The dominance of El Al Israel Airlines Ltd. (TASE:ELAL) in Israel’s skies, after many foreign airlines have canceled flights to and from Israel due to fears of an Iranian strike, led to record net profit of $147 million in the second quarter of 2024. With El Al able to charge high fares, second quarter profit was 84% higher than the net profit in the first quarter, which was itself “the best quarter in the company’s history.”
As the geopolitical tensions persist, El Al, controlled by US businessman Kenny Rozenberg and led by CEO Dina Ben Tal Ganancia, is expected to report very high profits in the coming quarters. In the first half of the year El Al reported revenue of $1.6 billion and net profit of $226 million, up tenfold from the first half of 2023.
It is hard to believe that four years ago, following the outbreak of the Covid pandemic, the airline’s very existence was threatened, as scheduled flights worldwide were suspended. Each new Covid wave led to a slump in demand, and huge losses, liquidity difficulties, with the auditors attaching a “going concern” qualification to the company’s reports.
The state assisted El Al, with support worth hundreds of millions of dollars (alongside capital injections from new controlling owner Rozenberg), to bridge cash gaps and allow the airline to meet its obligations despite the crisis.
An examination by “Globes” found that El Al does not currently pay tax on its profits. Although the company’s reports recorded tax expenses of $45.8 million in the second quarter and $65 million in the first half of the year, a closer look reveals that the amounts actually transferred as tax payments to the state were significantly lower: $100,000 in the second quarter and $200,000 cumulatively in the first half of the year, when corporate tax on profits is 23%.
El Al explains the discrepancy by stating that, “It has a high balance of losses to be carried forward for tax purposes, and it does not actually pay the tax.” So despite the huge profits it has recorded in recent quarters, El Al’s loss balance is still high, and at the end of the second quarter was about $744 million (compared to $970 million at the end of 2023). This means that even in the coming quarters, El Al is not expected to pay tax on its profits.
“First of all offset losses, and only then pays tax”
Thus in good times El Al does not share the state’s profits, but in hard times the state helps big time. As part of the agreement with the state in 2021, at the height of its financial troubles, El Al received $210 million as an advance payment from the state for security personnel services over the following 20 years.
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The state also injected an additional $100 million into El Al during that crisis period by issuing convertible bonds (about $45 million), and shares ($37 million), as well as advances on the state’s participation in security expenses and advance payment for fuel expenses.
A source familiar with the matter told “Globes,” “That is the tax regime in Israel. Any company that has losses carries it forward for tax purposes, and when it starts to make a profit, it first offsets the losses and only then pays tax. El Al, in the years 2020-2021 lost almost $1 billion ($531 million in 2021 and $413 million in 2022), this is unimaginable, therefore it is logical and reasonable that the company will first offset the losses from the Covid period and only then start paying taxes. It’s no different from any other company.”
Referring to the aid from the state, the source added, “The taxpayer did not directly aid the company. There were bonds options that the company paid back down to the last dollar. The state also invested in El Al in an IPO in 2020 and later sold the shares at a profit, so the taxpayer made a profit. The additional aid was an advance payment for the airline security guards – it is true that the state took a risk here, but the payment was capitalized at a high interest rate. It was not aid out of the blue, but an advance of payments, and the interest rate reflects the risk.”
The financial debt has been reduced, and equity has jumped
The sharp improvement in El Al’s profits since the start of 2024 is due to the jump in the price of tickets, with passengers often dependent on a dominant company whose occupancy rates have risen to a level that El Al itself defines as exceptional -over 92% in the second quarter of 2024, compared with 87% in the corresponding quarter of 2023.
Another figure that indicates the fare increases is that revenue per seat in the second quarter rose 24% compared with the corresponding quarter of 2023. The company’s cash flow from current operations was $391 million in the quarter ($767 million in the first half), up from $119 million in the corresponding quarter – an increase of 3.3 times.
A result of the high profits is that El Al’s equity at the end of June this year stood at about $200 million, compared with a deficit in equity of over $300 million at the end of the corresponding quarter in 2023. This improvement derives, along with the profits, from the capital raised by the company.
At the same time, according to the reports, El Al’s net financial debt has been significantly reduced to $611 million, compared with $1.4 billion at the end of 2023. All these figures are reflected in El Al’s market cap 0f NIS 2.3 billion, after the share price has risen 123% from its low point at the end of October 2023, shortly after the outbreak of the war. The main beneficiary of this is the controlling shareholder Kenny Rozenberg, who owns a 47% stake in the airline worth about NIS 1 billion.
Published by Globes, Israel business news – en.globes.co.il – on August 18, 2024.
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