Skift Take

Some national flag airlines no longer have a commercial purpose and probably should go out of business. El Al is not one of those carriers. Tourism in the airline's Israel home market is booming, and El Al should be able to ride the wave.

Each Friday this summer, an El Al Airlines Boeing 787-9 — an airplane with a list price of almost $300 million, arrives in Las Vegas in the late morning, then sits for nearly 36 hours before returning to Tel Aviv late the next night.

This is typically not how airlines use their newest, most efficient and priciest assets. But it’s normal for Israel’s national airline, which grounds its airplanes on Shabbat every week, from sundown Friday to sundown Saturday.

It’s among the many reasons El Al, Israel’s national carrier since 1948, could be the world’s most unusual airline. “People try to compare us to Air New Zealand, but they fly on Saturdays,” CEO Gonen Usishkin said in a recent interview.

It’s probably no surprise El Al has struggled to turn a profit in recent years. In the first quarter of this year, the airline said it lost $55 million, a larger loss than in the same period last year, when the Passover holiday boosted revenues. In full-year 2018, El Al lost $52 million, though it posted a small profit ($6 million) in 2017.

Its idiosyncrasies make it tough to run. How many other carriers shut down for a day each week? How many represent countries that have no diplomatic relations with many neighboring countries? How many struggle to sell connecting itineraries because security controls at its home airport are too stringent to make it viable?

But Usishkin, a former combat pilot in the Israeli Air Force, took over as CEO last year, with a mandate to turn the airline, which privatized more than a decade ago, into a more nimble business.

El Al still won’t be flying on the Sabbath, but it is finally confronting the realities of a new era, amid increased competition from U.S. legacy carriers and European low-cost airlines. It is spending to upgrade its fleet and onboard product, while changing where it flies, betting on long-haul flights where the competition is a little less fierce. It would also like its government, which has opened its borders to just about any foreign carrier, to show a little more favoritism to the national airline.

It’s not hopeless. Not long ago, El Al operated in a small niche, carrying Israelis and religious tourists, both Christian and Jewish. But in the past decade, Israel has not only established itself as a technologic center, rivaling Silicon Valley in many ways, but also has become a hot tourist destination for non-religious visitors, who come for Tel Aviv’s beach, food, and party scene.

“The market is growing,” said Jared Harckham, a vice president at ICF, an aviation consulting firm. “There is still an opportunity for them. They can ride the wave of Israeli being this high-tech country being at the cutting edge of the business.”

Massive Competition

For decades, El Al was essentially an arm of the government, flying passengers to and from the tiny nation when other airlines would not.

It didn’t always make money, but it served a valuable purpose. Between 1950 and 1956, EL Al flew more than 160,000 immigrants from Yemen, Iran and India to Israel. In 1960, the airline helped Israeli forces sneak Nazi war criminal Adolph Eichmann from Argentina to Jerusalem for trial. The Israelis pretended they were El Al crew members to get him out without Argentinian officials noticing.

Through the 1990s, El Al continued to help the national cause, carrying Jews back home or flying when other airlines did not. In 1991, during the first Gulf War, El Al had nearly 100 percent market share in Tel Aviv, as other carriers pulled out, according to the Associated Press.

More recently, after the airline’s 2005 privatization and with Israel’s economy booming and the security improving, the landscape has changed.

El Al remains vital to Israel’s security and sovereignty, and Israeli travelers may prefer it for patriotic reasons. But over the past decade, Israel has opened its skies, permitting any airline from the United States and Europe to fly into Tel Aviv, without restraints. Israel also has a liberal bilateral agreement with Turkey and several other countries.

Tourism has boomed. Last year, more than 4.1 million tourists visited Israel, an increase of 42 percent compared to 2016 and an all-time record, according to the government. As recently as 2004, Israel received about 1.9 million tourists.

Israeli authorities also said it was a record year for Israelis traveling out of the country, with more than four million Israelis making more than eight million trips.

The problem is most of the new passengers are not flying the national carrier. As recently as 2016, El Al held about one-third of the market share at its Tel Aviv hub, while last year it had just a quarter, a percentage that keeps falling.

U.S. airlines have been a nuisance, especially United Airlines, which has added two routes — San Francisco and Washington Dulles — in the past three years. But short-haul competition has been worse.

June’s market share numbers at Tel Aviv’s Ben Gurion Airport show how much other airlines have grown. For the month, Hungary-based Wizzair had the second-most international share at the airport, with 5.07 percent, up 24 percent year-over-year. Turkish Airlines (4.52 percent) and EasyJet (4.28 percent) not far behind.

“Open Skies has opened the flood gates,” said Jay Shabat, senior analyst at Skift Airline Weekly. “It is a big reason why it is very difficult for them to make money.”

Unequal Rules

Usishkin said El Al’s leadership understands the old days of market domination probably won’t return. But he argues the government’s policies implicitly favor foreign airlines, giving them an unfair advantage.

