Free Translation of the 2013 Annual Report - Hebrew Wording Binding

El Al Ltd

Annual Report For 2013

Chapter A Description of the Corporation’s Business

Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

CHAPTER 1: GENERAL

El Al Israel Airlines Ltd. is pleased to present a description of the Corporation’s business for the fiscal year ending December 31, 2013, describing the Corporation and surveying the development of its business, as they occurred during 2013. The report was prepared in accordance with the Securities Regulations (Periodic and Immediate Reports), 1970. The financial data included in the report is in U.S. dollars, unless stated otherwise. The financial data relating to monetary claims are in Israeli shekels (“NIS”) as of the date that the claim was filed, unless stated otherwise.

The percentages of ownership are presented in numbers rounded out to the nearest whole percent, unless stated otherwise.

Data appearing in this report is correct as of the report date, unless stated otherwise. Data appearing in this report as correct as of a date close to the approval of the report, has been updated as of March 12 2014, unless stated otherwise.

The importance of the data included in this Periodic Report, including the description of material transactions, has been assessed from the Company’s point of view, while in some cases, additional descriptive information is given in order to provide a comprehensive picture of the matter being described.

The description of the Company’s business in this periodic report partially includes “forward- looking information” as the term is defined in the Securities Law, 1968. Forward-looking information is a forecast, assessment, estimate or other information constituting uncertain information referring to future events or issues, based on information that existed in the Company near the reported date, unless noted otherwise, and includes estimates by the Company and/or its intentions as they existed near the reported date (unless noted otherwise). Results in practice may be materially different from the results estimated and/or implied from this information, as their realization is influenced, among other things, by factors not under the Company's control. Forward-looking information in this report will be identified by specific statements noting that it is forward-looking information, noting the key facts and data that served as the basis for the information as well as the key factors the Company estimates may lead to the fact that the forward- looking information is not realized.

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Glossary

For the sake of convenience, in this periodic report, the following abbreviations shall be assigned the meaning listed alongside them:

Report of the Board of The Report of the Board of Directors on the State of Corporate Affairs Directors- for the Year Ending December 31 2013.

USD/Dollar - U.S. dollar.

The Stock Exchange- The Stock Exchange Ltd.

The Financial The Company’s Consolidated Financial Statements for the Year Ending Statements- December 31 2013, unless noted otherwise.

The State - The State of Israel.

The Group - The Company and its subsidiaries

The Authority - The Securities Authority.

The Corporation or the El Al Israel Airlines Ltd. Company or El Al -

Fifth Freedom - Transporting passengers or cargo between two foreign countries by a third-country carrier For instance, El Al transports cargo between Liège and New York

Sixth Freedom - Transporting passengers or cargo between two foreign countries with a stopover in the airborne carrier’s country. For instance, a flight by a European from Israel to the U.S through an airport located in that airline’s European country.

The Companies Law - The Companies Law, 1999.

The Government The Government Companies Law, 1975. Companies Law -

The Securities Law - The Securities Law, 1968.

IATA - The International Air Transport Association

The Report Date - December 31 2013.

K’nafaim - K’nafaim Holdings Ltd. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

Date immediately prior March 12 2014, unless noted otherwise. to the approval of the report

Sun D’Or - Sun D’Or International Airlines Ltd.

Income Tax Order - The Income Tax Ordinance (New Version), 1961.

NIS- New Israeli Shekel

The Reported Year 2013.

2003 Prospectus - The prospectus published May 30 2003, as revised on June 3 2003 and June 4 2003

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

ATK - Available Ton Kilometer - the available capacity for transport of passengers (translated into tonnage) and cargo multiplied by the distance flown.

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

RTK - Revenue Ton Kilometer - the weight in tons of paying passengers and cargo multiplied by the distance flown.

FTK- Freight Ton Kilometer – the weight in tons of paid cargo (including mail) multiplied by the distance flown

FLF- Freight Load Factor – the load factor rate on cargo flights.

PLF - Passenger Load Factor – the load factor rate in passenger flights (percentage of seats being utilized).

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CHAPTER 2: DESCRIPTION OF THE GENERAL DEVELOPMENT OF THE CORPORATION’S BUSINESS

1. The Corporation’s Activity and Description of the Development of its Business

1.1 General

The Company is engaged primarily in the air transport of passengers and cargo (including baggage and mail) in Israel and abroad, by means of passenger aircraft and cargo aircraft. The Company’s passenger aircraft carry out scheduled flights as well as charter flights.

The Company serves as the designated air carrier of the State of Israel on most international routes that operate to and from Israel. See Section 7.1.1, 7.1.2, 7.1.10 and 9.11.7.2 below for more on this subject and on the meaning of the term “Designated Carrier”, and on the Government's decision regarding "Open Skies".

The Group is engaged in activities auxiliary to its air transport activity, such as sale of duty-free products, production and supply of food primarily to its aircraft, and in the leasing of aircraft, providing security services, regular maintenance and overhaul services to aircraft of other airlines at Ben-Gurion Airport (“BGN”) and management of travel agencies abroad.

The business environment in which the Company operates is the sector of international civil aviation and tourism to and from Israel, which are characterized by seasonal fluctuations and a high level of competition, which becomes more severe during periods of excess capacity.

In the area of passenger transport, in 2013 the Company competed with two Israeli airlines ( and Israir), 60 foreign airlines operating scheduled flights, and over 50 foreign charter companies, 37 of which operate regular flights. The airlines compete in various areas, principally: fares, frequency and flight times, operational punctuality, equipment type, airplane configuration, passenger service, etc. The competition is with the airlines that maintain scheduled flights between different destinations, charter flights between those destinations and/or Sixth Freedom Flights.

In the field of cargo transport, in 2013 The Company competed with seven airlines which operate cargo planes in flights to and from BGN, in addition to C.A.L. Cargo Airlines Ltd. Additionally, the Company competes with most of the scheduled airlines that operate passenger airplanes and transport cargo in their holds.

See Sections 7.8 and 8.7 below for more on the competition. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

1.2 Holdings Chart

The following is a chart of the structure of the Company’s holdings in investees active as of the date immediately prior to the approval of the report (the percentages listed in the chart express the Company’s holdings in the investee companies):

El Al Israel Airlines Ltd.

Sun Dor 100%

TAMAM 100%

Katit 100%

Superstar Holidays (Britain) 100%

Bornstein Caterers USA 100%

50% ACI

Tour Air Airtour 50%

Kavei Chufsha 20%

Maman Cargo Terminals and Handeling Ltd. 15%

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1.3 Year and Form of Incorporation

El Al Israel Airlines Ltd was incorporated as a limited liability company on November 15, 1948 under the name of El-Al Israel Airlines Ltd. changing its name to its present name on , 1951.

1.4 Changes in the Corporation’s Business

Until June 6, 2004, the Company was a “Government Corporation” in the process of “privatization” (as these terms are defined in the Government Corporations Law). See Section 9.11 below, “restrictions and regulation of the corporation’s business”, for additional details.

To the best of the Company's knowledge, as of today the State still holds 1.1% of the Company’s issued share capital, and therefore, the Company still has a "mixed company” status. Likewise, the State holds a Special State Share (for information on the Special State Share and its related rights, see Section 9.11.9 below).

2. Fields of Activity

The Group’s headquarters functions on an integrated basis in the fields of activity listed below, including financial management, human resources, procurement, legal counseling, IT, security, maintenance and engineering, sales, customer service, marketing and advertising, land and ground operations and construction.

The Group has two reported areas of activity. See Note 32 to the Financial Statements for details.

a) Air Transport in Passenger Aircraft

In this field, the Company transports passengers as well as cargo (including mail and baggage) in the holds of passenger aircraft, as well as providing auxiliary services, such as sale of duty free products and passenger aircraft leasing. Revenues from this area of activity constituted 91.3% of all of the Group’s revenues in 2013.

b) Air Transport in Cargo Aircraft

In this area, the Company transports cargo in a designated cargo transport plane as well as providing auxiliary services, such as leasing cargo aircraft. Revenues from this area of activity constituted 3.4% of all of the Group’s revenues in 2013. Starting June 2011 the Company operates a single leased -400 cargo airplane. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

Other than the fields of activity detailed above, the Group has additional activities that are not included in these fields, which are not material to the Company’s activity1, with total revenues from them constituting 5.3% of total Group revenues for 2013.

3. Investments in the Corporation’s Capital

3.1 General

On January 31 2013 the Company signed a letter of understandings with funds from the FIMI Group (hereinafter: “FIMI”) which was extended by the parties on March 11 2013 in the matter of an agreement in which FIMI will invest in the Company’s shares. The letter of understandings defined the basic conditions of the investment agreement, as detailed in the Company’s immediate reports from January 31 2013 (Ref. no. 2013-01- 026886) and March 11 2013 (Ref. no. 2013-01-002329). On October 10 2013 FIMI informed the Company that it was canceling the investment agreement between the parties, as the condition precedents set in the investment agreement had not been met.

3.2 Options

On February 26, 2006, the Board of Directors of the Company resolved to adopt the 2006 option plan for employees and executives of the Company (hereafter: “the 2006 Options Plan”). For details regarding the options plans, their conditions and the number of options see Note 25e to the Financial Statements.

On June 24 2009, after receiving the approval of the Company’s Audit Committee and Board of Directors, the general meeting approved a private allocation of 4,650,000 options to the Chairman of the Board of Directors, Mr. Amikam Cohen. As of this report, the Chairman of the Board holds 1,550,000 options (after the remaining portion expired, in accordance with the terms of the plan).

On January 6 2010 the Company’s Audit Committee and Board of Directors approved a private allocation of 9,914,382 options to the Company's CEO, Mr. Eliezer Shekedi.

For details regarding the terms of the options to the Company’s Board of Directors and CEO, see Notes 25.e.2 and 25.e.3 to the Financial Statements.

No expenses for the above-mentioned option plans were listed in 2013.

1 The production and supply of meals for passengers in flights, providing security services, regular maintenance services and overhaul services for aircraft of other companies at BGN and management of travel agencies abroad. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

3.3 Shares Held by Company Employees

The employees association (Holdings in Trust of El-Al Employees Ltd.) (hereinafter – “the Employees Association”) held Company shares by virtue of a right to purchase shares granted by the State pursuant to the 2003 prospectus.

According to notice provided the Company, on October 13 2013 the Court appointed a receiver for assets the Employees’ Corporation had pledged in favor of L’Israel Ltd.’ including shares of the employees’ corporation and the related rights and finances.

On December 5 2013 the Employees’ Corporation ceased serving as a Company interested party. To the best of the Company’s knowledge, as of December 31 2013, the Employees’ Corporation does not hold any Company shares.

3.4 Changes in Holdings of Interested Parties

To the best of the Company’s knowledge, no investments were made in the Company's equity over the course of the two years preceding this date.

On November 13 2013, the Company controlling shareholder, K’nafaim Holdings Ltd., sold 15,000,000 ordinary Company shares in an off-stock market transaction, constituting 3% of the Company’s issued and paid- stock capital. After completing the sale, K’nafaim holds 36.3% of the Company’s stock capital (35.47% fully diluted).

3.5 Table Summarizing Data on Interested Party Holdings and Capital

On June 5 2013 a special meeting of the Company’s shareholders approved, among other things, (a) an increase of the Company's listed capital to 1,000,000,000 ordinary shares, in addition to the Special State Share; (b) a revision of the Company's Articles of Association and Memorandum in accordance with the above-mentioned increase in capital (as detailed in the June 5 2013 immediate report, ref. no. 2013-01-086635).

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Breakdown of holdings in Company shares as of December 31 2013:

Breakdown of holdings in Company shares as of March 12 2014:

4. Distributions of Dividends

The Company did not distribute dividends in the reported year and in the preceding year. For details regarding the dividend distribution policy see Note 25d to the Financial Statements. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

For details regarding the letter from Bank Leumi to K’nafaim upon the latter becoming the Company's controlling shareholder, see Note 18.f.3 to the Financial Statements.

5. Financial Data on the Corporation’s Fields of Activity

For details regarding changes to international standards (IFRS) see Note 3 to the Financial Statements. For details regarding the Company’s operating segments see Note 32 to the Financial Statements.

5.1 Nature of the Adjustments

Reporting on the areas of activity seen by the Company’s chief operational decision maker (CODM) is carried out in an expenses nature format, while the Company’s Consolidated Financial Statements are presented on the basis of the operating characteristics of the Company’s expenses. The adjustments are carried out by virtue of IFRS-8, in order to reflect the gap between the segment reporting in question and the data included in the Company’s Consolidated Financial Statements.

5.2 Explanation of Developments Occurring in the Areas of Activity

See the in Section a.3 of the Board of Directors’ Report for an explanation of developments in the Company’s operating results during the reported year compared to last year.

6. General Environment and Impact of External Factors on the Company

6.1 Traffic in the International Aviation Industry

The international aviation industry is affected by the economic and political situation, by the security situation, and by unusual events, such as outbreaks of epidemics and natural disasters in the world, and in specific areas in particular.

Competition in the industry, including the slowdown in the global growth rate, the ongoing euro crisis, high fuel prices that lead to increases in input prices and to the diversion of cargo from air to sea and increased activity on behalf of low cost companies forces the airlines to take streamlining steps including reorganization, alliances and mergers, use of more efficient and cost-effective aircraft and careful management of seat capacities to increase aircraft usage, increased revenues from the sale of associated services as well as changes in the operating format. “Legacy” airlines are shifting to the operation of low cost flights, whether as classes in regular aircraft, or in flights to specific destinations with minimal service.

In spite the above, passenger traffic continued to grow at an impressive rate in 2013. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

According to IATA data, total passenger traffic (both international and domestic) increased by 5.2% in 2013, with average capacity increasing by 4.8% and an average load factor of 79.5%, a slight improvement over 2012. The growth rate in international traffic (only) was slightly higher, reaching 5.4% compared to domestic traffic, which listed an increase of 4.9%. The increase in traffic (both international and domestic) was led by emerging markets in the (+11.4%), (+7.1%), South America (+6.3%) and Africa (+5.1%). In the developed regions, and , growth rates were more moderate, at +3.8% and 2.3%, respectively.

Comprehensive cargo traffic (both international and domestic) listed a 1.4% increase in 2013 relative to 2012, after a 1.6% drop in cargo traffic in 2012.

6.2 Movement in the Israeli Aviation Industry

2013 saw a record number of incoming tourists visits to Israel, with 2.58 million inbound tourists via air were listed (not including day visits) in 2012, a 4% increase over 2012. In addition, 4.28 million outbound Israelis were listed in 2013, which indicates an 11% increase over last year.

According to data provided by the Israeli Airports Authority, total international passenger traffic through BGN increased by 8.6% in 2013 compared to 2012.

6.3 Fluctuations in Jet Fuel Prices

Jet fuel is a significant component of the Company’s expenses. The jet fuel prices are characterized by extensive and severe fluctuations. The following data refers to the weighted average of jet fuel market prices (before marketing margins and other tolls) in the various markets in which the Company purchases fuel, as quoted by Platts2. Jet fuel prices (the “markets basket” – the weighted price in accordance with markets in which the Company purchases jet fuel) decreased by 3.9% relative to 2012 prices over the course of 2013. See Sections 9.5.1 and 9.18.6 below for further details. See Sections a.3 and b.1.(3) of the Board of Directors' Report for additional details on the financial effect of jet fuel prices, including due to hedging activity.

6.4 Foreign Currency Rate Fluctuations

The Group’s results are affected by a number of currencies, particularly the U.S. dollar. Fluctuations in the exchange rate of the dollar vis-à-vis other currencies are likely to

2 To the best of the Company's knowledge, Platts is a company from the McGraw-Hill Group that has provided information on the energy industry for over 75 years. The company provides updated information and analyses, among other matters regarding prices and international occurrences in the petroleum, petrochemical, natural gas, electric and nuclear power markets. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

cause an improvement or erosion of the Group’s profitability. As of December 31 2013, the exchange rate of the U.S. dollar vs. the NIS was revalued by 7.0% relative to December 31 2012. As of December 31 2013, the exchange rate of the U.S. dollar vs. the euro was devalued by 4.3% relative to December 31 2012.

6.5 Interest Rate Fluctuations

The Company took loans in a significant amount at variable interest rates that is based upon LIBOR interest, in order to finance the acquisition of aircraft. A change in the LIBOR interest rate could materially affect the Company’s financing expenses. In 2013, the average LIBOR 3-month interest rate increased by 37.9%, compared with its average rate in 2012. See Note 18 to the Financial Statements for details on the Company’s loans.

CHAPTER 3: DESCRIPTION OF THE CORPORATION’S BUSINESS BY FIELD OF ACTIVITY

The following is a description of the business of the Group for each of the fields of operation separately, with the exception of matters applying to the overall operations of the Group, which are described collectively in the framework of Section 9 below.

7. Passenger Aircraft Activity

7.1 General Information on the Area of Activity

The principal activity of the Company in this area is the transport of passengers on scheduled and charter flights. In addition, the Company carries cargo in the holds of its passenger aircraft, an activity auxiliary to the activity of transport of passengers. Additional auxiliary services are associated with the service in this area, including sale of duty free products to passengers. Accordingly, in the context of describing this field of activity, the Company has focused on a description of transport of passengers. Certain matters that relate to the transport of cargo in the holds of passenger aircraft are similar to the service of carrying cargo in cargo aircraft, which are described in Section 8.

The following is a description of trends, events and developments in the macroeconomic environment of the Group, which have or are expected to have a material effect on operating results or on the developments in the field of activity, in the following areas:

7.1.1 Structure of the Field of Activity and Changes Occurring Thereof

As mentioned, the Company's main field of activity is air transport in passenger aircraft in scheduled flights to and from Israel. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

In the past, aviation activity was regulated by the resolution of the Ministerial Committee on Social and Economic Affairs near the publication of the 2003 prospectus (May 19 2003 HC/14 Resolution), in the matter of the Company's appointment as a “designated carrier”, and after that date, a number of government resolutions were passed establishing the Israeli aviation policy, regarding the Company’s activity and the State's participation in the security expenses of Israeli airlines. For details regarding regulatory arrangements applicable to aviation activity, including aviation rights granted the Company, see 9.11 below.

7.1.2 Legislative Restrictions, Regulations and Special Obligations that Apply to the Field of Activity

The field of activity of carrying passengers and cargo in passenger aircraft is distinguished by international and local regulatory restrictions in various areas, which are set in international treaties and agreements and in local legislation. Among other things, authorization is required for operating a flight from one country to another country, as well as approvals in the matter of flight frequencies. For details regarding regulatory arrangements in the matter of their realization, see 9.11 below.

In addition, these international and local arrangements established conditions and arrangements pertaining to the carrier’s operation and liability for damage and flight delays and cancellations.

The Company is also committed to act in accordance with local legislation and relevant government resolutions in the matter of the Company's areas of activity (including in the matter of aviation service security) as received from time to time, as detailed in 9.11.12 below.

7.1.3 Changes in the Volume of Activity and Profitability of the Area

a) International Developments

According to IATA estimates, passenger traffic (both international and domestic) increased by 5.2% in 2013 and international cargo traffic (including in the holds of passenger aircraft) decreased by 1.4%. International traffic (not including domestic traffic) listed a 5.4% yearly increase and the seat capacity on international flights increased by 4.9%, slightly lower than the rate of increase in passenger traffic, which led to an increase in load factors on international passenger flights – 79.3% in 2013 compared to 78.9% in 2012.

In December 2013 IATA revised its 2013 profits projection upward. According to the new estimate, the airlines are expected to present $12.9 billion in profits in 2013 Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

(compared to $11.7 billion in IATA’s estimates from September 2013), due to stability in jet fuel prices, the increase in passenger traffic, the leap in the sale of associated services and streamlining processes implemented successfully over the past year.

Regional cross-section of international traffic3, 2013 vs. 2012:

As reflected in the above table data, international passenger traffic (not including domestic flights) increased by 5.4%, with most of the increase deriving from emerging markets in the Middle East (+12.1%), and in South America (+8.1%). On the other hand, Europe saw a slowdown in the rate of increase of passenger traffic, which amounted to just 3.8% compared to a growth rate of 5.3% listed in 2012.

IATA predicts that 2014 will be the third year in a row in which the airlines will show an increase in profits (since 2012, when the airlines showed a net profit of $6.1 billion). At the same time, the profit margins of the aviation industry remain low: 1.1% of revenues in 2012, 1.8% in revenues in 2013 and an expected 2.6% of revenues in 2014, which are amounted to reach a sum of $743 billion.

The date in the following table refer to the general activity of the airlines both in international and domestic flights.

3 The data in the table refers to traffic in international flights only, excluding domestic flights. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

In March, IATA revised its 2014 projected profit forecast to $18.7 billion from $19.7 billion in the previous forecast from December 2013. The main reason the forecast was lowered was the increase in fuel prices, which are expected to amount to $108 per barrel (a total of $3.5 higher than the previous forecast).

The following are the key points of IATA’s 2014 projections:

GDP – the global growth rate is expected to reach 2.9% in 2014. The general trend of improvement in developed countries and in particular in the U.S., and slowed growth in Brazil, , India, China and , is expected to continue in 2014 as well.

Passengers – in 2013 passenger traffic is expected to reach $3.1 billion passengers and in 2014 passenger traffic is expected to increase by an additional 5.8% and reach $3.3 billion passengers. Competition in the industry remains intense, and as a result, the average yield per passenger is expected to drop by 0.2% in 2013 and by 0.6% in 2014.

Revenues from the sale of associated services – revenues from the sale of associated services continues to serve as a key element in increased airline profits. The airlines continue to increase their profits through the sale of innovative products and services. Average income per passenger (flight segment) is $181 and revenues from the sale of associated services are expected to add $14 per passenger.

Structural changes in the industry – structural changes and streamlining in airlines constitute a major factor in the increase in airline industry profitability in 2014. North (where numerous mergers took place) are expected to record the highest profits both in 2013 and in 2014. The European airlines, which are still suffering from the slowdown in the European economy, are expected to show a certain improvement in profits as a result of successful collaboration on North Atlantic routes.

Fuel – the average price per barrel (Brandt price) is expected to reach $108 per barrel in 2014, $3.5 per barrel higher than the previous forecast in December 2013. Jet fuel prices are also expected to increase and reach $124.6 per barrel, $1.7 higher than the previous forecast (but unchanged from 2013).

In December IATA published its passenger forecast for 2013-2017, in which total passenger traffic (both international and domestic) is expected to increase by 31% between 2012 and 2017. By 2017, the total number of passengers will reach 3.91 billion, a 930 million passenger increase over 2.98 billion passengers in 2012. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

The average yearly growth rate will be 5.4%, compared to an average yearly growth rate of 4.3% between 2008 and 2012.

The following table shows the activity of the international aviation industry (regular flights) over the past four years as well as the industry's revenues and earnings throughout the period.

International operations of the aviation industry and its profitability from the passenger aircraft area4(scheduled flights) of airlines under IATA:

Year Output Operating Operating Income Income (Loss) 5(in Billions (in Billions of of Dollars) Dollars) RPK7 Annual RTK6 Annual Before After Change Change Interest Interest (in (in in RPK in RTK Expens Expenses Millions) Millions) es 83102 3103 3,902,001 6.4% 269,232 8.4% 219.3 03.0 0.1 3100 3,400,646 3.9% 282,301 0.6% 212.4 03.8 3.8 3101 2,578,510 7.9% 209,299 01.8% 309.0 06.9 9.3 3119 3,202,061 3.9%- 349,302 3.3%- 329.0 2.0- 3.2-

a) Developments in the Israeli Market

International passenger traffic to/from BGN totaled, according to Airports Authority data, 13.4 million passengers during 2013, which represents an increase of about 8.6% (compared to 2012).

