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EL AL ISRAEL AIRLINES LTD.

FINANCIAL STATEMENTS AS OF JUNE 30, 2015 (unaudited(

CONTENTS

SECTION A - UPDATE OF CHAPTER A TO 2014 ANNUAL REPORT

SECTION B - DIRECTOR'S REPORT

SECTION C - FINANCIAL STATEMENTS Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding Update to Chapter "A" (Description of the Corporation's Business)1 Of the Periodic Report for the Year 2014 ("Periodic Report") Of El-Al Israel Airlines Ltd. (hereinafter: "The Company")

The following are updates to Chapter A – Description of the Corporation's Business:

General The Group's concise consolidated financial statements (hereinafter: "Interim Financial Statements") have been prepared in accordance with International Standard IAS 34, "Interim Financial Statements". In the framework of the preparation of these Interim Financial Statements, the Group has applied accounting policy, presentation rules and calculation methods identical to those applied in the preparation of its financial statements as of December 31, 2014, and for the year ending on the same date. As regards new accounting standards adopted and the change in the accounting policy relating to the presentation of the impact of the results of foreign currency hedging transactions, see Note 4 to the Financial Statements as of June 30, 2015 and Section D1 (2) of the Directors Report on the State of the Corporation's Affairs as of June 30, 2015. This update contains material changes or novelties that have occurred in the Company's business during the second quarter of 2015 and which must be described in the Periodic Report. This update refers to section numbers as they appear in the Description of the Corporation's Business Chapter in the Company's Periodic Report for the year 2014, which was published on March 25, 2015 (Reference No. 2015-01-060379).

In reference to Section 4 – Dividend Distribution For details regarding the announcement of dividend distribution after the date of the Report of the Financial Position, see Note 12 to the Interim Financial Statements as of June 30, 2015.

In reference to Section 6.1 – International Aviation Traffic - and to Section 7.1.3 (A) – Changes in the Volume and Profitability of Operations in the Segment – International Developments IATA data for January to May 2015 indicate an increase of 6.3% in passenger traffic on both international and domestic flights together, with international traffic alone reporting an increase of 6.5% compared to the corresponding period last year. Airline seat supply on international flights increased by 6.2%. Load factor on international passenger flights was 78.2% compared to 78.1% in the corresponding period last year.

1 The update is in accordance with Section 39A of the Securities (Periodic and Immediate Reports) Regulations, 5730-1970, and contains material changes or novelties which have occurred in the corporation's business in any matter that should be described in the Periodic Report. The update refers to section numbers as they appear in the Corporate Business Description Chapter of the Company's Periodic Report for the year 2014, which was published on March 19, 2014.

Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding By Regions: January to May 2015 compared to January – May 2014*:

Region Passengers RPK ASK PLF (Annual change) (Annual change) Africa -2.6% -2.9% 65.7% Asia 8.6% 6.7% 77.5% Europe 5.2% 4.2% 80.0% South America 6.4% 6.4% 79.3% Middle East 12.1% 15.3% 77.2% North America 2.3% 3.5% 79.3% Total 6.5% 6.2% 78.2%

*The above table describes international traffic data only.

ASK - Available Seat Kilometer – Available Seat-KM: number of seats offered for sale, multiplied by the distance flown.

RPK - Revenue Passenger Kilometer – number of paying passengers, multiplied by the distance flown

PLF - Local Factor – occupancy rate on passenger flights (percentage of seats used).

According to the data provided by IATA, during January to June 2015, an increase of 3.5% was recorded in air transportation of cargo (international and domestic together), compared to the corresponding period of the previous year.

In reference to Section 6.2 – Israel Aviation Traffic - and to Section 7.1.3 (B) – Changes in the Volume and Profitability of Operations in the Segment – Developments in the Israeli Market According to the data provided by the Central Bureau of Statistics, in the second quarter of 2015 about 1.3 million departures of Israelis by air were recorded, constituting an increase of approximately 6% compared to the corresponding quarter of the previous year. In addition, about 719 thousands of tourist arrivals by air (to Ben-Gurion Airport and Eilat) were recorded in the second quarter of 2015 (not including day trips), constituting a decrease of about 15% in relation to the corresponding quarter of the previous year. In this respect it should be noted that tourist arrivals are still affected by Operation Protective Edge which took place in July-August 2014. According to the data provided by Israel Airports Authority, an overall decrease of approximately 2% in the international traffic at Ben-Gurion Airport was recorded in this quarter compared to the corresponding period last year. The average load factor on passenger flights was approximately 80.9%, compared to 83.7% in the second quarter of 2014. An increase of approximately 5.6% in cargo traffic was recorded in the second quarter of 2015 compared to the second quarter of 2014.

Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding In Reference to Section 6.3 – Fluctuations in Jet Fuel Prices – and to Section 9.5.1 – Raw Materials and Suppliers - Fuel In the second quarter of 2015, the average jet fuel price for the Company (before hedging activities) dropped by approximately 37% compared to the corresponding quarter of the previous year. The average effective jet fuel price for the Company, after hedging activities, dropped by approximately 30% compared to the corresponding quarter of the previous year. In the second quarter of 2015, fuel expenses represented approximately 24.8% of the turnover (whereas in the corresponding quarter of the previous year, fuel expenses reached approximately 31.5% of the turnover).

In Reference to Section 6.4 – Fluctuations in Foreign Currency Rates As of June 30, 2015 a devaluation of approximately 9.6% occurred in the exchange rate of the NIS against the US dollar compared to June 30, 2014, and a reduction of about 3.2% compared to December 31, 2014. As of June 30, 2015, a devaluation of approximately 22% occurred in the exchange rate of the Euro against the US dollar compared to June 30, 2014, and a devaluation of about 7.8% compared to December 31, 2014. For further details, see Section B1 (5) of the Directors Report on the State of the Corporation's Affairs as of June 30, 2015.

1. Passenger Aircraft Operating Segment

In Reference to Section 7.1.3 – Changes in the Volume and Profitability of Operations in the Segment In June 2015 IATA published a new profit forecast for 2015, whereby the world's airlines are expected to present a profit of USD 29.3 billion (compared to the USD 25 billion predicted in the December 2014 forecast), thus constituting an increase of approximately 79% compared to the 2014 profit. Airlines profit in 2015 constitute about 4% of the airlines' revenue, which is expected to reach approximately USD 727 billion. The data contained in the following table refer to airlines' overall operations on international and domestic flights together, by region:

Region Profit Performance 2015 2014 forecast for appraisal for versus versus 2015 2014 2013 2014 2013 (in USD (in USD (in USD (in USD (in USD billions) billions) billions) billions) billions) North America 15.7 11.2 7.4 4.5 3.8 Europe 5.8 3.3 1.0 2.5 2.3 Asia 5.1 1.2 1.9 3.9 -0.7 Middle East 1.8 0.7 0.3 1.1 0.4 South America 0.6 0.0 0.2 0.6 -0.2 Africa 0.1 0.0 -0.1 0.1 0.1 Total 29.3 16.4 10.6 12.9 5.8 Source of data: ICAO 2013 data, 2014 and 2015 data – IATA Forecast and Estimate

Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding The data indicate that about half of the overall profit, USD 15.7 billion, is attributed to the North American airlines, but airlines of all the regions in the world are expected to show improvement in the results. The reasons for the expected growth in airlines' profits based on IATA forecast are the improvement in the global economic, the drop in oil prices and the increased efficiency of the airlines. The major factors described by IATA in its revised 2015 forecast are set forth below: Passengers – passenger traffic is expected to cross the USD 3.5 billion mark and increase by 6.7%, the highest growth rate since 2010 and higher than the 5.5% trend recorded in the past 20 years. Passenger traffic accelerates due both to the improvement in the global economy and to the fact that passengers enjoy discounted flights, as the average price of a round-trip flight (before extra charges and taxes) is expected to be USD 429, 64% less than the price 20 years ago. Fuel prices – IATA estimates that fuel expenses of the airline companies will drop to approximately USD 191 billion, constituting 28% of the overall operation costs thereof. IATA's forecast is based on jet fuel prices, which are expected to reach an average of 78 dollar per barrel in 2015; it should be noted that jet fuel prices as of the second quarter of 2015 amounted to an average price of 63.5 dollar per barrel.

In Reference to Section 7.1.10 - Structure of Competition in the Operating Segment and Changes Occurring Therein; Developments in the Segment's Markets In the second quarter of 2015, a decrease of about 3% was recorded in the passenger traffic of foreign scheduled airlines operating on routes to and from Israel, mainly due to a growth in the operations of low-cost airlines, as provided below. An approximate decrease of 23% was noted in the operations of charter airlines and overall, charter flight traffic (excluding flights marketed by Sun D'Or) was about 9% of the total traffic at Ben-Gurion Airport, compared to approximately 12% in the corresponding quarter of the previous year. The Company's passenger traffic on international flights remained with almost no change (+0.3%) and the Company's share of the overall passenger traffic in the second quarter of 2015 was 32.7% compared to 31.9% in the second quarter of 2014. In total, a decrease of approximately 2% was noted in international passenger traffic at Ben-Gurion Airport in the second quarter of 2015. In the second quarter of 2015, a number of airlines, including low-cost airlines, continued to expand their operations on routes to Israel by adding destinations and/or increasing frequencies and/or capacity. Among the most outstanding airlines, other than low-cost airlines, which expanded their operations in this quarter, are the following: British Airways operated 20 weekly flights on the route to Israel, compared to only 14 weekly flights in the corresponding quarter of the previous year, and its passenger traffic increased by approximately 44% compared to the corresponding quarter of the previous year. Brussels Airlines, the Belgian airline company, increased the number of its flights to 14 weekly flights starting from the 2015 Summer Season Schedule, compared to 11 flights in the corresponding period of 2014, and its passenger traffic increased by 36% compared to the corresponding quarter of 2014. Aegean Airlines, the Greek airline company, operated 9 weekly flights (in lieu of 7) on route Athens – Tel Aviv, and started operating 7 weekly flights from Larnaca to Israel, instead of Cyprus Airways, in addition to charter flights it operates on the routes between Greece and Israel. In total,

Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding Aegean Airlines' passenger traffic in this quarter increased by approximately 67% compared to the corresponding quarter of the previous year. Among the most outstanding low-cost airlines which expanded their operations in this quarter, are the following: Easy Jet, the British airline company, started to operate 3 weekly flights on route Tel Aviv – Paris as well, and increased the number of weekly flights it operates from Berlin, Milan and London (Gatwick). In total, Easy Jet's passenger traffic in this quarter increased by approximately 15% compared to the corresponding quarter of the previous year. Transavia, which also started operating three weekly flights on the Tel Aviv – Amsterdam route in April 2015 in addition to flights it began operating from Paris (a total of 5 weekly flights) and Lyon, increased its total passenger traffic by more than three times (236%) compared to the corresponding quarter of the previous year. Pegasus, the Turkish airline company, added 7 weekly flights on the Istanbul – Tel Aviv route and also started to operate 4 weekly scheduled low-cost flights on route to Anatolia. In total, Pegasus increased its passenger traffic by approximately 20% compared to the corresponding quarter of the previous year. In addition, also Germania Airlines, which operates weekly scheduled flights on the Tel Aviv – Hamburg and the Tel Aviv - Baden-Baden routes, commenced operations on routes to Israel, as well as the Spanish airline Air Europa, which started operating three weekly scheduled flights on the Tel Aviv – Madrid route, in addition to charter flights it operates to Barcelona and in summertime also to other vacation resorts in Spain.

In Reference to Section 7.2 – The Services in the Segment The following are data on the development of passenger traffic, by main destination groups: In the second quarter of 2015, international passenger traffic at Ben-Gurion Airport decreased by approximately 2% compared to the second quarter of 2014. Passenger traffic in the second quarter of 2015 was divided between the following airlines: El-Al (including flights marketer by Sun D'Or) – 32.7%; other scheduled airlines – 58.2%; charter airlines (excluding flights marketer by Sun D'Or) – 9.1%, all compared to the second quarter of last year, in which passenger traffic was divided as follows: El-Al (including flights marketer by Sun D'Or) – 31.9%; other scheduled airlines – 55.9%; charter airlines (excluding flights marketer by Sun D'Or) – 12.2%

The Routes to Europe Passenger traffic on routes to Europe (West Europe, Commonwealth countries and East Europe) decreased by approximately 1% in the second quarter of 2015 compared to the corresponding quarter of the previous year. Foreign scheduled airlines that operated in this network of routes have recorded an increase of about 4% in passenger traffic whereas charter airlines operating in this network of routes have recorded a decrease of about 25% in passenger traffic compared to the corresponding quarter of the previous year. The Company's passenger traffic on all routes to Europe (including flights marketed by Sun D'Or) dropped by approximately 2% compared to the corresponding quarter of the previous year.

Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding Transatlantic Routes In the second quarter of 2015 an increase of approximately 26% was recorded in passenger traffic on the route to Canada, in view of a significant growth in the operations of Air Canada (+43%), which operated 6 weekly flights in lieu of 5 in the corresponding quarter of the previous year. On the other hand, a decrease of approximately 5% was recorded in passenger traffic on the routes to the United States in this quarter, as all airlines operating on the routes to the United States recoded a decrease in their passenger traffic, particularly Delta Airlines, the passenger traffic of which fell below 25% in the second quarter of 2015 as a result of the transition to using smaller aircraft. The Company's passenger traffic on the routes to North America (United States and Canada) in the second quarter of 2015 remained without substantial change compared to the second quarter of 2014 (-1%).

Far East Routes In the second quarter of 2015 a decrease of about 5% was noted in the total passenger traffic on the Far East routes (direct flights). The Company recorded in the second quarter of 2015 a decrease of approximately 4% in its passenger traffic on these routes compared to the second quarter of 2014, whereas Korean Airlines, which operates flights to Seoul, recorded a decrease of approximately 14% in its passenger traffic.

Regional Network In the second quarter of 2015, a decrease of about 5% was noted in the total passenger traffic on this network of routes compared to the corresponding quarter of the past year. A decrease of 14% was recorded in passenger traffic to Turkey, as a result of a drop in charter traffic to vacation resorts in Turkey. On the other hand, a growth of nearly 11% was recorded in passenger traffic on routes to Greece, which forms an alternative to the vacation resorts in Turkey, in relation to the second quarter of 2014. An 13% increase was noted in the traffic to Cyprus, due to a significant growth in the Company's operations on this route (in the framework of UP flights) and the operations of the Greek airline Aegean Airlines.

In Reference to Section 7.4 – New Services New route to Boston – in June of this year, the Company launched a non-stop flight to Boston. The Company started operating three weekly flights on this route using a 767-300 Boeing aircraft with a configuration of 218 seats, of which 22 are bed-seats in Business class and 28 are seats in Economy Plus. During the flight, passengers can enjoy an in-flight streaming entertainment system allowing to view, with the utmost comfort, a variety of contents directly on their personal devices.

In Reference to Section 7.6.3 – Passenger Marketing and Sales In the second quarter of 2015, revenues from online sales increased by approximately 17% (including sales of package-deals, additional services and upgrades) compared to the corresponding period of the previous year. The Company's website presented an increase of nearly 68% in online sales of additional services through the website.

In Reference to Section 7.10 – Production Capacity In the second quarter of 2015, the Company's seats supply (in ASK terms) remained without change and the number of the Company's paying passengers, multiplied by the distance flown (RPK),

Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding increased by 3.6% compared to the corresponding quarter of the previous year. Therefore, in the second quarter of 2015 a slight decrease occurred in the weighted load factor, which was 81.1%, compared to 84.4% in the corresponding quarter of the previous year

In Reference to Section 7.11 – Aircraft Fleet  In May 2015 the Company entered into a "wet lease" agreement (a lease of an aircraft with crew) with Travel Services S.A for a three-month period commencing June 2015, with an extension option of two additional months due to a shortage of air crews in the Company.  In May 2015 the Company entered into a "wet lease" agreement with the Spanish company Privilege Style, S.A for a period of two and a half months commencing June 14, 2015 and ending August 31, 2015, with an extension option of two additional months due to a shortage of air crews in the Company.  In June 2015 the Company approved the extension of the lease agreement of a 737-800 aircraft marked EKO for an additional 60-day period commencing November 9, 2015 and ending November 9, 2020 or when both engines of the aircraft are left with 30 rounds before renovation, whichever is earlier. The Company has an option to terminate the lease during the period of the lease, subject to a prior notice and payment of exit fees in accordance with the provisions of the agreement.

2. Cargo Aircraft Field of Operations

In Reference to Section 8.1.1 – Structure of the Segment and Changes Occurring therein In the second quarter of 2015 the Company's share of the cargo transport market only was 25.9% compared to 25.5% in the corresponding period of the past year. The Company estimates that its share of cargo transport for the period January to June 2015 out of all cargo shipped by air to and from Israel (as well as cargo carried in the belly of passenger aircraft and including mail activity but excluding Sixth Freedom), was approximately 32.4%, compared to approximately 34.2% in the corresponding period last year.

In Reference to Section 8.1.3 (A) – Volume of Global Cargo Transport According to IATA reports, in the months between January and June 2015, an increase of about 3.9% occurred in the volume of global cargo transport (including cargo carried in the belly of passenger aircraft) in relation to the corresponding period last year and unlike the annual rate expected according to IATA estimates (+5%).

In Reference to Section 8.1.3 (B) – Volume of Cargo Transport by Aircraft to and from Israel According to data provided by Israel Airports Authority, in the months between January and June 2015, the volume of cargo traffic at Ben-Gurion Airport increased by about 5.6% compared to the corresponding period of the past year.

In Reference to Section 8.10 – Aircraft Fleet Due to a shortage of aircrew personnel, the Company had to lease cargo aircraft by means of "wet lease" throughout February – June 2015.

Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding In Reference to Section 8.2 – Services in the Segment Further to the Company's announcement in the 2014 Periodic Report, whereby in June 2014 the Company's Audit Committee and Board of Directors approved the exercise of the Company's option to extend the Framework Agreement with Maman – Cargo Terminals and Handling Ltd. ("Maman") until June 30, 2018, and whereby pursuant to the terms of the Framework Agreement, at the end of each year during the extension period the Company may choose whether to terminate the Framework Agreement or extend it on the same terms for another year up to the end of the extension period – the Company informs that the negotiations with Maman have not yet been concluded and the parties continue to operate under the Framework Agreement. In April 2015 the Company signed an SPA Agreement with GARGOLUX to for the transport of cargo that can be carried on cargo aircraft only. The agreement will enable the expansion of the route network to destinations in the Far East, North and South America.

3. Details on Both Operating Segments

In Reference to Section 9.4.2 - Employees Pursuant to Section 9.4.2 of Chapter A of the Company’s 2014 Periodic Report, the following is an updated table of the composition of the Company's employees as of June 30, 2015:

June 30, 2015 December 31, 2014 June 30, 2014 Permanent employees 3,782 3,788 3,766 Temporary employees 2,443 2,135 2,377 Total employees 6,225 5,923 6,143

On June 22, 2015 the Company and the New Histadrut Labor Federation, Professional Union Division - Transport Workers Union, and the Employee Representation of all El Al employees (the "Histadrut") have executed a special collective agreement constituting an interim agreement (the "Interim Agreement") containing the understandings that have been reached regarding the labor relations in the Company. The parties have been conducting negotiations from the date of execution of the Interim Agreement, which are expected to end on October 31, 2015, with respect to each one of the professional divisions of the Company, for the purpose of executing a new special collective agreement for the years 2015-2018 (the "2015 Agreement"). The Interim Agreement is in effect until October 31, 2015 or until the execution of the 2015 Agreement, whichever is earlier. In the event the 2015 Agreement is not executed, the Interim Agreement shall become the 2015 Agreement and be deemed a binding collective agreement commencing on November 1, 2015 and ending on August 31, 2018. The Interim Agreement includes, inter alia, the following issues: A. A salary increment of 3% payable after the execution of the 2015 Agreement or upon payment of September 2015 salary, whichever is earlier (the "Increment Payment Date"), to all employees who will be employed by the Company on such date and to which said agreement applies, of which a 2% increment shall be effective retroactively for the period commencing on January 1, 2015 and ending on the date stated above.

Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding B. A right to conditional salary increments of 0.5% - 1% subject to the Company's revenues and the terms stipulated in the Interim Agreement. C. Payment of a one-time Signing Bonus totaling USD 3 million, gross, to be distributed among all the Company's employees to which the said agreement applies. D. Termination of employment of 50 permanent employees – 35 employees will terminate their employment by December 31, 2015 and 15 additional employees will terminate their employment during the term of the agreement. E. The obligations of the Employee Representation and the Histadrut to maintain full industrial quiet on matters regulated in the Interim Agreement. F. The obligation of the employees to work in the standard framework, without disruptions, thus allowing full exploitation of the operating routine of the Company, including the delivery of all flights according to the planned flight schedule and the training of flight cadets and pilots in line with the Management's plan. G. Establishing a mechanism for settling disputes on various issues related to the sector of pilots, with respect to which it was agreed to hold an arbitration process in the event the parties do not reach understandings until August 31, 2015. The Interim Agreement was approved by the Board of Directors of the Company on June 24, 2015. For further details, see Note 10 to the Interim Financial Statements as of June 30, 2015. In July 2015, after the date of the Report, a judgment was given by the Regional Labor Court in Tel Aviv following a party's motion in a collective dispute filed by the New Histadrut Labor Federation, El Al workers committee and others against the Company, claiming that the Grounding Chapter of the collective agreement must be applied to the Company's pilots who over the age of 65 (all of the above is due to the decision of the International Civil Aviation Organization that pilots beyond the age of 65 can no longer serve as active pilots in airline companies). The hearing of the case was consolidated with the party's motion filed by the Company against the pilots' sanctions that took place in June in this context. The Labor Court accepted the Company's position that this is not a situation of "grounding" or "temporary grounding" under the collective agreement, since "grounding" is an intentional situation where a pilot loses his competency and license, unlike a situation where the Company is unable to employ an old pilot as pilot due to the fact that the countries over which and to which the Company flies do not agree that pilot over 65 would fly above them and to them. The Labor Court determined that this is not a "grounding" of a pilot but rather a "market failure" situation in which the Company found itself without it being its fault. The Labor Court further determined, with respect to the wage, that the demand to pay pilots over the age of 65 the same salary as they earned when they worked as flying pilots, although currently they are employed in "ground" positions, is unreasonable since this too would constitute discrimination towards other older employees working in the same positions.

In Reference to Section 9.11.2 (G) – Regulatory Arrangements – Restrictive Practice Law, 5747-1988 Further to the Company's immediate report dated June 30, 2015 (reference number: 20215-01- 05999) and to the description provided in Section 9.11.2 of the Company's financial statements as of December 31, 2014, regarding the protest filed by the Company following the announcement of the Antitrust General Director that the Company has been declared a monopolist in the provision of aviation security services abroad, pursuant to professional guidelines provided to airline companies in accordance with the provisions of the Security Regulation in Public Bodies Law, 5757-1998 and

Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding the Flight Law (Security in Civil Aviation), 5747-2977, concerning passengers and baggage on passenger flights – on June 17, 2015 the protest was dismissed, thus the announcement of the Antitrust General Director remains in effect.

In Reference to Sections 9.15 and 9.16 - Business Targets and Strategy; Expected Development in the Coming Year Further to the Company's reports contained in its Periodic Report for the first quarter of 2015 regarding receipt of initial proposals from the aircraft manufacturers Boeing and Airbus in an RFP for the acquisition of different models of wide-body aircraft and the inspection thereof, updated proposals from these companies have been received by the Company and on August 5, 2015 the Company's Board of Directors approved exclusive negotiations with Boeing and with aircraft leasing companies for the purpose of entering into transactions for the acquisition and lease of 15 Boeing aircraft, for obtaining an option to purchase additional 13 aircraft and for the purchase of alternative engines. These aircraft include the Boeing 787-9 (Dreamliner) aircraft, which will gradually replace the Boeing 747-400 aircraft, and the Bowing 787-8 (Dreamliner) aircraft, which will gradually replace the Boeing 767-300ER aircraft. Aircraft delivery dates are expected between 2017 and 2020. The schedule for ending the negotiations and for the execution of a Memorandum of Understanding with Boeing, the aircraft leasing companies and engine manufacturers is expected to continue for several weeks. The Company estimates that as of the date of this Report, the approximate estimate of the final purchase amount of these aircraft and the alternative engines (without the options) is assessed at approximately USD 800-900 million, based on a preliminary estimate whereby about half of the aircraft will be purchased by the Company. It shall be noted that the final purchase amount will be decided upon according to a division to be determined in the future between the number of aircraft to be acquired by the Company and the number of aircraft to be leased by it, in accordance with the purchase and leasing agreements that will be executed in the future. It shall be clarified that the information contained in this Report with respect to purchase and lease, with all components included, is a forward-looking information, as defined in the Securities Law, 5728-1968, consisting of forecasts, estimates and assessments available to the Company as of this date, which are based, inter alia, on data held by the Company as of the date of this Report, including the proposals received from Boeing and Airbus, the Company's experience with similar transactions and the economic condition in Israel and worldwide. It shall be further clarified that these forecasts, estimates and assessments may not materialize, in whole or in part, or materialize differently than expected, among other things, due to lack of agreement with Boeing on the terms of the agreements and the need for resumed negotiations with Airbus, the terms and conditions of the agreements to be executed (if any), the Company's decision regarding the mixture of purchase and lease, the exercise of purchase options and the cancellation possibilities of some of the aircraft included in the transaction, changes in the conditions of the market in which the Company operates, realization of risk factors applicable to the Company's operations, et cetera.

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El Al Israel Airlines Limited.

Report of the Board of Directors on the State of the Corporation's Affairs For the Period Ending June 30 2015

The Company and its Business Environment We hereby present the Report of the Board of Directors on the State of the Corporation's Affairs for the period ending June 30 2015.

The Company serves as the designated air carrier of the State of Israel on most international routes that operate to and from Israel. The primary activities of the Company and its subsidiaries are the transport of passengers and freight on scheduled and charter flights, between Israel and other countries.

The Company is also engaged in providing security services and maintenance services, including for other airlines at Ben Gurion Airport, in the sale of duty-free products, and through investees – in ancillary activities, mainly the manufacture and supply of airline food and the management of several overseas travel agencies.

The business environment in which the Company operates is the international civil aviation industry, and inbound and outbound tourism, which is characterized by a seasonal nature and strong competition, which is grows stronger in periods of over-capacity, as well as high levels of sensitivity to the economic, political and security situation in Israel and around the world.

The Group has two operating sectors reported as operating segments in the Company's consolidated Financial Statements: a) Passenger aircraft activity – in this segment, the Company transports passengers, as well as freight in the holds of passenger aircraft, and provides ancillary services, such as the sale of duty-free products. In the field of passenger transport, in the second quarter of 2015 the Company competed with two Israeli airlines (Arkia and Israir), over 60 foreign airlines that operate scheduled flights and over 40 foreign charter airlines operating flights to and from Israel. Revenues of this operating segment constituted 90.7% of the Company's total revenues in the second quarter of 2015. b) Cargo aircraft activity – in this segment, the Company transports cargo in a single leased 747-400 aircraft. In the field of cargo transport, the Company competes with one Israeli airline (CAL), with 9 foreign airlines operating cargo aircraft on a continuous basis, and with most of the scheduled airlines that operate passenger planes that carry cargo in their holds. Revenues from this area of activity constituted 3.9% of all of the Group’s revenues in the second quarter of 2015.

The Company has additional revenues that are not assigned to its major areas of activity, accounting for 5.4% of its total revenues in the reported quarter.

For further details regarding the Group's areas of activity, see a.3 below.

b-1

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a. Explanations of the Board of Directors for the State of the Corporation's Affairs a.1 Analysis of the Results of the Company’s Business Activity

a.1.1 Market Data

For the Three-Month Period Ending June 30 2015

Passenger and cargo traffic in BGN:

2 0 1 5 2 0 1 4 Change Thousands Thousands %

Incoming tourists * 719 845 )126( )15%( Departing Israelis* 1,306 1,230 76 6% Cargo imports – tons 37.9 34.4 3.5 10% **/* Cargo exports – tons 33.7 33.5 0.2 0.7% **/*

* Source: Central Bureau of Statistics. ** Does not include cargo in transit.

Incoming Tourist & Departing Israeli Traffic (In Thousands)

1,306 1,230 1,400 1,200 931 972 1,000 800 845 717 705 719 600 400 200 0

Incoming tourists Departing Israelis

* Source: Central Bureau of Statistics.

b-2

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Imports & Exports of Cargo by Air to and from Israel (in Thousands of Tons)

50

45

37.8 37.9 40 33.5 33.7 35 34.6 34.4 33.8 33.7 30

25

20

Export Import

*Source: the Israeli Airports Authority

Total Traffic through BGN and the Market Share of El Al and Sun D’Or

total traffic (mill. - per passeng. Leg) El Al & Sun D'or share in total traffic (%)

6.0 40%

33.7% 33.8% 32.7% 5.0 31.9%

30% 4.1 4.0 4.0 3.3 3.1 3.0 20%

2.0

10%

1.0

0.0 0%

*Source: the Israeli Airports Authority

For the Six-Month Period Ending June 30

Passenger and cargo traffic in BGN:

2 0 1 5 2 0 1 4 Change Thousands Thousands %

Incoming tourists * 1,251 1,448 )197( )14%( Departing Israelis* 2,201 1,994 207 10% Cargo imports – tons 75.4 69.2 6.2 9% **/* Cargo exports – tons 71.0 70.5 0.5 1% **/*

* Source: Central Bureau of Statistics. ** Not including cargo in transit.

b-3

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a.1.2 Company Operating Data*

For the Three-Month Period Ending June 30 2015

2 0 1 5 2 0 1 4 Change

Scheduled and charter passenger segments (paying passengers) – in thousands 1,257 1,258 )0.1%( RPK (scheduled) – in millions 5,010 5,199 )3.6%( ASK (scheduled) – in millions 6,180 6,164 0.3% Load factor (scheduled) – in percentages 81.1% 84.4% )3.9%( Total market share (scheduled and charter) – in percentages 32.7% 31.9% 2.7% Ton of cargo flown – in thousands 23.4 21.8 7.4% RTK – in millions 124.8 114.5 9.0% Weighted flight hours (including leased equipment) – in thousands* 43.0 42.1 2.1%

* Weighted flight hours in Boeing 767 terms.

Operating Data (in Millions)

7,000 100% 6,164 6,180 6,000 5,411 5,709 5,199 5,010 5,000 4,707 4,457 90% 4,000 3,000 84.4% 82.4% 82.4% 80% 2,000 81.1% 1,000 0 70%

RPK ASK L. F.

Glossary: Passenger leg – Flight coupon in one direction. RPK – Revenue Passenger Kilometer – number of paying passengers multiplied by distance flown. ASK – Available Seat Kilometer – number of seats offered for sale multiplied by distance flown. RTK – Revenue Ton Kilometer – weight of paid flown cargo in tons multiplied by distance flown. Passenger Load Factor (occupancy) – flown passenger-km is expressed as a percentage of available seat- km. Weighted flight hours – weighted value of the planes: Boeing 767 = 1.0; Boeing 747 = 2.0; Boeing 777 = 1.6; Boeing 737 = 0.6. These weighted values were determined based on an estimate of the total expenses of each type of aircraft, and are used consistently to calculate weighted flight hours as an indicator of the volume of aviation activity.

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For the Six-Month Period Ending June 30

2 0 1 5 2 0 1 4 Change

Scheduled and charter passenger segments (paying passengers) – in thousands 2,214 2,112 4.8% RPK (scheduled) – in millions 9,110 9,023 1.0% ASK (scheduled) – in millions 11,339 10,901 4.0% Load factor )scheduled) – in percentages 80.3% 82.8% )2.9%( Total market share (scheduled and charter) – in percentages 33.8% 32.5% 3.9% Ton of cargo flown – in thousands 47.9 44.6 7.4% RTK – in millions 256.1 234.8 9.1% Weighted flight hours (including leased equipment) – in thousands* 79.4 75.8 4.7% Number of aircraft operating at the end of the period – in units 41 39 2 Average age of owned aircraft fleet at the end of the period – in years 12.7 12.3 0.4

* Weighted flight hours in Boeing 767 terms.

Operating Data (in Millions)

11,339 12,000 10,901 100% 10,038 10,297 10,000 9,023 9,110 8,216 8,456 8,000 90%

6,000

4,000 80% 81.8% 82.1% 82.8% 80.3% 2,000

0 70%

RPK ASK L. F.

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a.2 Gain/loss data (Consolidated Financial Statements): For the Three Month Period Ending June 30

2015 2014 Change

Thousands of % of Thousands of % of Thousands Dollars Turnover Dollars Turnover of Dollars %

Operating revenues 510,642 100% 571,532 100% )60,890( )10.7%( Operating expenses )407,895( )79.9%( * )465,260( )81.4%( 57,365 )12.3%( Gross profit 102,747 20.1% 106,272 18.6% )3,525( )3.3%( Selling expenses )48,118( )9.4%( * )53,551( )9.4%( 5,433 )10.1%( General and administrative expenses )22,389( )4.4%( * )25,524( )4.5%( 3,135 )12.3%( Other revenues (expenses), net )4,830( )0.9%( 55 0.0% )4,885( Profits from regular activities 27,410 5.4% 27,251 4.8% 159 0.6% Financing expenses )5,551( )6,185( 1,122 Financing income 1,785 * 1,319 )22( The Company's share of the profits of affiliates - 168 )168( Profit before taxes on income 23,644 22,553 1,091 Taxes on income )6,343( )6,259( )84( Profit for the period 17,301 16,294 1,007

* Adjustment due to retroactive implementation of changes in accounting policy, see Note 4 to the Financial Statements.

Key factors that influenced the business results in the reported period compared to the same quarter last year:

Operating revenues – operating revenues in the reported period decreased by 10.7% compared to the corresponding period last year. Passenger revenues decreased by 11.9%, as a result of a decrease in RPK, which was influenced by the drop of incoming tourism (15%) and the timing of the Passover holiday as well as a decrease in yield per passenger-km, deriving in part from the drop in oil prices and competition, which was also influenced by the drop in passenger traffic, as noted above. Revenues were also influenced by the erosion of the exchange rates of various currencies relative to the USD. Cargo transportation revenues increased by 0.2%, mainly as a result of an increase in the amount of ton-kilometers flown, partially offset by a decrease in yield per ton-kilometer.

Operating expenses – operating expenses decreased by 12.3% in the reported period relative to the corresponding period last year, mainly as a result of a decrease in jet fuel expenses, as explained below, as a result of the erosion of exchange rates of various currencies relative to the USD and offsetting added salaries due to the work agreement signed in June 2015 (see Note 10 to the Financial Statements).

The Company's jet fuel expenses decreased by $53.5 million (29.7%) relative to the corresponding quarter last year. The decrease derived from the influence of the drop in the effective price of jet fuel (which includes the results of hedging activity taken by the Company, as described below), offset in part by the influence of a 2% increase in flight hours, following which the amount of jet fuel consumed increased. The share of jet fuel expenses from turnover dropped from 31.5% in the corresponding period last year to 24.8% in the reported quarter.

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The following table concentrates the influence of the jet fuel hedging activity on gain/loss in the second quarter of 2015 compared to the same quarter last year (in millions of dollars):

2015 2014 Difference

Cash flow impact )21.5( 1.7 )23.2(

Change in fair value 9.7 0.9 8.8

Total revenues (expenses) )11.8( 2.6 )14.4(

The positive changes in fair value of jet fuel hedging agreements charged to net capital reserve in the second quarter of 2015 amounted to $14.6 million.

For further information on jet fuel price hedging see b.1.(3) below.

