21-Nov-2011 3:36 PM

El Al's Sao Paulo departure highlights carrier's stagnation

Analysis

El Al's cancellation of its thrice-weekly flights between its Tel Aviv base and Sao Paulo's Guarulhos Airport come after the carrier began the route two years ago. It has cited high fuel and security costs as reasons for its termination.

Over the past few months, a variety of initiatives have been taken by El Al to reverse its weakening financial position. Temporary staff will be jettisoned, fuel-inefficient aircraft will be retired and second bag charges have been imposed on some routes. But despite these efforts, profitability remains elusive.

Back to the status-quo

The opening and subsequent termination, from 10-Nov-2011, of Sao Paulo is characteristic of the attempts of El Al to broaden its reach and improve its fortunes, only to fall back to a core operation that struggles to operate profitably. Deleting Sao Paulo leaves the carrier with only eight intercontinental routes: New York, Los Angeles and Toronto in the Americas; Bangkok, Hong Kong, Mumbai and Beijing in Asia; and Johannesburg. All of these destinations have been part of the carrier's network for over a decade.

El Al is far from being a normal flag carrier

Legacy carriers generally strive for consistency in their operations: daily service on a predictable schedule that makes it easy for home market customers to establish travel patterns as well as providing reliable connections for those in transit. These rules do not apply at El Al.

In its entire schedule, there is not a single flight that operates daily, with either Friday or Saturday omitted from almost every route (due to Jewish days of rest);
Times of operation vary considerably based on the day of operation. Three weekly flights to Johannesburg have two different schedules. Within Europe, the variations are even more pronounced. The weekly flight schedule to Berlin where no carrier operates daily is as follows:

Depatures times for Berlin

Day	Time
Monday	06:00
Tuesday/Thursday	06:05
Friday	05:15
Sunday	17:15

However, between Brussels and Tel Aviv, Brussels Airlines operates seven flights on a common schedule while the El Al response is six weekly services on four different schedules.

Ben Gurion is no hub

While this "use 'em when they're available" aircraft scheduling may have operational and utilisation benefits, from a passenger standpoint planning - and even remembering - become challenging.

The irregular schedule and European focus essentially makes the carrier a point-to-point operation, failing to create any hub synergy that is key to most legacy airlines. Furthermore, in this age of alliances and codeshares, El Al has relatively few partners.

An airline lacking a compelling message

El Al dates back to the very inception of the Jewish state in 1948. It is not only the nation's flag carrier but it also serves as a government resource, utilised in times of need for humanitarian missions.

A quick look at the airline's website reveals that compared with many of its peers, the amenities that form the basis of competitive advantage - premium seating, global network and awards for service excellence - lack any prominent display. A search for information on business lass seating, a key factor for many travellers, brings up a page with two paragraphs on B-767 seats.

Nor does refurbishment of this fleet appear to be a top priority. The last upgrade of the product was listed a being completed in 2009. Another entry tells prospective travellers "The cabin crew in Business Class provides professional, personal service." Full stop, and setting rather minimal expectations.

Perhaps the most revealing snapshot of its marketing concept is presented by its slogan - "It's not just an airline. It's Israel" - which indicates its customer appeal may lie outside traditional parameters.

Old fleet

Additionally, the carrier operates a rather old and static fleet with an average age of 14 years. It has only four aircraft on order, B737-900ERs, that are slated for delivery between 2013-2016, primarily replacing the B-757s. No new long-haul aircraft are on the books, having cancelled previous orders for B777-200s and B787s, leaving little room for expansion if the current network and schedule are maintained.

While the announcement of service ending to Sao Paulo indicated the B777s would be utilised elsewhere, their future deployment has yet to be announced.

El Al fleet composition

Aircraft	Number	Average Age
B-747-200F	1	31
B-747-400	6	16
B-747-400F	1	17
B-777-200ER	6	8
B-767-200ER	4	24
B-767-300ER	5	17
B-757-200	4	20
B-737-700	2	12
B-737-800	12	7
Ttl/Avg	41	14

Overwhelmed at its hub

The airline's main hub is Tel Aviv's Ben Gurion International Airport, the nation's primary international gateway. From there the carrier flies to 38 international destinations that are mostly in Europe.

