El Al is getting ready for a mid-year privatisation. Even without the right to fly on the Sabbath, the airline reckons that it is one of the most efficient in the world.

When running an airline that can fly only five days a week, you could be forgiven for losing your sense of humour. So far, El Al president Joel Feldschuh seems to be coping well. Even the prospect of tackling the Millennium Bug, for which El Al expects to be ready in June, fails to daunt him. "At least 1 January 2000 is the Sabbath, so we are not flying," he says. "Don't tell me there is no God!"

With luck, such divine help will continue to follow El Al as the carrier prepares to launch its first public offering by mid-year. The Israeli Government has decided to sell off 49% of the airline's shares on the Tel Aviv stock exchange and possibly Wall Street, but for the moment is ruling out the sale of a strategic stake to a major airline partner. Nor are there any plans to remove the ban on the airline flying on the Sabbath or on any of the many other Jewish holidays.

The terms of a decisive golden share for the stake were agreed at a government meeting, headed by Prime Minister Benyamin Netanyahu, on 26-27 December. This reconfirms the rules about the Sabbath and other religious holidays and matters such as the cargo capacity that must be provided.

Before privatisation can get under way, however, the government will have to reach agreement with El Al staff over $100 million due in compensation payments. The sum relates to a labour dispute in 1982 when the government shut El Al down for three months. Most Israeli companies still put money aside to pay out to employees when they leave - a practice that predates company pensions. In January 1983, the government used employee compensation funds to buy aircraft and reopen the airline. It must now repay the money before new shareholders can be brought in.

El Al recognises that its flying restrictions and lack of a major strategic partner put it at a significant competitive disadvantage, but points to its high levels of efficiency and the steps taken to boost yields and financial performance. "What others are doing 100% of the time, we have to do 80% of the time," says Feldschuh. "That really explains why we are so efficient. If we were not, we couldn't survive."

The Sabbath restriction represents a huge handicap for El Al. The airline's aircraft have to land before night fall, making Friday effectively a half day, and remain on the ground all day Saturday. In October, the Jewish New Year combines with the Sabbath to lose the airline as much as 10 days of flying. But Tel Aviv Airport stays open and every other airline flies. British Airways operates 16 flights a week into Tel Aviv, six of them at times when El Al cannot operate. Some 20% of Air Canada's activity is carried out on the Sabbath.

The limitations prevent El Al from taking a bigger share of a growing market. Some 2.5 million Israelis out of a total population of 6 million travel abroad, and many do so at the weekend.

Although there is no immediate prospect of a change in the government resolution affecting El Al, the situation in Israel is changing. Many retail outlets open on the Sabbath and public transport also operates in some places. "If you look at the government resolution that was taken in 1982 not to fly on the Sabbath, it's a political situation, not religious," according to Feldschuh.

But although the situation is far from perfect, it is important to start the privatisation process and bring in private investors who will help to effect change, says Feldschuh. "The Sabbath is a challenge - I don't perceive it as a problem. The government decision is to privatise the company while it's still restricted from flying on the Sabbath. But we think it's very important to start the process and I can guess that the investors who will sit on the board will have the ability to do what they, as the board nominated by the government, have to do."

Feldschuh regrets the government's decision not to make a strategic partner part of the process, but says El Al must make the best of the situation. "It was my preference, but that is not the decision of the government. Personally, I would like very much to see one of the [major] carriers taking a stake in El Al - we have to be part of the big global village-that's very clear and we can gain a lot of benefits."

Privatisation will bring other advantages, not least the ability to take decisions quickly. "If you want to purchase a company, make a deal, everything has to go through government entities, and even if they are willing to support you, it's a very bureaucratic process which doesn't fit into a modern business world," says Feldschuh. After privatisation, majority control will remain in government hands, but the mere presence of private shareholders should effect change, he adds. "The fact that you have-people who put their money in makes it a bit different." He denies there is any government intervention, however.

El Al has already made several changes to boost profitability and prepare for privatisation. Among these are a review of its fleet and the introduction of medium-sized long-range aircraft, an increase in frequencies on existing routes, an overhaul of service standards and seating designed to position El Alas a premium carrier and to raise yields and more aggressive marketing. A new livery is being launched.

Despite the handicap of its unique operating environment, El Al has been largely profitable. However, in 1996, hit by terrorism and a decline in traffic at the beginning of the year, it lost a hefty $83 million, its first deficit after nine consecutive years of profit. But by 1997, the loss had dropped to $4 million on revenue of $1.2 billion and in January-October 1998, helped by low fuel prices, the airline made $40 million. But its final net result will be considerably lower than that because November and December are traditionally unprofitable.

The airline's projection for 1999 of a profit of at least $10 million takes into account a ban on night flights between 02.00 and 05.50 introduced in October at Tel Aviv's Ben Gurion Airport. But in early January the transport ministry also looked set to grant cargo airlines full international scheduled cargo rights and the ability to fly on the Sabbath. Such a move is certain to hurt El Al's cargo revenues which account for one-third of its turnover.

Feldschuh actually sees the losses of 1996-7 as beneficial. "It was a very good reason to look at our strategy and that brought us to change the commercial strategy of the company," he says. El Al has faced growing competition since the end of the Gulf War in 1991, particularly from European carriers. Traffic declined by 2% in 1996 and tourism has not yet fully recovered. The signs for the coming months had been looking good, although the launch of US/UK hostilities against Iraq in late December could again discourage tourism to Israel.

