EL AL reconstitution plan
 

In the past, LY existed because it was state owned and therefore did not need to really compete in the marketplace. Since privatization the new owners, the Borovich family, were not able to remove the inefficient vestiges of EL AL's state owned corporate enterprise culture and position it for fierce private sector competition that is focused on the consumer.

Given EL AL's over $50 million loss in 2011 and their projected loss for 2012 I don't think the Borovich family will be able to keep this company afloat for much longer. Based upon this belief, I have lined up investors and we will purchase the assets of the airline from the bankruptcy trustee, should it collapse, and reconstitute EL AL into an efficient modern customer service oriented operation.

W/ discounts for all FT readers?

I knew someone would ask me that =)

Yes, I will give you all discounts and will personally welcome you aboard our brand new A380's with advanced AVOD in all classes, fully lie flat seats in Business, and semi enclosed First Class suites.

Will I be allowed to be a pilot? (Have some experience from microsoft flight simulator).

Though I am confident in your MS flight simulator experience I am afraid that the various aviation regulation authorities will deem said experience as not enough to be in the cockpit of an A380 (or any a/c for that matter) however, if you apply to be a baggage handler for LY at Ben Gurion send me an email with your details and I will personally put in a good word for you. =)

@ELY001

In all seriousness, what types of changes would you think are possible to undertake that would make LY more competitive?
And don't answer legacy obligations, b/c I'm sure you understand how hard it is in Israel for any of these former government-controlled countries to shed their salary ladders and pension obligations. (Just take a look at the problems in chevrat chashmal, and the average 40k+ monthly salaries at the ports.)

I know the problems associated with EL AL very well. Basically, should EL AL go bankrupt, it would be relatively easy to reconstitute the airline. I would purchase its assets ( mainly facilities, slots, etc) from the bankruptcy trustee, and form a new corporation under Israeli law. Though named EL AL Israel Airlines, this new entity would be free from all of the old EL AL's debt obligations, including union contracts.

I would then invite any and all former EL AL employees to apply for jobs with the new EL AL. It goes without saying that I would NEVER hire any of their current managers, including but not limited to Shkedy and Saadon.

From there I would bring in someone I know in the industry who is an excellent operations manager to map out streamlined and rational operations.

As far as the fleet is concerned, I would keep all of the 737's for short haul/European routes, replace the 744's with A380's 1 for 1, and replace all of the 767's and 777's 1 for 1 with A330s. The hard product on the entire long haul fleet would be standardized with lie flat seats in business, semi-enclosed cabins in First (First will only be on the A380s) and an advanced AVOD system. The frequent flier program and website will emulate what United has, and I will both expand codeshare agreements and get EL AL into an alliance; preferably OneWorld.

Since the new EL AL will have streamlined management, efficient aircraft, and the ability to compensate all employees at market rates (and not more) our yields will go up and we will be able to open more routes such as San Francisco and perhaps even Buenos Aires. We will turn TLV into as much of a connecting hub as possible by offering and promoting east/west fares with a stop in TLV and scheduling arrivals/departures accordingly so as to be able to do so.

What is LY's additional fuel costs due to having to reroute flights to avoid hostile neighbors?
Also, do you truly believe that even if the government allowed LY to go bankrupt (extremely unlikely), and they would allow a buyer to come in and not honor old union contracts? (And you can leave all legality aside. When Chaim Katz wants to fight for his unions, he wins. Trust me :) )

1. Obviously not being able to overly the Middle East to the Far East adds time to the sectors and fuel costs, however most, if not all, of LY's far east routes they currently fly using a mix of 744/777/767 are profitable. If we utilize more efficient A330's and, on occasion, A380's the yields will be higher and the routes will be even more profitable, thereby negating somewhat, the added fuel and sector time costs.

2. The government will most certainly allow LY to go bankrupt. It was Netanyahu who, as finance minister, spearheaded privatization. When I spoke with Danny Saadon in New York he told me that part of the problem why the unions will not negotiate in earnest is their belief that the government will never let the company go bankrupt, a belief that he and I both agree is wrong for the above reason.

3. If the government allows LY to go bankrupt, the assets of the company will be in the hands of the bankruptcy trustee who will sell them to the highest bidder in order to pay out the creditors. The bankrupt EL AL legal entity will be no more. My investors and I will create a new legal entity, call it EL AL, incorporate as much of EL AL's assets into the new legal entity as possible, and reconstitute a new airline. The only thing that will remain is the EL AL name, the facilities/slots we buy from the old entity, and any employees we hire. However, should the government step in and try to revive the old EL AL entity, all of this will be mute, though I don't think that will be the case. Consequently, Chaim Katz will have no say whatsoever in the new legal entity.

Personally, I think eliminating the El Al name will probably be better than keeping it and think it may be easier to just finance and start a competing airline than to pursue this plan.

