Saturday, 4 July 2020

El Al Israel Airlines shares details of its first quarter of 2020

El Al Israel Airlines Financial Results for the First Quarter of 2020 

The global pandemic of coronavirus COVID-19 has had a dramatic on airlines around the world,  the Israeli airline El Al is no exception.  The carrier that is still trying to negotiate a full rescue bailout deal with the government has released select details of its results for the first quarter of the year. 

The airline says the results were significantly affected by the crisis, especially towards the end of the quarter when they sent the majority of staff home and grounded all bar a few aircraft. The mass grounding of its own jets and those of other airlines around the world partly resulted in a rapid drop of fuel prices - good news you might have thought for an airline - but not when the planes are routed to the tarmac and not when many months previously you hedged your future fuel requirements at rates that were so much higher.  

El Al says its revenues decreased by about 25% around US$321 million, compared to 2019 levels.  The company recorded a net loss of approx. US$140 million, better than some had expected, especially when compared to a loss of US$55 million in the first quarter of last year

The crisis has led to a dramatic reduction in demand for passenger flights and an unprecedented number of flight cancellations, and therefore, El Al cancelled many flights already in February 2020, and finally announced a complete halt of passenger flights as of mid-March 2020, due to Government guidance addressing these circumstances and the fear of contraction of the virus.

Since the outbreak of the coronavirus crisis, the struggling airline has taken a series of streamlining measures and steps designed to improve its cash flow:


  • Grounding the fleet until July 31, 2020 
  • 5,800 staff sent home on unpaid leave.
  • Only reduced wages of top management and board members by 20%.
  • Deferred lease payments for some aircraft.
  • Cancelled lease agreements of two 737-800 aircraft scheduled for delivery in 2020.
  • Cancelled wet-leases for three aircraft, which were then returned. 
  • Signed an agreement for the sale and leaseback of three 737-800s.
  • Sold its stake in Maman.
  • Sold 4 engines.
  • In June 2020, five other engines were sold.
  • Large projects suspended or cancelled including renewal of the 777 aircraft fleet.
  • Cargo operations were expanded by adjusting passenger aircraft to carry essential cargo.
The Company is in the process of establishing a plan with the Ministry of Finance to obtain government assistance. As of the date hereof, two plans have been proposed, aiming to provide the Company with financing to help it address the coronavirus crisis. The first plan being examined consists of obtaining a USD 400 million loan, mostly backed by state guarantee, and carrying out an offering of shares in the amount of USD 150 million . The second plan consists of obtaining a USD 250 million loan, mostly backed by state guarantee, and carrying out an offering of shares in the amount of USD 150 million, with the State undertaking to purchase all shares not purchased by the investors as part of the offering.
Since there is uncertainty as to the completion of obtaining the assistance, which is essential to allow the Company to address the effects of the crisis. At this stage, there are considerable doubts regarding the continued existence of the Company as an ongoing concern, and accordingly, the financial statements include an ongoing concern disclosure.

El Al's CEO, Gonen Usishkin said"The world is currently facing the deepest economic crisis it has known in the last 100 years. The aviation industry was the first to be hit by this crisis and the last to come out of it. Due to the continued pandemic, there is still a great deal of uncertainty around the world as to the timing at which the industry in general, and El Al in particular, will return to regular and meaningful activity.

The coronavirus crisis is of a magnitude not seen before, and even the strongest airline would not survive this crisis without government assistance.
EL Al's management puts all of its energy in reaching the necessary agreements, including vis-à-vis its employees, to finalize the government assistance plan with the Ministry of Finance, the purpose of which is to stabilize the Company financially, and to allow its continued operation in future years. The assistance, along with the world gaining control of the pandemic, will allow the aviation industry and El Al to gradually return to regular and meaningful activity.

Even in such a challenging time, we take pride that El Al and its employees have made a significant contribution to fighting the coronavirus pandemic. The Company has operated complicated flights to remote destinations, including Australia, Columbia, Costa Rica, Peru and others, to extract Israeli civilians and bring them home safely. The Company takes further pride in operating flights carrying essential cargo for the fight against the coronavirus pandemic."

El Al's CFO, Dganit Palti said:  "The coronavirus pandemic has abruptly halted the Company's plans to expand its operations, upon completion of the process of replacing its fleets and the innovative aircraft acquisition program. Notwithstanding that the Company entered the year with high cash balances of USD 264 million, the crisis has caused a serious liquidity problem as a result of halting all scheduled passenger flights as of March 2020. This liquidity problem was manifested primarily by a 25% decrease in the Company's revenues, at a time when the greater part of the debt for the new aircraft has already been established. The decrease in fuel prices, which in normal times is a blessing, has led to losses in hedging transactions which, at low consumption rates, are in part not recognized as effective, and for which the Company recorded an expense of USD 56 million for the quarter. In addition, there was a decrease of approx. USD 108 million in capital funds in respect of all jet fuel, interest and foreign exchange rate hedging transactions which, in accounting terms, are recognized as effective. An additional decrease in equity was attributable to a net loss of approx. USD 140 million for the quarter. To improve its liquidity, the Company obtained an agreed deferral of lease payments, signed a memorandum of understanding for the sale and leaseback of three aircraft totaling approx. USD 76 million, realized its holdings in Maman in return for approx. USD 15 million, released excess amounts from old compensation funds totaling approx. USD 105 million, and made other moves. The Company is in talks with banks to raise loans in connection with the assistance plans offered by the government."
Key Financial Results:

