EL Al Israel Airlines Ltd. Announced Today Its Financial Results for the Year 2017 and the Fourth Quarter of 2017

Editor -

The Company's (TASE: ELAL) revenues in 2017 increased by about 3% to approx. USD 2,097 million, compared to approx. USD 2,038 million in the previous year; the growth in revenues arises from the continued growth in the number of passengers flown by the Company, which increased by approx. 2.4%, and the 1% improvement in income per RPK (Yield).

Load factor in 2017 amounted to 84.7% compared to 84% in 2016.

The Company's market-share of passenger traffic at Ben-Gurion Airport in 2017 stood at approx. 28.5% compared to approx. 32.6% in the previous year, due to the sharp increase of about 16% in passenger traffic at Ben Gurion Airport, higher than the rate of growth of EL Al's operations at the Airport, which recorded an increase of 2.4% and amounted to approx. USD 5.6 million passengers.

Operating expenses in 2017 increased by approx. USD 110 million compared to 2016, inter alia, as a result of an increase in payroll expenses, affected by the strengthening of the shekel against the dollar, wages agreements and a provision for bonuses in respect of the previous year. Additionally, an increase in fuel expenses was recorded due to the increase in jet fuel prices, tax assessment expenditure, and more.

Operating profit in 2017 amounted to approx. USD 29 million, compared to approx. USD 110.6 million in 2016.

Profit before tax in 2017 was approx. USD 8.7 million, compared to approx. USD 93.4 million in 2016;

The Company completed 2017 with a net profit of approx. USD 5.7 million compared to a net profit of approx. USD 80.7 million in 2016;

Despite the decrease in profitability, the Company generates a positive cash flow and continues to present high liquidity:

Cash flow from operating activities in 2017 amounted to approx. USD 284 million, compared to approx. USD 243 million in 2016; EBITDA in 2017 amounted to approx. USD 197 million, compared to approx. USD 287 million in 2016; the Company's cash and deposit balances as of December 31, 2017 totaled approx. USD 286 million;

The Company's revenues in the fourth quarter of 2017 rose by about 11% to approx. USD 512 million, compared to approx. USD 461 million in the fourth quarter of 2016.

The Company completed the fourth quarter of 2017 with a net loss of approx. USD 29.7 million, compared to a loss of approx. USD 2.4 million in the fourth quarter of 2016.

In 2017, two new Dreamliners were received by the Company as part of El Al's acquisition program, and two more aircraft of the same type arrived in 2018; thus, to date, four Dreamliners are in active service – one by owned and three leased.

Gonen Usishkin, El Al's CEO:

"During the year 2017, the Company coped with intensifying competition in the Israeli aviation market due to a significant increase in the number of seats offered by foreign airlines, in particular the low-cost carriers.

Notwithstanding the challenging business environment, the Company recorded a 3% increase in revenues alongside an increase in expenses, arising both from changes in exchange rates, mainly the Israeli shekel against the dollar, which affected, among others, payroll expenses, and from an increase in fuel prices and other expenses.

El Al is in the midst of a strategic process to adapt the Company to changes, as necessary to maintain its competitive position and continued positioning as a leading player in the Israeli aviation industry: the acquisition of new advanced Dreamliner aircrafts, which we consider to be a game changer in terms of the Company, will upgrade passenger experience and lead to savings in its operating expenses; the expansion of El Al's route network in North America, with direct flights to Boston, Miami and San-Francisco, and the additional frequencies to EL AL destinations; investment in digital technologies, aiming to create significant improvement and change in this important domain, and adding in-flight internet. Moreover, we continue, our efforts to enhance operational accuracy.

We are also in the of a process of changing the format of the flights to the company's European destinations, thus providing response to low-cost flights, which occupy a growing share of the traffic at Ben Gurion Airport. Within this framework, we consolidated the Company's European brands under the El Al brand to facilitate and improve customer experience, followed by operational streamlining, while dedicating our business class to loyal business customers. The new model allows El Al passengers to fly to Europe at a reasonable price, and tailor themselves, with complete transparency, a flight package that meets their needs.