Development of average jet fuel prices on the market:

$/Barrel cent/gallon 500.0 120 108.8 109.8 450.0 103.3 400.0 100 350.0

80 300.0 63.5 294.6 288.1 250.0 60 276.1 200.0

40 150.0 $/Barrel cent/gallon 175.9 100.0 20 50.0

0 0.0

Salary expenses

Salary costs in the reported quarter decreased relative to the same quarter last year. The decrease comes as a result of a number of trends: the strengthening of the USD relative to the NIS and an increase in interest rates according to which the vacation liability is discounted, which reduced salary costs on the one hand, while on the other, the collective agreement signed in June, which led to an increase in the Company’s salary expenses, in part on a one-time basis (for further details see Note 10 to the Financial Statements).

Note that the influence of the results of the NIS-USD exchange rate hedging agreements charged to salary expenses is a $2.0 million revenue compared to a $2.6 million revenue in the same quarter last year.

The positive changes in fair value of hedging agreements charged to net capital reserve in the second quarter of 2015 amounted to $4.1 million.

Gross profits – the Company’s gross profits in the reported quarter amounted to 102.7 million and constituted 20.1% of turnover compared to a gross profit of $106.3 million, which constituted 18.6% of turnover in the corresponding quarter last year.

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Gross profit rate:

25%

20.1% 20% 18.6%

15.1% 15.5% 15%

10%

5%

0%

Selling expenses – selling expenses decreased by 10.1% compared to the same quarter last year, largely as a result of a decrease in distribution expenses, due to the drop in revenues, and the drop in salary expenses, as noted above. The share of selling expenses from turnover remained unchanged relative to the corresponding quarter last year, 9.4%.

Administrative and general expenses – administrative and general expenses decreased by 12.3% relative to the same quarter last year, mainly as a result of the decrease in salary expenses, as noted above. The share of administrative and general expenses out of turnover decreased from 4.5% in the corresponding period last year to 4.4% for the period.

Other income and expenses – the Company listed other net expenses to the amount of $4.8 million in the reported period for an early retirement plan for 35 employees (see Note 10 to the Financial Statements). The Company listed other net expenses to the amount of $55,000 in the same period las year.

Financing – net financing expenses in the reported quarter amounted to $3.8 million compared to $4.9 million in the corresponding period last year.

Pre-tax gain – the profit before tax for the reported quarter amounted to $23.6 million, or 4.6% of turnover, a 4.8% increase compared to a pre-tax gain of $22.6 million in the corresponding quarter last year, constituting 3.9% of turnover.

Taxes on income – in the reported quarter, the Group listed a tax expense of $6.3 million, similar to the tax expense listed in the corresponding quarter last year.

Profit for the period – profit for the period amounted to $17.3 million, 3.4% of turnover, a 6.2% increase compared to a profit of $16.3 million in the corresponding quarter last year, 2.9% of turnover.

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For the Six Month Period Ending June 30:

2015 2014 Change

Thousands of % of Thousands of % of Thousands Dollars Turnover Dollars Turnover of Dollars %

Operating revenues 930,451 100% 986,949 100% )56,498( )5.7%( Operating expenses )775,285( )83.3%( * )863,095( )87.5%( 87,810 )10.2%( Gross profit 155,166 16.7% 123,854 12.5% 31,312 25.3% Selling expenses )92,140( )9.9%( * )99,383( )10.1%( 7,243 )7.3%( Administrative and general expenses )44,904( )4.8%( * )52,070( )5.3%( 7,166 )13.8%( Other revenues, net )4,802( )0.5%( 4,948 0.5% )9,750( Profit (loss) from regular activities 13,320 1.4% )22,651( )2.3%( 35,971 Financing expenses )12,832( )11,436( )1,396( Financing income 1,185 * 1,300 )115( The Company's share of the profits of affiliates 244 447 )203( Profit (loss) before taxes on income 1,917 )32,340( 34,257 Tax benefit (taxes on income) )606( 8,980 )9,586( Profit (loss) for the period 1,311 )23,360( 24,671

Key factors that influenced the business results in the six-month period ending June 30, 2015 compared to the same period last year are:

Operating revenues – operating revenues in the first six months of 2015 decreased by 5.7% compared to the corresponding period last year. Passenger revenues decreased by 6.5%, mainly as a result of a decrease in yield per passenger-km due to the drop in oil prices and due to competition influenced by the drop in incoming tourism (14%) as well as the erosion of the exchange rates of various currencies relative to the USD, offsetting an increase in the RPK. Cargo transportation revenues increased by 1.0% as a result of an increase in the amount of ton-kilometers flown, partially offset by a decrease in yield per ton-kilometer.

Operating expenses – operating expenses decreased by 10.2% in the first six months of 2015 relative to the corresponding period last year, mainly as a result of a decrease in jet fuel expenses, and the erosion of exchange rates of various currencies relative to the USD and offset by added salaries due to the work agreement signed in June 2015, as described above.

The Company's jet fuel expenses in the first half of 2015 decreased by 25.1% relative to the corresponding period last year, with the decrease deriving from the influence of the drop in the effective price of jet fuel (which includes the results of hedging activity taken by the Company, as described below), offset by the influence of the increase in amount of jet fuel consumed due to the increase in activity. Their share of the turnover decreased from 33.2% in the first half of 2014 to 26.4% in the first half of 2015.

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The following table concentrates the influence of the jet fuel hedging activity on gain/loss in the first half of 2015 compared to the same period last year (in millions of dollars):

2015 2014 Difference

Cash flow impact )50.3( 1.9 )52.2(

Change in fair value 14.2 0.4 13.8

Total revenues (expenses) )36.1( 2.3 )38.4(

The positive changes in fair value of jet fuel hedging agreements charged to net capital reserve in the first half of 2015 amounted to $23.8 million. For further information on jet fuel price hedging see b.1.(3) below.

Gross profits – the Company’s gross profits in the first half of 2015 amounted to $155.2 million and constituted 16.7% of turnover compared to a gross profit of $123.9 million, which constituted 12.5% of turnover in the corresponding period last year.

Selling expenses – selling expenses decreased by 7.3% in the first half of 2015 compared to the same period last year, largely as a result of a decrease in distribution expenses and a decrease in salary expenses due to the strengthening of the USD. The share of selling expenses from turnover decreased from 10.1% in the first half of 2014 to 9.9% in the first half of 2015.

Administrative and general expenses – administrative and general expenses items decreased by 13.8% in the first half of 2015 relative to the same period last year, as a result of the decrease in salary expenses, mainly due to the strengthening of the USD, and a drop in doubtful debt expenses. The share of administrative and general expenses out of turnover amounted to 4.8% in the reported period compared to 5.3% in the corresponding period last year.

Other income and expenses – the Company listed other net expenses to the amount of $4.8 million over the course of the first half of 2015, for an early retirement plan for 35 employees (see Note 10 to the Financial Statements). The Company listed other net revenues to the amount of $4.9 million in the corresponding period last year, mainly as a result of recording capital gains from the sale and re-lease of two engines.

Financing – net financing expenses in the first half of 2015 amounted to $11.6 million compared to $10.1 million in the corresponding period last year.

Pre-tax profit – the profit before tax in the first half of 2015 amounted to $1.9 million, or 0.2% of turnover, compared to a pre-tax loss of $32.3 million in the corresponding period last year, constituting 3.3% of turnover.

Taxes on income – in the first half of 2015, the Company recorded a tax expense of $0.6 million, compared to a tax benefit of $9 million in the corresponding period last year, mainly due to the transition from loss before tax to profit before tax.

Profit for the period – profit for the period amounted to $1.3 million, or 0.1% of turnover, compared to a $23.4 million loss in the corresponding period last year, or 2.4% of turnover.

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a.3 Segment-Based Reporting The following is operational segment data on a consolidated basis: a. General:

The Group has applied IFRS 8, "Operating Segments" (hereinafter "IFRS 8”).

According to IFRS 8, operational segments are identified based on internal reports on the Group's components, which are reviewed on a regular basis by the Group's chief operating decision maker for the purpose of allocating resources and assessing the performance of the operational segments.

The report array conveyed to the Group's chief operating decision maker, for the purpose of allocating resources and assessing the performance of the operational segments, is based on the distinction between revenues from passenger aircraft, revenues from the cargo aircraft, revenue from charter flights and other revenues. In light of the above, the following are the Company's reported operating segments in accordance with IFRS 8:

Segment A – passenger aircraft activity.

Segment B – cargo aircraft activity.

In determining the results of the reported operating segments, a number of components not part of the direct costs involved in operating the flights, such as depreciation as a result of aviation equipment, fixed maintenance costs and fixed costs at the Company’s overseas offices are also included. b. Analysis of income and results by operating segments:

For the Three Month Period Ending June 30 2015 Passenger Cargo Adjust- Aircraft Aircraft Others ments Total Thousands of Dollars (Unaudited) Revenues Revenues from outside customers * 463,160 19,660 11,021 16,801 510,642 Inter-segment revenues - - 12,511 )12,511( -

Total segment revenues 463,160 19,660 23,532 4,290 510,642

Segment results 67,979 )823( 12,105 - 79,261 Unassigned expenses )51,851(

Operating profit 27,410 Financing expenses )5,551( Financing income 1,785 The Company's share of the profits of affiliates -

Profit before taxes on income 23,644 Taxes on income )6,343(

Profit for the period 17,301

* Including $22,283,000 in revenues from cargo and mail in the holds of passenger planes.

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For the Three Month Period Ending June 30 2014 Passenger Cargo Adjust- Aircraft Aircraft Others ments Total Thousands of Dollars (Unaudited) Revenues: Revenues from outside customers * 528,558 16,949 12,752 13,273 571,532 Inter-segment revenues - - 8,326 )8,326( -

Total segment revenues 528,558 16,949 21,078 4,947 571,532

Segment results 69,897 )48( 10,318 - 80,167 Unassigned expenses ** )52,916(

Operating profit 27,251 Financing expenses )6,185( Financing income ** 1,319 The Company's share of the profits of affiliates 168

Profit before taxes on income 22,553 Taxes on income )6,259(

Profit for the period 16,294

* Including $25,007,000 in revenues from cargo and mail in the holds of passenger planes. ** Adjustment due to retroactive implementation of changes in accounting policy, see Note 4 to the Financial Statements.

In the three-month period ending June 30, revenues from the passenger plane segment decreased relative to the corresponding quarter last year, as described in 2.a above. Revenues from the cargo plane increased by 16%, mainly as a result of an increase in the amount of ton-kilometers flown offset by a decrease in yield per ton-kilometer.

The passenger plane segment listed a $68.0 million contribution in the reported quarter (14.7% of turnover), a decrease compared to a contribution of $69.9 million (13.2% of turnover) in the corresponding quarter last year, mainly as a result of the decrease in revenues offset by a decrease in fuel expenses, as explained above. The results of the cargo plane segment worsened, listing a $823,000 loss (4.2% of turnover) compared to a $48,000 loss (0.3% of turnover) in the corresponding quarter last year, largely as a result of an increase in ad hoc leasing expenses for a cargo plane from a foreign company partially offset by a decrease in fuel expenses.

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For the Six Month Period Ending June 30 2015 Passenger Cargo Adjust- Aircraft Aircraft Others ments Total Thousands of Dollars (Unaudited) Revenues Revenues from outside customers * 842,149 39,198 23,534 25,570 930,451 Inter-segment revenues - - 17,861 )17,861( -

Total segment revenues 842,149 39,198 41,395 7,709 930,451

Segment results 96,747 )1,719( 21,603 - 116,631 Unassigned expenses )103,311(

Operating profit 13,320 Financing expenses )12,832( Financing income 1,185 The Company's share of the profits of affiliates 244

Profit before taxes on income 1,917 Taxes on income )606(

Profit for the period 1,311

* Including $48,266,000 in revenues from cargo and mail in the holds of passenger planes.

For the Six Month Period Ending June 30 2014 Passenger Cargo Adjust- Aircraft Aircraft Others ments Total Thousands of Dollars (Unaudited) Revenues: Revenues from outside customers * 903,874 35,571 25,112 22,392 986,949 Inter-segment revenues - - 13,293 )13,293( -

Total segment revenues 903,874 35,571 38,405 9,099 986,949

Segment results 65,533 )250( 20,406 - 85,689 Unassigned expenses **)108,340(

Operational loss )22,651( Financing expenses )11,436( Financing income ** 1,300 The Company's share of the profits of affiliates 447

Loss before taxes on income )32,340( Tax benefit 8,980

Loss for the period )23,360(

* Including $51,368,000 in revenues from cargo and mail in the holds of passenger planes. ** Adjustment due to retroactive implementation of changes in accounting policy, see Note 4 to the Financial Statements.

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In the six-month period ending June 30, revenues from the passenger plane segment decreased relative to the corresponding period last year, as described in 2.a above. Revenues from the cargo plane increased as a result of an increase in the amount of ton-kilometers flown offset by a decrease in yield per ton-kilometer.

The share of the cargo plane segment out of total revenues in the reported period dropped from 91.6% in the first six months of 2014 to 90.5% in the reported period. The cargo plane segment increased from 3.6% of total revenues in the first six months of 2014 to 4.2% in the reported period.

The passenger plane segment recorded a positive contribution of $96.7 million in the reported period (11.5% of turnover) relative to a contribution of $65.5 million (7.3% of turnover) in the corresponding period last year. The results of the cargo plane segment worsened, listing a $1.7 million loss (4.4% of turnover) in the first half of 2015 compared to a $0.3 million loss (0.7% of turnover) in the corresponding quarter last year, largely as a result of an increase in ad hoc leasing expenses for a cargo plane from a foreign company partially offset by a decrease in fuel expenses.

For the Year Ending December 31 2014 Passenger Cargo Adjust- Aircraft Aircraft Others ments Total Thousands of Dollars Revenues: Revenues from outside customers *1,910,620 69,932 47,635 53,116 2,081,303 Inter-segment revenues - - 34,529 )34,529( -

Total segment revenues 1,910,620 69,932 82,164 18,587 2,081,303

Segment results 193,261 )742( 40,864 - 233,383 Unassigned expenses **)246,167(

Operational loss )12,784( Financing expenses **)27,471( Financing income 912 The Company's share of the profits of subsidiaries, net of tax 1,056

Loss before taxes on income )38,287( Tax benefit 10,227

Yearly loss )28,060(

* Including $105,280,000 in revenues from cargo and mail in the holds of passenger planes. ** Adjustment due to retroactive implementation of changes in accounting policy, see Note 4 to the Financial Statements.

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a.4 Seasonal Factors The Group's activity is based on seasonal factors and focuses on peak periods. Heavy traffic of Israeli residents traveling abroad occurs primarily during the summer months and during holiday periods, while heavy incoming tourist traffic occurs during the summer months and during Jewish or Christian holidays or vacation time in their countries of origin. a.5 Financial Position (Consolidated Statements)

June 30 December June 30 December 2015 31 2014 * 2015 31 2014 * Thousands of Dollars Thousands of Dollars

Current assets 442,661 288,420 Current Liabilities 948,998 807,766 Non-current Non-current assets 1,306,432 1,293,200 liabilities 655,078 662,419 Equity 145,017 111,435 Total 1,749,093 1,581,620 Total 1,749,093 1,581,620

* Reclassified.

The following are the main changes in the assets, liabilities and equity items as of June 30 2015 compared to December 31 2014: Current assets: The Company’s current assets as of June 30 2015 amounted to a total of $442.7 million, a $154.2 million increase relative to December 31 2014. The increase largely derived from the seasonal influence of an increase in cash and customer balances offset by a decrease in pledged deposits (see a.6 below).

Non-current assets:

Non-current assets as of June 30 2015 amounted to a total of $1,306.4 million, a $13.2 million increase relative to December 31 2014, mainly as a result of the purchase of a 737-900 plane and from payments on accounts of 3 additional 737-900 planes, offset by periodic depreciation expenses.

Current liabilities:

The Company’s current liabilities as of June 30 2015 amounted to a total of $949.0 million. The $141.2 million increase relative to December 31 2014 largely derived as a result of a seasonal increase in unearned revenue from the sale of flight tickets and from an increase in short-term credit, mainly as a result of financing for advance payments for aircraft, offset by a decrease in the derivative financial instruments item as explained below.

The total net change in the fair value of jet fuel, interest and foreign currency hedging presented under current liabilities and non-current liabilities items, amounted to in a $60.6 million decrease in negative fair value compared to fair value as at the end of 2014 (jet fuel hedging – a $46.5 million decrease, interest hedging – a $0.2 million increase, foreign currency hedging – a $13.9 million decrease). The change largely came as a result of transactions reaching redemption, from transactions occurring in the reported period and from changes in the fair value of transactions still open as of the reported date. For further details see b.1.(3), b.1.(4) and b.1.(5) below and Note 7 to the Financial Statements.

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Non-current liabilities: The Company’s non-current liabilities as of June 30 2015 amounted to a total of $655.1 million, a $7.3 million decrease relative to December 31 2014. The difference derived from the redemption of loans offset by a loan received in March 2015 to finance a 737-900 aircraft, the fifth of the series.

Equity Total equity as of June 30 2015 amounted to $145.0 million. The $33.6 million increase relative to equity as of December 31 2014 largely derives from the increase in capital reserve due to cash flow hedging as a result of an increase in the fair value of hedging agreements.

Equity development as of June 30 (millions of dollars):

160 144.3 145.0 140

120 107.3

100 89.2

80

60

40

20

0

As of June 30 2015, the Company has a working capital deficit of $506.3 million, compared to a deficit of $519.3 million on December 31 2014. The Company’s current ratio as of June 30 2015 amounted to 46.6% compared to 35.7% as of December 31 2014. The working capital deficit was largely influenced by an increase in unearned revenue and in short-term credit offset by an increase in cash, deposits and customers. The working capital deficit consists of three material elements included under the Company’s current liabilities items and characterized by current business cycles: unearned revenues from the sale of flight tickets including port taxes, unearned revenues from frequent flyer clubs, and employee vacation obligations. These items are influenced, among other things, by the seasonality of the activity and by the timing of the holidays. Therefore, a material part of the working capital deficit is not cash-flow based in the short term. Furthermore, the deficit was influenced by short-term loans for the purchase of new 737-900 planes that will be converted into long-term loans in the coming year, upon receiving the aircraft.