Feldschuh believes El Al is now in good shape for privatisation. "We have done a lot and I think we are already prepared." He says the airline, operating a fleet of 28 aircraft to 61 cities, is ranked as one of the most efficient in the world in terms of unit cost.

The fleet review will see the delivery of eight aircraft between February and December 1999, including five Boeing 737-700s and -800s, two used 767-200ERs from Air France and one new 747-400. At the same time, about seven older aircraft will be withdrawn, including two 747-200s, two 757s and two 737-200s. "We will change around 50% of our fleet - the review is very aggressive," says Feldschuh.

In a key change, El Al will introduce a medium-sized long-range fleet and is in the process of choosing between the Boeing 777 and the Airbus A340. "That's one of our main goals," says Feldschuh, "to renew our fleet and change the structure. One and a half years ago, we realised that we needed much smaller aircraft to increase our frequencies."

El Al currently operates 13 747s, including combis and pure freighters. Its single 747-100F has already been grounded. This dominance of large aircraft leads to considerable overcapacity during the winter and makes it difficult to operate the level of frequencies needed to attract business class passengers. To achieve maximum flexibility in three to four years' time, Feldschuh envisages a fleet mix of 747-400s, 777s or A340s, a smaller fleet of 757s or 767s, and some smaller 110/130-seat narrowbodies.

At the same time, El Al is working hard to improve service and attract more high-yield passengers. This is particularly important for a company with a cost base which reflects an average employee age of 49.5 years. "We are known for being a very secure company and very professional on the operational side, but that's not enough," says Feldschuh. "We have to exceed our customer demands."

El Al has expanded aggressively beyond its traditional strength in the ethnic market. Every employee is put through two days' rigorous training involving case studies based on customer complaints or some internal service problem. Seats are being pulled out of aircraft, taking seat pitch up to 810-860mm (32-34in) in economy and 910-960mm in business class. Service standards are rising in response and a 3.4% increase in passenger yields in 1997 flowed from the boost in business class traffic.

The move away from a dependence on tourist and charter traffic has been decisive for El Al. The airline has long been oriented towards tourism, which is strong only in the summer months. But the improvement in the Israeli economy led to a 72% increase in the number of Israeli nationals travelling overseas between 1983 and 1997 and the carrier's shift in strategy is a necessary response.

The airline's past attempts to compete in the charter market have typically depressed yields while tourist demand itself is changing. "In Eilat we will have 12,000 rooms in two years' time," says Feldschuh. "More than 30% are five star. Smart passengers are not willing to fly to a five star hotel by charter." A new yield management system, which is due to be fully implemented in January 2000, will cement the changes.

Commercially, the airline has become more aggressive in promoting itself, with specially tailored products that encourage people to travel at the weekend at times when El Al can fly them.

Destinations are not a problem for El Al. "I don't think you will find any airline in the world which is, in our eyes, so stretched with so many destinations," says Feldschuh. More than 50% of El Al's passengers fly to Europe and the airline remains a small player in the US market with 26 weekly frequencies planned this summer. Although El Al cannot fly to South America, the carrier has an extensive Asian route network.

"Our policy today is not more destinations, but to increase our frequencies," Feldschuh adds. "I don't believe in destinations where you fly once a week." El Al tries to use its aircraft as much as possible on the days when it can fly, but the airline prefers to lose some daily utilisation time in order to set up a more attractive schedule and raise yields.

Because of this, plans for new routes are limited. In mid-1999, however, Tel Aviv-Rome-New York will replace the current Tel Aviv-London Stansted-New York route. El Al has been designated the official airline to the Holy Land by the Vatican, which has ordained that the Catholic pilgrimage should focus on the Holy Land during 1999.

The Israeli Government's open skies policy, combined with its intransigence over the Sabbath issue, means that El Al faces intense competition effectively with one hand tied behind its back. "The minister would like us to pursue a very liberal policy regarding open skies," says Feldschuh.

"On the other hand, he is not releasing us from the constraints which are also the outcome of government decisions. It's a problem," Feldschuh says.

This perceived inequality has seen El Al run into hot water over issues such as third party codesharing. It has worked hard to string together an alliance strategy despite the government's decision against a strategic airline investor.

The airline has signed a memorandum of understanding with Iberia for a codeshare on the Barcelona-Madrid route and hopes to resolve a dispute over its proposed codeshare with American Airlines. This last agreement was blocked by the US Government in response to El Al's refusal to allow US airlines and their partners third party codesharing to and from Israel. As Airline Business went to press, a compromise - such as limited third party codeshares or their gradual introduction - had yet to be agreed. "We believe that if the terms to approve our agreement with American include third party codesharing by every US airline to Israel, we are going to be dropped from the market," says Feldschuh.

El Al continues to negotiate with other carriers, such as Lufthansa and Air France, and it has limited block space and codeshare agreements with several other airlines, including Sabena, Finnair, Balkan Bulgarian and Uzbekistan Airways.

Elsewhere, El Al aims to improve and innovate. Heavy maintenance and cargo now operate as separate profit centres and all overseas branches are independently judged contribution centres. The airline has taken a 20% stake in Unital, a charter distributor, and has invested in a major hotel at Tel Aviv Ben Gurion Airport.

El Al has not waited for privatisation to display a flair for commerce and improvisation. It was only the recent currency crisis that stopped the airline becoming the first to sell motor cars from an inflight brochure.

The carrier hopes that plans to introduce other innovative sales, including an inflight currency exchange service, will take its duty free revenue to $25 million in 1999. After all, an aircraft full of passengers is a premium captive market and offers one heck of a business opportunity.

Source: Airline Business