January-September

2020
2019
Change
Operating revenues
321
429
(25%)
Operating expenses
361
403
(10%)
Gross profit (loss)
(40)
26

EBITDAR[1]
(22)
16

Loss before taxes on income                       
(161)
(71)
126%
Loss for the period
(140)
(55)
152%

Profit and Loss for the First Quarter of 2020:
Operating Revenues
Operating revenues for the reported period decreased by approx. USD 108 million, reflecting a decrease of 25.2% compared to the first quarter of 2019. Revenues from carrying passengers decreased by approx. USD 107 million, indicating a decline of 28.2%. This decrease is attributable primarily to the decrease in passenger revenue per kilometer (RPK) flown by the Company and the decrease in yield per ton-kilometer, all due to the coronavirus crisis. In addition, there was a negative impact of exchange rates of currencies used for some of the Company's sales transactions, in relation to the dollar.
The decline of approx. USD 10 million (about 9%) in revenues from carrying passengers started already in February, and significantly increased in March by approx. USD 100 million (about 69%) compared to the first quarter of 2019, as a result of the coronavirus crisis. The Revenue Passenger-Kilometers Flown (RPK) decreased by approx. 4% in February and by approx. 65% in March compared to the same months in 2019.
Cargo revenues decreased by approx. USD 2 million due to a decrease in the amount of cargo flown and the decline in yield per ton-kilometer. A negative impact of exchange rates also contributed to the decrease in cargo revenues.

Operating Expenses
In the reported period, operating expenses decreased by approx. USD 40.9 million compared to the first quarter of 2019, for the following reasons:
  • A decrease of approx. USD 14.2 million in jet fuel expenses, as set forth below.
  • A decrease of approx. USD 13 million in payroll expenses. This decrease is attributable to a decline in operations and the result of sending employees to unpaid leave as of mid-March, and due to a decrease in actuarial expenses attributable primarily to an increase in the discount rate. On the other hand, there was a negative impact on exchange rates.
  • A decrease in expenses as a result of the decline in operations, as explained above, which was expressed by a decrease of approx. 16.8% in Available Seat per Kilometer (ASK). In March 2020, Available Seat per Kilometer decreased by approx. 56% compared to the first quarter of 2019.
Jet fuel Expenses
The Company's jet fuel expenses decreased in the reported quarter by approx. USD 14.2 million (reflecting a decrease of about 14%) compared to jet fuel expenses for the first quarter of 2019, as a result of a drop in jet fuel market prices and a 23% decrease in the amount of fuel consumed by the Company's aircraft, due primarily to the effects of the coronavirus crisis and the operation of the 787-9 Dreamliner aircraft, which are more efficient in fuel consumption. On the other hand, in the reported quarter the negative impact of hedging transactions was higher, as described below, and offset in part 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:

2020
2019
Difference
Jet fuel expenses for the period (before hedging impact)
71.2
100.4
(29.2)
Impact of Jet fuel hedging transactions on profit and loss
15.6
0.6
15.0
Total jet fuel expenses (including hedging impact)
86.8
101.0
(14.2)




Amount of jet fuel consumed (in millions of gallons)
39.1
50.6
(11.5)
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 4 to the financial statements.