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a.6 Liquidity and Financing Sources

Movement in cash flow for the three month period ending June 30 2015 compared to the same period last year is:

April-June 2015 2014 Change Thousands of Thousands of Dollars Dollars

Cash Flow from Current Activities 78,866 84,072 (5,206) Cash flow for investment activities (20,995) (23,171) 2,176 Cash Flows from Financing Activity (2,315) (5,611) 3,296 Revenues from exchange rate differentials due to cash and cash equivalents 2,319 93 2,226 Increase in cash and cash equivalents 57,875 55,383 2,492

Operating Activities

In the reported quarter, the Company generated a positive operating cash flow of $78.9 million, compared to a positive operating cash flow of $84.1 million in the corresponding quarter last year.

Investment Activities

The Company made a net investment of $21.0 million in investment activity in the second quarter of 2015. Investment in fixed and intangible assets amounted to a total of $31.7 million (mainly payments for the purchase of 737-900 aircraft and the purchase of parts and accessories). On the other hand, the Company realized pledged deposits used as collateral for jet fuel hedging agreements to the sum of $10.7 million.

The Company made a net investment of $23.2 million in investment activity in the second quarter of 2014. Investment in fixed and intangible assets amounted to a total of $24.3 million (mainly payments on account of the purchase of 737-900 aircraft and the purchase of parts and accessories). On the other hand, the Company received a total of $1.2 million from the realization of pledged deposits

Financing Activities

The Company used a net sum of $2.3 million for financing activity in the second quarter of 2015. The Company received loans to the sum of $15.4 million and increased its short-term credit to the sum of $7.3 million, while repaying loans to the sum of $25.1 million.

The Company used a net sum of $5.6 million for financing activity in the second quarter of 2014. The Company repaid long-term loans to the sum of $24.2 million, while on the other hand it received short-term credit to the sum of $18.6 million.

The reported quarter saw a $57.9 million increase in the balance of the Group’s cash and cash equivalents, which amounted to $176.6 million as of June 30 2015. Furthermore, as of June 30 2015 the Company had designated cash, short-term deposits and pledged deposits to the total sum of $14.1 million.

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Movements in cash flow for the six-month period ending June 30 2015 compared to the same period last year are:

January-June 2015 2014 Change Thousands of Thousands of Dollars Dollars

Cash Flow from Current Activities 138,036 159,914 (21,878) Cash flow for investment activities (48,792) (57,050) 8,258 Cash Flows from (for) Financing Activities 31,057 (12,802) 43,859 Revenues from exchange rate differentials due to cash and cash equivalents 1,625 59 1,566 Increase in cash and cash equivalents 121,926 90,121 31,805

Current Activities

The Group received cash flows from operating activity to the amount of $138.0 million in the six months ending June 30 2015 compared to cash flows from operating activity to the amount of $159.9 million in the same period last year. The decrease in current cash flow largely derived from changes in asset and liability items (mainly a decrease in unearned revenues and trade payables) as well as from payment deriving from realization of hedging agreements, which applied during the period, offset by the gap between profit before tax in the reported period compared to the loss before tax in the corresponding period last year.

Investment Activities

In the six months ending June 30 2015 the Company invested a net sum of $48.8 million in investment activity. Investment in fixed and intangible assets amounted to a total of $83.5 million (mainly payments on account of the purchase of 737-900 aircraft and the purchase of parts and accessories). On the other hand, pledged deposits were realized to the sum of $34.3 million.

The Company made a net investment of $57.1 million in investment activity in the first half of 2014. Investment in fixed and intangible assets amounted to a total of $66.3 million (mainly payments on account of the purchase of 737-900 aircraft and the purchase of parts and accessories). On the other hand, the Company received a total of $8.0 million from the realization of fixed assets, mainly from the sale and re- leasing of two engines.

Financing Activities

In the six months ending June 30 2015 the Company received a net sum of $31.1 from financing activity. In this period, the Company repaid long-term loans to the sum of $73.8 million, while also receiving net loans (less raising costs) to the sum of $85.2 million and $19.7 million in short-term credit.

The Company used a net sum of $12.8 million for financing activity in the first half of 2014. In this period, the Company repaid long-term loans to the sum of $71.7 million, while also receiving net loans (less raising costs) to the sum of $47.1 million and $11.7 million in short-term credit.

In total, the reported period saw a $121.9 million increase in the Group’s balance of cash and cash equivalents.

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Development of cash flow from current activity in the second quarter (millions of dollars):

90 84.1 78.9 80

70

60 47.8 50

40

30

20 14.1

10

0

The Company's material loans and credit frameworks:

Following Legal Position 104-15 of the Securities Authority dated October 30 2011, regarding a “reportable credit event”, the Company has established that the threshold of materiality for the purpose of detailing material loans is 5% of the Company’s balance sheet total.

In accordance with the criteria set above, no changes occurred in the Company’s material loans in the reported period.

In the matter of additional details pertaining to the Company’s loans and compliance with financial restrictions and covenants, see Note 8 to the June 30 2015 Financial Statements and Note 18 to the December 31 2014 Financial Statements.

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b. Market risk exposure and management:

b.1 Qualitative Reporting on Exposure to and Management of Market Risks

b.1. (1) General – Description of Market risks to which the Company is Exposed

The following are details of the market risks to which the Company is exposed:

Exposure to changes in prices of jet fuel – changes in prices of jet fuel, which constitutes a significant element of the Company's operating expenses, have a material effect on the Company's profitability. In the Company's estimation, at its current level of activity, every change of 1 cent US in the price of a gallon of jet fuel during an entire year impacts the Company's fuel expenses by $2.4 million. The Company has taken hedging measures to reduce the exposure, as detailed in b.1.(3) below.

Exposure to changes in interest rates – 60% of the Company's long-term loans are at variable interest. Therefore, an increase in the Libor rate could impact the Company's profitability. At the present level of loans, every 1% increase in the Libor rate for a full year increases the Company's financing expenses by $4.1 million. The Company takes hedging measures to reduce the exposure, as detailed in b.1.(4) below.

Currency exposure – most of the Company's revenues and expenses are in foreign currency (mainly the U.S. dollar), except for several shekel expenses, mainly salary expenses and payments to local suppliers in Israel. Accordingly, a change in the shekel/dollar exchange rate influences the Company's shekel expenses in dollar terms. In the Company's estimation, at present levels of activity, any 1% in appreciation of the exchange rate of the shekel relative to the dollar for an entire year increases the Company's annual expenses by $4.5 million. In addition, the Company has a non-material exposure to the euro and other currencies. The Company has adopted hedging measures to reduce the exposure, as provided in Section b.1.(5) below.

Exposure in long-term loan frameworks – according to the provisions of the loan agreements, the Company must maintain a minimal collateral ratio between the market value of the planes and the balance of the loans guaranteed by these aircraft. Likewise, the Company is required to comply with certain covenants, which, if not complied with, can be used to compel the Company to immediately repay the loans. The Company's exposure to market risks in this area derives from the changes that occur in the market value of planes around the world. For further details, see Note 14f and Note 20e to the December 31 2014 Financial Statements.

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b.1.(2) Company Market Risk Management Policies, Officials Responsible for their Management and Means of Controlling and Executing Policy

The Company’s Board of Directors is responsible for approving a market risk management policy and supervises the implementation of the policy through the Market Risk Management Committee.

The Committee is responsible for defining and updating the policy, supervising the policy’s implementation and issuing instructions/approvals for Company management to deviate from implementing the policy in accordance with various developments. This committee reports to management at least once per month and convenes for a discussion at least once per quarter.

The Company CEO, Mr. David Meimon, heads the Management Committee for Managing Market Risks, which also features the CFO and relevant professionals. The Management Committee for Managing Market Risks convenes at least once per month.

The Company CEO is responsible for making decisions regarding the timing and the manner in which the hedging agreements will be carried out in practice in accordance with the instructions of the Board of Directors Risk Management Committee while taking risk factors, commercial activity and the recommendations of the professional staff into account. For details regarding his education, experience and business skills see Chapter D of the Periodic Report under Regulation 26a.

The Company moderate the influence of these risks through the use of derivative financial instruments in order to hedge its exposure to risk. Use of derivative financial instruments is in accordance with Group policy approved by its Board of Directors, which sets written principles regarding: currency risk management, interest rate risk, jet fuel price risk and the use of derivative financial instruments and non- derivative financial instruments. Compliance with policy and with permitted exposure levels is supervised by the Risk Management Committee on a regular and continuous basis.

The jet fuel hedging policy is as follows: hedging exposure to jet fuel prices for up to 24 months forward, so that for every period, a minimum and maximum hedging rate would be set out of total expected consumption, in a gradual and decreasing manner. Hedging agreements shall be carried out on a monthly basis. Maximum and minimum hedging rates for the start of the period are 60% and 75%, respectively, and minimum and maximum hedging rates for the 12th month are 15% and 20%, respectively. The minimum and maximum hedging rates for the 13th\-18th months are 0% and 20%, respectively, and are 0% and 10%, respectively, in the 19th-20th months. Instruments and hedging levels shall be selected so that the Company limits its maximum exposure to cash securities. As of this report, the Company was hedged according to its policy, as well as near the report publication date.

The Company's policy with respect to interest hedging is to hedge half of the credit portfolio for a period of up to 5 years using financial derivatives or taking fixed-interest loans. As of this report, the Company is operating according to its policy.

The Company’s policy on the matter of NIS/USD exchange rate hedging is to hedge up to 75% of its cash flow exposure for a 1-year outlook as decided by management. As of this report, the Company is hedged according to its policy.

For details on the policy implemented in practice, see Sections b.1.(3), b.1.(4) and b.1.(5) below. For details regarding the influence of the changes in the economic environment after the balance sheet date, see Section e. of the Board of Directors Report below.

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b.1.(3) Hedging Jet Fuel Prices

The Company executes financial transactions to hedge against changes in jet fuel prices, in accordance with its policy as described in Section b.1.(2) above.

As of June 30 2015, the Company had several agreements designed for hedging jet fuel prices, at a scope estimated at 39% of expected consumption for the next 12 months. In addition, the Company hedged 15% of its expected consumption for the second half of 2016. Some of these transactions are recognized as hedging agreements for accounting purposes and some are not. The net fair value of all jet fuel hedging instruments as of June 30 2015 is a negative sum of $15.6 million, presented in the Financial Statements as part of current liabilities and non-current liabilities, under “derivative financial instruments". The Company listed an expense of $11.8 million from these hedging agreements in the reported quarter. For details regarding changes occurring to jet fuel prices subsequent to the balance sheet date, see Section e.2 of the Board of Directors Report.

b.1.(4) Hedging Interest on Loans

As of the report date, 60% of the balance of the loans received by the Company are at variable and non- hedged interest rates and 40% of the balance of the loans are at fixed interest for a period of up to 12 years. Furthermore, there are currently no hedges of the exposure in the Company’s long-term credit portfolio, due to changes in interest rate.

The Company acts in accordance with its policy as described in Section b.1.(2) above.

b.1.(5) Exchange Rate Hedges

The Company executes hedges to protect its currency exposure due to changes in the exchange rate of the NIS versus the USD, in accordance with its policy as laid out in Section b.1.(2) above. Some of these transactions are recognized as hedging agreements for accounting purposes and some are not.

Over the course of the second quarter of 2015, the Company has entered into several financial transactions, designed to protect the Company from drops in NIS/USD exchange rates until March 2016.

The net fair value of these instruments as of June 30 2015 is a positive sum of $2.8 million, presented in the Financial Statements in the framework of current assets and current liabilities, under derivative financial instruments.

The Company listed revenues from exchange rate hedging agreements to the amount of $2.0 million in the reported quarter.

For details on changes occurring in the NIS-USD exchange rate, see Section e.3 of the Board of Directors

Report below.

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b.1.(6) Sensitivity Analysis Reporting

The following is an analysis of the sensitivity of the fair value of the financial instruments sensitive to changes possible in the risk factors to which they are exposed. The analyses are provided relative to the fair value of the financial instruments as of June 30 2015.

Presented below are sensitivity analysis tables for instruments sensitive to changes in market factors:

a) Sensitivity to changes in the NIS/USD exchange rate – in thousands of dollars:

Gain (Loss) from Gain (Loss) from Changes Changes Increase Increase Decrease Decrease of of of of 10% 5% Fair 5% 10% Value 4.146 3.957 3.769 3.581 3.392 NIS/USD NIS/USD NIS/USD NIS/USD NIS/USD

Cash and cash equivalents )4,515( )2,365( 49,667 2,614 5,519 Designated cash )18( )9( 194 10 22 Short-term deposits )786( )412( 8,649 455 961 Trade receivables )400( )209( 4,399 232 489 Other receivables )1,449( )759( 15,937 839 1,771 Long-term bank deposits )81( )42( 890 47 99 Total Financial Assets )7,249( )3,797( 79,736 4,197 8,860

Short-term borrowings and current maturities 701 367 )7,712( )406( )857( Trade payables 3,564 1,867 )39,199( )2,063( )4,355( Other payables – current 39 21 )434( )23( )48( Derivative financial instruments 54 29 )599( )32( )67( Loans from banks and others 177 93 )1,949( )103( )217( Other payables – non-current )403( )211( 4,437 234 493 Total other financial liabilities 4,132 2,165 )45,456( )2,392( )5,051(

Linkage balance sheet exposure as a result of surplus of financial assets over financial liabilities )3,116( )1,632( 34,280 1,804 3,809

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b) Sensitivity of NIS/USD Exchange Rate Hedging

Loss from Changes Profit from Changes Increase of Increase of Decrease of Decrease of 10% 5% Fair Value 5% 10% In the In the In the In the Exchange Exchange Exchange Exchange Rate Rate NIS/USD Rate Rate 4.146 3.957 3.769 3.581 3.392

Forward transactions – designated for hedging )8,494( )4,578( 3,383 4,491 9,782 Transactions not recognized as hedging )2,101( )948( )560( 1,178 2,638 Total exchange rate hedging transactions )10,595( )5,526( 2,823 5,669 12,420

c) Sensitivity to changes in the EUR/USD exchange rate - in thousands of dollars: Gain (Loss) from Gain (Loss) from Changes Changes Increase of Increase of Decrease of Decrease of 10% 5% Fair Value 5% 10% 0.983 0.938 0.893 0.849 0.804 EUR/USD EUR/USD EUR/USD EUR/USD EUR/USD

Cash and cash equivalents )600( )314( 6,603 348 734 Trade receivables )1,219( )639( 13,409 706 1,490 Other receivables )213( )112( 2,343 123 260 Total Financial Assets )2,032( )1,065( 22,355 1,177 2,484

Trade payables 2,141 1,121 )23,550( )1,239( )2,617( Other payables 28 15 )312( )16( )35( Total other financial liabilities 2,169 1,136 )23,862( )1,256( )2,651(

Linkage balance sheet exposure as a result of surplus of financial assets over financial liabilities 137 72 )1,507( )79( )167(

d) Sensitivity to changes in jet fuel prices on inventory (dollar/gallon) – in thousands of dollars:

Profit from Changes Loss from Changes Increase of Increase of Decrease of Decrease of 10% 5% Fair Value 5% 10% 1.945 1.856 * 1.768 1.680 1.591 USD/Gallon USD/Gallon USD/Gallon USD/Gallon USD/Gallon

Total jet fuel hedging transactions 550 275 5,501 )275( )550(

* The price of jet fuel according to a moving weighted average for the period ending June 30 2015.

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e) Sensitivity of jet fuel hedging to changes in jet fuel prices - in thousands of dollars:

According to the model's principles, jet fuel hedges that react in a similar manner to market factors were grouped together, since there was no loss of material information required to understand the Company's exposure to market risks as a result of the grouping. On January 5 2009 jet fuel prices changed by 14%, and therefore the following sensitivity analysis includes a 15% change in jet fuel prices.

Profit from Changes Loss from Changes Increase Increase Increase Decrease Decrease Decrease of of of of of of Fair 15% 10% 5% Value 5% 10% 15% 1.973 1.888 1.802 1.716 * 1.630 1.544 1.459 USD/ USD/ USD/ USD/ USD/ USD/ USD/ Gallon Gallon Gallon Gallon Gallon Gallon Gallon

Swap agreements – recognized as hedging 14,874 9,891 4,934 )9,752( )4,920( )9,840( )14,782( Transactions not recognized as hedging 8,259 5,291 2,551 )5,818( )2,434( )4,858( )7,474( Total jet fuel hedging transactions 23,133 15,182 7,485 )15,570( )7,354( )14,698( )22,256(

* The price of jet fuel in the Mediterranean Basin as of June 30 2015, according to which the fair value of the Company's hedge transactions is calculated.