EL AL's Frequent Flyer Club and Fly Card credit card continue to function as one of its major growth engines, allowing the Company to deepen its relationship with passengers who are club members, by offering them unique benefits.

I am deeply committed to ensuring the Company's success while coping with challenging market conditions and competition, and determined to make all efforts to most efficiently implement the strategic process and provide our customers with high quality service and innovative technology."

Dganit Palti, El Al's CFO, stated:

"In 2017 the Company received two leased Dreamliners and paid advance payments for three aircraft it acquired. To-date, the Company received four Dreamliners, of which three are leased and one is owned by the Company which financed by long-term loans, affordable interest rates and high financing rates.

Despite the damage to the Company's profitability, mainly due to an increase in oil prices and the strengthening of the Shekel against the dollar, El Al generates a high cash flow from operating activities and continues to present high liquidity; EBITDA totaled USD 197 million while cash and deposit balances amounted at the end of the period to USD 286 million, indicating the Company's financial strength.

EL AL's financial condition allows it to maintain its new aircraft fleet acquisition program, thus enabling its future development in the coming years."

Highlights for the year Ended December 31, 2017 (in USD millions):

  1. Operating revenues – operating revenues increased in 2017 by approx. USD 58.6 million, showing a growth of about 2.9% compared to 2016, as revenues from passengers increased by approx. USD 55.7 million, recording a growth of about 3.1%. This increase in revenues is mainly due to the growth in passenger revenue per kilometer (RPK) flown by the Company and the increase in yield per passenger-kilometer, as specified above. Revenues from cargo increased by approx. 1.6% (about USD 2.4 million), primarily as a result of the growth in revenue-ton-kilometer (RTK) flown by the Company, partially offset by the decrease in the yield per ton-kilometer.

  2. Operating expenses – operating expenses increased in 2017 by approx. USD 110.2 million, reflecting a growth of about 6.7% compared to 2016, for the following reasons:

An increase of approx. USD 65.2 million in payroll expenses (attributable to operating expenses);
An increase of approx. USD 40.8 million in jet fuel expenses;
Additional expenditure totaling USD 10.2 million for a compromise agreement with the assessment officer in connection with air crew board and lodging expenses in relative to the expenditure recognized in 2016;
An increase in expenses totaling approx. USD 26.1 million due to a number of factors, mainly a growth in operations; the impact of the strengthening of the shekel compared to the dollar totaling approx. USD 8 million; an increase of approx. USD 2 million in the amount of fees payable to Israel Airport Authority (IAA) as a result of reduced discounts attributable to the decline in the Company's market share of traffic at Ben Gurion Airport; an increase of approx. USD 2 million in the Company's facilities lease expenses due to updated lease agreements with the IAA; as well as a USD 6 million increase in operating expenses incurred by EL Al subsidiaries and in the cost of selling duty-free products as a result of the growth in revenues from these activities.
An increase in expenses totaling about USD 10 million due to exceptional expenses in 2017, such as payment to IAA on account of previous years due to use of land, and as a result of various credits (attributable to past years) recorded in 2016, which no longer existed in 2017.
The above impacts were partially offset by the decrease in ad hoc lease expenses of passenger and cargo aircrafts totaling approx. USD 42.1 million.
3. Jet Fuel Expenses – the Company's jet fuel expenses increased by approx. USD 40.8 million (about 10.6%) compared to the corresponding expenditure in 2016, as a result of the increase in jet fuel prices, offset in part by the change in the results of jet-fuel hedging transactions.

The following table reflects the impact of jet fuel expenses, including hedging transactions, on the Company's results (in USD millions):

  1. Selling Expenses – selling expenses increased by approx. USD 16.5 million, mostly due to an increase in the Company's advertising expenses, mainly as a result of launching new advertising campaigns, and due to an increase in payroll expenses, as elaborated below.

  2. General and Administrative Expenses - general and administrative expenses recorded an increase of approx. USD 14.7 million compared to 2016, mainly due to the increase in payroll expenses, as explained below, and the increase in other general and administrative expenses mostly due to maintenance of information systems, professional consulting and office maintenance, inter alia, in view of the strengthening of the shekel compared to the dollar.

