Flying in two directions

New Zealand renationalizes its carrier, Swissair stumbles. What about El Al?
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The re-nationalization of New Zealand's national airline Air New Zealand last week, 12 years after its privatization; the $270 million aid the Swiss government granted Swissair; and the U.S. government decision to allocate $15 billion to help American carriers in these troubled times raise the question of Israel's policy toward El Al.

"Swissair is in the same state El Al was in back in 1982," said a top El Al executive."In both cases, the relevant governments did not let the airlines collapse. Swissair may not be a government company like El Al, but much like El Al it is run like a national carrier. This is completely unlike Tower Air, that was allowed to fold in peace, unhelped by the U.S. government."

Back in 1982, El Al sank into crisis and shut down for a while. It reopened after restructuring under the rule of a temporary receiver. Thousands were laid off. In return for its belt-tightening, the Israel government promised El Al it would remain in operation.

What's happening in Swissair?
Swissair is now undergoing something similar. In return for financial aid from the government and the banks, and layoffs of 2,600 people, the carrier is required to restructure beginning right away. Its recovery boils down to running a new airline, Swiss Air Lines, comprised of Swissair and its sister company Crossair. The new company will be amending its list of destinations and must restructure its catering service, Gate Gourmet, as well.

The combined Swissair and Crossair fleet of planes will be slashed by 2004, entailing a 25% cut in the number of long-distance flying jets.

As for New Zealand, the plan is for the government to lend the airline $122 million in exchange for newly issued shares. In early 2002 the government will contribute another $585 million in exchange for more equity.

But Swissair and Air New Zealand were struggling well before the terror attacks on the U.S., mainly because of excessive expansion strategies. Generally, they expanded through acquisitions of smaller companies, which all failed abominably.

In the last 12 months Air New Zealand reported a loss of $571 million. Swissair posted one of $1.8 billion. The company's current debt totals a mind-boggling $10.5 billion.

El Al also suffered a heavy loss of $109.4 million in the year 2000. In the last five years, excluding 1998 when it made a $22.7 million profit and 1999 when its profit was $16 million, El Al has posted losses.

In 1996 the national airline lost $83.1 million, shrinking to $4.2 million in 1997.

A panacea for society's financial malaises
Since 1988, all Israel's various governments have stuck to the notion that privatizing El Al will heal the economic ills of Israeli society.

The company's privatization, which would enable flights on Saturday (now forbidden, as a breach of Sabbath) and cutbacks on personnel and aircraft in case of a slump, was perceived as an ideal solution.

In the cynical words of a senior El Al executive, "The privatization plan is now celebrating its bar mitzvah. For 13 years now they've been talking privatization, but not one government has taken a single step in that direction."

El Al CEO David Hermesh sees no reason why the U.S. terror attacks should hinder the privatization process. The way he sees it, the slump in the aviation industry means the company must streamline, meaning layoffs, a fleet reduction and less destinations. These steps would help sell the airline, as they would improve El Al's financials.

The general manager of the Government Companies Authority, Yaron Jacobs, also supports selling El Al, whatever the fallout from the terror attacks on the U.S. He adds that the decision regarding the decision to privatize should not depend on the new situation.

El Al may find itself on the public market
Theoretically, the ministerial privatization committee is supposed to convene after the Jewish holidays ending this week to discuss El Al's privatization.

The government plan is to divide the sale into several stages. It may begin by selling 49% of the company, then proceeding to sell the remaining government holdings in the company. The state may even float some of the airline's shares on the stock market.

But whatever the government does, it must first ask itself what it would do had El Al been a private company. Chances are, when the crunch came, the government would still bail it out, rather than let it crash.

The American counter-attack on Afghanistan begs a second look at El Al's privatization.

In the past, when regional hostilities explode, foreign airlines stopped all their flights to Israel (during the Gulf War, for example). Only El Al, being the national airline, continued to fly.

What would happen if the owners of a privatized El Al were to halt all flights to and from Israel? Is that conceivable?

Golden share protection
That could be prevented if the government keeps the golden share. This share would ensure El Al continues to operate as an Israeli firm, subject to Israeli law, including the one that says equipment can be recruited for defense.

Retaining a golden share would also ensure that flight and operation capacity, of passengers and cargo, does not drop below a certain level, and that elements hostile towards Israel do not become substantial shareholders in the company.

Golden share protection is an accepted means of operation, though it does create certain limitations for the new owners.

But in any case, potential investors could worry that the limitations imposed by the golden share are more burdensome than they really are, which could lower the airline's price.

The trend-setter?
Air New Zealand's nationalization is the first one of an airline in distress following the September 11 terror attacks. Aviation specialists believe it will pave the way for additional airline nationalizations in the next few months.

Alitalia, even before the terror attacks, was planning to ask the government for 1.55 billion euros to back up its business plan for the next five years. The Italian government holds 53% of the airline.

One has to ask: Wouldn't a privatized El Al beg the government for aid if in need? And if it would, why privatize it at all, handing it over to private operators who would request financial aid in the future?

Jacobs: El Al's current condition does not justify financial help
In spite of what the aviation industry is going through these days, Jacobs, the general manager of the Government Companies Authority, still believes El Al's privatization should proceed.

"I still think privatization is essential for El Al, and will make it a healthier, more efficient company, and hence more successful. If privatization begins soon, it should take about 18 to 24 months," Jacobs surmises.

On government assistance, Jacobs explains, "El Al is in some respects enjoys the government's support, but in other ways it is harmed by the government's limitations.

"If the company request the support of the government and gets it, it might create an unwanted situation in which the company is financed by the citizens of Israel over a long period of time.

"El Al as a government company will find it difficult to develop and deal with the competition in its sector. I think that in principle, the government should not have to finance or help finance competitive corporate companies, except for cases that might require it ¿ but I think this case does."