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b.2. Linkage Basis Report The following is the consolidated linkage basis report for June 30 2015:

In or In or Linked In or Linked to Other Non- Linked to In Israeli to the Foreign Monetary the USD Currency EUR Currency Items ~ NIS ~ ~ ~ Total Thousands of Dollars

Current Assets Cash and cash equivalents 110,412 49,677 6,603 9,915 - 176,607 Designated cash - 194 - - - 194 Short-term deposits - 8,649 - - - 8,649 Restricted deposits 5,294 - 5,294 Trade receivables 136,230 4,399 13,409 11,464 - 165,502 Other receivables 7,044 15,937 2,343 3,801 - 29,125 Derivative financial instruments 3,422 - - - - 3,422 Prepaid expenses - - - - 32,888 32,888 Inventory - - - - 20,980 20,980

Non-current assets Long-term bank deposits - 890 - - - 890 Investments handled using the equity value method - - - - 17,449 17,449 Investment in other companies 1,259 - - - - 1,259 Fixed assets, net - - - - 1,195,167 1,195,167 Intangible assets, net - - - - 8,522 8,522 Prepaid expenses - - - - 9,871 9,871 Assets due to employee benefits - 73,274 - - - 73,274 Total assets 263,661 153,020 22,355 25,180 1,284,877 1,749,093

Current liabilities Short-term borrowings and current maturities )203,935( )7,712( - - - )211,647( Trade payables )88,145( )39,199( )23,550( )7,531( - )158,425( Other payables )64,781( )434( )312( )16,381( - )81,908( Provisions )1,795( )8,760( - - - )10,555( Derivative financial instruments )15,459( )599( - - - )16,058( Employee benefit obligations )11,201( )86,416( )1,104( )1,310( - )100,031( Unearned revenues - - - - )370,374( )370,374(

Non-Current Liabilities Loans from banks and others )473,180( )1,949( - - - )475,129( Employee benefit obligations )26,512( )49,885( )673( )7,643( - )84,713( Derivative financial instruments )111( - - - - )111( Other payables )1,136( )4,437( - - - )5,573( Deferred taxes - - - - )26,879( )26,879( Unearned revenues - - - - )62,673( )62,673( Equity - - - - )145,017( )145,017( Total liabilities and equity )886,255( )199,391( )25,639( )32,865( )604,943( )1,749,093(

Surplus of assets over liabilities (surplus of liabilities over assets) )622,595( )46,370( )3,284( )7,686( 679,935 -

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The following is the consolidated linkage basis report for June 30 2014:

In or In or Linked In or Linked to Other Non- Linked to In Israeli to the Foreign Monetary the USD Currency EUR Currency Items ~ NIS ~ ~ ~ Total Thousands of Dollars

Current Assets Cash and cash equivalents 148,138 3,069 18,569 6,485 - 176,261 Designated cash - 443 - - - 443 Short-term deposits - 9,465 - - - 9,465 Restricted deposits 6,850 - - - - 6,850 Trade receivables 120,569 1,508 29,804 21,404 - 173,285 Other receivables 13,375 14,420 3,553 3,826 - 35,174 Derivative financial instruments 3,164 1,921 - - - 5,085 Prepaid expenses - - - - 36,037 36,037 Inventory - - - - 21,109 *21,109

Non-current assets Long-term bank deposits - 1,310 - - - 1,310 Investments handled using the book value method - - - - 19,073 19,073 Investment in another company 1,228 - - - - 1,228 Fixed assets, net - - - - 1,149,095 *1,149,095 Intangible assets, net - - - - 8,830 8,830 Prepaid expenses - - - - 10,603 10,603 Assets due to employee benefits 46 61,748 - - - 61,794 Total assets 293,370 93,884 51,926 31,715 1,244,747 1,715,642

Current liabilities Short-term borrowings and current maturities )151,149( )4,201( - - - )155,350( Trade payables )94,686( )34,727( )26,862( )7,094( - )163,369( Other payables )71,543( )5,826( )141( )2,710( - *)80,220( Provisions )665( )16,375( - - - )17,040( Derivative financial instruments )709( - - - - )709( Employee benefit obligations )10,991( )98,104( )2,177( )1,526( - *)112,798( Unearned revenues - - - - )388,643( *)388,643(

Non-Current Liabilities Loans from banks and others )473,120( )1,491( - - - )474,611( Employee benefit obligations )15,322( )61,331( )829( )6,864( - )84,346( Other payables )3,781( )4,437( - - - )8,218( Deferred taxes - - - - )25,146( *)25,146( Unearned revenues - - - - )60,913( )60,913( Equity - - - - )144,279( *)144,279( Total liabilities and equity )821,966( )226,492( )30,009( )18,194( )618,981( )1,715,642(

Surplus of assets over liabilities (surplus of liabilities over assets) )528,596( )132,608( 21,917 13,521 625,766 -

* Reclassified.

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The following is the consolidated linkage basis report for December 31 2014:

In or In or Linked In or Linked to Other Non- Linked to In Israeli to the Foreign Monetary the USD Currency EUR Currency Items ~ NIS ~ ~ ~ Total Thousands of Dollars

Current Assets Cash and cash equivalents 7,225 38,931 5,006 3,519 - 54,681 Designated cash - 195 - - - 195 Short-term deposits - 8,382 - - - 8,382 Restricted deposits 37,940 1,671 - - - 39,611 Trade receivables 97,068 3,550 9,814 8,288 - 118,720 Other receivables 1,572 12,560 2,290 3,361 - 19,783 Prepaid expenses - - - - 26,465 26,465 Inventory - - - - *20,583 20,583

Non-current assets Long-term bank deposits - 1,002 - - - 1,002 Investments handled using the book value method - - - - 17,123 17,123 Investment in another company 1,190 - - - - 1,190 Fixed assets, net - - - - *1,188,102 1,188,102 Intangible assets, net - - - - 9,296 9,296 Prepaid expenses - - - - 9,335 9,335 Assets due to employee benefits - 67,152 - - - 67,152 Total assets 144,995 133,443 17,110 15,168 1,270,904 1,581,620

Current liabilities Short-term borrowings and current maturities )152,025( )2,623( - - - )154,648( Trade payables )82,688( )33,405( )22,167( )7,640( - )145,900( Other payables *)61,405( )990( )132( )1,533( - )64,060( Provisions )1,743( )8,356( - - - )10,099( Derivative financial instruments )62,289( )11,044( - - - )73,333( Employee benefit obligations )3,800( )88,654( )1,557( )1,553( - )95,564( Unearned revenues - - - - *)264,162( )264,162(

Non-Current Liabilities Loans from banks and others )498,782( )80( - - - )498,862( Employee benefit obligations )23,729( )48,839( )669( )7,778( - )81,015( Other payables )2,260( )4,437( - - - )6,697( Deferred taxes - - - - )14,704( )14,704( Unearned revenues - - - - )61,141( )61,141( Equity - - - - )111,435( )111,435( Total liabilities and equity )888,721( )198,428( )24,525( )18,504( )451,442( )1,581,620(

Surplus of assets over liabilities (surplus of liabilities over assets) )743,726( )64,985( )7,415( )3,336( 819,462 -

* Reclassified.

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c. Aspects of Corporate Governance:

Disclosure in the Report of the Board of Directors Regarding the Financial Statements Approval Process The body charged with ultimate control in the Company regarding the approval of the Financial Statements is its Board of Directors.

Within the framework of the Board of Directors, the Company operates several committees, including the Audit Committee, the Market Risks Management Committee, the Human Resources Committee, the Finance and Budget Committee, the Balance Sheet Committee, the Security Committee, the Corporate Governance Committee, the Executive Committee, the Remuneration Committee, and the Government Affairs and Regulations Committee.

As of the approval of these Financial Statements, the Balance Sheet Committee (Financial Statement Examination Committee) consisted of four members (a majority of whom are independent), as follows: Committee Chair Prof. Yehoshua (Shuki) Shemer, Ms. Ruth Dahan (Portnoy), Mr. Pinchas Ginsburg and Mr. Eyal Chaimovsky. For details regarding the experience and education of the directors in question see Regulation 26 of Part D (Additional Details on the Corporation) of the 2014 periodic report.

The Balance Sheet Committee meets for extensive and thorough discussion of the draft Financial Statements, in the presence of the auditing accountant. The Chief Executive Officer and the Chief Financial Officer present the members of the committee with extensive details on the Financial Statements, including detailed financial analyses about the Company's performance during the reporting period.

The Balance Sheet Committee studies the material issues in financial reporting and formulates a recommendation for the Company’s Board of Directors pertaining to, among other things, the following issues: (a) estimates and evaluations made pursuant to the Financial Statements; (b) internal controls pertaining to financial reporting; (c) the wholeness and propriety of disclosure in the Financial Statements; (d) the accounting policy adopted and the accounting treatment applied to material Group issues; (e) value estimates, including underlying assumptions and estimates, on which the data in the Financial Statements was based. The Committee also reviews different aspects of control and risk management, both those reflected in the Financial Statements and those impacting the reliability of the Financial Statements.

When complex or material issues are on the agenda, special discussions are held by the Balance Sheet Committee on the issues on the agenda with the participation of the independent auditor.

The Company’s Board of Directors is the organ responsible for discussing and approving the Financial Statements, after the members of the Board receive the draft Financial Statements and the recommendations of the Financial Statements Examination Committee at least two business days prior to the meeting.

Over the course of the Board meeting in which the Financial Statements are discussed and ratified, the Company CFO provides a detailed review of the key points of the Financial Statements and the Company’s accounting policy. The CEO also reviews the Company's current activity and the influence of this activity on the Company’s Financial Statements and emphasizes material issues.

Invited and present at the Board meeting in which the Financial Statements are discussed and ratified are representatives of the Company’s independent auditor, who provide remarks and clarifications to the Financial Statements and who are at the Board members’ disposal to answer questions and provide clarifications regarding the reports prior to their approval. In addition, the Chair of the Financial Statement Examination Committee (Balance Sheet Committee) reviews the key points of the Committee’s recommendations.

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The Balance Sheet Committee convened on August 3 2015 to formulate recommendations for the Board of Directors. Taking part in the meeting in question were the Committee members: Professor Yehoshua Shemer (Chair), Mr. Pinchas Ginsburg and Mr. Eyal Chaimovsky. Also taking part in the meetings in question were the Company CEO, Mr. David Maimon, the CFO, Ms. Dganit Palti, the Legal Counsel and Company Secretary, Mr. Omer Shalev, Esq., Omer Shalev, Esq. and representatives of the independent auditor.

The Balance Sheet Committee held a discussion about the Financial Statements presented to it, including directing questions to the members of management present and to the independent auditor. Likewise, the independent auditor is asked to present his comments to the committee members, including accounting policy applied and special events that arose during the review of the Financial Statements.

The following are details of the processes taken prior to the approval of the June 30 2015 Financial Statements: a) The draft Financial Statements were provided to the Committee members and to the other members of the Board of Directors on July 30 2015. b) Committee members are welcome to contact the Company CFO at any time with any question or clarification they require, prior to the meeting. c) Over the course of the meeting, the CFO reviewed the Company’s financial results and presented comparisons between the reported period and corresponding periods and the work plan. d) Pursuant to its meeting, the Committee studied the estimates and assessments carried out in relation to the Statements for the reported quarter, the wholeness and propriety of disclosure in the Financial Statements for the reported quarter, the accounting policy adopted and accounting treatment implemented regarding the Company's material issues. e) The Committee discussed the effectiveness of internal controls on the matter of financial reporting and disclosure in the Company. The Committee was also presented with the actions taken by the Company to verify that its reports had been prepared in accordance with the law. f) At the conclusion of the discussion, and after it has been clarified that the Financial Statements adequately reflect the state of Company affairs and its operating results, the Committee recommended that the Board of Directors approve the Financial Statements. g) The Committee’s recommendations were provided to the members of the Board of Directors on August 3 2015 in writing. The Company’s Board of Directors is of the opinion that in light of the scope and complexity of the recommendations and the time deemed reasonable by the Board of Directors to provide the draft Financial Statements and recommendations as noted above, they were passed on to the directors for study a reasonable amount of time prior to the Board of Directors discussion. h) On August 5 2015 a discussion was held by the Company’s Board of Directors regarding the recommendations of the Financial Statements Examination Committee. At the conclusion of the Board meeting, the June 30 2015 Financial Statements, prepared on the basis of IFRS rules, were approved unanimously. Present at the Board of Directors Meeting in which the Financial Statements were approved, were the following Board members: Amikam Cohen (Chairman), Tamar Moses Borowitz (Deputy Chairman), Yehuda Levi (Deputy Chairman), Professor Yehoshua Shemer, Pinchas Ginsburg, Shlomo Hannael, Sofia Kimmerling, Ruth Dahan Portnoy and Eyal Chaimovsky.

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d. Disclosure Provisions with Regard to Financial Reporting by the Corporation: d.1. Events Subsequent to the Balance Sheet Date 1. On August 5 2015 the Company Board of Directors approved exclusive negotiations with aircraft manufacturer Boeing and with aircraft leasing companies for the engagement in transactions to purchase and lease 15 Boeing aircraft, and to receive an option to purchase 13 additional airplanes and purchase spare engines. For further details, see Note 1g to the June 30 2015 Financial Statements.

2. On August 5 2015, the Company’s Board of Directors resolved to distribute dividends totaling NIS 0.19 (5 cents) per 1 NIS NV regular share. The total sum of the dividends amounts to 94.2 million NIS ($24.7 million according to the USD’s representative rate of exchange published August 5 2015). The determining date for the dividend distribution was set at August 13 2015, and the dividend payment date was set at August 26 2015.

The following are the Board of Directors’ explanations for the approval of the distribution:

a) On the basis of the Company’s June 30 2015 Financial Statements, the dividend distribution passes the profit test.

b) The Board of Directors is satisfied, after being presented with the data and the forecasts by management as well as on the basis of the Company’s projected cash flow for the next five years, the sources of finances at the Company's disposal for the purpose of redeeming all of the Company’s existing and expected liabilities and liquid cash balances, that the dividend distribution passes the solvency test in accordance with the Companies Law, 1999, and according to the Company's estimates, there is no real concern that the dividend distribution in question would prevent the Company from meeting its existing and expected obligations as they arise, as well as from executing its investment plan, including its equipping plan. The dividend distribution is not expected to have any material negative effect on the Company’s financial status, including its capital structure, liquidity and its ability to continue operating according to its existing format. The Company meets, and will continue to meet after distributing the dividends, its financial covenants toward the financing banks. d.2. Disclosure on Critical Accounting Estimates The implementation of accounting standards by Company management upon preparing financial statements occasionally involves various assumptions, assessments and estimates influencing levels of the assets and liabilities and the business results reported in the Financial Statements. Some of the assumptions, assessments and estimates are critical to the financial position or operating results reflected in the Group's Financial Statements, due to their materiality, the complexity of the calculations or the likelihood uncertain matters will be realized For details on the material estimates included in the Financial Statements see Note 4 to the December 31 2014 Financial Statements. d.3. The Subjects to which the Company's Independent Auditors Draw Attention in their Opinion on the Financial Statements The exposure to the approval of lawsuits as class actions and the Company’s exposure to these class actions as per Note 9 to the Financial Statements.

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e. Additional information:

Disclosure regarding Changes in the Economic Environment, the Implications of the Capital Market Crisis, Market Risks and Special Events 1. The international aviation industry is affected by the economic and security situation and by unusual events, such as the outbreak of epidemics and natural disasters in the world in general, and in specific areas in particular, as well as by the economic situation in Israel and around the world. Such influence was expressed in the material drop in the number of tourists arriving in Israel from the start of Operation Protective Edge in July and August 2014. No recovery has been evident since the start of 2015, and the number of tourists dropped by 14% compared to their number in the previous period last year.

The following are changes occurring to jet fuel prices and NIS exchange rates from the end of the quarter until immediately prior to the publication of the June 30 2015 Financial Statements:

2. As of the reported date, the market price of jet fuel (before fees and supplier margins) weighted according to the markets in which the Company purchases jet fuel, was 176.5 cents per gallon, while as of a date immediately prior to the approval of the report this price is 145.0 cents per gallon, an 18% decrease; note that jet fuel expenses constitute nearly 25% of the Company's revenue turnover, and therefore changes in price may have a material impact on its financial results. At the same time, the fair value of jet hedging instruments shall be set in accordance with price changes occurring since the end of reported quarter and the completion of accounting for some of the transactions. As of June 30 2015, the Company had agreements for hedging jet fuel prices, at a scope estimated at 39% of expected consumption for the next 12 months. Subsequent to the balance sheet date, the Company performed additional financial transactions to protect it from increased jet fuel prices in accordance with its hedging policy, and as of a date near the publication of this report, it is hedged at a rate of 41% of the expected consumption for the period from August 2015 to July 2016.

3. Immediately prior to the approval of this report, no material change occurred in the exchange rate of the NIS relative to the USD relative to the report date. The Company has hedging agreements on the NIS/USD exchange rate (see b.1.(5) above), the fair value of which may change according to changes in exchange rates. Note that the impact of exchange rates on next quarter's operating results shall be determined based on exchange rates in effect throughout the quarter and at its conclusion (September 30 2015).

Amikam Cohen David Maimon Chairman of the Board of Chief Executive Officer Directors August 5 2015

b-32

Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

El Al Israel Airlines Ltd.

Concise Consolidated Financial Statements As of June 30 2015

(Unaudited)

Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

El Al Israel Airlines Ltd.

Concise Consolidated Financial Statements As of June 30 2015

(Unaudited)

Table of Contents

Page

Auditing Accountants’ Review C - 2

Concise Consolidated Financial Statements (Unaudited)

Consolidated Balance Sheets C - 3 - C - 4

Concise Consolidated Statements of Operations C - 5

Concise Consolidated Statement of Comprehensive Income C - 6

Concise Consolidated Statement of Changes in Equity C - 7 - C - 11

Concise Consolidated Cash Flow Reports C - 12 - C - 13

Notes to the Concise Consolidated Financial Statements C - 14 - C - 29

Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

Independent Auditors' Report to Shareholders of El Al Israel Airlines Ltd.

Introduction We have reviewed the attached financial information on El Al Israel Airlines Ltd. and its subsidiaries (hereinafter – "the Group"), which includes the Concise Consolidated Balance Sheet as of June 30 2015 and its Concise Consolidated Statement of Operations and Reports on statement of Comprehensive Income, Changes in Equity and Cash Flows for the six and three-month periods ending that date. The Board of Directors and management are responsible for the preparation and presentation of financial information for these interim periods in accordance with IAS 34 "Interim financial reporting", and they are also responsible for the preparation of financial information for these interim periods pursuant to Chapter D of the Securities Regulations (Periodic and immediate reports), 1970. Our responsibility is to express our conclusions with regard to the financial information for these interim periods, based on our review.