Take competition with Turkish and other airlines in Turkey. Israel’s government has a bilateral agreement with Turkey that allows airlines from both countries to fly nearly as much as they want. Turkish capitalizes, flying between Istanbul and Tel Aviv nine times most days, with a schedule that allows it to capture connecting traffic from almost anywhere in the world.

Yet El Al doesn’t fly to Turkey, because of safety concerns. Turkish authorities have not permitted the Israelis to conduct the screening they require.

“The government sets the security parameters that restrict the airline’s growth,” Usishkin said. “We cannot fly to Turkey because of security. There is an almost unrestricted bilateral agreement with Turkey. That is negotiated by the Ministry of Transport, and then you have the ministry of like homeland security, who’s responsible for our restrictive rights to fly into Turkey. And there’s a huge disconnect.”

India is another challenge. Under a bilateral agreement, El Al should be able to fly to Delhi, but any obvious air route crosses Saudi Arabia. The Saudis won’t permit an El Al jet to fly over their airspace, but the country recently granted Air India rights to overfly it en route to Tel Aviv.

For now, Air India flies Tel Aviv-Delhi, while El Al does not. (El Al flies to Mumbai with a circuitous and expensive route that avoids Saudi airspace.)

El Al ‘s route to Mumbai avoids Saudi Arabian airspace.  Air India can fly over Saudi Arabia on its flights from Delhi. Screenshot from FlightRadar24.

There are other challenges. Usually when competition attacks an airline’s hub market, the home carrier diversifies revenue streams by carrying more connecting passengers. When tourism demand to Turkey fell about three years ago, Turkish Airlines made up for it by adding more connecting passengers.

El Al should be able to the same. It has the same geographical advantages as the Middle East mega hubs in Doha, Istanbul, Abu Dhabi and Dubai. But the peace situation makes it nearly impossible.

“Geographically, we’re situated as good as Turkish,” Usishkin said. “Until geopolitics change, I don’t see significant changes.”

El Al still has some routes where connections might work — think Miami-Tel Aviv-Moscow — but Usishkin said security controls make it tough. Ben Gurion Airport probably has the strictest security in the world, making it difficult to sell efficient connections passengers prefer.

“We cannot disconnect the airline from the country, right?” Usishkin said. “The geopolitics actually has not changed that much for us in the context of airline operations. As long as we are encircled with Arab countries and almost all of them have no peace agreements with Israel, there will be no significant connecting traffic. We do experiment on some of our network, connecting in Tel Aviv, but it’s still minor.”

Future Hope

In its turnaround, El Al is trying what any successful business would attempt — it’ll fly where its competitors do not, as it upgrades its product.

First, in short haul, it is focusing on European business markets low-cost-carriers often avoid. London Heathrow remains a strong market, Usishkin said, with El Al flying Boeing 787s with flat-bed business class seats. In most other European markets, El Al flies Boeing 737s with a true premium cabin, a differentiator against discount carriers that do not have them.

The company sees more potential with with long-haul flights, where there’s less competition and higher yields. Most growth is coming in North America, though next year the airline will fly Boeing 787s to Tokyo.

The 787s have a competitive product, a major improvement over the Boeing 747-400s that were for years the backbone of the airline’s international fleet. The airplanes were too big and inefficient to fly anywhere except the largest cities, and while El Al executives knew they needed to upgrade or replace them, they didn’t have the cash.

“Israel is a unique situation,” Usishkin said. “The economic downturns are for everyone, right? But we had all those wars, and all those wars wiped out a lot of value to invest back into the product and the customer.”

El Al finally took its first Dreamliner in late 2017, and now has 10 of the 16 it ordered, with plans to retire its last Boeing 747 later this year. The airline is also improving the cabins on its Boeing 777-200 fleet.

For years, El Al’s North America strategy focused on Los Angeles, Toronto and New York, three cities with gigantic Jewish-American populations, but the airline is betting the 787s and retrofitted 777s will make more North American cities viable. This summer it is flying to nine North American cities, including Las Vegas, Orlando, Miami, San Francisco and Miami, with Chicago coming next year. Many routes are less-than-daily.

After Chicago launches, Usishkin said the airline will probably turn its attention back to Europe, where low-cost-carriers make conditions challenging.

“They are tough competitors,” he said. “The good thing is we are hedged with long-haul flying. I think 60 percent of our revenue comes from long-haul flying.”

As he tries to improve the company, Usishkin is also making a series of tweaks to improve efficiency, like improving aircraft utilization, changing commissions paid to travel agents and restructuring fare options.

With the airline growing and entering new, non-religious markets, this might be a good time to revisit the question of flying on Shabbat. But Usishkin said that’s not happening, saying he fears it might anger the religious customers that still account for significant revenue. He said the airline can use the downtime for regular maintenance.

“The consequences of a Jewish state airline operating the aircraft on Saturday is not something that at this stage we want to explore,” he said. “In some of our history, we’ve tested it. I’m not sure I want to retest it now.”

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Tags: airlines, el al, israel

Photo credit: El Al, Israel's national airline, is betting on the Boeing 787 to revive its fortunes. 261353 / 261353

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