After near crash, oil price, exchange rate lift El Al

Less than two years have passed since El Al Israel Airlines (TASE: ELAL) was on the point of collapse, following the outbreak of the Covid-19 pandemic that almost entirely shut down its activity. The company accumulated huge losses, its financial statements bore a going concern qualification from its auditors, and it had to undergo a rescue plan that included cash aid from the state and a new owner, Kenny Rozenberg, who took over the airline from the Mozes-Borovitz family.

Now, El Al’s position has changed from one extreme to the other. The rapid recovery in the tourism industry after the pandemic died down has brought back the familiar crowding at Ben Gurion Airport, and ticket sales are back to pre-pandemic levels.

At the same time, in the past few months the airline has benefitted from two exogenic factors that can be expected to have positive effects on its first quarter results: the weakening of the shekel against the US dollar; and the plunging price of oil.

To some extent, this is already priced into the company’s stock, which has risen by over 20% so far this year, giving El Al a market cap of some NIS 750 million.

The fall in the oil price is, as mentioned, one of the factors supporting El Al’s share price, because of the expected effect on the company’s jet fuel costs. Last year, El Al paid $584 million for jet fuel, representing 35% of its operating expenses.

The price of a barrel of oil is currently $68, down 35% within a year. The oil price shot up last year following Russia’s invasion of Ukraine, raising the fear that global sales of Russian oil would be restricted, but it has since declined. One of the causes of the decline is greater oil production in the US.

10% rise in shekel-dollar rate brings in $11 million

Another element helping El Al’s financial performance is the weakening of the shekel against the US dollar. The company sells tickets in dollars, but most of its expenses are in shekels. Last year, El Al’s employee compensation expense was $360 million, about a fifth of its total operating expenses of $1.68 billion.

El Al’s financials note the effect of changes in the shekel-dollar exchange rate on its shekel-denominated costs: a 10% rise in the rate means an $11 million gain for the company, mainly from revaluation of commitments to employees. The shekel has weakened against the dollar by about 4% so far this year, and by 13% in the past twelve months, to a current rate of around NIS 3.66/$.

Sharp cut in headcount

El Al’s recently released financials for 2022 show a switch to profit. Besides the factors already mentioned, this is also thanks to a deep cut in the company’s workforce during the pandemic, from 6,300 employees at the end of 2019 to 4,500 at the end of 2022.

Meanwhile, revenue more than doubled year-on-year, and the bottom line was a $109 million net profit. In 2020 and 2021, the airline posted a cumulative net loss of nearly $1 billion.

The company, headed by Dina Ben-Tal Ganancia, recorded revenue of $2 billion last year, representing an increase of 131% from the year before. Operating profit for 2022 was $112 million, which compares with a painful $320 million operating loss in 2021.

Under its five-year plan, El Al aims to reach annual sales turnover of $3.5 billion by 2028, 76% more than in 2022. It plans to carry 7.5 million passengers in 2028, compared with 4.2 million last year.

Meanwhile, a month ago, there was another positive development for El Al, when Oman agreed to permit airlines from Israel to fly over its territory, cutting the flight time to the Far East, and opening up the possibility of new, more competitive routes to that part of the world.

As mentioned, all these recent developments appear to have encouraged investors, who have boosted El Al’s share price, although it is still down by more than 60% over the past five years.

The recent rise in the share price scuttled an attempt by controlling shareholder Kenny Rozenberg, who holds a 45% stake, to buy more shares. Rozenberg sought to buy 5% of the company in an offer to purchase at NIS 3.8 per share, which he later improved to NIS 4, which is similar to the current market price.

The public responded only partially to the offer, to the tune of 3.6%, and since the Companies Law does not allow Rozenberg to buy less than 5%, the purchase did not go ahead.

Switch of auditors from Deloitte to EY

Not all the news about El Al is positive. Last week, the company decided to switch auditors from Deloitte to EY Israel.

El Al said that the switch was made in order to “refresh auditing procedures and for reasons of effectiveness and compliance,” after twenty years in which it had not changed its auditors, and for the sake of “ensuring the propriety of the company’s control and auditing procedures.”

Deloitte, however, claims that the switch was made for extraneous reasons, after the firm pointed out shortcomings in El Al’s corporate governance in early 2022.

The dispute between El Al and Deloitte surfaced in a notice to the stock exchange of the convening of a special shareholders meeting, in which it was stated that Deloitte had remembered to report the alleged failings in corporate governance only after it found out that El Al intended to replace the firm as its auditor.

According to El Al, at a meeting last December, Deloitte stated that not only had the airline returned to regular business activity, but that corporate governance was restored to full functionality.

According to El Al, the change of auditors was made after a process of examination that included joint meetings of the board’s financial reporting committee and audit committee with representatives of the auditors and the company’s management, and the receipt of proposals for providing services, and negotiations over them.

Published by Globes, Israel business news – en.globes.co.il – on March 22, 2023.

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