We have not reviewed the concise interim financial information of subsidiaries the assets of which included in the consolidation constitute 0.3% of all consolidated assets as of June 30 2015, and revenues of which included in the consolidation constitute 0.9% and 0.9%, respectively, of all consolidated revenues for the three and three month periods ending that date. The concise interim financial statements of said companies have been audited by other accountants, the reports of whom have been provided us and our conclusion, inasmuch as it refers to financial information for these companies, is based on the reviews conducted by these other accountants.

Scope of the Review We conducted our reviews in accordance with Review Standard 1 of the Israeli Institute of Certified Public Accountants, "Reviews of Financial Information for Interim Periods Prepared by the Entity's Auditor." A review of financial information for interim periods consists of inquiries, mainly from people responsible for finances and accounting, and of the application of analytical and other reviewing procedures. This review is significantly limited in scope compared to audits prepared in accordance with generally accepted Israeli auditing standards and therefore does not allow us to achieve assurance that we have become aware of all material issues that may be identified in an audit. Accordingly, we cannot express an audit-level opinion.

Conclusion Based on our reviews and the reports of other CPAs, nothing has come to our attention leading us to believe that the financial information in question has not been prepared, in all material aspects, in accordance with IAS 34.

In addition to the above, based upon our review and that of other CPAs, nothing has come to our attention causing us to believe that the financial information in question does not fulfill, in all material aspects, the disclosure directives laid out in Chapter D of the Securities Regulations (Periodic and Immediate Reports), 1970.

Without stipulating our conclusion, we direct your attention to Note 9 to the Financial Statements regarding exposure to the approval of class actions and the Company’s exposure to these class actions.

Brightman Almagor Zohar & Co. Certified Public Accountants

Tel Aviv, August 5 2015

C - 2

Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

El Al Israel Airlines Ltd. Concise Consolidated Balance Sheet

As of June 30 As of December 31 2 0 1 5 2 0 1 4 2 0 1 4 Thousands Thousands Thousands of of Dollars of Dollars Dollars (Unaudited) Assets

Current Assets Cash and cash equivalents 176,607 176,261 54,681 Designated cash 194 443 195 Short-term deposits 8,649 9,465 8,382 Restricted deposits 5,294 6,850 39,611 Trade receivables 165,502 173,285 118,720 Other receivables 29,125 35,174 19,783 Derivative financial instruments 3,422 5,085 - Prepaid expenses 32,888 36,037 26,465 Inventories 20,980 *21,109 20,583

Total current assets 442,661 463,709 288,420

Non-Current Assets Long-term bank deposits 890 1,310 1,002 Investments handled using the equity method 17,449 19,073 17,123 Investment in other companies 1,259 1,228 1,190 Fixed assets, net 1,195,167 *1,149,095 1,188,102 Intangible assets, net 8,522 8,830 9,296 Prepaid expenses 9,871 10,603 9,335 Assets due to employee benefits 73,274 61,794 67,152

Total non-current assets 1,306,432 1,251,933 1,293,200

Total assets 1,749,093 1,715,642 1,581,620

* Reclassified.

The accompanying Notes constitute an integral part of the Consolidated Financial Statements. C - 3 Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

El Al Israel Airlines Ltd. Concise Consolidated Balance Sheet

As of June 30 As of December 31 2 0 1 5 2 0 1 4 2 0 1 4 Thousands Thousands Thousands of of Dollars of Dollars Dollars (Unaudited) Liabilities and Equity

Current Liabilities Short-term borrowings and current maturities 211,647 155,350 154,648 Trade payables 158,425 163,369 145,900 Other payables 81,908 *80,220 64,060 Provisions 10,555 17,040 10,099 Derivative financial instruments 16,058 709 73,333 Employee benefit obligations 100,031 *112,798 95,564 Unearned revenues 370,374 *388,643 264,162 Total current liabilities 948,998 918,129 807,766

Non-Current Liabilities Loans from banks and others 475,129 474,611 498,862 Employee benefit obligations 84,713 84,346 81,015 Derivative financial instruments 111 - - Other payables 5,573 8,218 6,697 Deferred taxes 26,879 *25,146 14,704 Unearned revenues 62,673 60,913 61,141 Total non-current liabilities 655,078 653,234 662,419

Total liabilities 1,604,076 1,571,363 1,470,185

Equity Share Capital 155,012 155,012 155,012 Share premium 35,554 28,007 28,007 Capital reserve from transactions with a former controlling shareholder 237,122 237,122 237,122 Capital reserve in respect of share-based payment - 7,547 7,547 Capital reserve in respect of cash flow hedging )4,681( 1,771 )33,228( Capital reserve in respect of translation differences of foreign activity )1,307( 1,504 )846( Capital reserves in respect of re-measurements of a defined benefit 4,586 )8,804( 401 Accumulated loss )281,269( *)277,880( )282,580( Total equity 145,017 144,279 111,435

Total liabilities and equity 1,749,093 1,715,642 1,581,620

* Reclassified.

Amikam Cohen David Maimon Dganit Palti Chairman of the Board of Directors Chief Executive Officer Chief Financial Officer

Financial Statements approval date: August 5 2015

The accompanying Notes constitute an integral part of the Consolidated Financial Statements. C - 4 Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

El Al Israel Airlines Ltd. Concise Consolidated Statement of Operations

For the Six For the Three For the Year Month Period Ending Month Period Ending Ending June 30 June 30 December 31 2 0 1 5 2 0 1 4 2 0 1 5 2 0 1 4 2 0 1 4 Thousands Thousands Thousands Thousands Thousands of of Dollars of Dollars of Dollars of Dollars Dollars (Unaudited) (Unaudited)

Operating revenues 930,451 986,949 510,642 571,532 2,081,303 Operating expenses )775,285( *)863,095( )407,895( *)465,260( *)1,802,661(

Gross profit 155,166 123,854 102,747 106,272 278,642

Selling expenses )92,140( *)99,383( )48,118( *)53,552( *)202,140( Administrative and general expenses )44,904( *)52,070( )22,389( *)25,524( *)100,811( Other revenues (expenses), net )4,802( 4,948 )4,830( 55 11,525

)141,846( )146,505( )75,337( )79,021( )291,426(

Profit (loss) from regular activities 13,320 )22,651( 27,410 27,251 )12,784(

Financing expenses )12,832( )11,436( )5,551( )6,185( )27,471( Financing income 1,185 1,300 1,785 1,319 912

Financing expenses, net )11,647( *)10,136( )3,766( *)4,866( *)26,559(

The Company's share of the profits of affiliates 244 447 - 168 1,056

Profit (loss) before taxes on income 1,917 )32,340( 23,644 22,553 )38,287(

Tax benefit (taxes on income) )606( 8,980 )6,343( )6,259( 10,227

Profit (loss) for the period 1,311 )23,360( 17,301 16,294 )28,060(

Profit (loss) per 1 NIS NV ordinary share. (In USD) Basic and diluted profit (loss) per share 0.00 )0.05( 0.03 0.03 )0.06(

Weighted average of number of shares (in thousands) used in the calculation of profit (loss) per share Basic and diluted 495,719 495,719 495,719 495,719 495,719

* Adjustment due to retroactive implementation of changes in accounting policy, see Note 4.

The accompanying Notes constitute an integral part of the Consolidated Financial Statements.

C - 5 Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

El Al Israel Airlines Ltd. Concise Consolidated Statement of Comprehensive Income

For the Six For the Three For the Year Month Period Ending Month Period Ending Ending June 30 June 30 December 31 2 0 1 5 2 0 1 4 2 0 1 5 2 0 1 4 2 0 1 4 Thousands Thousands Thousands Thousands Thousands of of Dollars of Dollars of Dollars of Dollars Dollars (Unaudited) (Unaudited)

Profit (loss) for the period 1,311 )23,360( 17,301 16,294 )28,060(

Other comprehensive income: Sums not classified to profit/loss in the future: Profit (loss) from the re-measurements of a defined benefit, net of tax 4,185 )9,463( 4,228 )11,552( )258(

Sums classified to profit/loss in the future: Exchange rate differences due to the translation of foreign activity )461( )98( )13( 108 )2,448( Profit (loss) in respect of cash flow hedging, net of tax 28,547 )6,299( 18,770 1,676 )41,298(

Other Comprehensive income (loss) for the Period 32,271 )15,860( 22,985 )9,768( )44,004(

Total comprehensive income (loss) for the period 33,582 )39,220( 40,286 6,526 )72,064(

The accompanying Notes constitute an integral part of the Consolidated Financial Statements.

C - 6 Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

El Al Israel Airlines Ltd. Concise Consolidated Statement of Changes in Equity

For the Six Month Period Ending June 30 2015 (Unaudited) Capital Reserve from Capital Trans- Capital Reserves in actions Capital Reserve Respect of with a Reserve in Capital due to Re- Former Respect of Reserve in Translation Measure- Controlling Share- Respect of Differences ments of a Share Share Share- Based Cash Flow of Foreign Defined Accumu- Capital Premium holder Payment Hedging Activity Benefit lated Loss Total Thousands of Dollars

Balance as of January 1 2015 155,012 28,007 237,122 7,547 )33,228( )846( 401 )282,580( 111,435

Profit for the period ------1,311 1,311 Other comprehensive income (loss) - - - - 28,547 )461( 4,185 - 32,271

Total comprehensive income (loss) for the period - - - - 28,547 )461( 4,185 1,311 33,582

Expiry of share options - 7,547 - )7,547( - - - - -

Total equity as of June 30 2015 155,012 35,554 237,122 - )4,681( )1,307( 4,586 )281,269( 145,017

The accompanying Notes constitute an integral part of the Consolidated Financial Statements.

C - 7 Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

El Al Israel Airlines Ltd. Concise Consolidated Statement of Changes in Equity (Continued)

For the Six Month Period Ending June 30 2014 (Unaudited) Capital Reserve from Capital Trans- Capital Reserves in actions Capital Reserve Respect of with a Reserve in Capital due to Re- Former Respect of Reserve in Translation Measure- Controlling Share- Respect of Differences ments of a Share Share Share- Based Cash Flow of Foreign Defined Accumu- Capital Premium holder Payment Hedging Activity Benefit lated Loss Total Thousands of Dollars

Balance as of January 1 2014 155,012 28,007 237,122 7,547 8,070 1,602 659 )254,520( 183,499

Loss for the period ------)23,360( )23,360( Other comprehensive loss - - - - )6,299( )98( )9,463( - )15,860(

Total comprehensive loss for the period - - - - )6,299( )98( )9,463( )23,360( )39,220(

Total equity as of June 30 2014 155,012 28,007 237,122 7,547 1,771 1,504 )8,804( )277,880( 144,279

The accompanying Notes constitute an integral part of the Consolidated Financial Statements.

C - 8 Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

El Al Israel Airlines Ltd. Concise Consolidated Statement of Changes in Equity (Continued)

For the Three Month Period Ending June 30 2015 (Unaudited) Capital Reserve from Capital Trans- Capital Reserves in actions Reserve Respect of with a Capital due to Re- Former Reserve in Translation Measure- Controlling Respect of Differences ments of a Share Share Share- Cash Flow of Foreign Defined Accumu- Capital Premium holder Hedging Activity Benefit lated Loss Total Thousands of Dollars

Balance as of April 1 2015 155,012 35,554 237,122 )23,451( )1,294( 358 )298,570( 104,731

Profit for the period ------17,301 17,301 Other comprehensive income (loss) - - - 18,770 )13( 4,228 - 22,985

Total comprehensive income (loss) for the period - - - 18,770 )13( 4,228 17,301 40,286

Total equity as of June 30 2015 155,012 35,554 237,122 )4,681( )1,307( 4,586 )281,269( 145,017

The accompanying Notes constitute an integral part of the Consolidated Financial Statements.

C - 9 Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

El Al Israel Airlines Ltd. Concise Consolidated Statement of Changes in Equity (Continued)

For the Three Month Period Ending June 30 2014 (Unaudited) Capital Reserve from Capital Trans- Capital Reserves in actions Capital Reserve Respect of with a Reserve in Capital due to Re- Former Respect of Reserve in Translation Measure- Controlling Share- Respect of Differences ments of a Share Share Share- Based Cash Flow of Foreign Defined Accumu- Capital Premium holder Payment Hedging Activity Benefit lated Loss Total Thousands of Dollars

Balance as of April 1 2014 155,012 28,007 237,122 7,547 95 1,396 2,748 )294,174( 137,753

Profit for the period ------16,294 16,294 Other comprehensive income (loss) - - - - 1,676 108 )11,552( - )9,768(

Total comprehensive income (loss) for the period - - - - 1,676 108 )11,552( 16,294 6,526

Total equity as of June 30 2014 155,012 28,007 237,122 7,547 1,771 1,504 )8,804( )277,880( 144,279

The accompanying Notes constitute an integral part of the Consolidated Financial Statements.

C - 10 Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

El Al Israel Airlines Ltd. Concise Consolidated Statement of Changes in Equity (Continued)

For the Year Ending December 31 2014 Capital Reserve from Capital Trans- Capital Reserves in actions Capital Reserve Respect of with a Reserve in Capital due to Re- Former Respect of Reserve in Translation Measure- Controlling Share- Respect of Differences ments of a Share Share Share- Based Cash Flow of Foreign Defined Accumu- Capital Premium holder Payment Hedging Activity Benefit lated Loss Total Thousands Thousands Thousands Thousands Thousands Thousands Thousands Thousands Thousands of Dollars of Dollars of Dollars of Dollars of Dollars of Dollars of Dollars of Dollars of Dollars

Balance as of January 1 2014 155,012 28,007 237,122 7,547 8,070 1,602 659 )254,520( 183,499

Loss for the year ------)28,060( )28,060( Other comprehensive loss - - - - )41,298( )2,448( )258( - )44,004(

Total comprehensive loss for the year - - - - )41,298( )2,448( )258( )28,060( )72,064(

Total equity as of December 31 2014 155,012 28,007 237,122 7,547 )33,228( )846( 401 )282,580( 111,435

The accompanying Notes constitute an integral part of the Consolidated Financial Statements.

C - 11 Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

El Al Israel Airlines Ltd. Concise Consolidated Cash Flow Reports

For the Six For the Three For the Year Month Period Ending Month Period Ending Ending June 30 June 30 December 31 2 0 1 5 2 0 1 4 2 0 1 5 2 0 1 4 2 0 1 4 Thousands Thousands Thousands Thousands Thousands of of Dollars of Dollars of Dollars of Dollars Dollars (Unaudited) (Unaudited)

Cash Flow from Current Activities Profit (loss) for the period 1,311 )23,360( 17,301 16,294 )28,060( Appendix A - Adjustments Required for the Presentation of Cash Flow from Current Activities 136,725 *183,274 61,565 *67,778 *191,503

Cash deriving from operating activities, net 138,036 159,914 78,866 84,072 163,443

Cash flow for investment operations Acquisition of fixed assets (including general engine overhauls and payment on account of aircraft) )83,077( )64,991( )31,458( )23,806( )173,966( Proceeds from the realization of fixed assets 308 8,038 110 63 8,666 Investment in intangible assets )408( )1,294( )216( )538( )3,031( Realization (investment) in restricted deposits 34,317 1,200 10,670 1,200 )31,561( Decrease (increase) in short-term deposits, net - )124( )193( )167( 959 Change in deposits for service providers and long-term 68 121 92 77 327

Cash used for investment activities, net )48,792( )57,050( )20,995( )23,171( )198,606(

Cash Flows from (for) Financing Activities Payment for loan raising costs )3,876( )4,815( - - )9,293( Receipt of loans from banking institutions and others 89,119 51,932 15,427 - 148,599 Repayment of loans from banking institutions and others )73,845( )71,659( )25,055( )24,165( )143,513( Increase in short-term credit, net 19,659 11,740 7,313 18,554 12,796

Cash deriving from (used for) financing activities, net 31,057 )12,802( )2,315( )5,611( 8,589

Increase (decrease) in cash and cash equivalents 120,301 90,062 55,556 55,290 )26,574(

Balance of cash and cash equivalents at the beginning of the period 54,681 86,140 118,732 120,878 86,140

Influence of changes in exchange rates on cash balances held in foreign currency* 1,625 59 2,319 93 )4,885(

Balance of cash and cash equivalents at the end of the period 176,607 176,261 176,607 176,261 54,681

* Reclassified.

The accompanying Notes constitute an integral part of the Consolidated Financial Statements.

C - 12 Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

El Al Israel Airlines Ltd. Concise Consolidated Cash Flow Reports

For the Six For the Three For the Year Month Period Ending Month Period Ending Ending June 30 June 30 December 31 2 0 1 5 2 0 1 4 2 0 1 5 2 0 1 4 2 0 1 4 Thousands Thousands Thousands Thousands Thousands of of Dollars of Dollars of Dollars of Dollars Dollars (Unaudited) (Unaudited)

Appendix A – Adjustments Required for the Presentation of Cash Flow from Current Activities Income and expenses not involving cash flows: Expenses (revenues) from exchange rate differentials due to cash and cash equivalents )1,625( )59( )2,319( )93( 4,885 Depreciation and amortization 79,295 69,687 39,437 33,785 142,158 Adjustment of value of long-term deposits )25( )9( )47( )16( 131 The Company's share of the losses (profits) of subsidiaries, less dividends received 312 )283( - )168( )891( Changes in deferred taxes 374 )9,257( 6,253 6,081 )10,399( Increase (decrease) in liabilities in respect of employee benefits and in provisions 7,926 3,174 6,639 )331( )17,167( Capital gains from the sale of fixed assets )199( )4,891( )48( )24( )5,457( Change in derivatives )21,748( )942( )15,058( )1,534( 29,150 Purchase of exchange rate hedging options - )105( - )105( )105( Revaluation of options received for no return )1,118( )1,214( )1,272( )1,306( )688( Change in designated cash 1 368 )23( 366 616

Changes in asset and liability items: Decrease (increase) in trade receivables )46,782( )48,141( )16,211( )6,582( 6,424 Decrease (increase) in other accounts receivable )9,323( )13,044( )10,254( )3,784( 2,027 Decrease (increase) in prepaid expenses )6,959( )10,007( )5,407( )1,976( 833 Decrease (increase) in inventories )397( 2,729 709 3,360 3,215 Increase in trade payables 12,525 37,061 19,926 27,205 19,592 Increase (decrease) in other payables 16,724 *22,534 2,297 *)459( 5,759 Increase in unearned revenues 107,744 *135,673 36,943 *13,359 11,420

136,725 183,274 61,565 67,778 191,503 Appendix B – Receipt (Payment) of Interest, Taxes and Dividends, Classified Under Cash Flow from Operating Activities

Interest payments 7,793 8,312 3,285 4,241 16,422

Interest receipts 67 90 25 17 225

Tax payments – advances in respect of extraneous expenses 91 99 8 40 517

Dividend receipts 556 164 - - 184

* Reclassified.

