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EL AL Israel Airlines Ltd.: EL AL Announced Today its Financial Results for the First Quarter of 201

EL AL Announced Today its Financial Results for the First Quarter of 2018

The Company (TASE: ELAL) reported an 11% increase in revenues to USD 464 million in the first quarter of 2018; a 2.5% increase in the number of passengers; an increase in load factor to approx. 83.8%; and a 4.3% increase in yield.

Alongside this, the Company recorded an increase of 15% in operating expenses, attributable primarily to the growth in operations; an increase in fuel expenses totaling approx. USD 23 million, mainly due to the increase in fuel price; an increase of approx. USD 7 million in payroll expenses following the erosion of the US dollar against the New Israeli Shekel; and an increase in minimum wage.

Net loss for the quarter amounted to USD 44 million.

Due to the complex reality faced by the Israeli aviation industry, particularly vis-à-vis low cost carriers, and in view of the challenges awaiting the Company in the near future, including intensifying competition and increase in fuel prices, EL AL management has resolved to take a number of measures to adjust its activities to these challenges:

Deepening the implementation of a business efficiency plan across the Company, including reducing expenses and increasing revenues.

Changing the compensation model for agents in Israel and abroad – The company adapts the trend prevailing among most of the world's leading airlines, by changing the compensation model between airlines and travel agents, and will move to a new model in which no base commission will be paid to agents, which currently stands at 5% in Israel and a variable percentage in countries where it operates, as of June 1st 2019.

As part of the Company's decision to accelerate the optimization process of all wide-body aircraft and in order to enhance customer service and becoming more efficient with the renewal of the Dreamliner fleet, the Company is currently engaged in scheduling the early removal 767 fleet from service by the end of 2018 instead of 2020.

Due to the early removal from service of one aircraft of the 767 fleet that was damaged at Ben Gurion Airport, it was decided to postpone the launch of the San Francisco route to the second quarter of 2019.

In April 2018 the Company started selling flight tickets to destinations in Europe based on the new model, which allows Economy Class passengers to choose from three types of flight product packages at various prices, tailored to their needs. This model allows the Company to more efficiently compete with all players in the market, in particular low-cost airlines.

  • Operating revenues amounted in the first quarter of 2018 to approx. USD 464 million, compared to USD 418 millionin the first quarter of 2017, reflecting an increase of approx. 11%.
  • The increase in revenues was primarily attributable to an improvement in a number of significant items:
    • The number of tier segments increased in the first quarter of 2017 by approx. 2.5% compare to last year; available seats per kilometer (ASK) increased by approx. 3.1%; the Company's operations in RPK terms (revenue passengers per kilometer) grew by approx. 3.3%; the Company's operations in terms of flight hours increased by approx. 2.7%
    • Aircraft load factor stood at approx. 83.8%, compared to 83.6% at the first quarter of 2017;
    • Average yield per RPK increased by approx. 4.3% compared to the first quarter of 2017.
  • El Al market share of traffic at Ben Gurion Airport amounted to approx. 27.9%. In the first quarter of 2018, the Company recorded an increase of 2.5% in the number of passengers flown by the Company, with passenger traffic at Ben Gurion Airport increasing by higher rate of 19%.
  • Loss before tax for the first quarter of 2018 amounted to approx. USD 57 million, compared to a loss before tax of approx. USD 39 million in the first quarter of 2017.
  • Net loss for the first quarter of 2018 was approx. USD 44 million, compared to a net loss of approx. USD 30 million in the first quarter of 2017.
  • The increase in loss is due primarily to the increase in jet fuel costs as a result of an increase of 25% in jet fuel price and an increase in payroll expenses following the erosion of the US dollar against the New Israeli Shekel.
  • Cash flow from operating activities in the first quarter of 2018 amounted to approx. USD 14 million compared to approx. USD 77 million in the first quarter of 2017. The difference in cash flows was due primarily to the increase in net loss and a payment of approx. USD 22 million to the tax authorities in respect of an audit of assessments, the expense for which was recorded in the previous year.
  • EBITDA amounted to USD -14 million (loss), compared to USD 30 million in the first quarter of 2017.
  • EBITDAR amounted to USD 14 million, Compared to USD 30 million in the first quarter of 2017.
  • The Company's cash balance as of March 31, 2018 totaled approx. USD 243 million.
  • The Company's equity as of March 31, 2018 totaled approx. USD 273 million.