4 The source of the data regarding 2009-2013: IATA publications (World Air Transport Statistics) (2013 – 57th edition). 5 Including cargo aircraft revenues. 6 Revenue Ton Kilometer – weight of paid flown cargo in tons multiplied by distance flown. 7 Revenue Passenger Kilometer – number of paying passengers multiplied by distance flown. 8 IATA data, estimates, assessments and projections referring to 2013 are preliminary. Final data for 2013 is expected to be published by IATA in June 2014 within the framework of World Air Traffic Statistics. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

Passenger Traffic to and from Israel (from/to BGN)9

Year Passenger Traffic through BGN

(Millions of Yearly Change Passenger Legs) 3102 02.8 4.3% 3103 03.8 0% 3100 03.3 3.6% 3101 00.8 9% 3119 01.6 -6%

The table and the graph below reflect the trends of incoming tourist traffic to Israel and the departing residents in recent years via air.10

Year Incoming Tourists (Foreign Departing Residents , No Day Visitors) (In Thousands of Rate of change (In Thousands Rate of Passengers) of Passengers) change 3102 3,641 8.1% 8,303 01.4% 3103 3,843 0.4% 2,431 1.0% 3100 3,824 6.8% 2,460 0.6% 3101 3,208 00.4% 2,644 6.3% 3119 0,932 )0.0(% 2,290 )8.8(%

The forecasts and estimates of IATA regarding the volume of passenger traffic to and from Israel and estimates for 2014 according to the various parameters noted above including relative to GDP, passengers, revenues from the sale of associated services, structural changes in the industry and fuel, represent forward-looking information, as defined in the Securities Law. This information is supported, inter alia, by IATA's assessments, in light of the trends of change in the aviation and tourism industries over recent years and expected developments, and in view of the economic, security and geopolitical situation around the world and in Israel. Accordingly, the change in this data may be materially different from that forecast as aforementioned, if IATA’s or the Company's assessments are not realized, and because of a large number of factors, including a change in economic, security and geopolitical conditions around the world and in Israel.

9 Source: Civil Aviation Administration (including non-paying passengers). In addition to the traffic to BGN, tourists in regular and charter flights arrive in Israel through the in minimal amounts as compared to the traffic at BGN. The term “leg” means a flight section from destination to destination. 10 Central Bureau of Statistics data. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

7.1.4 Developments in Markets of the Field of Activity or Changes in the Characteristics of its Customers

In recent years, competition has intensified considerably in the passenger aircraft transport field between dozens of international scheduled and charter airlines.

The airlines compete in various areas, principally: fares, frequency and flight times, on- time performance, equipment type, airplane configuration, passenger service. Fare competition is reflected primarily by offering reduced rates to passengers. The competition is present both with relation to direct scheduled flights between various destinations (including extensive activity by foreign airlines in Israel through their home airports to third destination – “Sixth Freedom” flights) and with charter flights to the same destinations. Additionally, during recent years, airlines known as “low cost airlines”, which generally offer competitive prices, have begun operating.11 For details see 7.1.10.(d) below.

The increase in the number of foreign airlines operating out of BGN, in the number of scheduled flights and in the seat capacity of the foreign airlines, has led to a further increase in the level of competition on routes to Israel. See Sections 7.1.10 and 9.11.7.2 below for further details.

7.1.5 Technological Changes that could Materially Affect the Field of operations

 The Company expanded its use of the SAP system while using the system to manage training and certification, and while providing a response to regulatory requirements in the subject of managing qualifications for aviation and non- aviation licenses.  Financial SAP system: over the course of 2013, the financial module of the SAP system was assimilated, and was used, among other things, to produce the Company’s Financial Statements.  The Company decided to discontinue its agreement to develop the RMS system with Systems, which was planned to begin in 2014, due to incompatibilities found in the product. In February 2014 the parties agreed to terminate the agreement between them and the Company therefore paid an insignificant sum for the early conclusion of the engagement.

11 "Low cost" airlines are relatively new airlines with a low expense structure deriving mainly from direct marketing over the internet and not through distribution systems and travel agents, use of secondary airports, minimal service profile during the flight and operations on short range flights, with no code share agreements with other companies and high utilization of aircraft. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

 Over the course of 2013, online sales on the Company’s website increased by 19% (not including packages and upgrades) compared to the same period last year. This increase is part of the constant improvements to the Company’s website, both in enriching its content and through the use of new digital tools, including improving fraud prevention processes, online and call center sales monitoring systems and other improvements.  In early 2013 it was revealed that an anti-Israeli group, consisting of hundreds of hacker groups from around the world, intended to carry out a cyber-attack on websites of Israeli organizations on April 7 2013, with the goal of the attack being, as published, to damage the websites of these organizations and disrupt Israeli business activity. The Company took various measures in order to prevent harm to the Company’s website and information systems, including toughening access filters to/from the Company and performing intensive monitoring of network traffic. Furthermore, the Company prepared for a rapid response to unusual events and tested the preparedness of its external internet providers. On April 7 2013 an extensive cyber-attack was carried out against the websites of Israeli organizations, including the Company's website, with the cyber-attack against the Company site being fully neutralized. Note that the Company is taking regular actions to neutralize cyber-attacks in the future, if any occur.  Over the course of the second quarter of 2013, the Company launched a self- check-in application on Airports Authority “kiosks” positioned in Terminal 3. Customers performing self-check-in are directed to a designated line for security screening and to a fast counter for handing over their luggage. The “kiosks’” advantage is in shortening the amount of time customers need to undergo the check-in process. The Company implemented the application in additional overseas stations over the course of the year.  A new mobile application was launched and expanded in 2013. This application allows Company passengers, at any time and in any place, to reserve flight tickets, select seats, perform pre-flight check-in, view takeoff and landing schedules, contact El Al call centers and offices, link to social networks, send a request to reserve a preferred seat or “Economy Plus”, provides an interface tothe frequent flyer website, which provides information on the state of accounts, latest actions, a conversion calculator as well as other information on all of the Company’s deals.  Starting January 2014 the Company received Payment Card Industry - Data Security Standard (PCI-DSS) certification, and accordingly, will be able to continue clearing with credit card companies on a standard basis and with high levels of security. The project included characterizing and studying the strict standards, creating designated and separate infrastructure and development Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

environments, examining and implementing changes in work processes at the call center and at the service and sales units and compatibility with the organizations' needs in Israel and at its oversea representations.  In March 2014 the Company entered into an agreement with Swiss Aviation Software Ltd. for the assimilation and implementation of the AMOS system – a central information system that gathers informationregarding planning, controls, operation and tracking of aircraft maintenance activity in Israel and in the Company’s stations abroad. The assimilation is expected to last 24 months and the system is expected to go live in Q2 2016.

7.1.6 Critical Success Factors in the Area of Activity and Changes Occurring Therein

A number of factors can be pointed to, in the operations of the passenger and cargo transport area via passenger aircraft, which affect the competitive position in the field: the economic and security situation in Israel, which influences passenger traffic to and from Israel; the branding of the Company in the eyes of the customers, including matters of safety, quality and service; the ability to offer flights to popular destinations at competitive prices and development of a network of routes independently and in cooperation with other airlines; preservation of aviation rights; the ability to offer flights at the frequency and the capacity demanded; a distribution system; risk management by implementing appropriate risk hedging policies.

7.1.7 Changes in the Supplier Array and Raw Materials for Areas of Activity

Fuel – the primary raw material used by airlines is jet fuel and it represents one any airline's major expense components. See Section 9.5.1 below for details relating to fuel.

Aircraft – as the Company's entire passenger plane fleet was manufactured by the Boeing Corporation, the Company is dependent upon this manufacturer for all matters pertaining to the regular maintenance of its aircraft, the supply of parts, repairs and engineering consulting.

7.1.8 Main Entry and Exit Barriers of the Field of operations and Changes Therein

One of the most significant entry barriers in the area of the international scheduled flights is obtaining the authorization to carry out scheduled flights from one country to another and appointment as Designated Carrier. The more liberal the aviation agreement between the countries, the lower the entry barrier.

In addition to obtaining authorization from the airline's parent country, consent is generally required from the countries to which the airlines wishes to fly with relation to the number of flights and to the capacity of the flight. Furthermore, each flight is required Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

to have a time slot for takeoffs or landings at the airports to or from which it operates. An additional significant entry barrier is the initial relatively large investment that is necessary in order to establish and operate an airline, including acquisition or leasing of aircraft.

Furthermore, international aviation agreements and regulation at various destinations, may include identity or citizenship requirements as a condition for ownership or actual control of an airborne carrier. These requirements may constitute an entry barrier for authorization to conduct flights. See Section 9.11 below for further details.

Regarding the operation of passenger aircraft on international charter flights, the Company estimates that no significant entry barriers exist, in light of the existing liberal policy of granting authorizations in the area of charter flights, regarding both Israeli charter airlines as well as foreign charter airlines.

The restrictions placed on the Company by the holder of the Special State Share in the matter of the reduction of the Company's aircraft fleet constitute an exit barrier. See Section 9.11.1 below for further details.

7.1.9 Substitutes for Services of the Area of Activity and Changes that have Occurred in Them

The alternatives for transport in passenger aircraft are transport by other means (maritime and surface vehicles and cargo aircraft for cargo in the holds of passenger aircraft). Note that Israel has no significant alternative to air passenger transport. According to the Company's estimation, the major considerations in preferring flight to sea and/or land transport are the purpose of travel, the passenger’s or cargo's timetable, the distance and the nature of the route.

7.1.10 Structure of Competition in the Area of Activity and Changes Occurring Therein; Developments in Markets of the Area of Activity

a) General – Competition in the Area of Activity

There is severe competition in the passenger aircraft transport field between dozens of international scheduled, charter and low cost airlines. The airlines compete in various areas, principally: fares, frequency and flight times, on-time performance, equipment type, airplane configuration, passenger service, bonuses to frequent travelers, commissions and special incentives to travel agents and supply of computerized reservation and distribution systems to travel agents.

Competition is not only with the Designated Carrier of the country on the other end of the route and with charter airlines that operate on the same route, but also with Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

other airlines, including those not operating flights to Israel (off line airlines), as the result of travelers' diverse alternatives in arranging their own flight schedule, in which a number of airlines participate, and the strengthening of code sharing agreements between airlines (Star, Sky Team, One World)

Additionally, most of the scheduled airlines operating flights to and from Israel also carry passengers on Sixth Freedom Flights, which has led to an increase in foreign airline activity in Israel. Because the flight from the home airport (Europe) to the United States is carried out without any connection to the flight from Israel to Europe, the situation sometimes permits the foreign company to lower the total price for the flight from Israel to the United States (through Europe) without reducing the price for which the from Europe to the United States is sold. As a matter of fact, sometimes the foreign airlines offer the airline ticket from Israel to the final destination (the United States, for example) at a price lower than the price which they offer for the flight from the stopover destination (Europe, for example) to the final destination. On the other hand, the Company does not presently enjoy the similar ability to transport passengers between different countries via Israel, primarily because of the current geopolitical situation.

In the past, a significant portion of the aviation agreements between Israel and other countries stated that the offered capacity must be based on the scope of traffic between Israel and the other country with which the agreement was signed. In recent years, the Ministry of Transportation has begun implementing a policy of increased liberalization in the aviation industry, with the aim of encouraging and increasing tourist traffic to Israel by increasing competition between airlines, and accordingly, requests by foreign airlines to increase frequencies or capacities were approved, even when these were not required by existing bilateral aviation agreements.

Other than this, certain regulatory changes may have an impact on the structure of competition in the area of activity. For further details see Section 9.11 above.

b) “Open Skies” Policy

Continued Implementation of the Open Skies Policy

In recent years, talks were held with the civil aviation authorities of several countries and new agreements were signed, in which the liberalization policy in the air transport field was expressed, in such a manner that the agreements established multiple carriers, enabling an increase in the number of airlines that can operate Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

scheduled flights on the routes to and from Israel as well as increasing their frequency.

The Open Skies Agreement with the

As reported by the Company, the Open Skies agreement between the State of Israel and the EU was signed in Luxembourg on June 10 2013. Pursuant to the agreements, all airlines in the EU will be able to operate direct flights to Israel from any location in the EU and Israeli airlines will be able to operate flights to airports throughout the EU. The agreement will come into effect gradually starting from this year over a period of five years, in which seven weekly flights will be added between Israel and various European destinations each year, with the yearly growth rate being more limited in a small number of central European airports – three or four added weekly flights per year. Upon coming into effect, the agreement will replace all of the bilateral agreements between Israel and the EU states and gradually cancel restrictions on the number of carriers, frequencies, capacities and types of aircraft allowed to carry passengers between the State of Israel and the EU. Regarding the increase the rate of the State's participation in Israeli airlines' direct security costs see 9.11.12 below.

A joint team was established for the Ministry of Transportation and the Ministry of Finance to examine the claims of Israeli airlines on the matter of the Open Skies Agreement, including requests to make regulatory changes and uphold certain conditions in order to allow fair competition. The subjects the team needed to discuss included, among other things, equality in flight options regarding security aspects, changes in Israeli antitrust law and their adaptation to European standard, enforcing consumer protection law on foreign airlines, equal treatment on the subject of aviation fees and port taxes and other aspects of regulation. The committee’s recommendations were as follows: the Committee recommended that the Airports Authority would study and handle the demand by the Israeli airlines to allow them to operate out of Terminal 2 at BGN, while adjusting the port tax rates applying to them to the reduced tax paid by the foreign low cost airlines using Terminal 1 (see below for details); regarding the demand by the Israeli airlines to make Israel antitrust laws comparable to European laws and cancel the requirements in this field regarding engagements between regional carriers, the Committee supported legislative amendments that were supposed to apply the binding arrangements chapter of the Israeli Antitrust Law on arrangements between foreign airlines pertaining to flight routes to and from Israel; the Committee rejected the request to cancel the fee for incoming passengers and including it in Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

the outgoing passenger fee, and rejected the request to grant a safety net granted on behalf of the State to the Israeli airlines, as the State gave foreign airlines; in addition, the Committee rejected the demand to give Israeli airlines priority in flying state representatives to destinations abroad; regarding amendments to the Consumer Protection Law, the Committee recommended that the Ministry of Transportation would act in coordination with the Consumer Protection Authority, to update legislation in this field in order to reduce the gaps between the law in Israel and the law in Europe regarding transaction cancellation dates, as requested by Israeli airlines; in addition, the Committee recommended that the Ministry of Justice act to formulate a position, as soon as possible, on the subject of adopting the Cape Town Treaty in Israel, which deals with international interest in mobile aviation equipment, as requested by the Israeli airlines. In January 2014 the Airports Authority published the criteria according to which the airlines are permitted to operate out of Terminal 1 and pay reduced fees, which include, among other things, a commitment to operate scheduled flights to fixed destinations according to a fixed timetable, waiving takeoff and landing rights at Terminal 3, meeting Terminal 1 operating hours (set at between 9:00 AM and 11:00 PM), a commitment to operate narrow-body planes only, a commitment to sell flight tickets in accordance with the law, including the option of purchasing tickets online, with the ticket price increasing as the flight date approaches, and the airlines undertake to sell flight tickets on a seat basis only, and not allow passengers to select their seats or the right to free food or carrying luggage free of charge in the cargo hold. In addition, the plane turnover shall be short and shall not exceed an hour and a half, and the services provided to the Company shall be limited compared to Terminal 3 and include not parking planes by jetway, transporting planes on buses from Terminal 1 to Terminal 3 and from Terminal 3 to the plane. In addition, the airlines operating flights from Terminal 3 will sell flight tickets to fixed destinations with no option of purchasing connecting flights on the same ticket. The Company approached the Airports Authority with a request to operate “UP” flights from Terminal 1, however, as Terminal 1’s operating hours are more limited and the late opening hours of Terminal 1 do not provide a response to the Up morning takeoffs, the Company shall, for the time being, operate its UP brand flights from Terminal 3. The Company estimates that the expected increase in the offerings of flights on behalf of existing airlines as well as the introduction of new airlines upon the implementation of the agreement, may have a negative impact on Israeli airlines, including the Company, following the additional intensification of competition. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

The Company's estimates regarding the possible influences of the implementation of the “Open Skies” agreement with the EU in 2014 on the Company constitutes Forward-Looking Information as defined in the Securities Law, which is based on estimates that as a result of the agreement an increase will be noted in the number of foreign airlines operating at BGN, and an increase will be noted in the capacity of foreign airlines operating today. The degree at which competition will increase in practice and the expected implications on the Company’s activity are influenced, among other things, by the possibility of a fair and mutual implementation of the agreement, the receipt of takeoff and landing rights at European destinations, the degree of gradualism in implementing the agreement and the scope of the change in the capacity and the frequency of foreign airlines operating to Israel.

The following is a description of the primary and material changes deriving from the Ministry of Transportation's Open Skies policy in 2013:

China – in August 2013 Israel and China signed a new aviation agreement, which significantly increased the frequency of flights permitted on routes between the two countries and allows Israeli and Chinese airlines to operate scheduled flights between the two countries. According to the new agreement, each of the countries can operate up to 14 scheduled passenger flights and up to seven cargo flights per week. So far, the Company operates just three scheduled flights on the Tel Aviv– Beijing, while the Chinese national airline does not operate flights between Israel and China in practice, but rather via code sharing with the Company. The signed agreement significantly expands the options of the Israeli and Chinese airlines in implementing joint code sharing agreements on routes between the two countries. Furthermore, code sharing agreements may be implemented for the first time between Israel and China on domestic routes regarding seven destinations throughout China. Canada – Israel and Canada have signed their first official aviation agreement that will allow a significant increase in the flight frequencies between the two countries and allow additional airlines to operate regular flights on the route. According to the new agreement, each side will be able to appoint additional scheduled airlines and operate up to 12 scheduled passenger or cargo flights per week. So far, aviation relations have existed between Canada and Israel with no aviation agreement, through protocols that specifically arranged the operation of direct flights between the countries and allowed the Company and only to operate scheduled flights. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

Russia – In February 2014 Israel and Russia signed a new aviation agreement allowing an unlimited number of airlines from Israel and Russia to operate a flight service between any airport in Russia and BGN and . Implementation of the new aviation agreement was stipulated in the implementation of appropriate security arrangements in Russian airports for flights by Israeli airlines. In addition, a memorandum of understanding was signed allowing airlines from each side to operate up to 36 scheduled passenger flights per week on the Tel Aviv-Moscow route, compared to a current quota of 21 scheduled weekly flights for each side. On all other routes between Israel and Russia, including the Tel Aviv-St. Petersburg route, airlines from Israel and Russia will be able to operate scheduled passenger flights with unrestricted frequencies. An additional consent that was expressed in the memorandum of understanding was the expansion of the possibilities of operating flights by Israeli airlines in the Russian airspace. The use of Russian airspace is vital for operating flights between Israel and East Asia, such as China, South Korea and Japan.

Over the past few years, new aviation agreements have been signed between Israel and a large number of countries (Spain, Italy, France, the UK, Belgium, Russia, Ukraine, Slovakia, Thailand, South Korea, Germany, , Brazil, Turkey, the U.S., Greece, Romania, Georgia, , Hungary, the Czech Republic, the Netherlands, Colombia, Canada and China). All of these new aviation agreements expressed the liberalization in the field of air transportation, via agreements for multiple Designated Carriers for each side as well as a significant increase in frequency allocations for scheduled flights. These agreements allowed an increase in the number of companies operating scheduled passenger flights and the launching of low cost flights to Israel.

Many airlines expanded their activity on routes to Israel in 2013 by adding destinations and/or increasing frequencies and/or capacity. Companies that significantly expanded their activity over the course of 2013: () (+27%), continued to expand its activity at BGN with additional frequencies on the route to the main airport (Atatürk) in and with an additional daily flight to the city's secondary airport (Sabiha Gokcen) starting late October 2013. In total, its weekly flights on routes to Istanbul increased to 46 (compared to an average of 27 weekly flights in 2012) and its passenger traffic increased by 59%). In May 2013 Turkish airline Pegasus began operating 2 daily flights, and in total increased its passenger traffic by 263% (more than times 3), Russian airline (+57%), Ukrainian Air International (+177%) and the low cost airlines EasyJet, which added frequencies to its flights to Luton and Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

and also began operating flights on the Rome-Tel Aviv route (+25%), Hungarian airline Wizzair, which began operating on the route to in December 2012 and expanded its activity significantly in 2013, beginning to operate flights to Israel from Warsaw and Katowice (), , Vilnius and Cluj-Napoca (Romania) as well. For further details regarding the activity of the low cost airlines in Israel, see also 7.1.10.(d) below. The increase in capacity allowed these companies, which operated international hubs at their home airports, to increase the number of passengers flown between Israel and a large number of destinations via indirect flights, taking advantage of their route networks (Sixth Freedom traffic) and that of their partners in global aviation alliances and code sharing agreements.

A number of new airlines began operating on routes to Israel this year: Finnish airline , which began operating 2 weekly scheduled flights between Helsinki and Israel starting June 2013 (before that, Finnair operated charter flights on the route to Israel); Ukrainian airline Air Onix, which operated a weekly flight on the Tel Aviv-Simferopol route until its license was revoked in December 2013 due to economic difficulties and Russian airline Yakutia Airlines, which began operating flights on the Tel Aviv-Krasnodar route, instead of Russian airline Kuban Airlines, which discontinued its activity.

A number of airlines operating on routes to Israel discontinued their activities over the course of 2013:

In January 2013, Ukrainian airline Aerosvit, which had entered into debt and filed for bankruptcy, discontinued its activity on routes between Ukraine and Israel; Armenian airline , which operated flights between Yerevan and Israel; Greek airline , which operated flights on routes between Israel and Greece as well as Jet2, which operated low cost flights on the Tel Aviv- Manchester route until November 2013.

In total, an 8.6% increase was listed in passenger volume at BGN in 2013, with an 8.2% increase in charter flights compared to last year. Overall, charter traffic (including charter flights marketed by Sun D'Or flights) through BGN constituted 14% of all traffic, similar to 2012. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

Passenger traffic through BGN in 201312 was divided as follows: the Company (including flights marketed by Sun D’Or) –32.5%; other scheduled airlines – 55.4%; charter airlines (not including Sun D'Or) – 12.1%.

Foreign airline activity on routes to and from Israel is expected to continue to increase in 2014 as well, as a result of additional increased capacity and/or frequencies and destination expansion by existing airlines, the entry of new airlines as well as the operation of scheduled flights to new destinations by Israeli and other airlines, with the start of the application of the open skies agreement with the EU starting from the Summer 2014 schedule, as detailed above.

From time to time, the Company assesses the possibility of increasing flight frequencies and/or capacities to existing destinations and the possibility of operating flights to new destinations, in accordance with market demand, including through code sharing agreements and other agreements with other airlines.

The Company's estimates regarding increased competition in 2014 and its possible impact on the Company are Forward-Looking Information as defined in the Securities Law based on the influence of the Open Skies policy, including the increase in the number of foreign airlines operating at BGN, and the increase in the capacity of foreign airlines operating today. The actual level of the increase and its impact on the Company are influenced, inter alia, by economic, security and geopolitical factors and by trends in the airline industry.

For regulatory changes that may alter the structure of competition in the field of activity – see Section 9.11.2 below.

c) Charter Airlines

Charter traffic to and from Israel increased by a total of 8% in 2013 compared to 2012. The share of charter airlines (Israeli and foreign) of total passenger traffic through BGN amounted to 14% in 2013, similar to 2012, as detailed in the following table:

12 Information regarding the activity of foreign airlines is based on IAA data.

Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

Year Share of Charter Airlines from Total Passenger Traffic through BGN 3102 08%

3103 08% 3100 06% 3101 06%

3119 00%

d) Low Cost Airlines

These airlines maintain low costs and generally offer very competitive prices, while providing a low level of service and using alternate, less desirable airports. These airlines have succeeded in growing enormously in the United States, in Canada and in Europe. A stirring in this field has also been felt recently in Asia.

In 2013, in preparation for the implementation of the open skies agreement, the low cost airlines significantly increased their activity on routes to Israel, both by opening new routes and by increasing frequencies and/or capacities. Thee low-cost airlines increased their passenger traffic to and from Israel by 42%, and in total, the foreign low-cost airlines transported 9% of the passenger traffic at BGN.

The entry of these and other airlines into the Israeli market could have a negative effect on the Company's business results, due to the increased capacity offered by these airlines at reduced prices. The Company estimates that an increase is expected in low cost traffic to and from Israel, and that the rate of passengers on these airlines out of all passengers through BGN is expected to grow in 2014 as well.

In response to the increased competition from the low cost airlines, the Company launched a new aviation brand called “UP”, which will initially operate low cost format flights to five destinations in Europe – , Budapest, Kiev, and Larnaca. The reduced price flights will start operating starting from the Summer 2014 schedule. See Section 7.4 below for further details.