  3. Payroll Expenses – the Company's total payroll expenses increased by approx. USD 79.6 million, according to the following segmentation:

The increase in payroll expenses is attributable to several factors, inter alia, the strengthening of the shekel against the dollar, which led to an increase of approx. USD 33.3 million; the growth in the number of employees and operating hours (among others, due to the Company's reduced use of "wet" leases – i.e. leasing an aircraft with crew) compared to the previous year; the impact of wages agreements signed in 2017 with different sectors within the Company; the minimum wage increase; bonuses recognized in 2017 for profits earned in 2016 (whereas bonuses for profits earned in 2015 were recognized in the same year); and actuarial loss in respect of other long-term benefits, mainly due to a decrease in the discount rate of these liabilities.

  1. Financing Expenses - net financing expenses amounted to approx. USD 20.5 million, compared to approx. USD 23.1 million in 2016. This decrease is mostly due to a positive impact of price differences included in financing expenses and the increase in income from deposit interest as a result of an increase in the Company's cash flow balances.

  2. Taxes on Income – net taxes on income in 2017 totaled approx. USD 3 million compared to approx. USD 12.8 million in 2016. This drop is the result of a decrease in profit before tax, partially offset by an additional tax expenditure of about USD 1 million, mainly due to a decrease in losses transferred from previous years as a result of the compromise agreement with the assessment officer, as detailed in Note 15B(29) to the financial statements. It should be noted that the tax expenditure in 2016 decreased by approx. USD 11.3 million, due to the reduction in corporate tax rates.

  3. Profit for the Period – profit before tax in 2017 totaled approx. USD 8.7 million and profit after tax totaled approx. 5.7 million, constituting about 0.3 % of the turnover, compared to profit before tax of approx. USD 93.5 million in 2016 and profit after tax of approx. USD 80.7 million, about 4.0% of the turnover.

Highlights for the Three-Month Period Ended December 31, 2017 (in USD million):

  1. Operating revenues – increased in the reported period by approx. USD 51.5 million, about 11.2% compared to the last quarter of 2016, with an approximate 10.2% increase in passenger revenues and an approximate 23.9% increase in cargo revenues. The growth in passenger revenues is due to the increase in revenue passenger kilometer (RPK) flown by the Company and the positive impact of exchange rates of currencies used in sales transactions entered into by the Company, compared to the dollar. This increase was partially offset by the decline in yield per passenger-kilometer. The increase in cargo revenues in the reported period is attributed to the increase in revenue-ton-kilometer (RTK), offset by the decrease in the yield per ton-kilometer.

  2. Operating expenses – increased in the reported period by approx. USD 69.1 million, about 11.2% compared to the fourth quarter of 2016. The operating revenue increase mainly results from an increase in the following expenses: payroll expenses increased by approx. USD 27 million, for the above detailed reasons, jet fuel expenses increased by approx. USD 19.2 million and maintenance expenses increased by approx. USD 12.3 million. The increase in expenses was partially offset by a decrease in ad hoc lease expenses of passenger and cargo aircrafts totaling approx. USD 8.9 million compared to the last quarter of 2016. Moreover, during this period the Company recognized substantially all expenses associated with the compromise agreement entered into with the assessment officer, as elaborated above. Furthermore, most impacts set forth above occurred during this period, including update of agreements with the IAA and decrease in the Company's market share. The actuarial loss mentioned above was also recognized.

  3. Jet Fuel Expenses – the following table reflects the impact of jet fuel expenses, including hedging transactions, on the Company's results (in USD millions):

  4. Selling Expenses – increased by approx. USD 6.1 million (13.2%) compared to the fourth quarter of 2016, mostly as a result of an increase in distribution expenses due to a growth in sales and an increase in payroll expenses, for the reasons explained above.

  5. General and Administrative Expenses – increased by approx. USD 4.0 million (about 15.0%) compared to the fourth quarter of 2016, mainly due to the increase in payroll and other expenses, as elaborated above.

  6. Financing Expenses – net financing expenses amounted to approx. USD 5.8 million, compared to approx. USD 6.1 million in the fourth quarter of 2016.