The accompanying Notes constitute an integral part of the Consolidated Financial Statements.

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El Al Israel Airlines Ltd. Notes to the Concise Consolidated Financial Statements

Note 1 – General

a. El Al Israel Airlines is the Israeli designated carrier on most routes to and from Israel. The Company is primarily engaged in the transport of passengers and cargo, including luggage and mail, on scheduled flights and charter flights between Israel and foreign countries. The Company is also engaged providing luggage handling and maintenance services at its home airport, sale of duty-free products and - through investees - in related activities, mainly production and supply of airline meals and management of several travel agencies in Israel and abroad. For information on the Group’s operating segments, see Note 11.

b. Passenger traffic through Ben Gurion Airport (BGN) is characterized by a high level of seasonality. Most activity is during summer months, peaking July-September. Winter months (January-March) are characterized by low passenger activity levels.

c. These concise statements must be seen in context of the Group's Yearly Consolidated Financial Statements dated December 31 2014 and the year ending that date, and the attached Notes.

d. The Group's Concise Consolidated Financial Statements (hereinafter: "the Interim Financial Statements") have been prepared in accordance with IAS 34, "Interim Financial Reporting".

e. The Interim Financial Statements have been prepared in accordance with the provisions of Chapter D of the Securities Regulations (Immediate and Periodic Reports), 1970.

f. In accordance with Regulation 4 of the Periodic and Immediate Reports Regulations, the Company did not include in its Financial Statements for the period ending June 30 2015 separate financial information as per Regulation 38d of the Securities Regulations (Periodic and Immediate Reports), 1970, in light of the negligible influence the investees’ financial statements have on the Consolidated Financial Statements

The parameters used by the Company in order to establish the impact in question are: revenues, profits and cash flow from regular operations of up to 5% of all assets, revenues, profits and cash flow from regular operations in the consolidated statements – accordingly, ignoring the impact of uncommon exceptional occurrences.

g. On August 5 2015, subsequent to the balance sheet date, the Company Board of Directors approved exclusive negotiations with aircraft manufacturer Boeing and with aircraft leasing companies for the engagement in transactions to purchase and lease 15 Boeing aircraft, and to receive an option to purchase 13 additional airplanes and purchase spare engines. The airplanes are Boeing 787-9s (Dreamliner), which will gradually replace Boeing 747-400s and Boeing 787-8s (Dreamliner), which will gradually replace Boeing 767-300ERs, with the aircrafts’ delivery date being between 2017 and 2020. According to the Company’s estimates, the estimated total purchase sum for the airplanes and spare engines (without the options) is estimated at $800 to $900 million US, on the basis of an initial estimate that some one half of the planes will be purchased by the Company. Note that the final purchase sum will be determined in accordance with a distribution determined in the future between the number of planes purchased by the Company and the number of planes it leases, in accordance with the purchase agreement and the leasing agreements signed in the future.

h. Following that stated in Note 1c to the Company’s December 31 2014 Financial Statements, in the first half of 2015 the Company presents a profit of $1.3 million compared to a loss of $23.4 million in the first half of 2014 (of that, a $17.3 million profit in the second quarter of 2015 compared to a profit of $16.3 million in the second quarter of 2014).

The results of the Company’s activity in the period in question were significantly influenced for the better by the sharp drop in jet fuel prices, which is also reflected in the forward curve observed in the market, a trend continuing after the balance sheet date. In addition, the strengthening of the USD also has a positive impact on the Company’s results in the reported period. These influences were partially offset by losses from hedging agreements charged to gain/loss in the reported quarter. These economic trends, inasmuch

C - 14 Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

El Al Israel Airlines Ltd. Notes to the Concise Consolidated Financial Statements

Note 1 – General (continued)

as they continue, are expected to have a positive impact on the Company’s cash flows in 2015. This influence was partially ensured for the coming month in accordance with the Company’s hedging policy.

Over the course of the first half of 2015 the Company continued dealing with an increase in flight offerings from existing airlines, as well as the introduction of new airlines, as well as an increase in low cost activity on routes to and from Israel following the implementation of the Open Skies agreement with the EU. The Company examined the implementation of the agreement and the increase in flight offerings on behalf of the foreign airlines, as was made possible following the agreement. As by 2015 most of the restrictions on the entry of foreign airlines into activity from Europe to Israel or on the expansion of their existing activity has been lifted, Company management estimates that the removal of additional restrictions planned for 2016 and 2017 is not expected to have a material impact on the Company’s activity.

As part of the medium and long term strategy being formed by Company management, the Company is acting to adapt its activity by changing flight frequencies and capacities in accordance with market needs while adapting its commercial operating model to models practiced in each of the markets, including, among other things, via flights using the UP aviation brand.

Company management estimates that performing these actions, including the expected equipping with modern and efficient wide-bodied aircraft as per Note 1g above, which are expected to bring about significant savings in fuel consumption costs and maintenance costs, as well as the Company’s positive cash flow deriving and expected to derive from its ongoing activity, which is influenced and expected to be influenced as a result of the drop in jet fuel prices as noted above, are expected to bring about a positive influence on the state of the Company's business and operating results, in such a manner that allows both the redemption of its existing liabilities in the foreseeable future, as well as its future commitments deriving from the equipping plan in Note 1g above. On the matter of the dividend distribution declared by the Company, see Note 12 to these Financial Statements.

Note 2 – Principal Accounting Policies

Basis for the preparation of the Financial Statements:

In preparing these Interim Financial Statements the Group has implemented an accounting policy, rules of presentation and calculation methods identical to those implemented in the preparation of its Financial Statements for December 31 2014 and the year ending that date, with the exception of the following changes:

a. Starting January 1 2015, the Company has International Financial Reporting Standard 9 (2013). Except for a few exceptions (which are not relevant to the Company), the standard has been implemented on a prospective basis. The standard establishes new hedging instructions and provides the opportunity to select as an accounting policy whether to implement the new hedging instructions detailed below in brief, or alternately, those existing as per IAS 32. The Company chose to implement the new hedging directives.

As part of the new standard, the three types of hedge accounting remained in effect: cash flow, fair value and net investment in foreign activity hedging. At the same time, material changes were made regarding the types of transactions fit for hedge accounting, particularly expanding the fit risks for hedge accounting of non-financial items. In this regard, the standard expands the hedging fitness of specific risks (or a risk element) inside non-financial items, assuming that they can be identified separately and measured reliably.

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El Al Israel Airlines Ltd. Notes to the Concise Consolidated Financial Statements

Note 2 – Principal Accounting Policies (continued)

Additionally, some of the hedging effectiveness tests were replaced by a more general test based on “economic relationships”. The retroactive assessment of hedging effectiveness shall no longer be required.

The Company examined and found that the existing hedging as of the first-time implementation are fit for hedging also under the new hedging instructions, and therefore treatment of this hedging will continue in accordance with the original zoning.

Regarding new transactions, the Company may hedge the changes to jet fuel prices only for a specific risk of changing the raw material price in lieu of hedging the full change in the cost of jet fuel expected for the Company as carried out in accordance with IAS 39; the Company has started with this policy in the reported period.

Regarding cash flow hedging, which is implemented by the Company, the standard states that in the event that the hedged item is a non-financial asset, then any profit or loss recognized in the other Statement of Operations for the hedging instrument, shall be charged, upon the occurrence of the hedged transaction, to the cost of the asset. A sum charged to the cost of the asset in question shall not be considered reclassification to gain/loss from other comprehensive earnings (reclassification adjustment). Regarding the remaining cash flow hedging, no change has occurred to the Company's accounting policy as a result of implementation of the standard, meaning upon the occurrence of the hedged transaction the sums recognized to other comprehensive earnings for the hedging shall be changed to gain/loss. Regarding jet fuel hedging carried out by the Company, the Company has decided that this hedging is essentially hedging current expenses, in lieu of hedging a non-financial asset as described above. This is due to the fact that the fuel purchased is consumed immediately, so the balance of the fuel inventory at any point of time is negligible. In light of all this, the Company has decided that gain or loss due to items used to hedge jet fuel shall be transferred to gain/loss (and presented in the Report on Other Comprehensive Earnings as a sum classified to gain/loss) upon purchase by the Company of the jet fuel covered by the hedging instrument.

The standard also stated that when option hedging is performed by the use of their internal value only then the time component for these options will also be charged to other comprehensive earnings and will be classified to gain/loss upon the occurrence of the hedged transaction as noted above or, under certain circumstances, earlier.

Over the course of the six- and three-month periods ending June 30 2015, the Company recognized a negative sum of $631,000 (before tax) in other comprehensive earnings for the time value of options designed (in their internal value only) as hedging instruments in the cash flow hedging.

b. Starting January 1 2015, the Company has altered its accounting policy in the matter of presenting the impact of the results of the foreign currency hedging agreements. See Note 4 to these Financial Statements.

c. Following that stated in Note 3b to the Company’s Yearly Financial Statements on the publication of International Financial Reporting Standard 15 “Revenues from Contracts with Customers”, the binding application of the standard was deferred to yearly reporting periods starting January 1 2018 or subsequently.

C - 16 Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

El Al Israel Airlines Ltd. Notes to the Concise Consolidated Financial Statements

Note 3 - Critical Accounting Considerations and Key Sources for Estimates of Uncertainties

In applying Group accounting policy, as set forth in Note 2 above, Company management is sometimes required to exercise considerable judgment with regard to estimates and assumptions with regard the book value of assets and liabilities, which may not be available from other sources. These estimates and related assumptions are based on past experience and other factors deemed relevant. Actual results may differ from these estimates.

Estimates and underlying assumptions are regularly reviewed by management. Changes in accounting estimates are only recognized in the period in which a change was made to the estimate, if the change only affects that period, or are recognized in said period and in subsequent periods in cases where the change affects both the current period and the subsequent periods.

For further details regarding critical accounting estimates employed by the Company, see Note 4 to the December 31 2014 Consolidated Financial Statements.

Note 4 - Adjustment due to Retroactive Implementation of Changes in Accounting Policy

Starting from 2015 the Company altered its accounting policy regarding classification in the Statement of Operations of the results of foreign currency transactions that hedge the currency exposure embodied in the Company’s salary expenses. In the Financial Statements up to and including the Statements for December 31 2014 and the year ending that date, the Company classified the results of these transactions under financing in the Statement of Operations. In the current Financial Statements the results of the foreign currency hedging transactions were charged to Statement of Operations items in which the hedged salary expenses are classified. Comparison data for precious periods were classified accordingly. The Company believes that this classification better reflects the economic nature of these hedging agreements.

C - 17 Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

El Al Israel Airlines Ltd. Notes to the Concise Consolidated Financial Statements

Influence of Retroactive Adjustment of Gain/Loss Items Before Influence of Influence of Retroactive Retroactive As Reported in Implemen- Implemen- these Financial tation tation Statements Thousands of Thousands of Thousands of Dollars Dollars Dollars For the Six Month Period Ending June 30 2014: Operating expenses )866,828( 3,733 )863,095(

Gross profit 120,121 3,733 123,854

Selling expenses )99,751( 368 )99,383(

Administrative and general expenses )52,624( 554 )52,070(

Loss from regular activities )27,306( 4,655 )22,651(

Net financing expenses )5,481( )4,655( )10,136(

For the Three Month Period Ending June 30 2014: Operating expenses )467,366( 2,106 )465,260(

Gross profit 104,166 2,106 106,272

Selling expenses )53,759( 208 )53,551(

Administrative and general expenses )25,837( 313 )25,524(

Operating earnings 24,624 2,627 27,251

Net financing expenses )2,239( )2,627( )4,866(

For the Year Ending December 31 2014: Operating expenses )1,795,336( )7,325( )1,802,661(

Gross profit 285,967 )7,325( 278,642

Selling expenses )201,418( )722( )202,140(

Administrative and general expenses )99,724( )1,087( )100,811(

Loss from regular activities )3,650( )9,134( )12,784(

Net financing expenses )35,693( 9,134 )26,559(

C - 18 Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

El Al Israel Airlines Ltd. Notes to the Concise Consolidated Financial Statements

Note 5 – Fixed Assets

a. Aircraft and Engine Purchase and Sales Agreements

(1) In January 2015 the Company signed an agreement to sell ten unusable P&W JT9D-7Q engines to a foreign company. The scope of this transaction is $2.75 million US, a sum expected to be recognized as a profit upon completion of the transaction, inasmuch as it is completed and executed.

(2) In March 2015 the Company signed receipt papers for an additional Boeing 737-900ER aircraft (“the Plane”), the fifth of this model purchased by the Company. The aircraft joined the Company’s narrow-bodied aircraft fleet in April 2015 and is operating on short- and medium- range destinations.

For details regarding financing this Plane, see Note 8b to these Financial Statements.

(3) In the matter of the Company’s plan to replace its wide-bodied planes, see Note 1g to these Financial Statements.

b. Examination of aircraft impairment:

If signs indicating deterioration are present in an aircraft fleet, the Company conducts an estimate of the recoverable sum of than aircraft fleet. The recoverable sum is the fair value of the aircraft less sales costs or its value in use, whichever is higher. In estimating value in use, the Company estimates future cash flows expected to derive from the operation of the fleet and its realization at the conclusion of the usage period, and deducts them to their current value using a discount rate reflecting the operational risk of the aircraft fleet based on the Company’s weighted discount rate.

As of March 31 2015, the Company examined the recoverable value of three aircraft fleets in which signs of deterioration were evident: 777 fleet, 747 fleet and 737 fleet.

The following are key assumptions used in calculating value in use:

(1) The expected contribution from the aircraft fleet is based on results listed in practice in Q1 2015 and the estimated results for Q2 (which are not materially different from results in practice) and the budget for the second half of the year (less imputed tax), projected forward unchanged across the economic life span of the entire aircraft fleet, unless expressly noted otherwise.

(2) The useful life of the 777 fleet is 8 years of activity on average, for the 747-400 fleet - 4 years of activity on average and for the 737 fleet – 17 years of activity on average.

(3) The weighted average capitalization interest after tax of 5.5% is equivalent to the capitalization interest before tax of 23.7% for the 747 fleet, 14% for the 777 fleet and 10.1% for the 737 fleet.

In an examination conducted by the Company, it found that the recoverable sum for each aircraft fleet surpasses its depreciated cost as of that date.

As of June 30 2015, no additional signs of impairment were found relative to the situation existing as of March 31 2015, and in particular: the assessment of the yearly contribution by aircraft fleet (less non- recurring influences) is not materially different from the contribution used for the purpose of the calculation made as of March 31 2015, no material change occurred in market interest rates relative to that date an therefore no change in the aircraft’s market price is known.

Accordingly, over the course of the six - and three -month periods ending June 30 2015, no provision to aircraft impairment was recognized. C - 19 Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

El Al Israel Airlines Ltd. Notes to the Concise Consolidated Financial Statements

Note 6 - Operational Lease Arrangements

a. In June 2015 the Company entered into agreements with AerCap Holdings N.V to extend the lease of 3 767-300 passenger planes for the following periods:

Plane EAK for an additional period of 61 months starting November 21 2015.

Plane EAR for an additional period of 29 months starting November 5 2016.

Plane EAM for an additional period of 21 months starting December 30 2017.

The Company has an option to conclude the lease agreement starting January 1 2017 with 12 months’ notice. The leases were classified as an operational lease in the Financial Statements.

b. In June 2015 the Company approved the extension of the lease agreement of a 737-800 aircraft marked EKO from Rain VI LLC, via the Aviation Capital Group, which manages the plane for the lessor for an additional period of 60 months starting November 9 2015 and ending November 9 2020 or when both engines have a balance of 30 cycles until renovation, whichever comes first. The Company has the option to terminate the lease during the lease period, subject to advance notice and the payment of exit fees, as detailed in the agreement. The lease was classified as an operational lease in the Financial Statements.

c. In May 2015 the Company signed a letter of intent for the dry lease of a Boeing 767-300ER aircraft with Pacific Aircorp 27993 Inc. through Sky Holding Company LLC, which manages the plane for the leaser (servicer). The plane was manufactured in 1996 and is expected to be received at the Company in September 2015. The lease agreement is expected to be signed soon, and it will establish that the lease period will end at the conclusion of the third heavy inspection expected to take place in March 2020 (54 months). The Company has an early exit option on plane’s the third heavy inspection date with the payment of an exit fee.

Note 7 - Financial Instruments

Material changes to the fair value of financial instruments measured at fair value:

The following are details of changes in the fair value of the Company’s financial derivatives, measured at fair value (Level 2) in the six-month period ending June 30 2015:

Negative Positive Fair Value (Negative) as of Change in Fair Value January 1 Fair Value as of June 2015 in Period 30 2015 Thousands Thousands Thousands of Dollars of Dollars of Dollars

Liability due to jet fuel hedging agreements (1) )62,074( 46,504 )15,570(

Asset (liability) due to foreign currency hedging agreements (2) )11,043( 13,866 2,823

Liability due to interest hedging agreements )216( 216 -

Total )73,333( 60,586 )12,747(

C - 20 Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

El Al Israel Airlines Ltd. Notes to the Concise Consolidated Financial Statements

Note 7 - Financial Instruments (continued)

(1) The increase in the fair value of jet fuel hedging agreements derives mainly from payment for jet fuel hedging transactions at negative fair value cost realized over the course of the reported period.