The Company's estimate regarding the increase in low cost activity in 2014 and its possible impact on the Company is Forward-Looking Information as defined in the Securities Law based on estimates that the growth in this activity in Israel will continue. The amount of growth in this activity and the expected Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

implications regarding the Company's activity is influenced, among other things, by regulatory changes required for this activity, including the implementation of the Open Skies policy, as well as in light of the fact that the activity is stipulated on certain operational parameters.

e) Domestic Flights

Following the instruction by the Civil Aviation Authority (CAA) to change flight routes and takeoff and landing procedures at the Eilat Airport during daylight hours, in early September 2013 the Company announced that its professionals have reached the conclusion that the new flight format does not allow a suitable level of civil aviation safety as accepted by the Company and at airports around the world. The combination of the unusual aerial procedure and the fact that the Eilat Airport is a special airport with various constraints and restrictive ground infrastructure, increases the total safety risk to daytime flights to Eilat to a level unsuitable for civil aviation. The Company has discontinued its daytime flights to Eilat, starting from the data set by the CAA for the implementation of the new format. In Early November 2013 the CAA informed the Company that starting November 18 2013, all flights to Eilat (including night flights) will take place on the new route only, and as a result the Company no longer holds flights to Eilat with its own planes starting from this date.

In 2013, the Company flew 191,500 passenger legs and its share of domestic traffic to Eilat was in this year was 13% compared to 16% in 2012.

7.2 Services in the Area of Activity

a) General

The main services provided by the Company in this field of operations are air transport of passengers and cargo to various destinations by using passenger aircraft. As of a date close to the approval of this report, the Group operates flights using passenger aircraft to 34 destinations in 25 countries in Europe, North America, East and Central Asia and other destinations. As noted above, the Company also operated domestic flights on the BGN-Eilat route until mid- November 2013. In 2013 the Company operated an average of 231 weekly flights on in each direction. In addition to the flights it operates, the Company markets flights in the framework of interline agreements with other airlines, which make it possible for passengers on scheduled flights, subject to certain restrictions, to use airline tickets issued by another airline, for flights of the other airlines. The company whose flights are used by the passenger submits the bill for payment to Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

the company that issued the flight ticket. The accounting between the airlines is done on a monthly basis, generally through IATA's clearinghouse.

The scheduled airlines also operate flights as part of “code sharing”. The use of the code sharing permits the air carrier to market flights operated by another air carrier as if they were its own flights, so that the passenger orders the flight through one carrier, despite the fact that, in practice, his flight is with another carrier. The code sharing provides the participating carriers with the possibility of increasing the frequency of the flights offered to its customers, accessibility to additional destinations and also marketing advantages, including amplifying the attractiveness of joining the Company’s frequent flyer club. The Company has also operated in this area in recent years.

In its scheduled flights, the Company operates five service sections that are distinct one from the other in the type of seat, the space between the seats, the food and beverage menu, the manner of serving, the assortment of convenience and leisure products and the number of flight attendants in relation to the number of passengers. The sections are , improved - platinum, business class, Economy Plus Class and economy class. The charter flights operate a service profile suitable for charter operations. Not all classes are operated on each flight. Scheduled flights feature a system of programs of audio, films, screened magazine and printed magazine and services are provided for the sale of duty free products.

As abovementioned, starting from the summer 2014 schedule, the Company shall also operate low cost flights under the new “UP” aviation brand. Two service classes will be operated on these flights: the Economy Class (144 seats) and the Economy Plus class (36 seats). See Section 7.4 below for further details.

In addition to its scheduled flights, the Company is engaged, through Sun D’Or, in carrying out charter flights by leasing capacity in aircraft to organizers of charter flights at prices agreed upon in advance, and the sale of blocks of seats to agents.

The Company’s flights are supported by a system of ground services that administers the processes of boarding passengers and their baggage, their alighting at destination airport and unloading their baggage, and cargo handling. The ground services exist at BGN and at each of the destinations at which the Company’s aircraft land. At the same time, the Company, as directed by government security authorities, operates a ground security array in each of the overseas airports at which Israeli airlines land and an air security array, which operates during the Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

flights of passengers of Israeli airlines (the ground security system at BGN is operated by the Airports Authority). b) Data Regarding the Company’s Destination Groups The following is data regarding the Company's market share broken down into groups of key destinations, relative to all passenger traffic to or from BGN, broken down into these destination groups:

To/From Total Passenger Traffic Through BGN By Company Estimates on the BGN Destination According to Direct Flights14 (in Company’s Market Share (in Thousands of Passenger Legs) %)13 Change 3102 3103 3100 3102 3103 3100 in % In 2013 North 1.8 1,623 1,595 0,381 20.1 23.0 26.0 America Europe 6.2 4,941 4,636 4,823 20.0 20.2 36.4 East and 6.1 893 839 882 60.8 60.8 60.3 Central Asia15 Others16 21.9 3,236 0,006 0,308 0.9 4.1 03.4 Total 4.6 02,831 03,238 03,098 23.6 22.3 22.9

13 This data is cross-sectioned by passenger final destination (including final destination in sixth freedom flights). The Company’s estimate concerning the passenger’s final destination is based upon data from global distribution systems. The Company cannot estimate the precision of the data received from the distribution systems, which include paying passengers only. Note that the Civil Aviation Authority publishes data that includes non-paying passengers, which is broken down by the airlines carrying out the flights (and not by destination). Thus, in cases of Sixth Freedom flights of European airlines between Israel and the U.S. through European airlines – the flight shall be attributed to the parent company of the European airline. According to the Company's processing of the Civil Aviation Authority data and cross-sectioning of flights to the airlines’ parent companies, while ignoring Sixth Freedom flights, the Company’s market shares were: in the North America route: 46.5% in 2013 vs. 46.0% in 2012; European routes: 33.1% in 2013 compared to 33.4% in 2012; in East and Central Asian routes: 87.7% in 2013 compared to 86.6% in 2012; other destinations: 8.7% in 2013 compared to 9.3% in 2012. 14 Civil Aviation Authority data refers to the airlines performing the flights and not the flights’ destinations. Therefore, this data constitutes the Company’s estimates based on an analysis of Civil Aviation Authority data. This data has been broken down by the direct flight destination and do not take into account passengers’ real destination in the case of foreign airline Sixth Freedom flights. 15 The Company is unable to assess the precision of its estimate of the market share that includes Sixth Freedom flights in the East and Central Asia market, Africa and regional destinations (such as Turkey, Greece and Cyprus), this in view of the lack of precision of information in the Company’s possession regarding the number of passengers of other airlines in these markets. 16 Others: passengers to regional destinations (Cyprus, , Greece, Jordan, Malta and Turkey) and Africa. Starting May 2009 until November 2011 the Company operated direct flights to Brazil. Therefore, in 2009-2011, passengers on these flights have been included under “Others" (regional destinations, Africa and Brazil). Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

c) Routes to North America (to the United States and Canada)

During the height of the 2013 summer season, the Company operated 32 weekly flights to North America and during the winter season, it operated some 23 weekly flights (mostly to New York).

There is a competition between United, Delta, Air Canada and U.S. Airways on the routes to North America.

In addition, intensive activity by European airlines taking traffic to the United States and Canada via their home airport (Sixth Freedom) continues. Overall, 2013 saw a 2% increase in passenger traffic on direct North American routes compared to 2012.

The Company’s passenger traffic on direct flights to North America (U.S. and Canada) increased by 3% over 2012.

On the route in question all of the airlines (Israeli and American) had full freedom of action in the matter of rates, frequencies, types of aircraft, aircraft configuration and so on. The Company, as a Designated Carrier to the U.S., has the right to carry passengers, cargo and mail to/from New York and other points in the U.S., some as part of a code sharing agreement with American Airlines. This agreement allows the Company to offer its passengers dozens of central destinations in North America, relying on the Company's network of direct routes.

d) Routes to Europe

As of this report, the Company has scheduled flights to 24 destinations in Europe, with the key destinations being , , Moscow, Frankfurt, Rome, Milan, Madrid and Zürich. The Company competes on the routes between Israel and Europe with the national Designated Carriers of the destination country, as well as with other scheduled airlines that take Sixth Freedom traffic to other countries via their home airport, with foreign and Israeli charter airlines that operate charter flights to various destinations in Europe and with companies operating scheduled low cost flights. The liberalization of the Israeli aviation industry continued in 2013, with the signing of the open skies agreement with the EU and the signing of new aviation agreements as described in 7.1.10 above, the appointment of additional Designated Carriers on these routes and approvals granted by Israeli authorities to increase capacity for foreign airlines. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

The foreign scheduled airlines operating on European routes, which are dealing with the ongoing economic crisis in the euro zone, the increase in jet fuel prices and the increased competition from low cost airlines, have taken streamlining measures, with some increasing their activity on these routes by increasing frequencies and/or expanding destinations alongside the use of smaller and more efficient aircraft, and some reduced their activity on routes to Israel.

In total, 2013 saw a 5% increase in total passenger traffic to Europe, with foreign scheduled airlines increasing their passenger traffic by 6%, and charter airlines operating on these routes listing a 9% increase. The Company increased its passenger traffic by 4% on these routes.

The Company began operating flights to Venice (Italy) in November 2013.

The most significant increases in passenger traffic were listed in routes in which an increase occurred in low cost airline activity: the UK (+10%), were a significant increase occurred in the activity of EasyJet; Hungary (+56%), where low cost airline Wizzair began its activity; as well as in the Scandinavian countries, where traffic to them almost doubled (+93%), due to an increase in activity by SAS and Norwegian Air Shuttle, as well as the start of scheduled flights to Helsinki by Finnair.

A material increase (+10%) also occurred in passenger traffic on routes to Russia, which listed a significant increase in activity by Aeroflot, as noted in 7.1.10 above, as well as a significant increase on the route to France (+13%) in light of increased activity by Air France and Air Mediterranee.

Aviation agreements signed in recent years such as the open skies agreement between Israel and the EU which was signed in June are expected to lead to the operation of scheduled flights to and from Israel by additional airlines, and to an increase in the capacity and frequency and/or an expansion in destinations among the existing airlines. Therefore, in 2014, a further increase is expected in the competition for traffic on these routes.

The Company's estimation regarding the increased capacity and frequency among the other airlines and the intensifying competition are Forward-Looking Information as defined in the Securities Law. This information relies, inter alia, on the Company's estimates in view of the volume of the Company's current activity and the degree of competition in the markets may not be realized – in full or part – or be realized in a significantly different manner. The actual situation may differ from projections, among other reasons due to the opening of the Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

market to additional competition, regulatory changes, the manner in which the Company deals with competition and the risk factors listed in Section 9.18 below as well as economic, security and geopolitical changes.

e) Routes to East and Central Asia

Other than the Company, which operates on routes to India (Mumbai), Thailand (Bangkok), China (Beijing) and Hong Kong, and which operates on the route to South Korea (Seoul), scheduled airlines that operate in Israel operate flights to these destinations in the context of Sixth Freedom traffic.

In total, the number of passengers on direct flights to these destinations in 2013 increased by 5% and passenger traffic to the Company increased by 6%.

f) Other Routes

The other routes that the Company operated during 2013 were Greece and South Africa and in addition, starting November 2013 the Company has also operated flights to Cyprus (Larnaca). In addition, from time to time the Company operates unique charter flights or short series of charter flights to various destinations.

On regional routes, most of the increase occurred on traffic to Turkey (72%) and Greece (11%). Note that the route to Istanbul listed an 84% increase in passenger traffic, in light of the significant increase (+59%) in the activity of Turkish Airlines and a significant increase (+263%) in the activity of Pegasus, as detailed in 7.1.10 above. The increase in traffic to Turkey largely derives from an increase in Sixth Freedom traffic, meaning passengers flying through Istanbul and continuing from there to follow-up destinations. Note also that 2013 saw some recovery in traffic to vacation destinations in Turkey (53% increase in passenger traffic to Antalya).To be clear, due to security restrictions imposed on Israeli airlines, no Israeli airlines have operated flights on routes to Turkey for the past five years. In this regard, note that in December 2013 the aviation authorities of Israel and Turkey signed an agreement intended to allow the renewal of flights by Israeli airlines to Turkey, subject to finding satisfying solutions by the Turkish authorities for the security issues raised by Israel, which are compatible with Turkish legal requirements. Following this agreement, Israeli officials are preparing to implement Israeli security guidelines in conjunction with the security procedures required by Turkish elements. In order to implement these flights, security mechanisms must be implemented at the specific destination, which involves time and the investment of significant monetary and human resources. Therefore, as decided by the CAA the effort to renew Israeli flights to Turkey in Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

summer 2014 will focus, initially, on Antalya only. The Company approached the CAA with a request to fly to Turkey and submitted its flight plans, but as of a date near the publication of the report, the authorities have yet to provide the necessary approvals the Israeli airlines require to carry out flights to Turkey and the inequality between the parties continues, in light of the increased activity by the Turkish airlines, as detailed above. In 2013, total passenger traffic on regional routes and on African routes decreased by 31% and the number of Company passengers on these routes increased by 23% compared to 2012.

7.3 Analysis of Revenues and Profitability from Services

2013 saw a 5.1% increase in the Company's revenues from this area of activity compared to revenues in 2012, with the rate of increase in passenger traffic through BGN in 2013 being 8.6% versus 2012.

For details regarding the breakdown of the Company’s revenues and profitability (consolidated) by reported operating segments in the area of passenger aircraft see Section a.5 of the Board of Directors Report.

7.4 New Services

 The Company began receiving 8 -900 aircraft, which are expected to be added to the Company’s aircraft fleet. The first aircraft was added in October 2013, the second plane was added to the Company’s aircraft fleet in November 2013 and two additional planes are expected to arrive in March and July 2014. The other four planes will arrive by February 2016. The planes will operate to short and medium range destinations. The 737-900ER planes will be operated in a configuration unique to the Company of 172 seats in two service classes: 16 seats in Business and 156 seats in Economy. The new planes feature variable in-flight lighting, large storage binds for carry-on luggage, power sockets for laptops, USB connections for all passengers, as well as a new design for the planes’ interiors. For the economy and business classes, the Company purchased thin and light seats manufactured using innovative technology, with ergonomic pillows for maximum comfort.

 The Company has begun upgrading its business class seats in four Boeing 747-400 planes, while making significant improvements to the seats and redesigning the upholstery. This will allow the Company to offer bed seats in route’s business class. In addition, first class passengers will be offered a redesigned class with more luxurious furnishings. This step is expected to be completed in Q2 2014. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

 The Company is expected to launch an in-flight entertainment system, which will be installed in some of its aircraft, which features a communications system (streaming) in order to improve the in-flight entertainment experience. The system will allow passengers to view a variety of contents through the passenger’s personal mobile device. Accordingly, in January 2014 the Company signed an agreement with Lufthansa Systems to install the system in some of its planes. The service is expected to become active, in a gradual manner, in summer 2014.

Furthermore, in February 2014 the Company signed an agreement with American company ViaSat Inc., a global leader in the field of satellite communications, to install satellite communications systems (using KA technology – the next generation of broadband satellite communications) in ten 737-900 aircraft. The systems will provide Company passengers with high-speed internet access during their flight using laptops, smart phones and tablets. The service is expected to start within a year, gradually, on the Company’s flights to Europe.

 As noted above, in November 2013 he Company launched a new aviation brand called “UP”, which will initially operate low cost format flights to five destinations in Europe – Berlin, Budapest, Kiev, Prague and Larnaca. The reduced price flights will start operating starting from the summer 2014 schedule, starting March 30 2014. The flights will use Boeing 737-800 aircraft, in two service classes: Economy Class (144 seats) and Economy Plus class (36 seats). The new brand offers passengers two types of tickets: the UP Basic ticket – a basic ticket on which a surcharge may be paid for services such as luggage, seating and food as chosen by the customer, with changes in the flight tickets requiring payment and no refund offered upon cancellation; the UP Smart ticket – which includes a variety of services such as shipping luggage, Economy Plus eating, preferred seats, access to the King David Lounge at BGN, free airport check-in and flexible ticket terms. Frequent flyer club members will be able to accumulate points on UP flights as well, at a reduced rate compared to regular flights.

 The new El Al “UP” website was launched in December 2013 - www.flyup.com.The site is based on advanced market technologies. Visually, the site design is compatible with the new brand’s spirit and values – simplicity and transparency. The new site offers all of the content needed on the product, the unique service specifications for UP flights, and all of the accompanied services required by passengers. Over the course of the development process, the entire flight ticket ordering process was upgraded, in accordance with the product, and new tools and options for selling associated products such as seating and luggage were added to the site. The result is an accessible and user- friendly site, adapted to the various end devices used by users and easily visible on all types of screens and mobile devices, at any size and with any browser. In preparation Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

for flight activity, a new check-in site will be launched using similar technology as that of the main site and using design compatible with the new brand. Additionally, kiosks will be placed at the relevant destinations in order to allow passengers to perform self- service check-ins.

 The Company has launched the Art & Lounge for its luxury customers at Newark Airport, U.S. The lounge is at the disposal of the Company’s luxury customers flying from Newark every day of the week and offers 90 spacious seats, high-speed Wi-Fi and a visual and culinary experience. The lounge space serves as a platform for rotating exhibits featuring contemporary art and design, offering an enriching cultural experience.

 The Company has expanded its destination network and starting November 2013 has been offering flights on new routes between Tel Aviv and Venice and Tel Aviv and Larnaca. At this stage, a single weekly flight operates on the Venice route and two weekly flights operate on the Larnaca route, and starting March 2014 three weekly frequencies will be operated to each of these destinations.

The following are updates regarding the Company’s code sharing and cooperation agreements for 2013:

 The Company has entered into a code sharing agreement with Ethiopian Airline, the national airline of . The agreement follows a free sale format, in which the Company will be able to offer its customers seats on each of the five weekly flights on the Tel Aviv- route. Furthermore the Company will be able to offer its customers flights to 30 connecting destinations in Africa, as part of the interline agreements the Company has with the Ethiopian airline. The agreement received the Antitrust Commissioner’s approval and has been implemented starting January 2014.

 In April 2013 the Company announced that it was canceling its code sharing agreement with Armenian airline Armavia, after it declared bankruptcy and canceled all of its flights.

7.5 Customers

The Company renders its services to passengers who are both members of households and of the business sector. The majority of the Company airline tickets are sold by way of travel agents and marketers of tourism packages, and directly by the Company to institutions and individuals. See Section 7.6 for additional details. For information on the frequent flyer program see Section 7.6.4 below. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

In the area of passenger aircraft shipping, the Company does not have a customer, including an agent, whose revenues or sales through them account for 10% or more of total Group revenues. The Company estimates that it is not dependent on any single customer or agent in the passenger aircraft transport field.

7.6 Marketing and Distribution

7.6.1 Travel Agents and Marketers of Tourist Packages

Most travel agents are IATA members and sell flight tickets for a number of airlines. Upon making their sale, the agents are entitled to commissions from the airlines at rates determined by them and in accordance with IATA directives17. Agents may occasionally be entitled to additional commissions, including sales incentives, as decided by the airlines.

The vast majority of the marketing of airline tickets to passengers is carried out by means of travel agents and marketers of tourism packages. In addition, airline tickets are sold by the sales offices of the Company and by direct sale over the telephone and the Internet. As of the writing of this report, the Company has 4 sales offices in Israel (Tel Aviv, Jerusalem, Beersheba and Eilat) and 29 sales offices at 21 missions abroad.

In addition, the Company sells airline tickets through 42 overseas general sales agents (GSAs).

Airtour Israel Ltd. (hereinafter- “Airtour”), a company jointly-owned by the Company and by travel agents, is an important marketing channel for the Group in the Israeli market, as a distribution arm to all agents in Israel with respect to sales campaigns and packages to all agents in Israel.

Subsidiary Sun D’Or also serves as a marketing arm for Company products, primarily for charter flights and for flights to various destinations.

The Company grants commissions and special incentives to travel agents, primarily based on the sales volume of airline tickets. In principle, the consideration to Israeli agents is divided in two: a fixed component (a fixed rate basic IATA commission) and a variable commission component, as an incentive. There are various methods in use globally regarding this matter, conforming to market needs. In recent years, a trend has developed in the aviation world of shifting to a reduced commission system, reaching a “net fare” system (fares without commissions) in such a manner that the agents' base commissions are canceled and service fees collected by the agents are added. Foreign scheduled airlines operating in Israel have instituted a similar policy to that of the Company,

17 For details regarding IATA directives see www.iata.org. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

although starting 2009 the foreign of airlines operating in Israel began reducing the base commissions and most of them canceled it completely.

In January 2013 the Company announced that it would be reducing its base commission from 7% to 5%. The date of the update to the based commission was set, after a delay following requests from travel agents, for July 1 2013. In addition, the Company offered a mechanism of an additional incentive for an additional period, which was agreed upon with each of the agents. This step was intended to reduce operating costs in light of increased competition and increased costs. Commissions to agents abroad vary from country to country, according to market conditions.

7.6.2 Computerized Reservations System

The Company’s computerized reservations system is the Amadeus system. This system displays the up-to-date flight schedule of the Company and of foreign airlines, and enables the users to book reservations and ticketing on those airlines’ flights, and includes a check-in system (DCS). The computerized system allows the more efficient use of loading capabilities for Company aircraft by calculating weight and balance using concentrated calculated data as well as more efficient supervision of customer treatment management.

The Company also has agreements with certain international distribution systems that allow sales and direct access to the Carmel system by the users of these systems in order to book reservations for Company flights.

7.6.3 Marketing and Sales to Passengers

The Company takes action in order to advertise its services to passengers in the Israeli market and in other large markets. The Company also initiates marketing events, sponsorships and cooperations.

2013 saw a continuation of the trend of global growth in e-ticketing, meaning the direct marketing of flight tickets over the Internet. This trend is intended to reduce airlines' marketing and distribution costs. The Company continues to conform its operations to this trend, by developing means that enable self-service for customers, such as online ticket purchasing, check-in and seat selection, check-in and seat selection at counters in the terminal, and so on.

The Company sells directly to passengers through the Company's reservations department and website. The Company also operates a business desk to promote sales to business entities, mainly in Israel. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

Subsidiary Dun D’Or also serves as a marketing arm for Company products, primarily for charter flights and for flights to various destinations, with the flights operated by the Company or other Israeli airlines (primarily on weekends and holidays).

In order to increase the attractiveness of the Company's flights for passengers interested not only in transport services to and from Israel, but also in tourism services, the Company markets a variety of ground services for tourists (hotels, tours, car rental) to individual passengers, directly and through agents. For this purpose, the Company markets packages through Airtour. This activity is marketed abroad through Superstar Holdings (England) at the Company’s branches abroad by independent direct marketing or through travel agents.

7.6.4 Frequent Flyer Program

As part of its marketing efforts, and in order to reinforce the loyalty of Company passengers, the Company offers special benefits to passengers belonging to its “frequent flyer” club, which is based upon a recorded database. The passengers receive points for their flights on all of the international routes carried out by the Company.

These points award passengers with various benefits, including airline tickets at a discount or for free (with the exception of a cash surcharge for port taxes and various extra charges, including a fuel surcharge), upgrades to better classes and access to the Company’s lounges throughout the world.

In recent years, the Company has entered into agreements that allow the accrual and redemption of points in other airlines and/or conversion of points/stars from credit cards and other businesses to the frequent flyers club as well as collaborative agreements allowing the accrual of points and/or the receipt of other benefits as a result of purchases made from various businesses (compensation is generally paid the Company by the business) and agreements for the use of points at various businesses. In addition, agreements have been reached with various non-profit organizations working for social, ethical and humanitarian causes, for the contribution of points to said organizations by club members.

Frequent flyer club membership is determined according to a number of ranks according to the activity level of its members: “Regular Frequent Flyer", “Silver”, “Gold”, “Platinum” and "Top-Platinum".

Concurrent with commercial changes made in recent years in the club's terms, various technological improvements were also made, including upgrading the information system by allowing club members to execute transactions in their accounts through the website, Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

improving the system for routing calls at the service center, improving the format of the customer account statement, and more.

The Company's program for cultivating, retaining and increasing the number of premium customers continued in 2013.

A new record was set this year in adding new members to the club. Over 211,000 new members joined, which reflects a 17% increase compared to the corresponding period last year.

The number of club members starting December 2013 amounted to 1.285 million members, 177,000 of them being GlobaLY members (a unique club card issued to supporters of Israel abroad). In total, frequent flyer club member traffic during 2013 accounted for 30% of the Company's total passenger traffic compared to 30% in 2012.

For details regarding the accounting treatment of the subject of club commitments see Note 2.o.(2) to the Financial Statements.

The Company intends to separate the activity of the frequent flyer club and conduct it as part of a separate legal entity, with no material financial implications on the Company expected as a result of such a change, to the best of the Company’s knowledge. As part of the preparations for implementing the separation of activity in question, the activity of the Company’s frequent flyer club was moved to its new location in Or Yehuda starting March 2014.