  7. Tax Benefit – amounted to approx. USD 8.4 million compared to a tax benefit of approx. USD 10.2 million in the fourth quarter of 2016. This decrease in tax benefit, despite the increase in loss before tax, was primarily attributable to a tax revenue of approx. USD 7.5 million, recognized in the fourth quarter of 2016 following the reduction in corporate tax rates, and a tax expenditure of approx. USD 1 million in the reported quarter as a result of the compromise agreement with the assessment officer referred to above.

  8. Loss for the Period – loss before tax in the reported period totaled approx. USD 38.2 million (loss after tax totaled approx. 29.7 million, constituting about 5.8 % of the turnover), compared to profit before tax of approx. USD 12.7 million in the fourth quarter of 2016 (profit after tax - approx. USD 2.4 million, constituting about 0.5% of the turnover).

Additional Data as of December 31, 2017:

  1. Current Assets – as of December 31, 2017, the Company's current assets amounted to approx. USD 518.4 million, reflecting a growth of approx. USD 83.2 million compared to their balance as of December 31, 2016. This growth mostly resulted from an increase in cash and short term deposits balances compared to their balances as at the end of 2016 and an increase in the Accounts Receivable and Accounts Receivable sections, which were partially offset by a decrease in the Financial Instruments (Derivatives) and Inventory sections.

  2. Current Liabilities – as of December 31, 2017, the Company's current liabilities totaled approx. USD 956.4 million, reflecting an increase of approx. USD 153.1 million compared to their balance as of December 31, 2016. This decrease is primarily attributable to an increase in the Revenue from Pre-Sale of Airline Tickets section, an increase in suppliers and accounts payable balances compared to their balance as of December 31, 2016, and an increase in provisions. In addition, the amount of short-term loans increased by approx. USD 15 million, as a result of loans provided to the Company to finance advance payments on the new aircrafts, whose repayment is expected upon receipt thereof, using short-term loans, net of a decrease in current maturities of existing loans.

  3. Working Capital – as of the December 31, 2017, the Company had a working capital deficit of approx. USD 437.9 million compared to a deficit of approx. USD 368.0 million as of December 31, 2016. It shall be noted that a substantial part of the working capital deficit does not reflect short-term cash flows, as explained below. The Company's current ratio remained unchanged compared to December 31, 2016.

As of December 31, 2017, the working capital deficit consists of substantial components included in the Current Liabilities section and characterized by current business cycle; however, the Company is not required to use cash-flow sources in the short term in order to repay these components: prepaid revenues from sale of airline tickets and the Frequent Flyer Club totaling approx. USD 360 million, to be settled by providing future flight services, and liabilities to employees for vacation pay in the amount of approx. USD 48 million, which are expected to be paid upon retirement but classified as a short-term liability in accordance with accounting principles. Current liabilities also include loans to finance pre delivery payments (PDP) on the 787 aircrafts, to be repaid through long-term financing obtained upon receipt of aircrafts. As of December 31, 2017, the amount attributable to these loans of the total current liabilities stands at approx. USD 85 million.

  1. Non-Current Assets – as of December 31, 2017, non-current assets amounted to approx. USD 1,333.0 million, showing a growth of approx. USD 48.1 million compared to their balance as of December 31, 2016, mainly as a result of advance payments for the 787 aircrafts acquisition, as detailed in Note 9 to the financial statements, less current depreciation..

  2. Non-Current Liabilities – as of December 31, 2017, the Company's current equity totaled approx. USD 616.9 million, reflecting an increase of approx. USD 15.9 million compared to December 31, 2016, mainly as a result of a decrease in loans from banking corporations due to current repayments, offset in part by an increase in liabilities for employee benefits.

  3. Total Equity – as of December 31, 2017, total equity amounted to approx. USD 278.2 million. The decrease of approx. USD 5.9 million compared to equity as of December 31, 2016 was primarily attributable to the profit for the period, less dividend payment of approx. USD 9.9 million and less changes in the Company's capital reserve funds totaling approx. USD 1.5 million.