(2) The increase in the fair value of foreign currency hedging agreements derives mainly from payment for foreign currency hedging transactions at negative fair value cost realized over the course of the reported period.

The following are details of changes in the fair value of the Company’s financial derivatives, measured at fair value (Level 2) in the six-month period ending June 30 2014:

Positive (Negative) Positive Fair Value (Negative) as of Change in Fair Value January 1 Fair Value as of June 2014 in Period 30 2014 Thousands Thousands Thousands of Dollars of Dollars of Dollars

Asset due to jet fuel hedging agreements 8,055 )4,933( 3,122

Asset due to foreign currency hedging agreements 4,834 )2,913( 1,921

Liability due to interest hedging agreements )991( 324 )667(

Total 11,898 )7,522( 4,376

The following are details of changes in the fair value of the Company’s financial derivatives, measured at fair value (Level 2) in the one-year period ending December 31 2014:

Positive (Negative) Negative Fair Value Fair Value as of Yearly as of January 1 Change in December 2014 Fair Value 31 2014 Thousands Thousands Thousands of Dollars of Dollars of Dollars

Asset (liability) due to jet fuel hedging agreements 8,055 )70,129( )62,074(

Asset (liability) due to foreign currency hedging agreements 4,834 )15,877( )11,043(

Liability due to interest hedging agreements )991( 775 )216(

Total 11,898 )85,231( )73,333(

C - 21 Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

El Al Israel Airlines Ltd. Notes to the Concise Consolidated Financial Statements

Note 7 - Financial Instruments (continued)

Financial Instruments not Presented at Fair Value in the Balance Sheet:

Other than as set forth in the table below, the Company believes that the book value of the financial assets and liabilities presented at depreciated cost in the Financial Statements are approximately equal to their fair value:

As of December 31 As of June 30 2015 2014 Value Value Book Book Value Fair Value Value Fair Value Thousands of Dollars

Long term fixed interest dollar loans 273,506 267,387 239,464 236,248

The fair value of these loans is based on calculating the current value of cash flows according to an interest rate of 2.80% as of June 30 2015 and 2.70% as of December 13 2014, as used for loans with similar characteristics.

The increase derives from the receipt of a loan during the reported period.

Note 8 - Loans from Banking Corporations

a. Ratio of loan balance to collateral:

As of the reported date, the Company meets the ratio of loans to collateral required in accordance with the agreements with the lending banks.

b. In March 2015 the Company signed financing agreement papers with a Canadian bank, guaranteed by the U.S. Export-Import Bank (EX-IM) for a Boeing 737-900ER, no. 5 (“the Plane”).

The loan, to the sum of $48 million, was received on March 10 2015.

The loan was taken for a period of 12 years from the receipt of the Plane and its redemption will be carried out in quarterly payments.

On April 2 2015, the interest on the loan was set until the end of the loan period.

Furthermore, the Plane along with all of the rights owed the Company by virtue of the transaction papers as well as the Company’s rights in accordance with the insurance policies issued within its framework, were pledged as collateral

c. Following that noted in Note 20.b.(2) to the Company’s December 31 2014 Yearly Financial Statements regarding a loan agreement with a fully-owned subsidiary of aircraft manufacturer Boeing, during the reported period, the date by which an agreement to lease or purchase the aircraft, as stated in that Note, was extended to September 30 2015.

C - 22 Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

El Al Israel Airlines Ltd. Notes to the Concise Consolidated Financial Statements

Note 9 - Legal Proceedings

As of June 30 2015, legal claims filed against the Company amounted to a total of $642 million, along with claims not quantified in monetary sums. The Company listed a provision totaling $10.7 million in its Financial Statements for all of the claims in question.

In the opinion of Company management, based upon the opinions of its legal counsel, it is not anticipated that the Company will be exposed to an additional loss with respect to the above claims in excess of the sums of the provisions recorded in the Financial Statements.

The following are material changes occurring during the reported period in the matter of the Company’s legal proceedings:

a. In January 2015 the Company’s main offices received a motion to approve a claim as a class action, which was filed before the Central District Court (“the Motion”). The Motion was filed against Arkia Israeli Airlines Ltd., Israir Aviation and Tourism Ltd., the Company and the Airports Authority (“the Respondents”). According to the Motion, the Respondents are in violation of their obligations in accordance with the Disabled Persons’ Equality Law, 1988, to operate a hearing accessory system with an induction coil in each airport passenger terminal to benefit people with hearing disabilities who use hearing aids. The Motion notes a personal sum of 500 NIS and a total sum for the entire Group of 83 million NIS. The Company filed its initial response. Company management estimates, based on the opinion of Company legal counsel, that it is more likely than not that the suit will be dismissed.

b. In January 2015 the Company’s main offices received a motion to approve a claim as a class action, which was filed before the Central District Court (“the Motion”). According to the Motion, its issue us the failure to repay fees and/or port taxes the Company charges its customers upon billing for flight tickets in cases in which the passengers failed to take their flights, in light of the fact that the Company does not give the fees and/or port taxes collected from these customers to third parties. The Motion notes a personal sum of 183 NIS and a total sum for the entire Group of 30 million NIS. The Company filed its initial response. Company management estimates, based on the opinion of Company legal counsel, that it is more likely than not that the suit will be dismissed.

c. In February 2015 the Company’s main offices received a motion to approve a claim as a class action, which was filed against it before the Central District Court (“the Motion”). The Motion was filed on behalf of a group of holders of branded credit cards of the Company's frequent flyer club – Fly Card. According to the Motion, contrary to the Company’s publications and presentations, these credit card holders do not receive various benefits promised by the Company in UP flights operated by the Company. The Motion notes a personal sum of 192 NIS and a total sum for the entire Group, estimated by the applicant, of 10 million NIS. The Company filed its initial response. Company management estimates, based on the opinion of Company legal counsel, that it is more likely than not that the suit will be dismissed.

d. In April 2015 the Company’s main offices received a motion to approve a claim as a class action, which was filed against it before the Tel Aviv District Court (“the Motion”). The Motion was filed on behalf of members of the Company's frequent flyer club (“the Group” and “the Club”). According to the key points of the claims in the Motion, the Company unilaterally altered the terms of a number of characteristics of the Club program, all of which constitute a significant worsening of the terms of the Club and a material negative economic impact on the value of the points accumulated by the group. The Motion notes a personal sum of 7,300 NIS and a total sum for the entire Group, estimated by the applicant, of 1.3 billion NIS. The Company is studying the Motion and will file a response as needed. At this early date, the chances this suit will be accepted cannot yet be estimated.

e. In June 2015 the Tel Aviv-Jaffa District Court decided to reject the motion to approve a suit as class action against the Company from May 2011 to the sum of 12.5 million NIS, filed by a Company passenger, whose flight had been canceled on May 5 2011 following contamination found in the jet fuel.

C - 23 Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

El Al Israel Airlines Ltd. Notes to the Concise Consolidated Financial Statements

Note 9 - Legal Proceedings (continued)

f. In June 2015 the Company’s main offices received a motion to approve a claim as a class action, which was filed against it before the Tel Aviv District Court (“the Motion”). According to the motion, it was filed on behalf of any person who examined the possibility of purchasing reduced-cost flights on the Company’s website in accordance with the Company’s publications, but there were no such flights present (“the Group”). The Motion notes a personal sum of 400 NIS and a total sum for the entire Group, estimated by the applicant, of 40 million NIS. The Company is studying the Motion and will file a response as needed. At this early date, the chances this suit will be accepted cannot yet be estimated.

g. In June 2015 the Company’s main offices received a motion to approve a claim as a class action, which was filed before the Tel Aviv District Court against the Company and against Israir Aviation and Tourism Ltd., Israir Charter (1994) Ltd. and Arkia Israeli Airlines Ltd. (“the Motion”). As alleged, the Motion was filed on behalf of all of the airlines’ passengers starting August 16 2012 the flight takeoff time of whom had been delayed for over two hours and/or whose flight have been cancelled and the takeoff date of their alternate flight has been postponed for over two hours from the original takeoff time and who were not provided with assistance in accordance with the Aviation Services Law, 2012 (“the Group”). The Motion notes a personal sum of 50 NIS, with the sum for the entire Group estimated by the applicants at 47 million NIS, of which 32.5 million NIS is attributed to the Company. The Company is studying the Motion and will file a response as needed. At this early date, the chances this suit will be accepted cannot yet be estimated.

h. In June 2015 the Company was informed that the Antitrust Court had rejected the appeal it had filed as a result of the notice from the Restraint of Trade Authority, according to which the Company was declared a monopoly in the supply of aviation security services abroad, according to professional guidelines provided airlines in accordance with the Arrangement of Security in Public Bodies Law, 1998 and in accordance with the Aviation Law (Security in Civil Aviation), 1977, regarding passengers and cargo on passenger flights.

i. In August 2015, subsequent to the balance sheet date, the Company’s main offices received a motion to approve a claim as a class action, which was filed before the Central District Court (“the Motion”). The Motion was filed on behalf of all passengers belonging to the Company’s “frequent flyer” club (“the Club”) who has purchased vouchers from the Company for the purchase of duty-free products in return for the Club points they have accumulated, in the seven years prior to the approval of the Motion, inasmuch as it is sustained. According to the Motion, the vouchers’ purchasing condition according to which there are “No refunds for partial voucher redemptions” constitute a harmful condition in a uniform contract. The remedies requested in the motion are, among other things, to compel the Company, from now on, to provide change in cash or credit vouchers or credit in Club points for partial use of the voucher as well as suitable monetary reimbursement to all customers who did not receive change for such partial usage. Note that the direct financial damage has been estimated by the applicant at 4 million NIS. The Company is studying the Motion and will file a response as needed. At this early date, the chances this suit will be accepted cannot yet be estimated.

C - 24 Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

El Al Israel Airlines Ltd. Notes to the Concise Consolidated Financial Statements

Note 10 – Employee Benefit Obligations

a. Signing of a special collective agreement with Company workers, to whom the collective agreement applies:

On June 22 2015 the Company and the workers representative signed a special collective agreement, which formulated understandings regarding work relations at the Company, until a period ending August 31 2018. The key points of the Agreement include:

a. A 3% salary increase starting September 2015 (or August 2015, subject to certain conditions).

b. A one-time 2% salary increase, retroactive for the period starting January 1 2015, until the increase denoted in a. above comes into effect.

c. A conditional right to salary increases of 0.5%-1% subject to the Company’s profits and the terms set in the agreement.

d. Payment of a one-time $3 million signing bonus, paid near the signing of the agreement.

For these increases, the Company recognized an expense of 6,277 thousands of $ for the six and three month periods ending June 30 2015. Furthermore, during the period the Company recognized as part of other comprehensive earnings a loss (before tax) of 1,444 thousands of $ as a result of a change in the actuary assumptions used to determine the Company’s post-employment obligations.

Furthermore, it was agreed that the Company may, according to its needs and its discretion, conclude the employment of up to 50 Company employees, who would retire from the Company over the course of the agreement period. The employees whose employment is ended shall receive a bridge pension from the Company from their retirement date until they arrive at the legal retirement age. Furthermore, it was agreed that the first 35 candidates terminated shall leave work no later than December 31 2015. In accordance with IAS 19 in Q2 2015 the Company recognized and expense and a liability to the sum of 18,042 thousands of NIS (approximately 4,787 thousands of $) for the retirement of the first 35 candidates. The expense was included in the other expenses item in the Statement of Operations.

b. Changes in interest for the capitalization of long-term employee obligations:

Over the course of the second quarter of 2015, a significant increase occurred in the yield to redemption rates of high-quality corporate debentures, used in order to discount the defined benefit plan obligation as well as other long-term employee benefits (primarily vacation and rest). This increase is relative to the discount rates applying as of the Company’s December 31 2014 Yearly Financial Statements, and is more severe relative to the Company’s Financial Statements for the first quarter of 2015, which saw a drop in discount rates relative to the yearly reporting date. The following is the influence of the change in discount rate:

For the Six- For the Three- Month Period Month Period Ending June 30 Ending June 30 Influence of change in interest rate 2015 2015 Thousands of Thousands of Dollars Dollars

Decease in post-employment obligations – change charged to Other Comprehensive Earnings (before tax influence). 3,693 8,991

Decrease in other long-term liabilities – change charged to the Statement of Operations 2,319 4,689

C - 25 Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding

El Al Israel Airlines Ltd. Notes to the Concise Consolidated Financial Statements

Note 11 - Segment-Based Reporting

a. General:

The Group has applied IFRS 8, "Operating Segments" (hereinafter "IFRS 8”). According to IFRS 8, operational segments are identified based on internal reports on the Group's components, which are reviewed on a regular basis by the Group's chief operating decision maker for the purpose of allocating resources and assessing the performance of the operational segments.

In light of the above, the following are the Company's reported operating segments in accordance with IFRS 8:

Segment A – passenger aircraft activity.

Segment B – cargo aircraft activity.

The Group’s other activities include revenues from charter flights via subsidiary Sun D'Or (which are written off in the "Adjustments" column), revenues from maintenance service provided to outside elements as well as a broad variety of services and revenues such as equipment leasing, frequent flyer membership fees, loading and unloading services and more.

b. Analysis of revenues and results according to operating segments:

For the Six Month Period Ending June 30 2015 Passenger Cargo Adjust- Aircraft Aircraft Others ments Total Thousands of Dollars (Unaudited) Revenues Revenues from outside customers *842,149 39,198 23,534 25,570 930,451 Inter-segment revenues - - 17,861 )17,861( -

Total segment revenues 842,149 39,198 41,395 7,709 930,451

Segment results 96,747 )1,719( 21,603 - 116,631 Unassigned expenses )103,311(

Operating profit 13,320 Financing expenses )12,832( Financing income 1,185 The Company's share of the profits of affiliates 244

Profit before taxes on income 1,917 Taxes on income )606(

Profit for the period 1,311

* Including $48,266,000 in revenues from cargo and mail in the holds of passenger planes.

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El Al Israel Airlines Ltd. Notes to the Concise Consolidated Financial Statements

Note 11 - Segment-Based Reporting (continued)

For the Six Month Period Ending June 30 2014 Passenger Cargo Adjust- Aircraft Aircraft Others ments Total Thousands of Dollars (Unaudited) Revenues: Revenues from outside customers *903,874 35,571 25,112 22,392 986,949 Inter-segment revenues - - 13,293 )13,293( -

Total segment revenues 903,874 35,571 38,405 9,099 986,949

Segment results 65,533 )250( 20,406 - 85,689 Unassigned expenses **)108,340(

Operational loss )22,651( Financing expenses )11,436( Financing income **1,300 The Company's share of the profits of affiliates 447

Loss before taxes on income )32,340( Tax benefit 8,980

Loss for the period )23,360(

* Including $51,368,000 in revenues from cargo and mail in the holds of passenger planes. ** Adjustment due to retroactive implementation of changes in accounting policy, see Note 4.

For the Three Month Period Ending June 30 2015 Passenger Cargo Adjust- Aircraft Aircraft Others ments Total Thousands of Dollars (Unaudited) Revenues Revenues from outside customers *463,160 19,660 11,021 16,801 510,642 Inter-segment revenues - - 12,511 )12,511( -

Total segment revenues 463,160 19,660 23,532 4,290 510,642

Segment results 67,979 )823( 12,105 - 79,261 Unassigned expenses )51,851(

Operating profit 27,410 Financing expenses )5,551( Financing income 1,785

Profit before taxes on income 23,644 Taxes on income )6,343(

Profit for the period 17,301

* Including $22,283,000 in revenues from cargo and mail in the holds of passenger planes.

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El Al Israel Airlines Ltd. Notes to the Concise Consolidated Financial Statements

Note 11 - Segment-Based Reporting (continued)

For the Three Month Period Ending June 30 2014 Passenger Cargo Adjust- Aircraft Aircraft Others ments Total Thousands of Dollars (Unaudited) Revenues: Revenues from outside customers *528,558 16,949 12,752 13,273 571,532 Inter-segment revenues - - 8,326 )8,326( -

Total segment revenues 528,558 16,949 21,078 4,947 571,532

Segment results 69,897 )48( 10,318 - 80,167 Unassigned expenses **)52,916(

Operating profit 27,251 Financing expenses )6,185( Financing income **1,319 The Company's share of the profits of affiliates 168

Profit before taxes on income 22,553 Taxes on income )6,259(

Profit for the period 16,294

* Including $25,007,000 in revenues from cargo and mail in the holds of passenger planes. ** Adjustment due to retroactive implementation of changes in accounting policy, see Note 4.

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El Al Israel Airlines Ltd. Notes to the Concise Consolidated Financial Statements

Note 11 - Segment-Based Reporting (continued)

For the Year Ending December 31 2014 Passenger Cargo Adjust- Aircraft Aircraft Others ments Total Thousands of Dollars Revenues: Revenues from outside customers *1,910,620 69,932 47,635 53,116 2,081,303 Inter-segment revenues - - 34,529 )34,529( -

Total segment revenues 1,910,620 69,932 82,164 18,587 2,081,303

Segment results 193,261 )742( 40,864 - 233,383 Unassigned expenses **)246,167(

Operational loss )12,784( Financing expenses **)27,471( Financing income 912 The Company's share of the profits of affiliates 1,056

Loss before taxes on income )38,287( Tax benefit 10,227

Yearly loss )28,060(

* Including $105,280,000 in revenues from cargo and mail in the holds of passenger planes. ** Adjustment due to retroactive implementation of changes in accounting policy, see Note 4.

Note 12 - Declaration of Dividend Distribution Subsequent to the Balance Sheet Date

On August 5 2015, the Company’s Board of Directors resolved to distribute dividends totaling NIS 0.19 (approximately 5 cents) per 1 NIS NV regular share. The total sum of the dividends amounts to 94.2 million NIS (approximately $24.7 million according to the USD’s representative rate of exchange published August 5 2015). The determining date for the dividend distribution was set at August 13 2015, and the dividend payment date was set at August 26 2015.

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