El Al destinations by region: 31-Oct-2011 to 06-Nov-2011

From the airport, one can travel non-stop to 68 foreign airports, 30 served only by foreign carriers, most of which offer a wide range of connections from their hubs. On the 39 routes where El Al is a competitor, it supplies a 47% seat share for the week in question - less than half. With the elimination of Sao Paulo, that number drops by 1 ppt to 46%. Its share of all seats offered at Tel Aviv is only 38.5%, but, due to very few foreign long-haul competitors, it has a 60% share of intercontinental services - which now drops to 58%.

El Al long-haul, total, network comparison (% of seats): 31-Oct-2011 to 06-Nov-2011

According to the airline's 2010 Annual Report, market shares in the dominant regions are dropping slightly: "…the Company's market shares were: on the North America route: 44.5% in 2010 vs. 48.5% in 2009; European routes: 36.7% in 2010 compared to 37.6% in 2009; in East and Central Asian routes: 85.9% in 2010 compared to 88.7% in 2009; in other destinations: 16.8% in 2010 compared to 14.2% in 2009". Post Sao Paulo, the "other" will decline.

It is not unreasonable to attribute some of that decline to its outdated product and its scheduling and service deficiencies.

Limited long-haul competition

Unlike most airports, there are only two intercontinental services operated solely by competitors: a thrice-weekly Korean Air non-stop to Seoul Incheon and a daily US Airways service to Philadelphia. Elsewhere on long-haul services El Al contends only with Delta Air Lines and Continental to New York and with Air Canada at Toronto. There is no Gulf carrier presence, though Turkish Airlines, as the only regional carrier with regular flights, offers 25 weekly flights to its Istanbul hub.

Much of Asia is a trek

With such limited access to Asia, passengers to/from Israel are generally forced to travel via Europe - or more recently, Istanbul. While El Al has non-stops to a few destinations, these are all less than daily and, from cursory examination, carry a premium.

Fares to Bangkok for a chosen date in November are considerably higher on El Al, but shorter as alternative routings add substantially to the total elapsed travel time.

Fares from Tel Aviv Ben Gurion Airport to Bangkok Suvarnabhumi Airport: 17-Nov-2011 to 24-Nov-2011

Carrier	El Al	Turkish	Lufthansa	Swiss
Fare (USD)	1980	1021	1227	1357
Connecting Point	non-stop	IST	FRA	ZRH
Elapsed Time East-Bound	10.4	13.25	17.25	19.3
Elapsed Time West-Bound	11.5	14.55	19.55	20.0

A similar differential was observed to Hong Kong where an El Al ticket was priced at USD1558, with Turkish offering USD996 and Swiss USD1339, but again with longer travel times.

For Shanghai, not served by El Al, fares were USD877 on Turkish, USD1104 on Aeroflot and via Zurich on Swiss, USD1198, generally lower pricing than is found on routes where El Al operates. In these three examples at least, the presence of El Al actually increased prices somewhat for all carriers.

Traffic mostly home grown

El Al's annual report also provides data as to the composition of the airport's traffic. The larger proportion of the passengers consists of Israelis travelling abroad, accounting for about 60% of the airport's international throughput: a substantial segment for a nation with only 7.7 million inhabitants. Perhaps the frequency and schedule irregularities work because they are the norm for the airline's key constituency.

Tel Aviv traffic by type: 2006 to 2010

As shown by the following chart, again from the 2010 Annual Report, load factors on services operated are quite high - above 80% for five years running.

High percentage of infrequent flights

The airport also has a very large percentage of low frequency operations - by both El Al and its competitors. There are 13 destinations, 19%, with only one or two weekly flights and the total number of destinations with three or fewer weekly flights is 23 - a third.

El Al's no-fly Saturdays also have a huge impact on the airport. According to CAPA data, Tel Aviv has 115 movements on Saturday and 226 on Sunday, a disparity probably unseen at any other major airport.

All of these factors considered together make Ben Gurion Airport an origin and destination airport, limiting synergies for the home carrier that frequently accrue to a hub operation.

Where next?

In the last decade, not a lot has changed. In 2001 Los Angeles was a one-stop service via New York, but is now a non-stop. Flights to Chicago and Miami, via US intermediate points, have been terminated. Sao Paulo was added but is now gone and other intercontinental destinations remain essentially unchanged from 10 years ago. Despite ample evidence across the industry that change may be key to financial improvement, the company has remained static over a decade while others have radically restructured.

There appears to be a high probability that little will change in the next decade and that as the third decade of the century begins, El Al may look much like it does today, a prospect that probably will not stem the red ink.