Branded Credit Card The Company has decided to initiate a process of issuing a branded El Al credit card and is undergoing advanced negotiations with the various Israeli credit card companies with the aim of signing agreements for the issue of a branded El Al credit card. The card in question will be issued in two layers:  A basic card aimed at most of the Company’s customers. The major benefits of this card are a significantly better than accepted conversion rate as well as the option of accumulating additional points from leading business partners in the fields of retail and tourism.  A premium card targeted at the exclusive members of the Company's frequent flyer club (Silver and higher) as well as for customers with high credit card expenditure profiles. The major benefits of this card are an improved conversion rate over the basic card, the option of additional accumulation with business partners as well as significant benefits in the field of aviation. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

In addition, the Company is acting to successfully conclude its negotiations with major retail entities in the State of Israel in order to grant benefits to branded card holders as well as for recruiting basic credit cards on the retail sales floor.

7.7 Accumulated Orders

The Company has no financial data as to the volume of projected revenues from reservations for future flights. Furthermore, a portion of these tickets may also be redeemed by the customer over an extended period that does not exceed two years. The Company has “unearned revenues” deriving from the receipt of advance payments for flights yet to take place as well as from points accumulated by frequent flyer club members as noted above.

7.8 Competition

7.8.1 General

a) The cargo aircraft transport field is characterized by fierce competition between the airlines that supply transport services between the same destinations or alternative destinations.

b) The Company serves as the Designated Carrier of the State of Israel to most of the destinations from which it operates regular flights to and from .

c) The Company estimates that, over the course of 2013, competition on flights to and from Israel was with approximately 120 airlines, including Israeli airlines Arkia and Israir (operating both charter flights and scheduled flights to certain destinations), 60 foreign airlines operating scheduled flights to 70 destinations in 40 countries and 50 airlines operating charter flights (of which 37 operated throughout the year and the balance operated individual flights). The competition for cargo transport in the holds of passenger aircraft, which is included in this field, is against airlines that transport cargo in cargo aircraft and in the holds of passenger aircraft. See Section 8.7.1 for additional details.

See Section 7.1.10 above for details on the competitive structure of this field of operations.

7.8.2 The Company’s Market Share in the Service Categories

According to the Company's estimates, in 2013 the Company's portion of all traffic to and from BGN amounted to 32.5%, compared to 33.6% in 2012. For the Company's market share of service groups see Section 7.2.(b) above. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

7.8.3 Significant Competitors in the Field of Passenger Aircraft Transport

To the best of the Company's knowledge, the Company's major competitors in the passenger aircraft transport field in 2013, in terms of market share, were United (U.S.), Delta (U.S.), U.S. Airways (U.S.), Lufthansa (Germany), (UK), (Italy), Air France – KLM (France and the Netherlands), Swissair (Switzerland), (Russia), Aeroflot (Russia), Ukraine Air International (Ukraine), EasyJet (UK and Switzerland) and Turkish Airlines (Turkey).

See Section 7.1.10 above for details regarding the intensification of competition in the field in 2013.

7.8.4 Key Methods for Dealing with Competition

The Company acts in a number of venues in order to raise profitability, while preserving and increasing its market share and increasing its load factor, including:

a) Conforming the schedule, as much as possible, to the seasonality of traffic and to international events.

b) Increasing the frequency of flights to popular destinations and increasing the number of flight destinations, including by cooperating with other airlines.

c) Striving to constantly improve service to passengers, including improving seat comfort, food quality and variety, flight entertainment, etc. focusing on business class.

d) Providing benefits to frequent flyer club members and to businesses belonging to members of the Company's business desk.

e) Operating through all relevant marketing channels.

f) Addressing the traveling public through advertising campaigns in Israel and abroad.

For further details on the UP flight brand, see Section 7.4 above.

The positive factors that affect, or are likely to affect the Company’s competitive position include the following: a broad and varied flight structure; a distribution system dispersed widely throughout Israel; the existence of an attractive frequent flyers club; a formidable brand in the local market; high level of safety and security; schedule stability and on-time performance; conforming services to market needs and code sharing agreements with other airlines.

7.9 The negative factors that affect, or are likely to affect, the Company's competitive position include the following: a geopolitical situation that significantly reduces the Company's opportunities to carry out Sixth Freedom Flights (indirect flights via BGN) as opposed to the expansion of Sixth Freedom Flights by foreign airlines; the possibility of appointing additional competitors as Designated Carriers in Israel to destinations to Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

which the Company flies or to nearby destinations, especially in view of the Government's above decisions; the entry of low cost airlines; membership of foreign airlines in global aviation alliances (STAR, One World, SKY); regulatory changes and legislative restrictions applicable to the area of activity; excess capacity of competitors; the Company's reliance on distribution by means of agents as opposed to the growing trend of direct marketing over the internet; the absence of Company passenger flights on the Sabbath or Jewish holidays and possible worsening of the economic, security and political situation in Israel. Seasonal Factors

The Company's activity is seasonal and focuses on peak periods. Heavy traffic of Israeli residents traveling abroad occurs primarily during the summer months and during holidays, while heavy incoming tourist traffic occurs during the summer months and during Jewish or Christian holidays or vacation time in their countries of origin. The Company’s peak activity is in the third quarter of the year. In the third quarter of 2013, passenger volume was 32% of total yearly passenger traffic, as it was in 2012. The following is data on the breakdown of the Company’s quarterly revenues from passenger aircraft18:

2013:

Quarter Yearly (In (In Millions of Dollars) Millions of Dollars) Year January- April-June July- October- January – March September December December 2013 244.6 849.4 646.6 863.6 0,931.2 % of 31.3% 36.6% 21.6% 32.4% 011% Area of Activity

2012:

Quarter Yearly (In (In Millions of Dollars) Millions of Dollars) Year January- April-June July- October- January – March September December December 2012 243.3 800.0 683.9 830.0 0,430.9 % of 31.9% 33.0% 39.9% 32.0% 011% Area of Activity

18 The Jewish holiday period, according to the Gregorian calendar, varies from year to year; this may have an effect on comparing quarterly operations between one year and another. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

7.10 Manufacturing Capabilities

The accepted indices of output in the world of aviation as regards passenger aircraft are load factor19 and ASK20. At peak demand (August), the Company’s productive capacity approaches its full potential output. In August 2013 the Company’s ASK was 2,245 million RPK and the Company load factor for August 2013 was 87%.

The following graph describes the monthly ASK average and the Company's average load factor over the past five years:

In accordance with the 1982 government resolution, the Company ceased operating scheduled flights on the Sabbath and Jewish holidays, and, accordingly, does not fully utilize its productive capacity. With the conversion of the Company to a “Mixed Company” on June 6, 2004, this prohibition was removed. Pursuant to an agreement reached in January 2007 between representatives of the Rabbinic Committee for Sabbath Observance and Company representatives, the parties agreed that the Company would continue to maintain the status quo which had existed up to then, according to which the Company does not carry out passenger flights of EL Al on the Sabbath and on Jewish holidays, pursuant to the 1982 government resolution. In light of the need that arises from time to time for flights to be carried out on the Sabbath, it was agreed that, prior to such flights, the Company would communicate with the Chief Rabbi to clarify the position of Jewish doctrine. Additionally, the parties formulated understandings concerning the refund of cancellation fees for portions of kosher meals, in the event that, as the result of

19 Passenger Load Factor – calculated based on flowed passenger-kilometers (RPK – the number of paing passengers times the distance flown) as a percentahe of the available seat-kilometer (ASK – number of seats offered for sale times the distance flown. 20 ASK - number of seats offered for sale times the distance flown. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

the breach of this understanding, ultra-orthodox customers would be forced to cancel their flights.

7.11 Aircraft Fleet

7.11.1 As of a date near the approval of the report, the Company makes use of 37 passenger aircraft, 22 of which are owned by the Group and 15 are leased by the Group.

7.11.2 The Company's fleet of passenger aircraft was manufactured entirely by Boeing. As a result, El Al is dependent upon the aircraft manufacturer Boeing for all matters related to the supply of aircraft parts, in the event of failures and findings occurring during regular maintenance (as a result of it being the aircraft’s manufacturer) and engineering consulting.

7.11.3 The following table itemizes the fleet of passenger aircraft owned by the Company, as of December 31 2013:

Type of Aircraft Total Average Average Maximum Cargo Age (in No. of Flight Capacity 21 Years) Seats Range (Nautical Miles)22

747-400 3 04.2 802 3,811 04.0

737-900ER27 3 1.3 003 3,611 3.6

737-700 3 08.2 001 3,611 3

737-60008 3 9.0 068 3,811 3

777-200ER23 3 01.3 309 0,211 33.8

Total 00 33 058

On October 8 2013 the Company signed receipt papers for a new Boeing 737-900ER aircraft, the first of this model purchased by the Company. The aircraft joined the Company’s narrow-bodied aircraft fleet in October 2013. In addition, on November 26 2013 the Company signed the receipt papers for a second plane of the same model. For

21 Cargo capacity of an aircraft full of passengers for a range where the required amount of fuel does not come at the expenses of useful cargo 22 The range is for a plane full of passengers without cargo.

23 Some of the 737-800, 777-200ER and 737-900 aircraft were purchased via Ex-Im/using Ex-Im guarantees and therefore the legal formula states that the aircraft were first leased by the Company, with the Company retaining the option to purchase the aircraft at the end of the period in return for $1. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

details regarding these aircrafts’ financing and a loan framework for the purchase of aircraft see Note 18 to the Financial Statements.

In October 2013 the Company Board of Directors approved the realization of the option to purchase two additional 737-900ER aircraft from Boeing (“the Option Planes”).

Confirmation of the purchase of the Option Planes constitutes the completion of a comprehensive purchase agreement with aircraft manufacturer Boeing of eight 737- 900ER aircraft as signed in February 2011; this transaction is compatible with the Company’s commercial needs and allows the renewal and lowering of the age of the Company’s aircraft fleet, with the Option Planes expected to serve the Company in short and medium ranges (Europe and regional destinations).

As part of the reduction of the age of the Company's aircraft fleet and the reduction of the number of fleets – the Company’s -200ER (EAF) plane ended its commercial service over the course of October 2013. This aircraft was the last of its fleet of Company aircraft and upon its removal from commercial service this fleet’s activity at the Company has been discontinued.

Company management is continuing to test, in conjunction with the two leading aircraft manufacturers, Boeing and Airbus, the process of receiving offers for replacing and renewing the Company’s wide-bodied aircraft fleet, as part of the Company’s long-term strategy.

7.11.4 The following table details the fleet of aircraft leased by the Company, as of December 31 2013:

Additional Details Average End of Lease Date Average Total Type of No. of Age Aircraft Seats * EKU – exit option for the Company 060 EKO – November 01.0 *9 737-800 from March 2017. 2015** ** EKO – the Company has an exit EKP – October 2014 option for November 2014; EKI – October 2015 ** EKT – the Company has an exit option for November 2016. EKS – August 2016 EKF – December 2016 EKT - November 2018*** EKM – May 2018 EKR – May 2018 EKU – March 2019* * EAR – the Company has an exit option 338 EAR – November 2016* 04.2 3 030-ER for November 2014. In January 2014 EAL – November 211 the Company informed the lessor that Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

it was exercising this option. 2017** ** EAL – both sides an exit option for EAM – December 2017 *** November 2015. EAK – November 2015. *** EAM – the Company has an exit EAP – November 2014 option from February 2016 to **** December 207 with the exception of December 2016, January, June, July EAJ – November 2014 and August 2017. ***** **** EAP – the Company has an option to extend by an additional 12 months. ***** EAJ – In February 2014 the plane was purchased by the Company. 365 3331 35 Total

Leasing fees for the Company’s aircraft in this area of activity amount to $71 million in 2013 compared to $64 million in 2012 and $59 million in 2008. T

For details regarding transactions for the purchase of aircraft, lease of aircraft, sale of aircraft and the extension of agreements regarding aircraft, see Notes 13d and 21(2) to the Financial Statements.

8. Cargo Aircraft Field

8.1 General Information on the Area of Activity

The following is a description of trends, events and developments in the Company's macroeconomic environment, which have, or are likely to have, a material effect on operating results or on the developments in the entire Company or in the cargo aircraft- field of operations, regarding the following matters:

8.1.1 Structure of the Field of Activity and Changes Occurring Thereof

There are four types of competitors in the cargo air transport market: airlines that carry cargo solely in cargo aircraft; airlines that carry cargo solely in the holds of passenger aircraft; companies, like El Al, that carry cargo both in cargo aircraft and in the holds of passenger aircraft; courier airlines which, in addition to cargo related to courier services, also carry other cargo in their aircraft.

In recent years a constant increase has been evident in the volumes of passenger planes traveling on international routes around the world, which increases competition.

The increasing trend of diverting cargo to maritime shipping continued over the past year.

According to the Company's estimates, its portion of the cargo shipping market in 2013, 2012 and 2011 has been assessed at 35.2%, 33.2% and 33.2% respectively, out of all Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

cargo transported to and from Israel (including cargo shipped in the holds of cargo craft. Not including Sixth Freedom and including mail activity).

8.1.2 Legislative Restrictions, Regulations and Particular Considerations Applicable to the Area of Activity

The regulatory restrictions for cargo transportation in cargo aircraft are similar to those applicable to passenger transport in passenger aircraft.

Regulatory arrangements have also been set for the cargo field relating to a number of operational aspects, such as permissible flight capacity, responsibility of the air carrier for damages, flight safety standards, security and noise. For further details see Section 9.11 above. Nevertheless, the policies of the global aviation authorities in granting permits for cargo aircraft have tended to be more lenient than in the passenger aircraft field. The situation especially affects the opportunity to carry out flights of cargo aircraft using Fifth Freedom and Sixth Freedom.

8.1.3 Changes in the Volume of Activity and Profitability of the Area

a) Scope of Global Cargo Transport

According to IATA estimates, in 2013 global airborne cargo transport (including in the holds of passenger aircraft) increased by 1.2% (international only). A decrease of 1.3% (international only) was listed in 2012.

In December 2013 IATA published its estimates according to which by 2017 an average annual growth (2013-2017) of approximately 4.9% is anticipated in global airborne cargo transport (international only) (including in the holds of passenger aircraft).24 IATA estimated that 2014 will see a growth at a rate of 2.6%.

The following table describes the development of airborne cargo shipping activity between 2009 and 2013, based on IATA data25:

24 The IATA projection for up to 2017 refers to increases in the weight of cargo shipped in tons times the distance flown – Revenue Ton Kilometer (RTK). 25 2013 data has not yet been published. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

Year Output RTK26 (in Millions) Annual Change in RTK (%) 3102 No data. No data. 3103 062,226 )1.6( 3100 068,016 )1.2( 3101 068,639 31.3 3119 034,692 )00.3(

b) Volume of Cargo Transported on Aircraft to and from Israel

The following is data on cargo traffic to and from Ben Gurion Airport over the past five years (The data includes cargo carried in cargo aircraft and in the holds of passenger aircraft)27:

Cargo Traffic through BGN (Thousands of Tons) for the Year Ending December 31 Change Change Change Change 3102 from 3103 from 3100 from 2010 from 3119 2012 2011 2010 2009 Exports 029 )6%( 080 )6%( 066 )6%( 038 0% 068 Imports 023 0% 028 )8%( 029 3% 023 06% 004 Total 306 )3%( 340 )8%( 398 )3%( 211 01% 303

Aircraft traffic through BGN listed a 2.2% decrease in 201328, constituting 6,000 tons, compared to 2012.

In addition to Israeli cargo company CAL Cargo Airlines Ltd. (“CAL”), the cargo capacity of foreign airlines included the cargo capacity of passenger flights and capacity in cargo flights by seven airlines: FedEx (U.S.), MNG and Turkish Airlines (Turkey), EAT (Belgium), (Jordan) and Korean Air (Korea), Lufthansa (Germany). Likewise, unscheduled cargo flights were flown through foreign companies, on an ad hoc basis.

54.2% of the cargo traffic through BGN was flown on cargo aircraft and the remainder (45.8%) was flown in the holds of passenger aircraft (primarily wide- body planes). This data does not include cargo that the Company flew via BGN in

26 Revenue Ton Kilometer – weight in tons of cargo in cargo craft, paid, times the distance flown. 27 Source: the Civil Aviation Authority and the Company’s estimate, which includes the deduction of Sixth Freedom activity by El Al through BGN and the addition of El Al mail activity. 28 Without deducting the Company's Sixth Freedom activity through BGN, the rate of decrease in traffic in 2013 was about 2.3%. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

the context of Sixth Freedom to the amount29 of 500 tons in 2013, of a negligible amount in 2011-2012 as well as to the amount of 1,000 tons in 2010.

8.1.4 Developments in Markets of the Field of Activity or Changes in the Characteristics of its Customers

The Israeli market in the field of operations of cargo transport by cargo aircraft is characterized by high seasonal fluctuations, due to the relatively high importance of agricultural exports (carried out primarily in the winter months), out of total exports. See Section 8.5 below for information on the Company's customers in the field of cargo aircraft shipping.

8.1.5 Technological Changes that could Materially Affect the Field of operations

The Company is working to expand and develop advanced IT solutions in the field of airborne cargo, in the field of online trade and in self-service abilities with the goal of improving service and reducing the Company's costs.

The Company has successfully completed a pilot for the development of an interface between the cargo system and Israeli Customs and began broadcasting the data directly to the Israeli Customs World Gate system starting November 2013 (according to Customs’ instructions, starting from that date all airlines must transmit a complete aerial manifest for the entire cargo content of a flight).

A new cargo mobile application was launched in February 2014. This application allows Company customers to track the status of their package (by entering the bill of lading) online, keep updated on the planned flight schedule and view takeoff and landing timetables.

8.1.6 Critical Success Factors in the Area of Activity and Changes Occurring Therein

A number of factors can be pointed to in the operations of the cargo transport sector via passenger aircraft that affect the field's competitive position: the ability to offer the transport of cargo to popular destinations at competitive prices; development of a network of routes on an independent basis, including the possibility of carrying out Fifth Freedom Flights and Sixth Freedom Flights, both as operations supporting transport to and from Israel; cooperation with other airlines; offering transport at the frequency and quality demanded while meeting time schedules; risk management and risk hedging.

29 Data includes cargo that was carried in cargo aircraft as well as cargo carried in the holds of passenger aircraft. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

8.1.7 Changes in the Supplier Array and Raw Materials for Areas of Activity

The primary raw material used by airlines is jet fuel and it represents one any airline's major expense components. See Section 9.5.1 below for additional details relating to fuel. In addition, the Company is dependent on Boeing, as detailed in 7.1.7 above.

8.1.8 Main Entry and Exit Barriers of the Field of Activity and Changes that have Occurred Thereof

The regulatory entry barriers (the need for appointment as Designated Carrier and the permits as to frequency, capacity, etc.) for regular flights in cargo aircraft are similar in essence to the regulatory entry barriers for scheduled flights in passenger aircraft, as detailed in 7.1.8 above.

The Company assesses that some countries have a more liberal policy of granting permits in the field of cargo transports. Therefore, The Company assessthat this entry barrier is less significant for some countries in the cargo field.

Another important entry barrier in the industry is the initial, relatively large investment that is necessary in order to establish and operate an airline, including acquisition of aircraft and other substantial current investments, including aircraft leasing.

The limitations of the holder of the Special Government Share in the matter of the reduction of the Company's cargo fleet constitute an exit barrier. See Section 9.11.1 below for further details.

8.1.9 Substitutes for Services of the Area of Activity and Changes that have Occurred in Them

The principal substitutes for air transport in cargo aircraft are transport in the holds of passenger aircraft, maritime shipping or a combination of maritime shipping to the nearest destination port and from there, shipment overland. There were no substantial changes during 2013 in alternatives to transport by means of cargo aircraft.

8.1.10 Structure of Competition in the Field of Activity and Changes that have Occurred Therein

There has been a structural change in the industry in the Israeli market in recent years, due to increased sources available to customers with the entry of new airlines with designated cargo aircraft. In addition, the expansion in the number of scheduled flights to and from Israel in passenger planes capable of carrying cargo in their holds, may increase competition in the field of cargo activity. At the same time, most of the increase in passenger planes is from increased activity by low cost airlines, which operate flights Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

from European destinations to Israel using narrow-bodied planes that do not usually carry cargo; for further details see 8.7 below.

8.2 Services in the Area of Activity

In this area of activity, the Company offers cargo transport services in cargo aircraft from Israel to destinations to and from Israel; cargo transported from one foreign country to another foreign country (Fifth Freedom), for example from Liège to New York; or cargo transported in the context of Sixth Freedom (indirect flights via stopovers in the home country of the airlines), for example from Asia to Europe or the U.S. with a stopover in Israel. The Company transported negligible amounts of cargo in its cargo aircraft using Sixth Freedom rights (in 2010-2013) The Company differentiates between three main destination groups: (1) North America; (2) Europe; (3) East and Central Asia.

During the reported year, the services offered by the Group in this area of activity were cargo transport services to one destination in Europe on scheduled flights, three destinations in Europe on charter flights and one destination in North America. Moreover, the Company offers cargo services to many additional destinations by means of the Company’s passenger aircraft or by means of cooperative arrangements with other airlines and also by means of land transport from the airport.

The following is a breakdown of the volume of cargo traffic in the Company’s cargo aircraft, by principal destination category, in 2010 to 2013:

Cargo Traffic in the Company's Cargo Aircraft, by Region (Tons), for the Year Ending December 31

0033 0030 0033 0030 Israel to/from Europe 23,089 23,622 22,306 23,134 Israel to/from the U.S. 6,031 3,312 0,430 4,201 Israel to/from the East 23 033 0,309 0,804 and Central Asia

Total 377503 367656 107775 157758

This data does not include cargo that the Company flew other than via BGN in the context of Fifth Freedom rights and cargo that the Company carried by air, via BGN, in the context of Sixth Freedom rights. The Company flew cargo by Fifth Freedom to the amount of 3,000 tons, 5,000 tons, 10,000 tons and 3,000 tons in 2013, 2012, 2011 and 2010, respectively. The Company transported negligible amounts of cargo using Sixth Freedom rights. The principal markets for cargo shipping services are for importers, industrial enterprises and the agricultural sector. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

The Company operates an array of transport trucks via subcontractors, in order to deliver the cargos from its cargo centers.

In August 2013 the Company entered into an agreement with JH. Essers Warehousing- Transport Systems (hereinafter: “Essers”) for land transport services of cargo to Europe for a 3-year period with an option to extend it by another two periods of one year. Essers was selected as the chief transporter for ground shipping of Company cargo to various European destinations, in addition to managing the Company's transportation desk at Liege. 8.3 Analysis of Revenues and Profitability from Services

In 2013 the Group's revenues from this area of activity decreased by 12.5% compared to 2012 revenues, and a 2.2% decrease in cargo traffic through BGN in 2013. For information regarding the breakdown of the Company’s revenues and profitability (consolidated) by the Company's reported operating segments in the area of cargo aircraft shipping see Section a.5 of the Board of Directors Report.

8.4 New Services

From time to time, the Company studies the prospects of operating flights to new destinations and increasing the frequency of the flights to existing destinations, in accordance with market demands.

8.5 Customers, Marketing and Distribution

Most of the Company's sales in the field of cargo aircraft shipping using cargo planes are made through cargo agents (92.3% in 2013). The remaining sales are made directly to end customers who are not cargo agents.

In the field of transport using cargo carrying planes, the Company does not have any customers the revenues from whom amount to 10% or more of total Company revenues.

In addition, the Israeli company for cargo consolidation (ACI), part of the shares of which are held by the Company (without the right to receive dividends), is engaged in consolidation of air cargo at BGN and its transfer abroad, mainly through the Company. ACI, like other airlines that operate in this field, consolidates the cargo of individual dispatchers into one shipment and, as a dispatcher, transfers it to the Company for shipment.

Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

8.6 Accumulated Orders

In general, air transport of cargo in cargo aircraft is carried out near the execution of the service reservation. Therefore, the Company did not have a significant volume of reservations backlog in 2013.

