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Privatization Lifts El Al Hopes for Higher Profits, More Services

July 6, 2005
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It’s morning for El Al. A dozen women in aprons and hair nets are arranging items on plastic food trays. Nearby, several more slide silverware and mini-packs of salt and pepper into narrow plastic bags.

“They’re making breakfast for El Al,” Jacob Li-Or tells a group of visiting journalists.

Li-Or, president and CEO of Borenstein Caterers, is leading a tour of the company’s Queens, N.Y. facility. On this particular morning, he says, the company — an El Al subsidiary since 1972 — has made 2,500 kosher in-flight breakfasts.

Breakfast aside, it’s morning for El Al in another sense: After its recent privatization, the company is orchestrating a new beginning, developing a strategy to streamline its economic approach, offer a wider range of services, expand first- and business-class sections — and factor in management’s accountability to private shareholders.

“The future looks very bright,” says Israel “Izzy” Borovich, El Al’s new chairman, speaking recently to JTA from his car while driving into Tel Aviv.

The strategic plan, called “El Al 2010,” should be completed within the next several months, Borovich says.

State-owned since its birth in 1948, El Al began the process of going private in June 2003 with an initial public offering of 15 percent of its shares on the Tel Aviv Stock Exchange. Now, Borovich’s Knafaim-Arkia Holdings owns 40 percent of the carrier’s stock, and intends to exercise its option to purchase an additional 12 percent of the shares.

In 2004, the airline’s annual profit shot up from $6.4 million to $33.1 million, El Al says. In 2004 its cash flow was higher than ever, and its annual revenues increased by 19 percent to over $1.3 billion.

Borovich says El Al shares are thriving on the Tel Aviv Stock Exchange: His investment has already tripled, he says.

“I think that’s because they were ahead of the curve on terrorism,” says John MacAyeal, who covers international transportation for Hoover’s Online, an Internet business information service. “The major threat facing the industry is just a sense of safety, and they’re ahead of everyone else on that.”

In other words, the arrows seem to be pointing up. But what does privatization mean for passengers?

First of all, better food.

In June, El Al launched its new Platinum business-class menu, designed by chef Avner Niv, a former personal chef to fashion magnate Donatella Versace.

The menu includes fare such as rib eye steak in peppercorn sauce; chicken breast in teriyaki sauce; sea bass filet; seared salmon in orange, chive and red peppercorn sauce; veal stew, and corned beef with red pepper curry.

Changes in coach and first-class menus are expected as well.

Beyond the food, Borovich says the business model of a private company is entirely different than that of a government-owned operation, and El Al will reflect the distinction. As a private company traded on the stock market, he says, El Al must boost revenues and profits if it hopes to succeed.

“The objective is different. Being a private company, there is a very simple objective: Make money,” he says.

The Israeli government’s objective was to establish a presence in many markets, based not simply on economic considerations, but also on political concerns.

“Our objective,” Borovich says, “is to make money, period.”

In this vein, El Al will be looking at each of its routes to determine its economic value, adding routes where necessary and perhaps pulling others. For example, the company is investigating possible nonstop flights to Israel from Chicago and Miami, Borovich says.

A former professor of information systems at Tel Aviv University, Borovich says El Al’s improving fortunes demonstrate a principle many in the airline industry have long been aware of: Airlines should not be run by governments.

Still, the company continues to face a unique set of economic challenges. The carrier does not operate on Shabbat, leaving it with one day less each week to make money than its competitors.

MacAyeal says it’s “common knowledge” that El Al loses $35 million to $90 million a year because of the Shabbat issue.

Borovich says he has no plans to change the airline’s Shabbat policy. But he did say he would consider “innovative solutions” to the dilemma, including looking into letting other airlines operate flights on El Al’s behalf during the Shabbat period.

MacAyeal says religious restrictions on operating “aren’t as unusual as you might think,” citing several supermarket chains in the Midwest and a fast-food restaurant chain that do not operate on Sundays, the Christian Sabbath.

Religious affiliation “might create customer loyalty,” which makes it easier to take cost-cutting measures such as increasing fares, he adds.

Also presenting a challenge is the fact that Israel is not a natural hub. Passengers do not want to fly all the way to Israel and then double back to Europe, and Tel Aviv hasn’t been seen as a natural way station on the way to the Far East.

Borovich says the company is looking into synchronizing flight schedules from the Eastern and Western hemispheres to make flights to the Far East from the United States and Europe more convenient. And, he says, Ben Gurion International Airport’s new terminal, inaugurated in December 2004, will make flying El Al more attractive.

El Al’s financial fortunes also are linked to tourism to Israel, an arena often adversely affected by the region’s unstable political climate. But things are getting better in Israel, Borovich says,

“We are already seeing an increase in the traffic we are moving around,” he says.

According to one El Al flight-attendant, however, not much has changed since privatization.

The woman, who asked that her name not be used, says that there are rumors among her colleagues that El Al might begin putting staff up in less luxurious hotels on trips to the Diaspora, though no such move could be confirmed. But, she says, employees were happy to receive a $400 dollar bonus at Passover.

El Al now is planning to expand its range of services and clients, offering its expertise in maintenance, tourism services, ground handling and, of course, security, to other airlines.

“Our philosophy is that we should use our business and our know-how” to sell to other carriers, Borovich says. “Everything that we know how to do, we do very professionally. Believe me, we’ll be successful.”

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