El Al chief executive Haim Romano has been busy chipping away at the Israeli flag carrier’s cost base in an attempt to improve its efficiency and recoup the losses caused by last year’s Israel-Lebanon conflict. And he believes it is beginning to pay off.
El Al incurred a $44 million net loss in 2006, compared to the $64.1 million net profit recorded in the previous year. Romano says that “almost all of the losses were due to the war”, which took place in July and August 2006. Full-year revenue in 2006 rose to $1.7 billion from $1.6 billion a year earlier, despite a loss of $60-70 million in revenues resulting from the conflict.
But the second quarter of this year marked a “turning point” for El Al, bringing in a net income of $12.6 million, compared to the $10.4 million loss posted in the same three-month period in 2006. Revenue in the second quarter increased by 5.5% year-over-year to $453 million. These improvements can mainly be attributed to El Al’s cost-cutting plan, which saw it close unprofitable routes and axe jobs.
“We ended the second quarter of this year with 500 less employees than last year. I’m not sure if there will be any more layoffs – this is under discussion with the unions,” says Romano. “We have looked at every area of the business to see if we could do it more efficiently.”
Going forward, Romano says El Al’s main growth will come from premium traffic, inbound traffic and non-aviation products. The carrier has upgraded the business class product on its Boeing 737s and 767s, and is in the process of upgrading the first and business class products on its 777s and 747-400s. In order to boost inbound - traffic, El Al has embarked on a marketing campaign: “We are trying to reach new segments and attract more people for leisure travel. The potential is great for Israel – we have great weather.”
El Al’s fleet simplification strategy will see the carrier phase out its 757s and replace them with 737-800s, as well as acquire additional 777s for long-haul operations. “We will acquire as many 737-800s as we can get – probably between six and eight,” says Romano. El Al operates an all-Boeing fleet of 39 aircraft – comprising 777s, 767s, 757s, 747s and 737s – but plans to simplify the fleet to a maximum of four aircraft types.
“We want three or four types in the fleet eventually,” explains Romano, adding that the carrier is “looking for another 747-400” and plans to convert two of its existing 747-400s into freighters. El Al last year pulled out of a commitment to purchase up to 10 Boeing 787s, but is still in discussions with the US manufacturer over a possible future order.
“The 787 is an interesting aircraft but unfortunately there’s a delay now,” says Romano. “The reason we pulled out was because we felt it was too early to take such a commitment at that time.” He adds that the carrier “does not regret” its decision to scrap the commitment, insisting that the original plan to take delivery of the aircraft in 2015 was “too fast”. El Al has been a loyal Boeing customer in the past, but Romano does not rule out a possible future order for the Airbus A350 XWB. He says, however, that it is “too premature to discuss” the 787 or the A350: “We are looking forward to understanding more about the market and prices, but in the meantime we are looking for slots on the 777s.”
El Al is eyeing Shanghai and Tokyo as possible new additions to its network, as part of an eastern push which will also see the carrier increasing frequencies on existing routes to Eastern Europe and the Far East. Romano says Eastern Europe and the Far East are “key markets” for the carrier, adding that both Shanghai and Tokyo are “very interesting” destinations.
“Eastern Europe is in a momentum of growth, especially Moscow,” he says. “We are looking at Latin America as well but we are not sure about that market.” El Al does not currently operate any non-stop flights to Latin America. The USA remains the Tel Aviv-based carrier’s “most important” market. It found itself up against a new competitor in its transatlantic market last year when Israeli charter carrier Israir Airlines was granted permission by Israel’s ministry of tourism to operate scheduled flights between Tel Aviv and New York JFK. Israir began operating scheduled flights on the city pair in May 2006.
El Al, which was previously the only scheduled carrier to operate non-stop service in this market, subsequently filed a petition with Israel’s High Court of Justice against the government’s decision. But despite El Al’s opposition to the move, Romano says Israir’s scheduled JFK service “has not affected us in a significant way”.
El Al also faces a new wave of competition from UK carriers, following a slight relaxation of the UK-Israel bilateral air services agreement earlier this year. “Our main competition is from foreign carriers,” admits Romano, although he adds that El Al is “not afraid” of competing.
Romano believes El Al is unique in offering its Tel Aviv-based passengers the opportunity to check-in for their flights at home, a process which involves sending security personnel round to a passenger’s house to carry out the carrier’s strict security measures. “Security personnel come with a van, take the luggage and give security clearance in the home,” he explains. This service is available to passengers at a cost of $49 per family.
In another move specific to the Israeli carrier, El Al plans to continue to uphold its policy of not flying on the Jewish Sabbath for the time being. However, Romano recognises the potential competitive threat from foreign airlines operating to Israel which have no such qualms.
The Sabbath is a weekly holy period which runs from sunset on Friday to sunset on Saturday, and El Al has traditionally avoided operating during this time. Romano admits that choosing not to fly on the Sabbath has a negative impact on revenues, but says: “Getting into conflict with the Orthodox Jewish community also has an impact.” He adds: “The airports are open and others can take-off and land [on the Sabbath] and this affects market share, of course.” Nevertheless, he says the Sabbath ban will stay in place “for now”.
El Al is not currently a member of an alliance, although it has had discussions in the past about the possibility of joining one of the three major groupings. “These talks did not materialise into anything because of political issues,” says Romano, adding that those same political issues “would probably be the case in the future” if El Al were to again pursue alliance membership. Instead, he says El Al is focused on increasing codeshare deals.