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Buyer emerges as plans to rescue Israel’s El Al enter final stretch

  • July 06, 2020

The labor strife that erupted last week between El Al Airlines management and the pilots’ union is over a technical issue of work assignments, but the real issue is which of two plans to rescue the beleaguered airline will win out – one that would leave El Al in the hands of its current shareholders or a second that would probably restore control to the Israeli government.

But while the two sides wrestle, a third option is emerging under the leadership of Reem Aminoach, an accountant and reserve army colonel. Aminoach is representing a wealthy Israeli family that wants to buy Israel’s flag carrier.

The unnamed family doesn’t expect to make money from El Al – the global airline industry is facing a long period of depressed air travel and bankruptcies.

Aminoach was apparently chosen because he is familiar with the issue of golden shares – stock held by the government in formerly state-owned companies that entitle it to special rights. He has experience on the board of two such companies – the shipping company Zim, where he served as a director, and Israel Chemicals, on whose board he sits now.

The family at this stage has not entered into discussions with Tami Mozes Borovitz, who controls the airline through a company called Knafaim Holdings, on any deal. But the family is ready to acquire the airline as is, without a careful inspection of the books or any indemnities, which in any case Mozes Borovitz is unlikely to agree to. The family does not want to jointly control the airline with her.

Most importantly, the family is prepared to inject into El Al money equal to twice what it pays to buy it. It is not requiring that the current controlling shareholders reach a deal with the treasury over a rescue plan. Nor is it requiring the bank loans to be secured in advance to tide El Al over, or that the airline reach collective labor agreements with the pilots or the unions.

El Al has signed an agreement with flight attendants and is in talks with mechanics and pilots.

  • Israel’s El Al to Become Leaner After Government Bailout
  • El Al Cancels All Remaining Flights Amid Pilot Disputes
  • El Al Board Rejects Government Rescue Plan and Offers One of Its Own

The family reportedly believes that there is an 80 percent chance of reaching an agreement to buy control of El Al in the next few weeks. The major risk to a deal being completed is that the carrier will be in the hands of an official receiver beforehand. In such a situation, a deal could still be completed at a lower valuation, but El Al’s creditors would likely call in existing loans, requiring the family to enter into complicated negotiations that it does not want to do.

The pilots’ local union is also looking askance at the idea of a receiver being appointed. That would enable the airline to throw open existing labor agreements in the face of the imploding global aviation market, where tens of thousands of pilots are being laid off or put on unpaid leave. They would also face pay cuts deeper than any of the current rescue plans call for.

The third option comes as El Al tries to wind up labor negotiations that will yield the cost cuts it needs to meet the government’s condition for aid. The airline has been struggling since the start of March as global aviation effectively shut down in the face of coronavirus restrictions.

Pay as you fly.

Four-fifths of its 6,500 employees had been put on unpaid leave, while it continued to fly cargo jets and occasional special passenger flights. Last week, talks between management and the pilots broke down, forcing the airline to cancel flights and furlough another 500 staffers, including 100 pilots.

Officially the dispute is over the pilots’ claim that management isn’t honoring a commitment to allow 30 pilots who normally fly 737 passenger planes to fly cargo flights on 787 Dreamliners, the only aircraft currently in use to carry cargo.

But sources say the real issue is a fight over which of two rescue plans should be adopted. The first, which is backed by management and would leave current shareholders in control, calls for $400 million in bank loans, 82.5% guaranteed by the government. El Al shareholders would contribute 150 million shekels in new capital to the airline via a rights offering.

The pilots’ local, led by Nir Reuveni, openly support a revised treasury plan that calls for a small loan ($250 million, 75% state-backed) and a bigger contribution from shareholders ($150 million via share sale). Critically, if investors don’t buy the stock, the government will and that could leave it with a majority stake in El Al.

The pilots favor the second option because they don’t believe that Mozes Borovitz has the resources to put more capital into El Al. They are hoping that the second option would bring in a new controlling shareholder with that capital. The smaller loan component of the plan would also keep down El Al’s debt burden, which is already quite heavy.

Either decision will drastically alter El Al since a key condition for receiving the loans is achieving $400 million of cost savings a year. That includes trimming 2,000 jobs and giving up some of its fleet of short-haul Boeing 737 aircraft and eliminating unprofitable routes, although the airline will likely keep all its Boeing 787s.

The airline, which owes some $350 million in customer refunds due to canceled flights after Israel closed its borders, lost $140 million in the first quarter.

The family holds that the other two rescue plans for El Al aren’t feasible because in the end the airline will need a big capital infusion to remain in business, which only an outsider with deep pockets can provide.

Of the two main options right now, the one with the $400 million loan components and 15 million equity infusion stands the least chance of happening, the family believes. That is because the second wave of the coronavirus means El Al won’t be resuming normal operations any time soon.

In addition, Knafaim bondholders won’t agree to the company injecting capital into El Al. That will leave Mozes Borovitz no choice but to produce tens of millions of shekels from her personal fortune, which she is not believed to have and/or doesn’t want to part with. They see it as unlikely that she will be able to recruit institutional investors to partner with her so long as she continues to plan an active management role in El Al.

The second option, so the family says, presents a different problem, namely that of government control of the airline. The Finance Ministry does not want this to happen because it would then have to deal with El Al’s militant labor unions and the risk of political intervention in the airline’s management.

The family holds that El Al doesn’t have a lot of time left to delay on a rescue. The second coronavirus wave means recovery will take longer than earlier expected and it owes some $350 million in customer refunds due to canceled flights after Israel closed its borders.

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