8.7 Competition

8.7.1 Competitive Conditions in the Field of Activity

a) The cargo aircraft transport field is characterized by fierce competition between the airlines that supply transport services between the same destinations or alternative destinations. The airlines compete in different areas, mainly: transport rates, schedule of flights and frequency of flights.

b) In the Israeli area of activity, the Company competes with CAL and with foreign airlines operating cargo planes. As of the date of the report, CAL operates flights to various destinations in the United States and Europe.

c) In 2013 the Company competed for cargo transport in cargo aircraft to and from Israel with six foreign airlines (in addition to CAL), which operated cargo aircraft in flights to and from Israel.

d) The Company competes with most of the scheduled airlines that operate passenger aircraft and carry cargo in their holds. The Company’s share of the passenger plane cargo hold activity in 2013 amounted to 48.3% compared to 25.2% in cargo planes.

e) In recent years, the Civil Aviation Authority has tended to approve requests of foreign scheduled airlines to increase the frequency of their flights to Israel. As a result, an increase has been apparent in the capacity of cargo shipping in the holds of passenger aircraft of foreign airlines. This increase has led to intensifying competition in cargo shipping as well.

f) In October 2012 German airline began operating three weekly cargo flights on the Frankfurt Tel-Aviv routes (most with a stopover in Istanbul), using a unique MD-11 cargo plane, capable of carrying 92 tons of cargo.

g) In November 2013 the Silk Way company began operating a weekly cargo flight on Tuesdays on the route to Baku (Azerbaijan) as a charter flight. This traffic poses competition to the Company in its cargo activity to and from East Asia.

Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

8.7.2 Major Competitors in the Field of Cargo Aircraft Transport

To the best of the Company's knowledge, its most significant competitor in transport through cargo aircraft, from the standpoint of market share, is CAL.

8.7.3 Key Methods for Coping with Competition

The Company acts on a number of levels in order to raise its profitability, while retaining and increasing its market share and also increasing the volume of the cargo it transports, including:

a) Conforming their timetable, as much as is possible, to the seasonality of traffic and maintaining the timetable's stability.

b) Increasing the frequency of flights to popular destinations and increasing the number of flight destinations by cooperating with other companies.

c) Offering competitive prices.

d) Adding to the frequency of the Company’s cargo flights between two foreign countries.

Positive factors that affect, or are likely to affect, the Company’s competitive position include: operating a designated 747-400 cargo plane; a strong brand name in the local market; a high standard of service; high safety levels; a variety of destinations for direct flights; timetable stability and on-time performance.

Negative factors that affect, or are likely to affect, the Company's competitive position include: the possibility of appointing additional competitors in Israel as Designated Carrier or to additional destinations; regulatory changes that restrict the option of entering into agreements with other airlines or prevent the utilization of flight rights; the entry of new, foreign competitors; increases in flight capacity of foreign airlines (including fifth and Sixth Freedoms); security restrictions and requirements; a downturn in the economic, security and political situation in Israel.

8.8 Seasonal Factors

The field of operations is characterized by high seasonal fluctuations due to the relatively strong influence of agricultural exports out of total exports by means of cargo aircraft. The following are data on the breakdown of the Company’s quarterly revenues from the cargo aircraft:

Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

2013:

Quarter Yearly (In (In Millions of Dollars) Millions of Dollars) Year January- April-June July- October- January – March September December December 2013 04.8 03.0 06.3 09.0 01.8 % of 33.0% 32.0% 33.3% 34.1% 011% Area of Activity

2012:

Quarter Yearly (In (In Millions of Dollars) Millions of Dollars) Year January- April-June July- October- January – March September December December 2012 32.6 30.1 00.0 04.4 41.8 % of 39.3% 33.0% 30.2% 32.8% 011% Area of Activity

8.9 Manufacturing Capabilities

The generally accepted output indices for airborne cargo shipping using cargo aircraft are load factor30 and available ton-kilometer (ATK)31. Note that the load factor indicator is calculated based on the weight of the cargo only and does not take the volume of the cargo into account.

30 The available cargo shipping capacity times the distance flown (available ton kilometer). 31 Calculated by RTK (the weight in tons of the paid cargo times the flight distance) as a percentage of the ATK (the available cargo shipping capacity times the distance flown). Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

The following graph describes the Company’s average load factor and ATK index per quarter in 2013:

8.10 Aircraft Fleet

In June 2013 the Company signed an extension of the lease agreement of a 747-400F (ELF with Bank of America Leasing Ireland Co. Limited for an additional period of 72 months, starting August 1 2013, with the Company given the option of ending the lease after 48 months.

In addition, the Company leases cargo aircraft via “wet leases” (aircraft leased with its crew) as needed.

Total leasing costs borne by the Company in this area of activity amounted to $10 million in 2013, $13 million in 2012 and $13 million in 2011.

8.11 Raw Materials and Suppliers

The principal raw material employed by the Company is fuel. See Section 9.5.1 for further details. In the cargo aircraft field, the Company, in its various stations throughout the world, engages suppliers dealing in unloading and loading aircraft, in cargo storage in warehouses, in providing airborne equipment and consumable materials for ongoing use, and in land transport of the cargo from the customer to the airport and vice versa. The rate of expenses related to commitments with these suppliers 2013 accounted for some 16% of the operating sector’s expenses. The Company was not dependent on any single supplier in 2013.

9. Information on Both Fields of Activity

9.1 Fixed Assets and Installations

9.1.1 Real Estate: Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

a) The Company owns an area of 1,560 square meters in the El Al Building on 32 Ben Yehuda St. in Tel-Aviv, which until recently served as the offices of the Company's Israeli branch and is now rented (for details see (f) below). The Company also owns offices in Spain (Madrid) and Argentina (Buenos Aires) with a total area of 269 m².

b) The yearly cost for renting areas in Israel is $8,200,000 for built-up property 88,000 m² in size (80,000 m² of which is in the El Al campus). The following are details of material real estate properties rented by the Company in Israel:

The Property Parties to the Consideration Contract Period and Option to Agreement Extend The El Al BGN campus Authorization agreement $3.7 million US The agreement shall be in effect has a built-up area of between the Airports for the ground and until December 31 2010. 80,000 square meters on Authority (authorizing) structure Furthermore, the option exists to 29 hectares of land. and El Al (recipient). component for extend it for an additional 25-year period. The Company announced See (c) below. 2013. its intent to exercise the above option in accordance with the agreement, and is currently negotiating with the IAA to extend the period by an additional term. The SLN warehouse at Authorization agreement Yearly usage fees to The agreement was extended to BGN with a built-up area between the Airports the amount of 2.5 December 31 2016. of 2,600 m² plus 1,750 m² Authority (authorizing) million NIS. of operational grounds. and El Al (recipient). Areas in BGN Terminal 3 – Authorization agreement Yearly usage fees to This agreement was extended to .Area for King David between the Airports the amount of 18 May 31 2014 .א Authority (authorizing) million NIS. Lounge and other and El Al (recipient). areas.

See (d) below. Agreements to grant a permit for

7.8 million NIS per the other areas were signed, Authorization agreement year. covering a period of 10 years Other operational .ב between the Airports starting November 2, 2004. The

areas in Terminal 3. Authority (authorizing) contract is expected to end on and El Al (recipient). November 1 2014

Authorization agreement Total yearly cost of

between the Airports 0.2 million NIS. The agreements are for different Authority (authorizing) .Space in Terminal 1 periods .ג at BGN, the Eilat and and El Al (recipient). Ovda terminal – space totaling 140 square meters (for flights to Eilat) Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

Areas in BGN for the Agreement between El Yearly usage fees to The agreement was extended to Company’s cargo Al and Maman – Cargo the amount of 0.3 December 31 2014. shipping activity, which Terminals and Handling million NIS in a NIS include the Maman Ltd. contract. Building compound, with a total area of 445 sq. meters. El Al branches throughout Different owners in Total yearly cost of The agreements are for different the country with a total conjunction with the 2.1 million NIS. periods. area of 1,500 square Company. meters (not including parking). c) Land Usage Rights at Ben Gurion Airport (BGN)

Ben-Gurion Airport (BGN) serves as the Company's home port and central base of operations. The Company’s headquarters, hangars, aircraft parking areas, workshops, warehouses and other offices and installations are located at BGN. Most of the offices, hangars and other buildings used at BGN were constructed by the Company on land to which the Company holds long-term usage rights.

By virtue of the agreement dated June 1992 with the Airports Authority (AA), as amended in February 1995, the Company has the usage right (permit) to 290 hectares of land at BGN through December 31, 2010. This period may be extended for an additional 25-year period under the terms of the contract or under other terms as will be agreed upon with the AA. It appears that the exercise of the option will be subject to the payment of Purchase Tax. The Company is currently negotiating with the Airports Authority regarding the extension in question.

According to the aforementioned agreement, the AA permits the Company to use the property and the access roads to it and also allows the Company to operate airline services on and/or through the property. The agreement gives the AA the right to demand that the Company vacate space and/or a building that it will need for the operations, safety, development or security of the airport.

In 2005, the Company paid $960,000 in licensing fees for the aforementioned usage rights, and starting 2006 and subsequently, the licensing fees will rise by 7.4% per year until the end of the contract period, so long as the maximum payment does not exceed $4 million. In accordance with an October 19 2004 revision to the agreement, in addition to the payment for the land, the Company will pay yearly usage fees to the IAA for certain fully depreciated buildings and installations. Payment is at a gradually increasing rate (according and subject to the amount and type of structures finishing the depreciation period each year, according to a depreciation period of 40 years from the structure’s construction). The expense amounted to a total of $3.7 million in 2013. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

d) Terminal 3

For details regarding the authorization agreement for the operation of the Company passenger lounge in Terminal 3 and agreements for authorizations in other areas in Terminal 3 see Note 24.c.(4) to the Financial Statements.

In the context of the operations of Terminal 3, the Group considered whether to set up an aircraft maintenance center adjacent to Terminal 3. For this purpose and in preparation for the move to Terminal 3, in April 2000 the Company signed an agreement in principle with the IAA to lease an area of 2 hectares in order to set up a maintenance center, a hangar and supporting facilities near Terminal 3. The IAA Board of Directors ratified the transaction but it is subject to the signing of a detailed agreement between the parties and the ratification by the Company's Board of Directors. As of these Statements, no detailed agreement has yet been signed between the parties. The Company has received notice from the IAA, according to which the IAA apparently cannot uphold the agreement and allow the Company to construct a hanger for large aircraft at the location decided upon. In light of this notice, the sides have been holding talks to find an acceptable solution.

e) Global Real Estate Rentals

The following are details of material real estate properties rented by the Group around the world:

Category Area in M² Cost in Thousands of Dollars

East Asia 3,061 931

Europe 0,361 2,811

The UK 0,361 0,011

North America 8,023 2,341

Total Global Rental fees 06,043 4,081

The Company rented a hall for the lounge at Newark Airport, covering 350 m², for its passengers at the airport, at a yearly cost of $350,000.

The Company rented space for the Company’s offices in New York, instead of its current offices in , starting March 2014. The new offices cover Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

850 m² (instead of the current 1,800 m²) at an average yearly cost of $500,000 (compared to a current average yearly cost of $750,000).

f) El Al Building in Tel Aviv:

The Company moved its offices from the El Al Building in Tel Aviv to the Terminal Park in Or Yehuda starting May 2013. The shop was moved to commercial space in a landmark building on 27 Rothschild Blvd. in Tel Aviv starting from February 2013. The office and trade space at the El Al Building were rented for a period of 5 years, plus 2 option periods.

9.1.2 Accessories, Spare Parts and Spare Engines

The Company keeps accessories, spare parts and spare engines in its warehouses, with a total book value of approximately $97.7 million as of December 31 2013. In recent years, the Company has begun to purchase external logistic support services from designated suppliers abroad, to complement the spare parts purchased by the Company. See Note 13 to the Financial Statements for additional details of fixed assets.

9.2 Insurance

The Company’s insurance coverage is mainly related to two aspects: insurance of the different types of Company property and legal liability insurance for property and bodily injury.

The Company’s airline liability insurance is limited to a ceiling of $1,500 million per occurrence, with the insurance coverage for third party damages from terror and war actions amounting to $1,000 million. According to the Company's estimates, this coverage suffices to provide the proper insurance protection for its activity.

The hull all-risk insurance of the aircraft owned by or in the service of the Company, or as regards loss or damage to aircraft for which the Company has agreed to be responsible for their insurance, is based on the “agreed value” of each aircraft and includes deductible levels acceptable in the aviation industry.

Insurance of aircraft hulls against dangers of war and similar risks covers, inter alia, acts of war, terror actions, civil war, strikes, riots, malicious damages, hijackings and confiscation.

The Company is also covered by various insurance policies, which Company assesses are sufficient to provide insurance coverage adequate for the primary risks to which the Company and its employees are exposed. These refer to policies to insure employers’ Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

liability, insurance of buildings against fire, earthquakes and the like, health insurance personal accident insurance for company employees, etc. The policies are renewed on a yearly basis.

For details regarding engagements with the controlling shareholder – K’nafaim – in a joint insurance agreement see Note 33.c.1.(a) to the Financial Statements.

The overall cost to the Company for insurance premiums during 2013 was $8 million.

9.3 Intangible Assets

The Company owns the “El Al” trademark, which constitutes the Company’s anchor brand, the Company’s name and its logo design. A registered trademark is valid in Israel for limited periods fixed by law, and may be renewed at the end of each period. In addition, the Company owns the trademark for "El Al" (name and designed logo) in the U.S. and in other countries around the world as well. The Company assesses that the economic lifespan of the “El Al” trademark covers a multi-year period, due to being part of the Company’s name, and due to the many years that this symbol has been used and its dominant market position.

In addition, El Al is in advanced stages of registering the “UP” and “Economy Class Plus” trademarks.

Various internet domain names have been listed in the Company’s name in Israel and abroad, valid for variable periods of time, in accordance with registration rules in various countries, with an option to extend.

For details regarding the Company’s rights to the use of security equipment see Note 14 to the Financial Statements.

9.4 Human Capital

9.4.1 Organizational Structure

Day-to-day management of the Company’s affairs has been assigned to the CEO, who is assisted in his duties by the management team, serving as the Company head office, and comprised of the CFO, the VP of Maintenance and Engineering, the VP of Commerce and Aviation Relations, the VP of Human Resources and Administration, the VP of Service and Customers, the VP of Operations, the VP of Information Technology, the VP of Cargo, the General Counsel and Corporate Secretary and the Company Internal Auditor. For details regarding the CEO's terms of employment see Note 33e to the Financial Statements. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

The following chart describes the Company’s organizational structure:

9.4.2 Employees On December 31 2013 the Company employed 5,749 employees, 3,757 of whom on a regular basis [318 of which in the Company’s overseas offices (including 25 Israelis posted abroad)] and 1,992 temporary employees (111 of them overseas)32. The following are details of regular and temporary employees as of December 31 2013 and December 31 2012:

Position December 31 2013 December 31 2012

Regular employees 2,060 2,046

Temporary employees 0,993 0,991

Total employees 6,089 6,006

32 The breakdown of temporary employees according to their areas of occupation were: flight attendants (855), ground and service personnel (674), maintenance and engineering (182), marketing, sales and cargo (35), abroad (111), and the rest (135) in othe r positions. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

The fierce seasonality of the industry requires modulation of personnel, which is carried out, according to demand, through a varying number of temporary employees. Personnel employed by the State also work as part of the Company’s security system, and the Company pays part of their salaries (in accordance with the splitting of security costs between the Company and the State - see Section 9.11.12 below for details).

In January 2014 the Company filed a party request in a class dispute motion to the District Court and a temporary remedy motion, due to pilot sanctions taken starting December 2013.

The sanctions were expressed in an unusually extensive report on “illnesses” on flights to certain destinations (both of pilots assigned to the flights and due to the reported illness could not perform them and of pilots on standby, who if they had not called in sick would have been required to make the flight instead of the sick pilots) and lack of response to the Company’s requests to help man the flights in which the captains who had been assigned to them had called in “sick”. At a hearing held at the Tel Aviv Labor Court, the ATA representatives at the workers’ representation undertook to instruct the pilots to return to work as they had worked prior to September 2013. On February 9 2014 the Company was forced to file another court motion and in a hearing held on February 11 2014 the Histadrut and workers’ representatives announced that they would instruct all pilots to carry out their assigned duties property, as they had done prior to September 2013. In addition, the parties undertook to maintain proper and fair work relations, benefiting the Company, its customers and its workers.

On October 7 2013 Company engineers initiated a work slowdown on all matters pertaining to engineering decisions on ongoing work subjects and various projects disrupting work orders, following a deceleration of a work dispute by the Association of Engineers, Architects and Graduates in Technical Sciences in Israel. The Company filed a party motion and a motion for an injunction to the Labor Court, against the Federation of Engineers and the Professional Unions Branch at the Histadrut, claiming that the work dispute had been declared unlawfully, as the party authorized to declare a work dispute at the Company was the Professional Unions Branch at the Histadrut, and therefore the sanctions imposed are also unlawful. A hearing was held on the party request on November 7 2013, in which the parties reached an agreement according to which the dispute regarding the identity of the organ at the Histadrut authorized to declare a work dispute at the Company shall be decided on by the Head of the Professional Unions Branch, and in the interim period until the Head of the professional Union Branch rules on the subject – the sanctions imposed by the engineers shall be put on hold, and no additional sanctions imposed. The Professional Unions Branch filed its position on Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

December 25 2013, stating that the deceleration of a work dispute at the Company requires the approval of the employees’ council and the Professional Unions Branch. Following the above announcement by the Professional Unions Branch, the Federation of Engineers asked for a hearing in order to complete oral arguments. A hearing was set for April 3 2014.

The following is the breakdown of the Company's permanent employees in Israel and abroad as of December 31 2013 and December 31 2012, according to their fields of employment:

Position December 31 2013 December 31 2012

Senior employees 80 82 Marketing, sales and cargo 823 860 Pilots 600 610 Flight attendants 200 243 Ground, security, control, 383 322 operations and service operators. Maintenance, renovations, 0,030 0,084 engineering and inspection Auxiliary services 336 306 Total regular employees33 2,060 2,046

9.4.3 Material Dependence on a Specific Employee.

The Company has no material dependence on any specific employee and/or executive.

9.4.4 Training and Instruction

The Company’s training center has been certified as a “Qualification Institute” according to the Aviation Regulations (Inspection Institute, Qualification Institute and Self- Maintenance), 1979. The center trains workers and holds training courses for most of the professions needed by the Company: pilots, aircraft technicians, flight attendants, traffic officers, ground attendants, reservations and ticketing personnel, marketing and sales managers, middle management and so on. In addition, the Company holds courses and study programs for travel agents and cargo agents in Israel and abroad.

The Company invested $10 million in employee instruction and training in 201334.

33 Includes 1st Generation and 2nd Generation (next generation) employees. 34 This cost includes the direct training budget, payments for simulator practice, including related expenses, and also the salaries of employees during their training period. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

9.4.5 Employee Compensation Plans

See Note 25e to the Financial Statements for further details.

9.4.6 Exemption from the Budget Fundamentals Law

The Company’s request for exemption from Section 29 of the Budget Fundamentals Law was approved by the Minister of Finance, and was ratified by the ’s Finance Committee on March 17, 2005.

9.4.7 Special Collective Agreements

In addition to labor legislation and extension orders, the terms of employment of Company personnel employed in Israel, with the exception of the executives and other personnel employed under personal contracts, are organized in special collective agreements that are signed from time to time between the Company and the New General Workers Histadrut (above and hereinafter – “the General Histadrut”) and also by procedures that are published from time to time by management.

The collective agreement signed in November 2008 expired on December 31 2012. Discussions for the renewal of the agreement are held between the parties starting November 2012.

For further details on collective work agreements see Note 19.(c).(12) to the Financial Statements.

9.4.8 Pension Arrangements

For further details regarding the pension agreement, executive insurance agreement, the deficit on the subject of severance pay and its coverage and details on the Company’s employee benefit obligations, see Note 19.(c) to the Company’s Financial Statements.

9.4.9 Legislative Amendments Pertaining to Retirement Age and Retirement Arrangements

The 10th Amendment to the Sexual Harassment Prevention Law, 1998, was published in January 2014; the amendment is designed to prevent harassment using various technological means (photographs, film or other human recordings), the availability of which has become much more extensive in recent years.

Furthermore, in February 2014 the Minister of Economics signed an expansion order, which expanded the provisions of the July 2013 collective agreement to the entire Israeli economy, which means an immediate and significant improvement to the terms of employment of custodian workers employed via contractors, including salary increases, entitlement to provident funds, increasing employer provisions to pension Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

funds, increasing convalescence pay and so on. This change also has an impact on the parties ordering the service, who are now obligated to specify in their agreement with the contractor, among other things, the salary components the contractor will pay employees and the minimum salary cost and make sure that the contractor does not receive deficit payment.

9.4.10 Eligibility for Flight Tickets

According to IATA regulations, Company employees are entitled to service-vacation flight tickets (free or at a discount), the majority of which are on an available seat basis for themselves and for their families, including retired employees. This right is set forth in the labor agreements (and in the personal employment agreements of the senior executives (with the exception of directors)), in the personal retirement agreements, in Company procedures and in the professional instructions of the human resources division. The quota of free or discounted flight tickets is limited by the provisions of the labor agreement, of personal agreements or retirement agreements and by Company procedures.

9.4.11 Voluntary Employee Early Retirement Plans

For details regarding the voluntary employee early retirement plan see Note 19.(e).(1) to the Financial Statements.

9.4.12 Local Employees at Company Branches Abroad

See Note 19.(c).(9) to the Financial Statements for further details.

9.4.13 Israeli Employees Posted Abroad

See Note 19.(c).(8) to the Financial Statements for further details.

9.4.14 Welfare Services and Payments

In addition to salary, part of the Company’s permanent employees also receive welfare services and payments, which include: subsidized meals for employees and gross-up of related taxes, medical examinations of employees, participation in medical and health care insurance and dental insurance for employees, clothing, uniforms, and partial participation in higher education. Some of these benefits are also given temporary employees.

Employees may, under certain conditions, receive guarantees for loans for various purposes. The loans are for periods of up to 60 months and are provided by the Company and Bank Yahav on terms that have been approved by the Ministry of Finance. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

9.4.15 Restrictions on Leasing Aircraft via "Wet Lease"

According to a letter dated December 1999 from the Company’s CEO to the Chairman of the Division for Professional Unions of the Histadrut, the Company is to restrict itself in the future to leasing up to 4 aircraft from Israeli airlines, so that the flight hours that will be executed by the Israeli airlines for the Company will not exceed 10% of the Company's total flight hours (including flight hours that will be carried out in wet leases by the Israeli airlines, but not including leased aircraft from foreign companies), and they will operate in specified aircraft models in routes from/to Israel to destinations to which the flight range to them from Israel does not exceed 2,400 nautical miles. The Company will continue to plan the employment of its air crews at a volume of 83 monthly flight hours on an annual average, as it has done until now, and, in the event of a significant change in external circumstances that will create the necessity to change this policy, the CEO will discuss the matter with the Chairman of the Division for Professional Unions of the Histadrut, before deciding on the matter.

In this matter, party motions were filed in a collective agreement by the Transportation Workers’ Union at the Histadrut, claiming that the Company was not entitled to enter into a wet lease agreement for an Israir aircraft in order to activate some of the Company’s flights to Eilat, claiming that it was not entitled to rent a plane for flights marketed by subsidiary Sun D’Or as no negotiations had been held with representatives of the employees in advance. These motions are pending before the Labor Court

9.4.16 Executives and Senior Management

The members of the Company’s Board of Directors are not Company employees.

The Chairman of the Board of Directors

On January 21 2009 the Company's Board of Directors decided to appoint Mr. Amikam Cohen as Chairman of the Company's Board of Directors, starting February 21 2009. For details regarding the employment agreement of the Chairman of the Company's Board of Directors, including the revision to the terms of his employment as approved by the Company's general meeting on January 8 2014, see Note 25.(e).(2) to the Company's Financial Statements..

Directors

As of the publication of this report, the Board of Directors consists of 9 members, following the December 31 2013 decision of the general meeting of the Company’s shareholders. On March 6 20104 Mr. Nadav Falti resigned from the Board of Directors.

Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

Company CEO

On December 1 2013 Company CEO Mr. Eliezer Shekedi announced his decision to conclude his duties after four years in office (he began serving on January 1 2010). Mr. Shekedi shall conclude his service on March 19 2014. On January 29 2014, the Company's Board of Directors decided to appoint Mr. David Meimon as the Company's CEO starting March 20 2014. Mr. David Meimon has served a VP at the Company since 2005, serving as VP of Commerce and Aviation Relations since 2011. On February 19 2014 the Company summoned a special shareholders meeting for April 2 2014, to ratify the terms of Mr. David Meimon's employment.

For details regarding the terms of employment of the outgoing Company CEO and the incoming Company CEO, see Notes 25.(e).(3), 33.(e) and 36.(a) to the Financial Statements.