EL AL's CEO, Gonen Usishkin, announced today as follows:

"During the first quarter of 2018, EL AL recorded an 11% growth in its revenues compared to the first quarter of 2017. The Company increased its volume of operations, notwithstanding the numerous challenges arising from the Open Sky policy and the intensifying competition posed by foreign airlines, in particular low-cost carriers, and successfully improved its yield by about 4%.

"However, the Company reported an increase in expenses, attributable mainly to the rise in fuel price and changes in exchange rates, thus, at the bottom line, it completed the first quarter, a quarter that is typically characterized by seasonal weakness, with a net loss of approx. USD 44 million.

"In view of the changing reality and growing competition, as well as the increase in fuel prices, changes in exchange rates and regulatory restrictions, EL AL is currently in the midst of an accelerated optimization process, both in terms of its scope and the speed of its implementation. Within this framework, we announced a number of significant steps and more decisions are expected to be made in major areas which has an efficiency potential. The program is comprehensive and reviews all fields of activity and business areas, with the aim of increasing revenues and considerably reducing expenses in order to establish a coherent path for improving results, through a multi-year process.

"The Company is currently in the process of receiving the Dreamliner aircrafts. To date, we have received 4 airplanes and about to receive 3 more airplanes by the end of 2018 .The aircrafts acceptance program is properly implemented in compliance with prescribed schedules, and the Company continues to take all necessary steps required by the program. The demand for seats on the Dreamliner aircrafts is impressive and it certainly meets our expectations regarding the revenues from each service department as planned."

Dganit Palti, El Al's CFO, announced today as follows:

"Three of the five Dreamliner aircrafts that the Company is about to be equipped in 2018 will be owned by the Company. One of them was received in March and the other two will be delivered in June and August. The Company is currently working to expand the sources of financing for the aircraft, and is currently raising from a number of international financial entities long-term loans at attractive interest rates and at high financing rates.

"The Company also first contracted LOI with investors from Japan, which specialize in financing an equity tranche to aircrafts for airlines companies around the world, to finance the equity tranche to the aircraft expected in June, under comfortable conditions.

"The Company completed the first quarter of 2018 with cash and deposits balances of USD 243 million, indicating its financial stability."

Highlights for the Three Months Ended March 31, 2018 (in USD millions):

 

January-March

 

2018

2017

Change

Operating revenues

464

418

11%

Operating expenses

(433)

(377)

15%

Gross profit

31

41

(25%)

EBITDA

(14)

10

 

Loss before taxes on income

(57)

(39)

(47%)

Loss for the period

(44)

(30)

(47%)

1. Operating revenues increased in the reported period by approx. 11.0%, indicating an growth of approx. USD 46.1 million compared to the first quarter of 2018, as revenues from passengers increased by approx. 10.2%, representing a growth of approx. USD 37.4 million. This increase in passenger revenues is attributable to the growth in passenger revenue per kilometer (RPK) flown by the Company. Revenues from cargo increased by approx. 19.7% (about USD 7.0 million), mainly as a result of the growth in revenue-ton-kilometer (RTK), which was partially offset by the decrease in the yield per ton-kilometer.

2. Operating expenses increased in the reported period by approx. USD 56.4 million, indicating a growth of about 15.0% compared to the first quarter of 2018. The increase in operating expenses is attributable to a variety of factors, among them the increase in jet fuel expenses, as elaborated below; an increase in activity demonstrated by an increase in available seats per kilometer (ASK) and the number of segments flown (due to the arrival of the 787 aircrafts); an increase in payroll expenses primarily attributable to the impact of the strengthening of the shekel compared to the dollar and the minimum wage update; a decrease in the Company's market share of traffic at Ben Gurion Airport, which led to a reduction in discount rates obtained by the Company for services it acquires from Israel Airport Authority (IAI).

3. The Company's jet fuel expenses increased by approx. USD 22.6 million (about 25.0%) compared to the first quarter of 2017, mainly as a result of the increase in jet fuel prices, offset in part by the change in the results of jet-fuel hedging transactions and the growth in operations.

