ratio rose to 44.9% compared to a current ratio of 41.1% as of December 31, 2018.
  • Non-Current Assets. As of December 31, 2019, the Company's non-current assets amounted to approximately USD 3,010 million, indicating a growth of approximately USD 1,318 million compared to their balance as of December 31, 2018, mainly due to the rights of use of leased assets totalling USD 983 million (which were recognized following the initial implementation of IFRS 16), an increase of approximately USD 274 million as a result of the acquisition of one 787-9 aircraft and two 787-8 aircraft under ownership that entered service in 2019, and an increase of USD 50 million in long-term deposits as a result of the initial implementation of IFRS 16 (see Note 2.D to the annual financial statements), as well as due to an increase in assets for employee benefits.
  • Non-Current Liabilities. As of December 31, 2019, the Company's non-current assets amounted to USD 2,244 million, reflecting an increase of approximately USD 1,379 million compared to their balance as of December 31, 2018, mainly as a result of lease liabilities of approximately USD 928 million due to the initial implementation of IFRS 16 (see Note 2.D to the annual financial statements), long-term financing obtained as a result aircraft acquisition and an increase in long-term prepaid revenues from grants received from credit card companies as part of agreements entered into with these companies (see Note 12.C to the annual financial statements).
  • Total Equity. As of December 31, 2019, the Company's equity amounted to approximately USD 169 million. The decrease of approximately USD 61 million compared to the Company's equity as of December 31, 2018, is mainly attributable to the loss for the year (2019) and the impact of the IFRS 16 implementation in the amount of approximately USD 19 million, which were offset in part by a positive impact of equity funds due to cash flow hedging.
Operational Data  - El Al and Sun D'or

2019
2018

Q4/2019
Q4/2018

Scheduled and Charter Passenger Segments (paying passengers)
5,826
5,609
3.9%
1,333
1,258
6.0%
Total Market Share – in percentages
24.6%
25.5%
(3.6%)
23.4%
25.0%
(6.4%)
Passenger Revenue per Kilometer (RPK) – in millions
23,642
22,852
3.5%
5,593
5,285
5.8%
Available Seat per Kilometer (ASK) – in millions
28,520
27,303
4.5%
6,735
6,373
5.7%
Passenger Load Factor (PLF) – in percentages
82.9%
83.7%
(1.0%)
83.0%
82.9%
0.2%
Flight Hours – in thousands
172.8
171.2
0.9%
41.2
39.6
4.1%
Total average income per RPK – in cents*
8.18
8.23
(0.6%)
8.3
8.2
0.9%
Cargo (Ton) Flown – in thousands
74.5
80.7
(7.8%)
18.0
17.6
2.4%
Revenue Ton Kilometers (RTK) Flown – in millions
446.4
472.0
(5.4%)
112.5
109.3
3.0%
RASK**
7.3
7.5
(2.5%)
7.4
7.5
(0.9%)
CASK**
7.4
7.7
(4.7%)
7.8
8.0
(2.4%)
CASK without fuel**
5.7
5.9
(2.6%)
6.2
6.2
1.5%
* Revenues from passengers and related revenues from scheduled and charter flights, excluding changes in exchange rates.
** Passenger aircraft, excluding financing expenses.


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