The problem with your idea is that it has been tried before to one degree or another by Arkia and Israir and the results have not been good. Israel is a relatively small base market and cannot sustain so many airlines. Additionally, EL AL has monopoly power on many routes to and from Israel so starting a competing airline is not that simple. Consequently, the best approach would be to wait until EL AL folds, buy its routes and valuable assets from the bankruptcy trustee, and reconstitute the airline, perhaps even merge with Arkia and Israir.

The reason why I would keep the EL AL name is for both symbolic reasons and for its name recognition. For better or worse EL AL is one of the most recognizable brands from Israel and is identified with safety and security. It is this symbolism that makes Airbus desperate to sell their planes to LY for a loss, which is what I want to exploit.

I think you're being waaayyyy to optimistic. He (and others) wouldn't allow anyone to purchase the pieces unless there was an agreement protecting the workers.
And you can go on thinking that the process would be fair, and that e/t would be sold to the highest bidder, but I don't see that happening.

And either way, they consider LY an strategic asset, and I don't think they'll allow them to go bankrupt. They'll either re-nationalize, or bail them out.

This is not how bankruptcy law for private commercial enterprises in Israel, the EU and USA works. Should the controlling shareholders of EL AL announce the company is insolvent, which will likely transpire as a result of not having enough cash on hand to meet short and medium term debt obligations, then there will be 2 choices. The first choice would involve reorganization where EL AL's owners negotiate with various creditors and essentially cram down both the debt obligations and payment terms. Should reorganization fail, the bankruptcy trustee will then be forced to liquidate the assets of the company on the open market and will be legally obligated to get the highest price per asset and transfer the proceeds to the creditors. The only scenario where Chaim Katz may play a role is in reorganization, however he would be forced to engage in givebacks, something I suspect he is unwilling to do much of.

As far as the Israeli government stepping in, I highly doubt it. If Netanyahu believed EL AL was a strategic asset to Israel he would have never sold it off in the first place when he was Finance Minister. If the Israeli government believed EL AL was such as asset then they would have never signed transport contracts with foreign airlines, most notably Alitalia, President Peres would have never flown Air Canada, and Yoram Zelakha's plan, which calls for the Israeli government to inject $50-70 million into EL AL would be taken seriously. Additionally, open skies with Europe would never have gotten as far as it has, and the Israeli government would not be in open conflict with EL AL and its management/owners as it has been for years now. Given that the Israeli government recently raised taxes and missed its budgetary deficit goals by over 1% of GDP, a bailout of any company, muchless one which a substantial portion of the Israeli public doesn't even like, will not occur in the foreseeable future.

I too think EL AL is a strategic asset both for the State of Israel and the Jewish people which is precisely why I have spent significant amount of time and capital putting together my team to reconstitute the airline should the Borovich family not be able to save it.

How much capital would be needed do you think?
And would financing come from Israeli banks, or US ones?

Taking the example of Golan Telecom, which only cracked the market because it had foreign investors rather than Israeli banks whose owners have close ties to the owners of the existing Israeli airlines, my guess would be foreign.

Just for the intellectual exercise, I was mulling the viability of a TLV-based OpenSkies/CWLCY-type airline, preferably with a similar relationship to BA, to go head-to-head with LY and others for premium pax. There is a surprising number of them, and LY's hard and soft products are totally uncompetitive. In the long run, LCCs may well kill off LY's ability to compete for Y pax too on EU routes, but Arkia might be able to adapt.

This is especially interesting in the light of the withdrawal of long-haul bizclass seating on all routes except LX/ZRH and BA/LHR. On the latter, there is no Prem Econ or First any more, as well as complaints about using T1, leading to a massive reduction in overall premium seating availability. On the former, they often switch equipment to a short-haul product from the usual A330 and are rumoured to also be about to do so permanently.

The route network I was toying with might be to LCY (bolstering BA's premium capacity for point-to-point) and ORY (attacking LY and AF), scheduled to connect to OpenSkies/CWLCY transatlantics, also maybe places like FRA and MXP to compete with LH/AZ point-to-point and connect to AA flights to destinations not served directly in the USA but with large Jewish/business/Christian Zionist communities, like MIA, BOS, ORD. I imagine AA would prefer to put people on their own metal transatlantic and just have the last leg with a BA subsidiary, than switch people to the LY codeshare.

Also potentially could look at NBO>JNB and ADD>BOM, and a smattering of shorter biz and oligarch routes around SE Europe and the Caspian.

Would use A318s or the new CS110ER, 32-36 fully-flat bed seats, or a split of 16-18 beds and 32-36 cradle seats. All this actually does is make up for BA's shortfall to London of about 70 premium seats a day, and go head to head with everyone else on other routes for high-end punters.

I did some basic costings and worked out that, charging no premium at all above LY's bizclass price, you'd need something like a 60% load factor to break even.

We had in mind that you'd get a lot of it off the ground in the way that BA's CWLCY did, by forward-selling a big block of tickets to the likely largest customers, and by being part of an alliance, with suitable insurances in place, if the airline goes kaput they will always use them on another routing.

Anyway, just a fun exercise with a couple of geeky plane spotter mates, but food for thought...