The table below demonstrates the impact of jet fuel expenses on the Company's results, including the impact of hedging transactions (in USD thousands):

 

2018

 

2017

 

Difference

Jet fuel expenses for the period

(before hedging impact)

117,484

 

91,525

 

25,959

           

Impact of jet fuel hedging

transactions on profit and loss

(4,345)

 

(1,032)

 

(3,313)

           

Total jet fuel expenses (including

hedging impact)

113,139

 

90,493

 

22,646

4.      Selling expenses increased by approx. USD 4.2 million, mostly due to an increase in the Company's distribution expenses, resulting mainly from growth in sales and an increase in the Company's advertising expenses.

5.      General and administrative expenses recorded an increase of approx. USD 5.1 million compared to the first quarter of 2018, primarily due to a provision for legal claims and maintenance of information systems.

6.      Net financing expenses in the first quarter of 2018 amounted to approx. USD 4.0 million, compared to approx. USD 5.0 million in the first quarter of 2017. This decrease is attributable primarily to an effective decrease in the Company's loans over the quarter compared to the previous year and a reduction in exchange rate differentials due mainly to changes in the Company's balance-sheet shekel balances.

7.      Tax benefit in the reported quarter totaled USD 12.9 million compared to USD 8.8 million in the first quarter of 2017, due to the increase in loss before tax.

8.      Loss before tax in the reported quarter totaled approx. USD 57 million and loss after tax totaled approx. USD 44 million, representing about 9.5% of the turnover, compared to a loss before tax of approx. USD 39 million and loss after tax of approx. USD 30 million in the first quarter of 2017.

Balance Sheet Data as of March 31, 2018:

1.      The Company's current assets amounted to approx. USD 528.3 million, reflecting a growth of approx. USD 9.9 million compared to their balance as of December 31, 2017. This growth mostly resulted from a seasonal increase in accounts receivable and prepaid expenses, which was partially offset by a decrease in cash and short term deposit balances.

2.      The Company's current liabilities totaled approx. USD 953.2 million, indicating an decrease of approx. USD 3.2 million compared to their balance as of December 31, 2017. The change is attributable on the one hand to a decrease in short-term credit and current maturities, mainly due to repayment of loans obtained to finance advance payments on aircrafts, which were converted into a long-term loan, and a decrease in employee provisions and liabilities (among others, due to a payment in respect of a compromise agreement with the assessment officer), and, on the other hand, from a seasonal increase in prepaid revenues from sales of airline tickets and accounts payable balances related thereto, compared to their balance as of December 31, 2017.

3.      The Company had a working capital deficit of approx. USD 424.9 million compared to a deficit of approx. USD 437.9 million as of December 31, 2017. It should be noted that a substantial part of the working capital deficit does not reflect short-term cash flows, as explained below. As of March 31, 2018, the Company's current ratio increased to 55.4% compared to 54.2% as of December 31, 2017.
As of March 31, 2018, 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 411 million, to be settled by providing future flight services, and liabilities to employees for vacation pay in the amount of approx. USD 46 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 advance payments on the 787 aircrafts, to be repaid through long-term financing obtained upon receipt of aircrafts. As of March 31, 2018, the amount attributable to these loans of the total current liabilities stands at approx. USD 55 million.

4.      Non-current assets amounted to approx. USD 1,455.6 million, showing a growth of approx. USD 122.6 millioncompared to their balance as of December 31, 2017, mainly due to the receipt of a 787-9 aircraft during the reported period and advance payments for the acquisition of the 787 aircrafts that have not yet been received, less current depreciation.

5.      The Company's current equity totaled approx. USD 757.4 million, reflecting an increase of approx. USD 140.5 millioncompared to December 31, 2017. This increase was due primarily to a loan obtained to finance the787-9 aircraft that arrived in March 2018.

6.      Total equity amounted to approx. USD 273.3 million. The decrease of approx. USD 4.9 million compared to equity as of December 31, 2017 occurred notwithstanding the equity increase of USD 37.5 million following the implementation of IFRS 15  - "Revenue from Contracts with Customers" (see note 6.A to the condensed financial statements), which was mainly attributable to the loss for the period.

The contents of this notice do not replace reading the Company's financial statements for the first quarter of 2018 and immediate reports published from time to time by the Company.

This press release was sourced from EL AL Israel Airlines Ltd. on 29-May-2018.