Senior Executives

On April 28, 2014 the Company CFO, Mr. Nissim Malchi, announced his resignation. Mr. Malchi shall depart the Company on March 19 2014 and on March 20 2014 Ms. Deganit Falti will begin serving as Company CFO.

On February 6 2014, the Company’s VP of Human Resources, Mr. Reuven Virovnik, announced his resignation. Mr. Virovnik will depart the Company on April 30 2014.

In addition to the CEO, other senior personnel are employed under personal employment agreements. The salary of the senior personnel under personal agreement is updated, so that the overall salary is linked to the CPI and updated every year, in the month of January, after deduction of the cost-of-living increments paid.

The Company used to customarily approve incremental bonus severance pay to senior employees at the rate of one month per year of work, and a provision was made on this in the Financial Statements.

The following details the number of employees in the category of Company executives and senior management personnel during 2013 and 2012:

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Number of Employees35

December 31 2013 December 31 2012 Chief Executive 0 0 Officer Senior management 00 00 Expanded 39 20 management and additional senior employees36

Internal Enforcement Plan

For details regarding the internal enforcement plan on the subject of securities law and corporate law see Section C.(12) of the Board of Directors Report.

Senior Executive Remuneration Policy

On January 8 2014 the general meeting of Company shareholders ratified, via special majority, a senior executive remuneration policy, in accordance with the 20th Amendment to the Companies Law. For details see Section c.10 of the Board of Directors Report.

9.5 Raw Materials and Suppliers

9.5.1 Fuel

a) The principal raw material employed by the Company is jet fuel. Jet fuel is one of the Company's main expense components, as it is for every airline. In 2013, the Company’s jet fuel expenses represented some 39% of the Company’s operating expenses (compared to 40% in 2012).

b) The price of jet fuel has a material effect on the Company’s profitability. The Company estimates that at the operating level as of the date of the report, every change of 1 cent in the price of a gallon of jet fuel over the year increases the Company's fuel expenses by $2.3 million.

c) Since 2001, the Company has taken actions to hedge part of its projected jet fuel consumption. A special committee of the Board of Directors for the management of market risks sets the Company’s policies on the hedging of jet fuel prices, the hedge period and the proportion of the hedge out of total jet fuel consumption for that period. The Company requests proposals for framework arrangements from

35 According to the organizational structure (as opposed to salary levels). 36 Heads of departments. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

several financial institutions and fuel companies with which the Company has framework arrangments, carries out commercial negotiations with them and executes the hedge transactions with them. The billing between the parties is done once each period, and if the average price for the above period in the market is higher than the hedged price, the Company receives a refund in the amount of the price difference multiplied by the quantity for that period; where the average monthly market price is lower than the hedged price, the Company pays the difference multiplied by the quantity for that period. In 2013 the Company received $6.1 million for hedging transactions.

d) In 2013, the average market price of jet fuel dropped by 3.9% before hedging transactions. The effect of this price increase on the Company's operating results is substantial.

Following the increase in jet fuel prices, the Company updates from time to time the fuel surcharge paid by passengers as part of their flight tickets.

e) The Group purchases fuel in Israel and abroad. In 2013, the Company purchased fuel from four suppliers who were chosen via tender process, with some 50% of its fuel purchases in Israel from one supplier (the Paz Company). For details regarding the Company’s engagements in fuel purchasing agreements in 2014 see 9.12 below.

f) The Company purchases jet fuel abroad from a number of suppliers, including fuel companies that supply jet fuel to a large number of airports. The foreign contracts are for periods of two years, except for cases in which engagements of just one year were permitted. Most of the contracts are signed with suppliers after a tender process and after commercial negotiations the Company conducts with the suppliers, except for those stations in which there is only a single supplier.

g) In February 2013 the Company published a request for proposals (RFP) for overseas fuel supply companies starting July 2013 for a period of two years. As of immediately prior to the approval of this report, the Company has jet fuel purchasing agreements in most foreign airports in effect until June 30 2015.

h) From time to time, the Company reviews the feasibility of importing jet fuel independently as opposed to purchasing from local suppliers, and carries out these activities based upon market conditions. There were no jet fuel imports in 2013.

i) The Company purchased 25% of its total fuel purchases (in Israel and abroad) during 2013 for that year from one supplier (Paz). The Company has seven additional fuel suppliers from which it purchased more than 5% of its total fuel Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

purchases in that year. The Company believes that the scope of purchases from the central supplier in Israel may create a dependence on this supplier insomuch as there are no suitable and immediate alternatives for the supply of jet fuel at BGN.

j) In 2003 the Company initiated a policy of maintaining an inventory of jet fuel, which was purchased from local suppliers. As of December 31 2013, the Company held and inventory of jet fuel purchased from suppliers in Israel and abroad to the amount of $10.7 million.

k) In addition to fuel suppliers, the Company receives fueling services in Israel from other suppliers.

9.5.2 Aircraft

a) All of the aircraft operated by the Company were manufactured by the Boeing Corporation. The Company has a material dependence on Boeing, as detailed in 7.1.7 above. At the same time the Company estimates that the likelihood of termination of engineering support is low.

b) For details regarding agreements for the purchase and sale of aircraft and engines see Note 13.d to the Financial Statements.

9.6 Working Capital

9.6.1 Inventories

The Company has an inventory of raw materials that include jet fuel for consumption, duty-free products to be sold in flight, and expendable inventory (chemicals, food, and supplies.) for the use of passengers during flight. The following is a calculation of average inventory days:

2013 2012 Jet fuel inventory 6 3 Inventory of food and supplies for 82 80 passengers

Duty Free Inventory Purchasing Policy

The Company purchases 80% of its duty-free products from the DFASS Company and the remainder of the products are Israeli products purchased directly from local suppliers (20%). Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

Alcoholic beverages and cigarettes are provided directly to the duty free warehouse, on a quarterly basis, with the remaining products provided to El Al stations, and the Company ships them to Israel on the basis of available space.

The Company is entitled to return any product (not food, tobacco or logo products) so long as the product is in its original packaging. The Company is responsible for sending the products including shipping and insurance costs to their point of supply (cigarettes and alcoholic beverages from the duty free warehouse, other products to the Company's overseas station).

Storing Products in the SLN Warehouse

All purchased products are stored in the duty free warehouse (a separate unit within the SLN warehouse, with restricted access). Products requiring special storage conditions (such as chocolate), are stored in refrigerated conditions. The value of inventory in the warehouse at any given moment averages one and a half million dollars. For details regarding the extent of the inventory see Note 11 to the Financial Statements.

9.6.2 Reservation Cancellation Policy

In general, Company policy is that a customer is permitted to cancel a reservation, without payment, until the date that the ticket is issued to the customer (hereinafter – “Ticketing”). The customer may cancel certain tickets even after ticketing, at times without the payment of cancellation fees and at times with payment of a cancellation fee. Tickets also exist that the customer may not cancel at all, including after ticketing. Generally, the higher the ticket price, the greater the willingness to allow cancellation of the ticket without cancellation fee or with a low cancellation fee.

The above is subject to the fact that legal requirements do not demand otherwise. In this regard note that as regards certain transactions the Consumer Protection Law, 1981 and the Consumer Protection Regulations (Canceling Transactions), 2010 provide special instructions regarding the possibility of canceled transactions. In addition, a U.S. Department of Transportation ordinance, which that came into effect in January 2012, allows a reservation to be held for 24 hours with no charge, or alternately, allows a reservation to be canceled within 24 hours with no cancellation fees, for reservations made up to 7 days before the flight.

9.6.3 Service Liability Policy

The Company’s responsibility for damages (bodily damages and property damages) caused over the course of international air transport are stipulated in international conventions adopted in the Air Transport Law, 1980 and resulting directives. The Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

Company also operates in accordance with IATA directives on various matters connected to responsibility for passengers and their luggage. The Company’s liability for denial of boarding of passengers due to overbooking of flights is established by the Aviation Services Licensing Regulations, 1985 and in the Aviation Services Law (Compensation and Assistance due to Flight Cancellation or Alteration), 2012, which imposes an obligation on the Company to provide passengers whose flights are altered or canceled with a variety of remedies in accordance with the duration of the delay or the circumstances of the cancellation such as assistance (food, drinks, sleeping accommodations), returning the proceeds or an alternate flight and event monetary compensation. In addition, in all matters pertaining to bumping passengers from flights, flight delays and flight cancellations to and from countries belonging to the European Union, Regulation 261/04 of the European Union applies. In addition, and in all matters pertaining to denying flights and delays on flights from the US, the Enhancing Airline Passenger Protections; Final Rule, 2011 applies. For details regarding legislative changes in this area in Israel see 2.11.9.(i) below.

9.6.4 Credit Policy

a) Credit to customers: Travel or cargo agents approved by IATA enjoy special payment arrangements in accordance with IATA regulations (a non-IATA agent is obliged to provide guarantees or pay in cash). The Company grants credit to agents in Israel for periods varying between 15 to 45 days. In general, direct sales of air transport to customers are made in cash, other than credit sales to Government ministries and certain commercial customers.

b) Suppliers’ credit: The Group receives credit from its suppliers in Israel and abroad for periods between 30 to 90 days, according to the type of supplier and the arrangement with them (with the exception of fuel suppliers).

c) The following are the average credit volume and credit periods for customers and suppliers of the Group in 2013 and 2012:

2013 2012 Average Credit in Average Average Credit in Average Millions of Dollars Days of Millions of Dollars Days of Credit Credit Customers 157 27 064 34 Suppliers 159 42 063 82

d) Note that the gap between the customer credit policy and its supplier credit policy derives, inter alia, from the fact that the supplier credit policy is set by the Company, taking into account market conditions, liquidity and generally accepted Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

policy. On the other hand, the customer credit policy is largely set according to generally accepted practices in the aviation industry and in accordance with ordinances and procedures accepted by the IATA and travel and cargo agents.

9.6.5 Working Capital Deficit

As of December 31 2013, the Group had a working capital deficit of $416 million, compared to $429 million at the end of the previous year. The Company’s current ratio as of the end of 2013 is 43% compared to 41% at the end of the previous year.

See Section a.1 of the Board of Directors' Report for details of the factors leading to the decrease in the working capital deficit.

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. Therefore, a material part of the capital deficit is not cash-flow based in the short term.

9.7 Investments

See Note 12 to the Financial Statements for details of all of the Company’s investees.

9.7.1 A Concise Description of the Businesses of Principal Subsidiaries

a) Sun D’Or International Airlines Ltd. (“Sun D’Or”)

The Company's charter operations, described above and below, are organized and marketed through Sun D’Or (a fully owned El Al subsidiary). Sun D’Or continues to serve as a tourism organizer for wholesalers and individuals, while preserving the “Sun D’Or” label for charter flights it markets and which are carried out by the Company (on weekdays) and by other airlines (on weekend and holiday flights). In addition, the marketed seats are included in tourism packages by tourism wholesalers.

On March 20 2011 the CAA informed Sun D’Or that it would be revoking Sun D’Or’s operator’s license starting April 1 2011. Sun D’Or’s comprehensive activity dropped 6% in 2013.

Sun D'Or's revenues amounted to $52,149,000 in 2013 compared to $54,035,000 in 2012 and $75,893,000 in 2011. As of December 31 2013, Sun D'Or employed 27 employees.

Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

b) Tamam Aircraft Food Industries (BGN) Ltd. ("Tamam")

Tamam (a fully owned El Al subsidiary) is primarily engaged in the production and supply of prepared kosher airline meals. The company has recently expanded its non-aviation activity and it supplies, among other things, institutional catering services. Tamam is located in Israel and its offices are located outside Ben Gurion Airport. The Company is the principal customer of Tamam. In 2013, some 82.5% of its sales were to the Company, with the remainder to other airlines and to other customers. Tamam’s revenues in 2013 totaled $30.3 million compared to $27.2 million in 2012 and $28.3 million in 2011. As of December 31 2013, Tamam employed 350 workers.

c) Katit Ltd. ("Katit")

Katit (a fully owned El Al subsidiary), deals mainly in the manufacture and supply of means to Company employees. Katit is based in Israel and its offices are at Ben Gurion Airport. In 2011 86% of its sales were to the Company. Katit's revenues in 2013 amounted to $4,065,000, compared to $3,624,000 in 2012 and 3,787,000 in 2011. As of December 31 2013, Katit employed 109 workers.

d) Borenstein Caterers Inc. (USA) (“Bornstein”)

Borenstein (a fully-owned El Al subsidiary), incorporated in the United States and operating out of New York’s JFK airport, deals mostly in the production and delivery of prepared meals for airlines and other institutions. The Company is Borenstein's primary customer (some 53% of its sales for 2011). Borenstein’s revenues amounted to $12,755,000 in 2013 compared to $12,121,000 in 2012 and $11,592,000 in 2011. As of December 31 2012, Bornstein employed 89 workers.

e) Superstar Holidays Ltd. (Britain) - (“Superstar”)

Superstar (a fully-owned El Al subsidiary), is a tourism wholesaler marketing tour packages to travel agents and individual travelers, and selling airline tickets on Company routes at reduced prices. In recent years, Superstar has become one of the largest tour operators in Great Britain and France for tourism to Israel. The Company has operations in several other countries. Superstar’s revenues amounted to $15,972,000 in 2013 compared to $13,919,000 in 2012 and $15,141,000 in 2011. As of December 31 2013, Superstar employed 14 workers.

9.7.2 The following is a concise description of the businesses of the principal investees that are not subsidiaries:

Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

a) Cargo Consolidation: Air Consolidators Israel Ltd. ("ACI")

ACI (a company in which the Company holds all of its Type B shares, granting the Company the right to appoint one half of the number of directors as well as participate and vote in general meetings) is primarily engaged in the consolidation of air cargo at BGN in order to reduce the price of airborne shipments. Air transport is carried out by the Company, at special prices, as well as by foreign companies. The shares do not provide the Company with the right to receive dividends or any other benefit to be distributed by ACI, other than earnings and dividends distributed from capital gains.

In 2012, the Company paid commissions to ACI to the amount of $976,000. To the best of the Company’s knowledge, ACI’s revenues amounted to $31,098,000 in 2013 compared to $32,014,000 in 2012 and $30,456,000 in 2011. As of December 31 2013, ACI employed 20 workers.

b) Flight Marketing: Tour Air (Israel) Ltd. ("Airtour" or "Tour Air")

Airtour (a company 50%-owned by El Al) markets Company flights and special promotions to all Company destinations. The Airtour shares held by the Company grant it the right to participate and vote in shareholders’ meetings and to appoint half of its directors, but do not grant the Company the right to receive dividends or earnings, other than earnings derived from share capital investments of Airtour.

The Company pays Airtour handling fees for certain actions carried out by Airtour for the Company and in addition, participates in its operating expenses. Airtour's revenues were $3,488,000 in 2013 compared to $3,309,000 in 2012. As of December 31 2013, Airtour employed 62 workers.

c) Touring and Hotels: Kavei Chufsha Ltd. ("Kavei Chufsha")

Kavei Chufsha (a company 20%-owned by El Al37) deals in the marketing and sale of tourism services, including as a wholesaler and as an organizer of charter flights to and from Israel. The Company’s investment in Kavei Chufsha was made in order to enlarge its marketing channels in the charter flights sector and to expand the Group's hold on the marketing of tourism traffic. Kavei Chufsha performs its marketing via travel agents and by the distribution of seats and touring packages to the end consumer.

37 To the best of the Company's knowledge, the remainder of the shares is held by A. Arnon Aviation and Tourism Ltd. (44%), Cohen Kana Investments Ltd.(35.2%) and Arnon Englander (0.8%). Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

d) Maman – Cargo Terminals and Handling Ltd. ("Maman")

Maman is a public company the shares of which are traded on the . The Company holds 15% of Maman’s stock capital and also holds options for 10% more exercisable as Maman shares. Maman’s primary activity is managing and operating the cargo terminal authorized to handle all import and export cargo at Ben Gurion Airport, based the special authorization of the Airports Authority. In addition, Maman is also active in the field of logistical services, real estate property rental and provides aviation services. Maman’s activity takes place in Israel, the Czech Republic and India.

To the best of the Company’s knowledge, Maman’s revenues in 2013 were $127,312,000 compared to $104,127 in 2012 and $111,000,000 in 2011. To the best of the Company’s knowledge, as of December 31 2013, Maman employed 1,018 workers.

9.8 Finance

9.8.1 Loans Not for Exclusive Use

See Note 18 to the Financial Statements for details.

9.8.2 Credit Limitations on the Corporation

a) Observance of Collateral Ratio

For details see Note 18.(e).(1) to the December 31 2013 Financial Statements.

b) Single Borrower and Group of Borrowers Limitation

For details see Note 18.(e).(2) to the December 31 2013 Financial Statements.

c) Limitations on Transferring Control

For details see Note 18.(e).(3) to the December 31 2013 Financial Statements.

d) Demand for Immediate Repayment by the Bank

For details on the matter of financial limitations and covenants involving the Company's long term loans, see Notes 18e and 18f to the Financial Statements.

9.8.3 Credit Frameworks

See Note 30 to the Financial Statements for details. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

9.8.4 Guarantees for Collaterals

See Note 24b to the Financial Statements for details.

As of December 31, 2013 the Company was not required to provide any collateral for its hedging transactions.

9.8.5 Loans Not for Exclusive Use

The Company has taken loans for the purchase of aircraft and engines. For details regarding these loans see Note 18b to the Financial Statements.

For details regarding liens and collateral see Note 35 to the Financial Statements.

9.8.6 Financing the Company’s Investment Plan

The Company estimates that an examination may be necessary, from time to time, of the need to raise additional sources of finance the Company’s investment plan and the purchase of aircraft and/or a strategic plan, if the decision is made to purchase them.

The Company's estimates regarding the need to raise additional funds to conduct the Company’s business constitutes forward-looking information, as defined in the Securities Law, which is based upon the price of jet fuel on the date of the report and on the Company’s assessments based mainly on past experience and its experience to date. Therefore, the need to procure additional sources of finance for the Company’s operations may be materially different from the results assessed or implied from this data, as the result of a large number of factors, including changes in jet fuel prices, liquidity considerations, outfitting, unexpected expenses borne by the Company, unexpected events that may have a negative impact on the Company’s activities and changes in interest rates.

9.9 Taxation

9.9.1 Tax Laws Applying to the Corporation

See Note 23.(c) to the Financial Statements for details.

9.9.2 Status of the Corporation’s Tax Assessments

See Note 23.(d) to the Financial Statements for details.

9.9.3 Tax Laws Applicable to Significant Affiliated Companies Incorporated Abroad

See Note 23.(c) to the Financial Statements for details. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

9.9.4 Reasons for Material Differences Between the Effective Tax Rate and the Statutory Tax Rate

See Note 23.(b) to the Financial Statements for details.

9.9.5 Accumulated Losses for Tax Purposes

See Note 23.(a) to the Financial Statements for details.

9.10 Environmental Issues and Corporate Responsibility

9.10.1 Significant Implications of Rules Pertaining to Environmental Matters

Many countries, including Israel, have adopted the conventional international standards regarding engine noise of aircraft and have prescribed additional directives for environmental conservation. Restrictions exist in various airports in the world as to the times of takeoff or landing of aircraft. The schedules of airlines, including those of the Company, are set in accordance with these restrictions.

The Company attributes a great deal of importance to the subject of the environment and invests resources and time to this issue (inter alia through the Company's Safety and Quality Branch, which is responsible for these activities). In addition, regular discussions are held headed by the Company CEO, which review the subject of safety. The Company is undergoing a process of obtaining an ISO 14001 environmental certification.

The Company is carrying out internal activity to increase environmental awareness, with each area of the Company having a person assigned as responsible for the environment, pollution prevention and careful use of resources.

In the field of waste reduction – paper, cardboard and other recyclable materials from the Company’s flights and offices is passed on for recycling.

In addition, regular activities are carried out pertaining to the subject of environmental protection, including tours of maintenance and operation areas and treatment of issues requiring correction in coordination with the Airports Authority; ongoing coordination with the Airports Authority on the subject of oil evacuation at Terminal 3 as well as improvements to technological systems in order to control and track findings in the field of environmental protection.

9.10.2 Restrictions in the Operation of Aircraft at Airports and at BGN

Various restrictions exist on the activity of airports in which the Company is active, in particular Ben Gurion Airport, including nighttime hours during which aircraft takeoffs Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

are not permitted. Regarding BGN, these restrictions were placed by virtue of government resolutions and the directives of the relevant authorities.

Furthermore, after the new Aviation law was passed, the law in question contained several provisions regarding the subject of aircraft noise, according to which economic sanctions may be placed on the Company in the event of deviation from noise restrictions, as set in law.

Following the announcement by the Civil Aviation Authority that in preparation for the conclusion of the runway upgrading project at BGN, the CAA is formulating its recommendation to the Minister of Transportation o the matter of expanding the “restriction hours” on activity at Ben Gurion Airport during nighttime hours, the Company informed the CAA that changing the “restriction hours” may have implications regarding the Company's activity and in particular on its ability to maintain activity to various destinations, particularly to North America, and that additional restrictions may impact the Company’s operational capabilities, including holding two rounds of flights to Europe each day. The Company asked that before the CAA’s recommendations on the subject be sent to the Minister of Transportation, a professional opinion be prepared by the CAA, which will include a comprehensive and thorough examination of the influences of changes to takeoff and landing times at BGN on airlines, particularly Israeli airlines, and that opinion would be studied by the Company and it shall be given the right to respond to it. In August 2013, the CAA published a draft recommendation to the Minister of Transportation and the Company submitted to the CAA its detailed response to the implications of the expansion of the restriction hours at BGN on Israeli civil aviation, and on the Company in particular.

On January 21 2014 the Minister of Transportation and Road Safety issued his decision determining the takeoff hours from BGN, as follows: 1. Takeoffs shall not be allowed from BGN between 01:40 and 04:50 (local time) during the summer season (summer season as per the IATA). 2. Takeoffs shall not be allowed from BGN between 01:40 and 05:20 (local time) during the winter season (winter season as per the IATA). In addition, the Minister ruled that despite the above, takeoffs shall be allowed between 01:40 and 02:00 at an amount and in a manner determined by the head of the CAA. On January 26 2014 the Head of the CAA decided that the Manager of BGN would be permitted to approve takeoffs of two flights between 01:40 and 01:50 and one flight between 01:50 and 02:00, according to criteria determined by the Manager of BGN.

The Minister’s decision also stated that this shall not detract from the special permit given the Company, allowing it to take off on nights between Thursday and Friday and on Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

nights before holiday eves, in order to allow its passengers to reach their destinations before the start of the Sabbath or the holiday.

In accordance with the Minister's decision, the changes in BGN’s operating hours shall come into effect in accordance with his ruling at the start of the 2014-2015 winter season. Despite the above, and in direct violation of the above decision by the Minister of Transportation and CAA Manager, in February 2014 the Company received notices from the Manager of BGN and the BGN Schedule Planning Administration on their intent to begin implementing the above Minister of Transportation’s decision starting from the Summer 2014 timetable (starting March 30 2014), contrary to the decision by the CAA Manager, that there would be no takeoffs from BGN after 01:40 (local time), with no exceptions. The Company contacted the Minister of Transportation and requested that the decision be followed verbatim, including granting the options mentioned above in accordance with the CAA Manager's decision.

The Company estimates that inasmuch as the change in BGN operating hours comes into effect in the summer 2014 season with no special permits issued by CAA management, as detailed above, the Company’s regular activity may be impacted as a result of delays in nighttime flights, which will prevent takeoffs before the restricted hours in question and which may impose additional costs on the Company.

The description of the implications of the change in BGN’s operating hours on the Company’s regular activity is forward-looking information, as defined in the Securities Law, based largely on the Company’s estimates regarding cancellations and delays of flights, particularly in light of past experience and operational restrictions placed on ongoing activity. Therefore, the expenses due to changes in operating hours may be materially different from the results estimated or implied form this data as a result of a variety of factors, including the manner in which the Minister of Transportation’s decision was implemented, takeoff and landing approvals at various destinations as well as external events (including maintenance and security events) influencing the professional precision of the Company’s flights.

9.10.3 Waste Treatment

The Company’s waste is treated at a modern central facility within the confines of BGN, approved by the Ministry of the Environment and operated by the Airports Authority. Furthermore, the Company has been operating a facility at a cost of $600,000 since June 2009. The Company facility, constructed on the Company’s land, serves as an emergency reservoir in the event of problems with the quality of the Company’s waste. The Company pays usage fees to the Airports Authority for the use of the main facility for a period 22 years (from 2008). Starting 2013 the usage fees amount to $150,000 per year. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

At the same time, the toxic waste created by the Company is transported to the Environmental Services Company at Ramat Hovav.

