Battle With Pilots Still Haunts World's Worst Aviation Stock

(Bloomberg) -- Pascal Cohen won’t fly El Al Israel Airlines unless he has to. His flight to Moscow last year was delayed for seven hours because the pilots, embroiled in a labor dispute, didn’t show. He struggled in vain to get any kind of compensation. 

“I’m a Zionist but if you want to compete in the world, you need to offer better service,” Cohen said by phone. “Today we have other choices.”

Other choices indeed. The pilots’ work action and the airline’s aging fleet have left it largely unable to increase profit during a travel boom in the four years since Israel deregulated international air travel. Foreign carriers such as Turkish Airlines Inc. and Hungary’s Wizz Air Holdings Plc have been grabbing market share with cheaper prices.

El Al’s schedule problems -- more than half its flights were delayed last year -- earned it the status of the world’s least dependable airline in January from FlightStats. That’s improved after management came to terms with the pilots. But the damage to the brand is done, according to Roee Cohen, a fund manager at Migdal Mutual Funds, which owns El Al shares.

Israel’s flagship airline reported a 30 percent plunge in profit last quarter, two weeks after Chief Executive Officer David Maimon said he would step down. It was the fifth straight quarter showing a worsening bottom line. The shares have plunged 50 percent in the past year, the worst return of 75 major airline stocks.

Business Plan

El Al says it’s sticking to its business plan in order to turn things around. The company is pushing the rollout of its upgraded fleet, opening new routes and finalizing a merger with an Israeli low-cost airline that could help the company compete with discount carriers.

And yet El Al is struggling when it should be soaring. Global airline earnings will reach a record in 2018, the International Air Transport Association said Tuesday. Fuel costs are about half of what they were in 2014, tourism to Israel is projected to set a record and relative quiet prevails between Israel and its Arab neighbors.

Those factors were supposed to neutralize the decline of ticket fares brought on by the low-cost players, an area where El Al struggles to compete because of its “inefficient cost structure,” said Migdal’s Cohen. 

“The next CEO needs to deal with the pilots,” Cohen said. “This is the true problem. Every time the company makes more money, the pilots automatically jump on this and want to grab more for themselves.”

In 2015, El Al posted record profits and reinstated its dividend, thanks to the cheaper oil and the effects of the Open Skies Agreement of 2013, which removed restrictions on foreign airlines and airports. Maimon spent $1 billion to replace El Al’s fleet with modern and cost-effective planes, nine Boeing Co. 787 Dreamliners, with plans to lease another seven at an undisclosed cost. 

Then started the trouble with the pilots, who began agitating last year to boost their working conditions. Management headed into these negotiations at a disadvantage, as El Al policy dictates the company only hires Israelis to fly their planes.

“That gives the pilots a lot of power,” said Noam Pincu, an analyst at Psagot Investment House Ltd., who covers the company. “And they exploit it.”

Salaries for El Al’s 550 pilots start at about 720,000 shekels ($206,000) per year, according to Pincu. The pilots also receive automatic increases each year. United Airlines, which had the highest share of traffic among U.S. carriers in Israel’s main airport in October, pays an average of $188,000, according to a sample of 15 salaries compiled by Glassdoor, a website that aggregates anonymous employee reviews and wages.

Overtime Hours

El Al pilots earn on average about 500 shekels ($143) per flight hour, according to a person familiar with the matter, who spoke on condition of anonymity to discuss company affairs. That is well below the rate of what captains with seven years of experience earn at major U.S. airlines, but El Al crews tend to fly overtime, which then inflates their monthly salaries, the person said.

The professionalism of the pilots is El Al’s “most important asset” and the company ought to leverage it in such an competitive environment, Itay Goor, a spokesman for the pilots union, said in an emailed reply to questions.

“The existence, survival and success of El Al over the years is due to the blood of the pilots,” Goor said. “We are very sorry that there are people trying to pin the company’s crisis on its workers.”

One-Way Flight

At the height of the dispute last year the pilots asked for extra perks, such as working one leg of the flight and getting a seat in business class while in plain clothes on the way back.
They threatened work stoppages, and meant it. There was a “high volume” of cases when the pilots called in sick, according to a company filing. El Al had to scramble for alternative crews, and pay them overtime.

Management agreed to bump their wages almost 9 percent in December 2016. That helped drag down the company’s financial performance -- in part because salaries are paid in shekels, which has strengthened nearly 10 percent this year against the U.S. dollar. 

Then in February, El Al had to cancel flights after pilots refused to staff them. This time, the fight was over the wages for pilots older than 65, who are barred from flying and now provide training, a position that falls under a lower pay scale. The sides came to an agreement later that month.

With the pilots back to work, El Al has improved its ability to take off on-time. But the Israeli airline remains the fifth-worst among 45 international carriers, with 28 percent of flights delayed more than 15 minutes, according to an October report by FlightStats.

It all turned Lauren Izso off of El Al. Her flight to Canada in April was delayed 10 hours because the company didn’t have enough pilots. She wasn’t reimbursed even though others received a night’s stay in a hotel and a cab ride to the airport, she said.

The company declined to comment on its pilots’ wages or Maimon’s resignation. El Al said that it’s “committed to the continuing implementation of its business strategy,” headlined by the new planes and also includes building out its credit card business. El Al is awaiting regulatory approval of a $24 million merger with Israir Airlines & Tourism Ltd., which offers discount flights and tourism packages.

The company expects to fully replace its older fleet in the next two years, which could save 20 percent on costs and improve its “competitive position and the experience it will offer its customers,” the statement said.

Load Factor

El Al pointed to its 84 percent passenger load factor -- which measures how efficiently transport companies fill seats -- as one of the highest in the world and a source for optimism. That doesn’t leave much room for sales growth, though, with the company’s reliance on local talent limiting the amount of flights it can offer, said Pincu, the Psagot analyst.

Many Israelis still choose to fly El Al for its security standards and historic role in events that shaped the country, like the Mossad’s capture of the fugitive Nazi Adolph Eichmann in 1960. Israeli spies smuggled a sedated Eichmann, dressed in an El Al uniform, onto the plane where he was later brought to Israel and hung for his role in killing Jews in the Holocaust. 

But that doesn’t mean Israelis will remain beholden to its national carrier.

“I’m a patriot and I served in the army,” Pascal Cohen said. “But flying El Al is not necessarily a duty to the country.”

To contact the reporter on this story: Yaacov Benmeleh in Tel Aviv at ybenmeleh@bloomberg.net.

To contact the editors responsible for this story: Anne Swardson at aswardson@bloomberg.net, Anthony Palazzo at apalazzo@bloomberg.net.

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