Selling Expenses
Selling expenses decreased by approx. USD 15.8 million compared to the first quarter of 2019, due mostly to a reduction in distribution costs that resulted from the decrease in operations, the decrease in payroll expenses, as explained above, and a decrease in orders for distribution systems.
General and Administrative Expenses
No significant change was recorded in general and administrative expenses compared to the first quarter of 2019.
Other Revenues (Expenses)
Net other revenues (expenses) amounted to approx. USD 11.6 million and consisted of capital gains from the sale of engines and inventory surplus, compared to the first quarter of 2019 in which an expense of approx. USD 0.3 million was recognized.
Financing Expenses
Net financing expenses amounted to approx. USD 65.1 million, compared to approx. USD 18.2 million in the first quarter of 2019. This increase is attributable mainly to an expenses of approx. USD 40.9 million for non-effective jet fuel hedging transactions in April-June 2020, when consumption was lower than the hedged quantity, and therefore, the negative fair value of these transactions as of the report date was credited to profit and loss. In addition, during the period there was an increase in loan interest expenses compared to the first quarter of 2019, mostly due to an increase in the amount of loans taken by the Company to finance the Dreamliner 787-9 and 787-8 aircraft that the Company acquired.
Loss Before Tax
Loss before tax amounted to approx. USD 161.1 million in the reported quarter compared to a loss before tax of approx. USD 71.0 million in the first quarter of 2019.
Tax Benefit
The tax benefit amounted to approx. USD 21.5 million in the reported quarter compared to USD 15.6 million in 2019, as a result of the increase in loss before tax.  The tax benefit was recognized in part up to the reset of the balance of net liabilities for deferred tax.
Loss for the Period
Loss after tax amounted to approx. USD 139.6 million in the reported quarter compared to a loss of approx. USD 55.0 million in the first quarter of 2019.
Balance Sheet as of March 31, 2020:
  • Current Assets. As of March 31, 2020, the Company's current assets amounted to approx. USD 324 million, indicating a decrease of approx. USD 162 million compared to their balance as of December 31, 2019. This decrease resulted mostly from a decrease in cash and deposits balances and further decrease in trade receivables, which was offset in part by deposits provided by the Company as collateral for the jet fuel and interest hedging transactions.
  • Current Liabilities. As of March 31, 2020, the Company's current liabilities amounted to USD 2,194 million, indicating an increase of approx. USD 1,111 million compared to their balance as of December 31, 2019. This increase is attributable primarily to the increase in short-time credit and current maturities due to the reclassification of the balance of long-term loans from financial institutions to current liabilities. In addition, there was an increase in the derivatives financial instruments item as a result of the sharp drop in jet fuel prices and LIBOR rates as well as in prepaid revenues from the sale of airline tickets. On the other hand, there was a decrease in the balance of trade payables and liabilities for employees.
  • Working Capital. As of March 31, 2020, the Company had a working capital deficit of approx. USD 1,871 million compared to a deficit of approx. USD 597 million as of December 31, 2019. Current liabilities as of March 31, 2020 included approx. USD 1,080 million classified as short-term loans from financial institutions, and liabilities to employees for vacation pay in the amount of approx. USD 50 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 approx. USD 265 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 effects of the coronavirus crisis, and particularly in light of the halt of passenger flights as of March 2020, a portion of the said amount is required to be repaid in cash. Current liabilities also include a loan of approx. USD 31 million to finance advance payments for a 787-8 aircraft, which will be repaid by means of a long-term financing obtained upon receipt of the aircraft. As of March 31, 2020, the Company's current ratio dropped to approx. 14.7% compared to a current ratio of 44.9% as of December 31, 2019.
  • Non-Current Assets. As of March 31, 2020, the Company's non-current assets amounted to approx. USD 3,060 million, indicating a growth of approx. USD 49 million compared to their balance as of December 31, 2019, due primarily to an increase of approx. USD 78 million in the reduced ownership of the fixed assets and intangible assets, mainly as a result of the entry into service of the third owned 787-8 aircraft. On the other hand, there was a decrease in assets for employee benefits, rights of use of leased assets, derivatives financial instruments and long-term investments.
  • Non-Current Liabilities. As of March 31, 2020, the Company's non-current assets amounted to USD 1,268 million, reflecting an decrease of approx. USD 976 million compared to their balance as of December 31, 2019, mainly as a result of reclassification of the balance of loans from bank corporations to current liabilities. In addition, the deferred tax balance decreased as a result of the loss before tax for the period and the negative fair value of the derivatives financial instruments, and there was also a decrease in liabilities for employee benefits and liabilities for leases. On the other hand, there was an increase in the derivatives financial instruments item as explained above, and further increase in the item of long-term prepaid revenues from club points.
  • Equity. As of March 31, 2020, total equity amounted to approx. USD 79 million. The decrease of approx. USD 248 million compared to equity as of December 31, 2019, is due primarily to the loss for the first quarter of 2020 and the negative impact of equity funds due to cash flow hedging.

2020
2019
Change
Scheduled and Charter Passenger Segments (paying passengers) – in

thousands
806
1,123
(28.2%)
Total Market Share – in percentages
23.3%
25.0%
(6.5%)
Passenger Revenue per Kilometer (RPK) – in millions
3,680
4,726
(22.1%)
Available Seat per Kilometer (ASK) – in millions
4,877
5,861
(16.8%)
Passenger Load Factor (PLF) – in percentages
75.4%
80.9%
(6.7%)
Flight Hours – in thousands
29.5
35.7
(17.2%)
Total average income per RPK – in cents*
7.3
7.6
(3.9%)
Cargo (Ton) Flown – in thousands
17.5
18.6
(5.8%)
Revenue Ton Kilometers (RTK) Flown – in millions
102.5
108.1
(5.2%)
RASK**
6.1
6.9
(12.5%)
CASK**
8.3
7.8
6.5%
CASK without fuel**
6.6
6.2
7.6%
Aircraft Fleet *** / ****



Number of aircraft in operation at the end of the period
45
42
3
Average age of aircraft fleet at the end of the period - in years
9.1
11.5
(2.4)
*    Revenues from passengers and related revenues from scheduled and charter flights, excluding changes in exchange rates.

**  Passenger aircraft, excluding financing expenses.

It should be clarified that reading the content of this announcement is not a substitute for reading the financial statements of the Company as of March 31, 2020.
[1] Profit before financing, taxes, depreciation, amortization and rent expenses.









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