9.10.4 Fuel Tanks

Following the ground contamination surveys the Company conducted in 2011, which discovered contaminated points in various areas in the Company's compound, the Company initiated additional tests over the course of Q2 2012 to examine the findings of the contamination surveys. The Company retained the services of an environmental consulting company, which examines the survey's findings and offers the Company various means of treating the ground. Accordingly, the Company has decided to act to rehabilitate the contaminated ground, despite the fact that the Company did not cause the contamination. The Company reported the survey results to the Ministry of the Environment, and held a tour with representatives from the Ministry of Environment. The Company requested that the Ministry of the Environment allow it to perform in-site treatment, however, at this stage the Minister of the Environment decided that a comprehensive historical survey must be carried out for the compound, and only after the survey in question will a decision be made how to deal with the polluted areas found. The Company intends to work with the Ministry of the Environment and receive instructions regarding the further treatment of the areas in which pollution was found in the survey conducted, out of a commitment to environmental and social values. Carrying out the land rehabilitation plan and following the instructions of the Ministry of the Environment, as above, may involve monetary costs and various requirements on behalf of authorities, regarding which as of this report the Company cannot make any certain estimates.

The Company’s estimate regarding the implementation of actions pertaining to ground rehabilitation as required by the relevant authorities and resulting monetary costs constitutes forward-looking information as the term is defined in the Securities law, based on information existing at the Company and surveys it performed, including the estimates of its consultants in these areas. Therefore, the influences on the Company's activities and the costs involved in treating this subject may be materially different from the results assessed or implied from this data, as the result of a large number of factors, including the demands of the relevant authorities, additional findings pertaining to these activities, unexpected costs the Company will be required to bear and unexpected events that may have a negative impact on the Company’s activities.

9.10.5 Material Environmental Costs and Investments for the Reported Year and Those Anticipated Subsequently

The Company carries out a great number of activities and invests financial expenses in improving environmental elements, including the establishment of a waste removal Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

facility that will collect the Company's wastes in the event of deviation from waste quality (in accordance with its agreement with the Airports Authority), separating oil in the Company's yards and performing local separations between the drainage and sewage systems.

3103 3102 2014 (Projected) Material Costs $120,000 a year $120,000 a year $150,000 a year Material $250,000 a year $150,000 a year $100,000 a year Investments Total $370,000 a year $270,000 a year $250,000 a year

Information concerning the material anticipated environmental costs and investments represents Forward-Looking Information, as defined in the Securities Law. The information is based upon the requirements of the environmental laws presently in effect and on current market prices of the goods and services that the Company must purchase in the framework of the environmental investments. Therefore, the actual costs and investments may vary materially from the forecast as above, as the result of a large number of factors, including legislative changes, requirements of the authorities and changes in the prices of the goods and services that the Company will be required to buy in the framework of the environmental investments.

9.10.6 Restrictions on the Level of Engine Emissions

Following growing world awareness to global warming, governments have become interested in monitoring and restricting the level of air pollution produced by engines. During coming years, laws are expected to be enacted on the matter in different countries all over the world.

On January 1 2012 an EU regulation came into effect, establishing conditions for the supervision, reporting and confirmation of gas emission (ETS – Emissions Trading Scheme) in incoming and outgoing EU flights, this following the inclusion of aviation under emission policies in existence for other branches, as established in the EU decision dated June 26 2008. In addition, an economic remuneration mechanism was established, according to which each Company shall receive an emissions cap in light of past emission data. Exceeding this cap will require the purchase of an additional cap and reduction will allow the sale of the cap. Over the course of 2009 airlines were required to submit supervision programs on the subject of emissions. Such plans were submitted on behalf of the Company and were approved. In accordance with the EU decision, the Netherlands were appointed supervisor of the Company's activities. The reporting obligation, reporting procedures the manner of reporting have been fully established and binding directives on this subject have been published The supervising element has inspected the Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

reporting and set down in writing that the Company has successfully passed the inspection.

In order to reduce greenhouse gas emissions, winglets have been installed on some of the Company’s airplanes, in order to improve the aerodynamics of the aircraft and thus also reduce fuel consumption (see 7.11.5 above), the aircraft engines are washed to improve their efficiency and the aircraft bodies are washed from the outside to lower air resistance. Furthermore, the Company is acting to reduce unnecessary weight from its aircraft so as to reduce the amount of fuel consumed.

Starting 2012 the Company will receive its free allocation of pollution certificates in accordance with EU rules. This allocation is calculated in advance as a partial allocation on the basis of the performance of the airlines in practice in 2010. In accordance with the planned flight plan, the Company is expected to exceed these quotas on a yearly basis, and thus will be required to purchase appropriate certificates on the free market, according to their cost on the date of purchase. The expected yearly expense for the purchase of these certificates as of this report amounts to an estimated sum of $4 to $5 million a year.

Over the course of 2012, resistance increased on behalf of various non-EU countries to the implementation of the plan and the future payments for deviations from approved exempt allocations. The U.S. even anchored its resistance in a law forbidding U.S. carriers from taking part in the ETS venture. In order to prevent the unilateral implementation of ETS on carriers taking off and landing in the EU, the ICAO proposed a global outline, the details of which are yet unclear, which is supposed to be voted by ICAO management in September 2013. As a gesture of good will, the EU nations decided to “stop the clock” on the subject of meeting quotas set by the EU until information is received regarding the ICAO outline, and then decide whether to continue with the first outline or join that of the ICAO. This decision does not exempt carriers flying inside Europe from collecting information and submitting reports on flights from destinations inside the EU and payment for excessive emissions on flights carried out between European destinations.

In October 2013 the ICAO decided to postpone its decision regarding a global outline and decided that an agreement must be reached between all of the member countries on the subject by 2016, to be implemented in 2020.

To date, the EU has not decided on an emission policy regarding its 2013 activity. In the event that the Stop the Clock policy will be expanded to the 2013 year of activity, the number of flights that will be taken into account regarding CO2 emissions shall be 125 of the 18,910 total flights the Company flew inside Europe (on flights carried out between Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

European destinations). A sum of €5,000 was paid in 2012. The Company is expected to pay a similar sum in 2013.

The degree of the influence of the implementation of directives by various authorities (including the EU and ICAO), legislation or the results of legal proceedings in this matter on the Company's activity may constitute forward-looking information, as defined in the Securities Law, based on Company assumptions and forecasts. Therefore, the actual results of the passing of these legislative changes, monetary charges or legal proceedings as noted above or their impact on the Company's activities may differ materially from the results estimated or implied by this information.

9.10.7 Corporate Responsibility

9.10.7.1 General

The Company sees itself as committed to the community in which it operates and to the environment, and attributes a great deal of importance to working to promote and nourish them. As a result of its “national leader” approach, the Company places the security and safety of its passengers at the top of its priorities, and conducts extensive activity in order to ensure their existence. Furthermore, the Company sees its workers as the source of its strength, and acts to foster an attentive, considerate, safe and fair environment; this arises from an understanding of the affiliation between high-quality business-strategic management and the commitment to act and promote corporate responsibility.

9.10.7.2 The Company is a fellow in the Ma’alah Organization – an umbrella organization of business committed to managing the field of corporate responsibility, which acts to implement social, environmental and ethical considerations in regular corporate activity, and to promote the development and implementation of corporate responsibility strategies as a business approach.

In the 2013 Ma’alah rankings the Company received the “Gold” grade.

9.10.7.3 Ethical Code

The Company continued with the assimilation of its ethical code in 2013, with the cooperation of employees and executives from the Company and its subsidiaries, and with the assistance of outside consulting firms specializing in the subject.

The code features values, norms, enforcement and assimilation policies and communication channels for reporting violations of the code and of ethical rules, intended to direct the activity of the Company and of all of its worker over the course of their work, and to dictate criteria for their behavior. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

9.10.7.4 Community Involvement and Support

The Company attributes a great deal of importance to its responsibility to the community, out of a true and special affinity to the State of Israel. The Company has formulated a community responsibility policy, in which it conducts community contribution and employee volunteering activity, while establishing long-term partnerships with community partners. Included among the groups supported by the Company are: IDF soldiers, students requiring assistance who are active in the community, children with medical difficulties or disabilities and special needs children and families requiring assistance.

As part of its activities, the Company contributed cash and cash equivalents in 2013. For details see Section c.1 of the Board of Directors Report.

9.11 Restrictions and Supervision of the Corporation’s Business

9.11.1 General

Most aspects related to the operations of the Company as an air carrier are subject to a system of regulatory arrangements - Israeli and international - which relate, among other things, to flight rights, setting of tariffs, capacity and flight safety standards, security and noise, and are conditional on a commercial operating certificate and an operation certificate.

The Company’s activity, in addition to the operating licenses, is contingent on it being an Israeli air carrier (principal ownership and real control held by the state or its citizens), on its appointment as Designated Carrier and on the permits issued by foreign companies to make use of the aviation rights granted it as Designated Carrier. See Sections 9.11.6 to 9.11.8 below for information on aviation agreements and Israel’s civil and international aviation agreements. In addition, additional restrictions exist on the Company's activity due to the Special State Share.

9.11.2 Regulatory Arrangements

The following are principal regulatory arrangements, Israeli and international, pertaining to the Company's operation as an air carrier.

(For security arrangements see 9.11.12 below, for emergency operations see 9.11.13 below).

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a) The Aviation Law, 2011 (hereinafter: “the Aviation Law”)

The law regulates the activities of all factors active in the field of civil aviation – personal licensing of aviation employees (air crews, air traffic controllers, maintenance personnel, trainers and instructors) as well as licensing organizations (aircraft manufacturers, airlines, flight schools and maintenance technical certification institutions, and more). The Aviation Law covers a great deal of subjects in the field of aviation, including those dealing with aviation matters and their obligations, aircraft, the aviation supervision sector, supervision rights, safety incident investigations and establishes directives regarding penalties and financial sanctions due to the violation of the law.

The Flight Regulations (Maintenance Facilities), 2013 (“the New Maintenance Facility Regulations”) were published February 3 2013. The New Maintenance Facility Regulations will apply to the Company within 24 months of their publication or on the date of the completion of the maintenance facility’s relicensing, whichever comes first. As required by the New Maintenance Facility Regulations, the Company has started, even before the New Maintenance Facility regulations were published, a process of recertification of the Company's maintenance institute, which includes writing new procedures and adjustments to the New Maintenance Facility Regulations.

On March 9 2014 an amendment was published to the Aviation Regulations (Aircraft Operation and Flight Rules), 1981 (“the Operation Regulations”). This is an extensive amendment to the regulations intended to adapt the laws applicable to the operation of large aircraft used for commercial air cargo shipping by Israeli air operators, to the provisions of the first part of Appendix 6 of the Chicago Treaty (Operation of Aircraft - International and Commercial Air Transport – Airplanes). The amendment will come into effect one year from publication, however, regarding the Company the amendment shall apply from the date the Company completes its recertification process or on March 9 2015, whichever comes first.

Along with the Operation Regulation Amendments, the Aviation Regulations (Types of Severe Incidents), 2014 was also published. These regulations apply, in Israel, Attachment C of Appendix 13 of the Chicago Treaty, by setting a list of sample “aviation incidents” that are likely to be defined as “severe incidents” (as defined in the Aviation Law). These regulation came into effect upon publication (March 9 2014).

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b) Aviation Services Licensing Law, 1963 (hereafter - “the Licensing Law”) and the Licensing Regulations

This law regulates the principles of aviation licensing, and El Al’s commercial operation license was issued in accordance with it. Regulations issued under the auspices of the Licensing Law regulate, among other things, overbooking, licenses for operating and leasing aircraft and operations of charter flights.

c) The Air Transport Law, 1980

This law and the orders and the notices issued thereunder adopt a number of international conventions which stipulate various rules relating to international air transport, particularly regarding the air carrier’s liability for damages (bodily damage and property damage), caused during international air transport, and the damages imposed on the air carrier for this liability. This law applies the treaty for the purpose of consolidating certain rules pertaining to international airborne shipping (the Warsaw Treaty), and their revisions. In May 1999 a new treaty was prepared in Montreal establishing rules for international civil airborne transportation (hereinafter: "the Montreal Treaty") the purpose of which is to formulate, update and modernize the existing set of rules, including raising the limits of liability for damage caused a passenger's person or property, adding judicial powers and requiring air carriers to take out insurance. The Montreal Treaty came into effect in Israel starting March 20 2011.

d) Equal Rights for Persons with Disabilities

In the third chapter of the Equal Rights Regulations for Persons with Disabilities (Accessibility Arrangements to Public Transport Services), 2003, provisions were prescribed regarding the obligation to integrate assistance for persons with disabilities in aviation transport, which imposes various obligations on air carriers as a condition for operating aircraft.

e) The Airport Authority Law – 1977

This law, the regulations and rules issued under its auspices, regulate, inter alia, the following matters: aviation fees, transport by import couriers, entry into restricted territories, licensing fees and the unloading and loading of aircraft.

f) The Civil Aviation Authority Law – 2005

This law designates the functions of the Civil Aviation Authority, which replaced the Civil Aviation Administration. Among the functions of the Authority are: to determine and assure the existence of internal and international flight regulations Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

according to aviation laws; to grant civil aviation licenses, permits and approvals, according to aviation laws; to supervise the civil aviation sector, including maintaining a proper level of flight safety for Israeli aircraft and for aircraft that are present in Israeli air space.

In this regard, we remind you that on November 1 2012 the Ministry of Transportation announced that the U.S. Federal Aviation Administration (FAA) had restored Israel’s flight safety rating to Category 1, after being downgraded in 2008, following which the Civil Aviation Authority conducted a series of activities regulating legislation for Israeli aviation law (including the Aviation Law) and a process of recertification was initiated for the Company’s operational activity as well as for the Company’s upkeep facilities.

g) The Restraint of Trade Law, 1988

Amendment no. 10 to the Restraint of Trade Law, which canceled the statutory exemption currently granted arrangements between air carriers regarding international shipping, came into effect January 1 2009. As an accompanying step to the statutory exemption, a class exemption was installed by the Restraint of Trade Commissioner (hereinafter: "the Class Exemption" and "the Commissioner", respectively) which exempts various types of arrangements between air carriers, with the goal of preventing sweeping and unwanted incidences of the binding arrangement chapter on the thousands of arrangements which serve as the basis of aviation activity to and from Israel and which pose no risk to competition.

The class exemption deals with a broad range of arrangements and provides an exemption from licensing requirements to various operational arrangements, interline and cargo arrangements which do not include an assurance of a minimal amount of flight tickets or cargo capacity and frequent flyer agreements.

The Rules of Business Restrictions (Type Exemptions for Arrangements between Air Carriers Pertaining to the Marketing of Flight Capacities to Destinations Subject to Open Skies Agreements), 2012, was published on December 11 2012, and establishes exemptions from the receipt of court approvals for flight capacity marketing arrangements (including code sharing arrangements) under the following conditions: (a) the arrangement deals with flight routes covered by an open skies agreement; (b) the arrangement does not limit competition in a significant portion of the market influenced by it or may increase competition in a significant portion of the market in question, but has no material impact on competition in the market in question; (c) the focus of the arrangement is not the reduction or prevention of competition and it does not include restrictions that are not needed to achieve its Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

focus; (d) the parties to the arrangement have informed the Restraint of Trade Commissioner of its existence.

On November 28 2013 the Antitrust Authority published the Restraint of Business Rules (Type Exemption for Arrangements between Air Carriers) (no. 2), 2013 (“the New Type Exemption”), which renew and revise the Restraint of Business Rules (Type Exemption for Arrangements between Air Carriers), 2008, published in August 2008. The New Type Exemption, like the previous Type Exemption, deal with the exception of types of arrangements between air carriers from the incidence of the Binding Arrangements Chapter of the Restraint of Business Law, 1988. The New Type Exemption retains the legal arrangements set in the previous Type Exemption, except in all matters pertaining to leasing agreements between air carriers. Regarding these arrangements, the new Type Exemption establishes various requirements for its incidence, distinguishing between dry and wet leases, between leasing cargo aircraft and other leases, and between leases between Israel carriers and leases between Israeli carriers and foreign carriers.

BSP Exemption

On November 7 2013 the Antitrust Commissioner issued his decision regarding the exception from court approval for binding arrangements involving the IATA and the airlines, dealing with the Billing and Settlement Plan (BSP), in accordance with Section 14 of the Restraint of Business Law, 1988 (“the Exemption”) This arrangement deals in the installation and use of a central automated clearing system arranging accounting and payment processes between IATA-certified travel agents and airlines who have joined the arrangement through the BSP plan. A prior exemption for the BSP arrangement had been given by the Commissioner on November 14 2010 subject to conditions. The exemption will remain in effect until November 7 2018 and is stipulated on terms essentially similar to the terms set by the Commissioner in his November 14 2010 decision. The conditions deal with: the IATA’s obligation to connect all willing travel agents to the BSP system and to act in a nondiscriminatory fashion with the travel agents, restrictions on the transfer of information, restrictions on the ability to disconnect a travel agent from the plan, the travel agents; ability not to pay disputed sums and so on. Furthermore, it was decided that in cases in which an airline is suspended inform the BSP arrangement due to financial difficulties, travel agents must not be allowed to offset a disputed sum attributed to that airline, and on the same time, agents may not be compelled to pay a sum owed that airline through the plan.

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Decisions and Proceedings on the Subject of Monopolies

On October 27, 2005, the Company received notification from the Restraint of Business Commissioner concerning his designation of the Company as the holder of a monopoly in transporting time sensitive and price sensitive passengers in the civil aviation market to , Hong Kong, Bangkok and Mumbai.

On September 9 2012 the Company received 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. On February 3 2013, the Company filed an appeal with the Business Restrictions Tribunal regarding the above Commissioner's decision; the matter is still pending.

h) Legislative Provisions Applicable to the Company as a “Mixed Company”

(1) Until June 6, 2004, the Company was a “Government Corporation” in the process of “privatization” as these terms are defined in the Government Corporations Law. Starting from June 6, 2004, the Company is a “Mixed Company”, as defined in the Government Corporations Law. In other words, a company no longer a Government Corporation, for which half or less of the voting rights at its general meetings, or the right to appoint half or less than its directors, are held by the State. As a practical matter, as long as the State owns shares that provide it with voting rights in the Company, the Company will remain a “Mixed Company”. In June 2007, the State ceased being an "interested party" by virtue of its holdings in the Company, although as of a date immediately prior to the report date, the Company continues to hold 1.1% of the Company's share capital (in addition to the Special State Share in the Company).

As a Mixed Company, the Company is subject to part of the provisions of the Government Corporations Law (as detailed in Section 58 of the Government Corporations Law, which applies various provisions to a Mixed Company).

(2) Chapter H2 of the Government Corporations Law authorizes the Prime Minister and Minister of Finance, with the consent of the Ministerial Committee for Privatization, in consultation with the minister responsible for the company’s affairs, to prescribe instructions by decree designed to protect Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

the vital interests of the State in connection with a company undergoing privatization. These provisions will apply for a specified period, or in general, they might also apply after the company’s privatization, as stipulated in the decree. The definition of vital interests includes various interests, which in part are similar to those which, in order to protect them, led to the issuance of a Special State Share, and also the avoidance of concentration in the economy, damage to the foreign interests of the State, etc. The position of the Government Corporations Authority is that Chapter 2H to the Government Corporations Law also applies to a Mixed Company. On November 17, 2004, a Government Corporations Decree (Declaration of Vital Interest to the State as to El Al Israel Airlines Ltd.), 2004 (hereafter in this paragraph: “the Decree”) was published under the aforementioned Chapter H2. The Decree stipulates that the State has a vital interest with regards the Company, in order to make effective use of vital assets during a time of emergency or for security purposes, to assure the continuation of activities which are vital to the security of the State. The Decree also prescribes that the Company is required to employ, at all times, Israeli air crew members, and Israeli ground crews in Israel, properly qualified and licensed in order to operate the “vital assets” (minimal fleet of aircraft; see “Special State Share”), at sufficient numbers for continuous and simultaneous operation of all of the “vital assets” during a time of emergency or for security purposes. The Decree adds that it does not intend to make the Company subject to the provisions of Section 59.i of the Government Corporations Law (which deals with restrictions on the transfer of control), and that the Decree does not intend to detract from the provisions of the Special State Share. See Section 9.11.9 for details of additional restrictions to which the Company is subject under the auspices of the Special State Share.

i) Aviation Services Law (Compensation and Assistance due to Flight Cancellation or Changes in Conditions), 2012

The Aviation Services Law (Compensation and Assistance due to Flight Cancellation or Changes in Conditions), 2012 came into effect on August 16 2012. The Law adopts, with certain adjustments and alterations, the principles of EU Regulation 261/2004, which came into effect in February 2005 and establishes conditions for denied boarding ("overbooking") of passengers from flights, flight delays and flight cancellations. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

The law applies to all of the flights (scheduled and charter) departing from Israel, as well as flights arriving in Israel – if their passengers had not received the remedies owed them in accordance with the laws of their countries of origin. In accordance with the law, in cases of flight cancellations, flight delays, the refusal to allow a passenger on board a flight or downgrading a ticket to a lower seating class, according to the terms and circumstances set in the law, passengers shall be entitled to benefits such as free assistance, reimbursements, alternate tickets or even financial compensation.

The Aviation Services Regulations (Compensation and Assistance due to Flight Cancellation or Changes in Conditions), 2013 came into effect on September 4 2013. The regulations regulate the times in which domestic flights are considered to be canceled as well as the level of compensation for domestic flights.

9.11.3 Business Licenses, Building Permits and Employment Permits

Some of the Company's activities require the receipt of licenses under the Business Licenses Law, 1968 or the receipt of permits from various regulatory bodies. As of 2003, the Company has filed requests for business licenses for the activities requiring licenses. Within the framework of the arrangement of business licenses, the Company acts to regularize all of the buildings within its properties, including old buildings, for which the Company does not have buildings permits from the period that the Company was a governmental company. The Company acts in coordination with representatives of the Ministry of Interior, and hires consultants to assist in the process. In this framework, the Company acts according to an orderly Outline Plan to complete the process of obtaining the building permits and conforming them to the existing buildings, and to arrange the licenses for conducting the Company's business. Over recent years (starting in 2008), five building permits were received for various compounds including most of the buildings for which no building permit had been issued. Two additional building permits were received over the course of 2013. In addition, a building permit for a lot containing buildings built before 1965 before being discussed at the regional committee due to a dispute on the matter of receiving an approval and permit for buildings built prior to 1965, and as a result the building licenses of the businesses residing in it were delayed. The committee was provided with legal opinions on the subject, and the Company was informed that the committee gave a positive response on this issue and that temporary business licenses will be approved for businesses defined in this permit. Note that their official written reply has not yet been received, but the Company was asked to submit a request for a permit to arrange the building permit for the lot in question in accordance with the agreement with the committee. A request for a building permit for the lot in question shall be presented to the regional committee in Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

2014 to complete the process of preparing the business permit for the buildings on this lot.

The Company requires 31 business licenses for its activities. As of March 2014, the Company holds 18 permanent business licenses, one temporary license and 12 renewal requests that are currently undergoing approval. 5 license requests (out of the 12 requests undergoing approval) were submitted to the Committee in 2010, however, the local committee postponed issuing the license due to a dispute on the matter of the receipt of approvals and permits for buildings built prior to 1965 in which these business are located. As noted above, these licenses will be arranged as well upon receiving the committee’s written response.

In the matter of subsidiary Katit – Katit has 5 business licenses and an alcoholic beverages license that are renewed in accordance with the demands of the committee and the authorities.

Regarding the subsidiary Tamam – part of the Tamam factory has an expired business license, and the Licensing Committee is currently considering a new application filed by Tamam for a business license. The position of the Licensing Committee, at this stage, is that a business license for the Tamam factory will only be issued after the subject of building permits for the entire area of the factory is resolved. In accordance with the committee's agreement, Tamam received a temporary license valid until September 4 2014 and it must act to secure a building permit for the structure by that date. In order to submit its final plans to the licensing committee, Tamam must secure the consent of the Airports Authority, the property’s owner. Note that in the material issues, those relevant in terms of health and safety issues, Tamam is in compliance with the required conditions and holds approvals both from the Ministry of Health and the approval of the Fire Department.

Failure to receive permits and licenses as noted may place restrictions on the Company's activities pertaining to the buildings covered by the permits and licenses in question, affect the Company's activity and even cause sanctions to be placed on the Company.

Non-receipt of the licenses and permits or failure to meet the terms set in the permits and the resultant implications constitute forward-looking information as defined in the Securities Law, which includes Company estimates or projections as of the report date. Therefore, the actual outcome of the failure to receive business licenses and building permits or the failure to receive the proper permits may be materially different from the outcome that is estimated or that might be deduced from this information as a result of a large number of factors, including among other things the actions of the licensing agencies, changes in legislative provisions and the results of legal proceedings. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

9.11.4 Commercial Operating License

The Company has a new commercial operating license (No. 1/88) issued on January 22 2014 (instead of the previous license dated August 2 1988) granted by the Minister of Transportation under the Licensing Law, which includes general instructions regarding the activation of aircraft, including the obligation to operate flights in accordance with a license, the obligation to obey the law and uphold national security and flight safety. The license is valid as long as it has not been revoked or suspended by the Minister of Transportation or the CAA.

The license features a directive according to which the license holder shall be an “Israeli operator” as defined in the Aviation Services licensing Law, 1963 and obligations regarding the submittal of reports and data to the CAA were set.

The services that the license holder is permitted to offer and perform are stated in the addendum to the license, and largely consist of transporting passengers and goods on scheduled flights between Israel and points in foreign countries, and between the points themselves. Note that some of the points are not utilized by the Company due to lack of economic feasibility (and accordingly, the Minister of Transportation may revoke such an appointment; transporting passengers between BGN and Eilat in feeder flights; transporting passengers on domestic flights on the BGN-Eilat route; transporting cargo using cargo planes (All Cargo) on scheduled international flights and international cargo flights; transporting passengers and goods on international charter flights.

9.11.5 Aviation Operating License

The Company has an aviation license (no. 1/88) (hereinafter: “license”) which is issued from time to time by the Civil Aviation Authority.

The license states, among other things, that the operator (El Al) may perform operational commercial operations, as defined in the operation specifications constituting part of the license, in accordance with the guidebooks for the operator’s operations and in accordance with the aviation regulations detailed in the license. By virtue of the license, the Company is permitted to act as a “Designated Air Carrier” of large airplanes [under Section 13 of the Flight Regulations (Operation of Aircraft and Flight Rules)], and to operate international flights to regions defined in the operating specifications.

The aircraft recorded in the license have Israeli registration or foreign registration approved by the CAA, fully owned by the license holder, or have been placed at the disposal of the license holder, with the consent of the Civil Aviation Authority and the Minister of Transportation. The operator has an obligation to report every change in the list of aircraft that appears in the operational specifications, such as sale, purchase, lease Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

to another operator and/or lease from any Israeli operator or foreign operator. The report will be submitted to the CAA.

As noted in 9.11.2.(a) above, on June 26 2012 the Company started a “relicensing” procedure began for the purpose of re-validating the Company’s operating license as required by FAA from the Civil Aviation Administration as part of the process of restoring the State of Israel’s Category 1 status. In accordance with the amendment to the Aviation Regulations (Operating Aircraft and Flight Rules), 1981, published on March 9 2014, it was decided that the aviation operation license shall remain in effect for two years after its issue, unless canceled or stipulated by the CAA manager or if the commercial operation license it was based on was revoked or placed on hold (the existing arrangement until the regulations come into effect does not place any restrictions on the duration of the aviation operation license).

9.11.6 International Regulatory Arrangements

The principle of universality dominates civil aviation, whereby every country is sovereign over its own air space, and therefore, each commercial flight to or over any country requires that country's permission. The permission may be in the form of a bilateral agreement (as is customary for scheduled flights), an open skies agreement or for a flight(s) on an ad-hoc basis.

The international civil aviation industry operates in the context of a system of regulatory arrangements that affect most of the operational aspects of the airlines and, in particular, the subjects of flight rights, permissible capacity, fare setting, air carrier’s responsibility for damages (physical and property damage) and flight safety standards, security and noise. This system of arrangements is composed of international conventions, laws, regulations and administrative directives, as well as bilateral and multilateral agreements.

The existing basis for the international regulatory arrangement for international civil aviation is the Chicago Convention of 1944.

The International Civil Aviation Organization (ICAO), a United Nations agency, was established in the wake of the Convention. In the framework and under the auspices of ICAO, recommended standards and procedures were prescribed for various areas of aviation activities. The rights to transport passengers and cargo between countries for compensation, permissible capacity and rate setting are organized via air transport agreements or aviation agreements (bilateral), which are based on reciprocity and provide fair and equal opportunities to airlines from both countries.

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9.11.7 Air Transport Agreements and the Civil and Aviation Policy of the State of Israel

9.11.7.1 Aviation Agreements- General

Most of the aviation rights by which the State of Israel permits a company to transport passengers and cargo on international routes are anchored in aviation agreements between Israel and foreign countries, and a minority (due to the absence of aviation agreements) in agreements between aviation authorities or commercial agreements between the Company and the air carrier of the other country, which require the approval of both countries. The principal elements of air transport agreements include, inter alia, the aviation rights granted, appointment of the Designated Carrier and permitted capacity.

Most of the aviation agreements to which Israel is a party may be terminated or canceled with prior notice of one year. After such notice, negotiations are generally held between the two governments in order to set an interim arrangement or new conditions before the expiration of the agreement.

As noted above, the Open Skies agreement between the State of Israel and the EU was signed in Luxembourg on June 10 2013. Pursuant to the agreements, all airlines in the EU will be able to operate direct flights to Israel from any location in the EU and Israeli airlines will be able to operate flights to airports throughout the EU. Upon coming into effect, the agreement will replace all of the bilateral agreements between Israel and the EU states and gradually cancel restrictions on the number of carriers, frequencies, capacities and types of aircraft expected to travel between the State of Israel and the EU.

In addition, several aviation agreements between Israel and a number of countries were signed over the course of 2013, which allow the entry of additional Designated Carriers to existing and new destinations, as well as an increase in frequencies allowed the sides' airlines. See 7.1.10 above for further details.

9.11.7.2 Designated Carrier

In aviation agreements, each government grants its counterpart the right to select one or more of its air carriers as Designated Carrier. The Designated Carrier is granted the right to carry passengers and cargo between the two countries. At times, the Designated Carrier also receives the right to operate scheduled flights from the second country to a third country (subject to an agreement with the third country).

In the past, in most aviation agreements between countries, each government appointed an air carrier as a “Designated Carrier” on its behalf that will operate the flights and utilize the traffic rights under the agreement. After the Designated Carrier is selected, it must obtain a permit from the aviation authority of the other country. Until the second Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

half of the 1990s, the Company was the sole Israeli Designated Carrier for scheduled flights for the transport of passengers and cargo to and from Israel, with the exception of Sharm-a-Sheikh. The change in the Company's aforementioned exclusive status occurred after licenses were given additional Israeli carriers as Designated Carriers to several flight destinations, some in the Company’s place as well as following the signing of the open skies agreement with the EU, which in effect makes the need to appoint a designated carrier to the destinations included in this agreement unnecessary.

9.11.7.3 Air Carrier Ownership and Control

There is no uniform international arrangement regarding the percentage of the practical ownership and control over an air carrier that must be held by a state or its citizens. The bilateral air transport agreements to which Israel is a party include a provision according to which each of the contracting states maintains the right to suspend or to cancel the permit it gave the airline of the other state, if the “substantial ownership and effective control” are not held by the contracting state or the citizens of the contracting state. The agreements do not include the definitions of substantial ownership and effective control.

The practice in the countries of the Western world is to receive the appointment of an airline as Designated Carrier as if it included an affidavit that the required demand for substantial ownership and effective control is complied with in full, and if it is found that the requirement no longer exists, the state will demand that the situation be rectified.

The Open Skies agreement with the EU revised the sections pertaining to ownership and control and allows airlines the ownership and control of which is in one of the EU member states to operate flights from any EU destination to Israel.

Capacity

Most of the aviation agreements to which Israel is a party (excluding the agreement between Israel and the United States and Great Britain) featured limitations on the maximum permissible capacity or frequency that each airline may offer on the agreed routes in order to assure equal opportunities to the air carriers of the two countries that are parties to the agreement. As noted above, the Open Skies agreement signed between Israel and the EU states cancels the former restrictions on number of carriers, frequencies, capacities and types of aircraft.

9.11.7.4 Flight Rates

The rates for flights on international routes are published within the framework of the IATA, the international association of scheduled airlines. These fares allow passengers to purchase a flight ticket from one company and to utilize it in an additional flight or flights Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

for other companies (within the framework of interline agreements). In addition to the fares within the framework of IATA, which are supervised by aviation authorities, El Al is permitted to set special rates on a unilateral basis.

The Israeli Ministry of Transportation does not generally intervene in setting rates advertised by the Company unilaterally, provided that the level of these rates is not higher than IATA fares. IATA is evaluating the companies' fares, and accordingly, publishing flex fares that serve as interline fares.

Under the aviation agreement between Israel and the United States, the carriers are free to set fares, and only if the two governments oppose a proposed rate (a method known as “double disapproval”) due to its being abnormal (exaggerated or within the boundaries of "dumping”), the new rate will not be approved and it may not be offered to the public.

Despite the flex fares set by the IATA, most flight tickets and cargo capacity are sold at prices below those that were agreed upon and approved or at conditions different from those prescribed for the various fares. The Company behaves in accordance with general industry practices, while conforming its policies to market conditions. A substantial part of the Company’s revenues is derived from sales under these conditions.

During recent years, a broader variety of flight ticket fares has been created. In all of the aircraft service classes, there are different types of “reservation classes” (or types of price). Varied demand and different conditions exist for each “reservation class” during different periods of the year.

Charter flight fares are set in a different manner than those for scheduled flights. Every organizer is committed to pay the air carrier for the capacity (number of seats) he has chartered and, on the other hand, he himself sets the price per seat, generally a package price that includes seats and ground arrangements. Organizers requesting authorization to operate a flight or series of charter flights must state the price offered the public and obtain approval to carry out the flights and their prices from the aviation authorities/administrations of the relevant countries. Airlines, including the Company, collect fuel surcharges, which are updated from time to time in accordance with increases and decreases in jet fuel prices. In addition, the airlines charge a security surcharge as part of the flight ticket price.

9.11.8 Israel’s International Civil Aviation Policy

Over the years, the Government of Israel and ministerial committees (privatization or social and economic) have approved a series of decisions pertaining to Israel’s international civil aviation policies. Resolution number 323 HC/14 of the Ministerial Committee for Social and Economic Matters in the matter of "Aviation Policies of the Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

State of Israel on Scheduled Routes" was passed in May 2003, as detailed in 7.1.1 above. A resolution was passed on "Encouragement of Competition in Civil Aviation to and from Israel" in August 2005, and Resolution 441 on the matter of encouragement of competition in civil aviation to and from Israel was passed September 2006, and the decision made by the Minister of Transportation and Road Safety to establish a public committee to examine "Open Skies" policy.

In recent years, the Ministry of Transportation has begun implementing a policy of increased liberalization in the aviation industry, the "Open Skies" policy, with the objective of encouraging and increasing tourist traffic to Israel by increasing competition between airlines.

For further details on Government resolutions and the open skies policy see 7.1.10 above.

9.11.9 The Special State Share

9.11.9.1 Close to the publication of the 2003 Prospectus, the Company issued a “Special State Share” to the State. The rights granted to the holder of the Special Share are listed in the Company’s Articles of Association, which also detail the vital interests of the State in the Company, which must be protected by means of the Special State Share. These vital interests are:

 Preserving the Company as an Israeli company so that it will remain subject to Israeli law, including legislation that allows equipment to be mobilized for security purposes and legislation for times of crisis, and so that the conditions needed to maintain its operating license and traffic rights should be maintained.

 Safeguarding the possibility of ensuring that the operating capability and ability to fly passengers and cargo by the Company will not fall below the capacity detailed in the Company’s Articles of Association, in order to provide the State with effective use of vital assets in times of emergency or for security purposes, as will be determined from time to time by those authorized to do so, all as detailed in the Company’s Articles of Association.

 Preventing parties hostile to the State of Israel or persons who could cause damage to the vital interests of the State or to the foreign or security interests of the State or to the aviation ties of Israel with foreign nations, or persons that are found in and/or likely to be found in substantial conflict of interest which could cause damage in one of the areas detailed above, from being an interested party in the Company from influencing its management in any other way. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

 Fulfilling the security directives and arrangements that apply, or that will apply as a result of Government resolutions or under any law, to the area of security of flights, passengers, baggage, cargo and mail, in Israel and abroad, including in relation to the Company’s operations abroad and to the cooperation needed from local authorities abroad in these areas; in the area of security classification of employees and suppliers of services to the Company; and in the area of security over classified data and protection of security information.

9.11.9.2 The holder of the Special State Share is the State of Israel through a minister or ministers, and in order to protect these vital interests, directives were set in the Special State Share as to the following matters:

 Instructions for the purpose of preserving the Company as an Israeli company, including restrictions as to the citizenship and security clearance of Company executives;  Instructions on the matter of compliance with security rules and arrangements;  Instructions on the matter of rights to security information and classified information in the Company;  Instructions on the matter of the Company’s discussions of security issues;  Instructions on the matter of Company discussions on security matters;  Directives on the matter of maintaining minimal flight load factors – the Company is not permitted to carry out certain transactions relating to its aircraft without consent of the holder of the Special State Share if, as the result of such transactions, it might reduce the Company's flight capacity below the level that was set by the Special State Share.  The acquisition of influence or status in the Company requires the State's consent – in accordance with the Company's Articles of Association, transactions involving the Company’s shares at a certain scope will not grant any right that is derived from holding and/or from purchasing shares in the Company without the prior written consent of the holder of the Special State Share (the State through the ministers designated by the Government). The Articles of Association stipulate a detailed arrangement on the subject of the manner of submitting the request for obtaining the consent to own shares in the Company, in the event such consent is necessary as above.  Instructions on the matter of obtaining approval to vote at the General Meeting – the right to vote at the General Meeting requires the Company’s approval. Approval to vote at the General Meeting will not be given when circumstances exist that require the consent of the holder of the Special State Share, and such has not been granted. The articles of association also prescribe special Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

instructions in cases when there is reasonable concern that the ownership of the Company’s shares by foreigners might cause damage to the Company's flight rights or to its operating license.

9.11.9.3 Any change, including an amendment or cancellation, in the Company’s memorandum or bylaws pertaining to the rights granted to and/or ascribed to the Special State Share and to its holder, will be ineffective as regards the Company, its shareholders and any third party, without the prior written consent of the holder of the Special State Share.

9.11.10 Regulation

The Company is preparing for the implementation of the Safety Management System plan – SMS. The plan’s implementation constitutes an advanced perception of the Company’s safety management, in a manner compatible with ICAO guidelines. The essence of the plan is the integration of safety issues as an inseparable part of management as a whole. The existence of the SMS plan and its implementation shall have passed the 2012 IOSA inspection.

The Company's maintenance system has received ISO 9001 certification from the Israeli Standards Institute. In addition, the Company's maintenance system has been certified as a maintenance institute, approved by the Civil Aviation Authority in Israel, the U.S. Federal Aviation Agency (FAA) and the European Aviation Safety Agency (EASA). To be clear, the EASA certification is for the Company's line maintenance array.

The Company underwent an IOSA (IATA Operational Safety Audit) inspection over the course of 2012. The Company has complied with all requirements for the receipt of an extension to the Standards Association stamp granted it and in October 2012 the Company received IOSA certification from the IATA for an additional two years. This standard is an international standard in the area of airline operations, safety and quality assurance that constitutes a precondition for IATA membership. Receipt of this certification places the Company in the forefront of world airlines as far as flight safety is concerned.

In addition, the Company has a “crisis event” array, assembled and practiced in accordance with guidelines set by the IATA, which examined and approved the array in four separate inspections in 2006, 2008, 2010 and 2012. The Company conducts “crisis event” training exercises at the Company level once per period (with the last exercise conducted in 2014), and updates its procedures according to global developments in the field (booklets, conferences and professional media).

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9.11.11 Quality Control

El Al's maintenance system is monitored by an internal quality control system that operates according to the manufacturer’s specifications and a maintenance program approved by the Civil Aviation Authority.

9.11.12 Security Arrangements

The civil aviation industry, particularly on routes to and from Israel, is a target for attacks by various parties, particularly terror organizations around the world. The Company takes extraordinary security measures, under the guidance of the governmental body responsible for this area.

Following the Company’s reports in its Financial Statements on the announcement from the Russian authorities regarding the start of security checks for Company flights departing from Russia conducted by local security elements and not by El Al security and following extensive negotiations between Israeli authorities (the Foreign Ministry, the and the CAA) and Russian authorities, the parties reached a settlement according to which Israeli security procedures will be applied by Russian security companies in relevant airports in Moscow and St. Petersburg, starting April 1 2013.

The State’s Participation in Aviation Security Expenses

Until the early , the State had covered all of the Company's direct and indirect security costs. Over the years, the State has instituted a policy of reducing the rate of its participation in security expenses. A number of government resolutions were made over the years that changed the State’s participation rate in the security expenses of Israeli airlines and set various terms for their incidence.

Note that following the August 2011 agreement between the Company and the State of Israel arranging the activity of the Israeli aviation security array and establishing a gradual increase in the State's participation in the security expense burden of Israeli airlines (including increasing participation as dependent on opening new flight routes or expanding existing flight routes following the signing of the Open Skies agreement with the EU), on December 31 2011 the Government passed Resolution 4026 ratifying this agreement.

Following this resolution, on April 22 2013 an agreement was reached with the Ministry of Finance that arranged issues pertaining to the financing of security for Israeli aviation. In accordance with the key points of the summary in question, starting May 1 2013, the state’s participation in the defense expenses of Israeli airlines was increased to 72.5% (instead of 70%) and a fixed participation surcharge, fully financed by the state, was Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

given at an additional 12.5%. It was also agreed that starting from the implementation of the Open Skies Agreement, as defined in the government resolution dated December 25 2011, the fixed participation surcharge shall be increased by an additional 12.5%. The summary and the agreement regarding the arrangement of the civil aviation security array’s activity shall remain in effect until December 31 2019.

Following this agreement, the Workers’ Histadrut announced that it was ending the strike by the employees of Israeli airlines, in accordance with the work dispute declared on April 18 2013.

On April 24 2013, the Company Board of Directors ratified the agreement in question and on April 28 2013 the government passed Resolution 82 approving the agreement in question.

On December 18 2013 State elements approved the increase in the State’s participation in the security expenses of Israeli airlines by an additional 12.5%, so that the State’s participation rate would amount to 97.5%. According to the announcement of the State elements, the approval for the increase in participation rate in question was given retroactively starting July 16 2013, the date on which the State confirmed that the terms set in the above Government Resolution 4026 on the implementation of the Open Skies Agreement had been met in such a manner that awards the Israeli airlines the increased participation rate.

In this regard, note that as of this report, the Ministry of Finance has yet to approve the Security Branch’s demand to increase the security budget deriving from the expected increase in activity of Israeli airlines as a result of the Open Skies agreement with the EU. In the event that the budget in question is not approved in full by the relevant regulatory elements, difficulty may arise in the activity of Israeli airlines, including the Company.

The implementation in full of the Government Resolutions and their potential impact on the Company's activities and operating results constitute Forward-Looking Information as defined in the Securities Law. The manner and degree to which the Government Resolutions are actually implemented, the receipt of security expenses funding at the updated rate and in accordance with the increase in activity by Israeli airlines as well as the implementation of the Open Skies agreement with the EU may be carried out differently than estimated, among other things due to regulatory limitations, economic limitations resulting from the need to purchase equipment needed to operate additional airlines, contractual limitations involved in the alteration of bilateral agreements or other aviation agreements as well as changes in the national security, economic and geopolitical information and their impact on competition as well as changes in Government resolutions. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

The following details the direct costs of security of the passengers, aircraft and employees of the Company, divided between the portion financed by the Company and the portion financed by the State:

State Financing (In Company Share (in Total (In Thousands of Dollars) Thousands of Dollars) Thousands of Dollars) 0033 013,494 06,820 004,226 0030 43,999 22,303 003,300 0033 00,009 81,123 000,066

The Company also has indirect security costs that are caused, inter alia, by flying security personnel in seats of paying passengers. Furthermore, beginning October 2001, the Company has been allowed to collect a surcharge for insurance and security of $8 per flight leg.

Aircraft Protection Systems

Following the decision by the Israeli government according to which all Israeli airlines must equip themselves with protective systems on their passenger flights, and following the decision of the Ministerial Committee on National Security from September 2011, according to which the State would finance all of the costs involved in operating, maintaining and installing the system and its various derivatives, the Company is currently in the end stages of signing an agreement with the State of Israel arranging the Company’s participation in the financing expenses of the protection systems installed on Company aircraft, including the State’s commitment to pay for all system maintenance costs and costs borne by El Al for added fuel, as a result of the drag and weight added to the aircraft. We emphasize that the State of Israel is the owner of the systems and that all system development, equipping, operation and installation expenses, including expenses due to future improvements and developments shall be financed in full by the State. Systems installed on Company planes shall be removed at the conclusion of the lease period, the sale of the plane or cancellation of the agreement with the Company, and the plane's condition shall be restored at the State’s expense (work hours and parts only) to its state prior to the system’s installation.

Furthermore, the Company is about to engage with Elbit Electro-Optic Systems El-Op Ltd. (“El-Op”) in an agreement according to which the Company will act as a subcontractor for installing the protection systems in the Company's aircraft and on those of other Israeli airlines. El Al is supposed to install the protection systems on its planes and on those of Arkia by the end of 2016, with El-Op given the option of additional installations. The rate and timing of the installations is coordinated between the CAA, El- Op and El Al, in accordance with the plane renovation plan (the installations are expected Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

to take place as part of the planes’ C inspection). As of the publication of this report, the system was installed on a number of El Al planes.

Security Services for Israeli Airlines

In addition, the Company provides security services to Israeli airlines, in return for a refund of the Company's aforementioned costs. Accounting for these services was arranged by use of a "payroll price list" (dated 2008) published by the Ministry of Finance, as well as in accordance with an understanding on the subject of security reached with the Ministry of Finance and Government Resolution 4026 on the matter of aviation security services provided by the Company.

9.11.13 Operations during Times of Emergency and for Vital Purposes

Under existing law, during times of emergency, the Israeli airlines, including the Company, may be operated for purposes of national defense or public security or maintaining supplies or vital services. In addition, arrangements exist with the Company as to flights for the security of the State, or at times of emergency, as well as flights for other extraordinary purposes, including the consideration to be paid for them on a commercial basis.

The Law for the Registration and Mobilization of Equipment for the , 1987, empowers the Minister of Defense, if he is convinced that the defense of the State so requires, to declare by decree the need to mobilize equipment (including aircraft). The law relates to equipment owned by the Company during times of emergency. The law obligates the State to pay utility fees for the equipment that was mobilized, and, if the equipment was damaged during the period of emergency - compensation for the damages.

The Law for Work Services during Times of Crisis, 1967, empowers the Minister of Labor to certify an enterprise as “a vital enterprise”, and after such certification, to mobilize all of its workers for vital work service. The Company has been certified a “vital enterprise”. The approval is renewed from time to time at the Company’s request. The current certification is effective through December 31, 2015.

The Law for Supervision of Goods and Services, 1957, grants the minister so empowered by the Government, the authority to issue a “personal decree” or a “general decree” for the performance, inter alia, of a “vital action” for the defense of the State, for the security of the public, to maintain regular supplies or services. This action includes, among other things, the obligation to operate an enterprise or to perform any regulated service.

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9.12 Material Agreements

 In February 2013 a seasonal agreement was signed with the Taglit organization for the summer 2013 season, for the transportation of 13,000 passengers, to the sum of $18 million. The Taglit organization provides visits in Israel to youths from around the world, which include heritage and Zionism tours. In November 2013 an additional agreement was signed with the Taglit organization for the Winter 2013-14 season, for the transportation of 6,300 passengers, to the sum of $7 million.

 In October 2013 a competition process was held between fuel supply companies and companies performing refueling services for the supply and refueling of jet fuel in Israel for the period beginning January 1 2014. Following negotiations with the companies, in December 2013 the Company's Board of Directors approved engagements with fuel supply companies Paz, Sonol and Dor Alon, to provide 70%, 20% and 10% (respectively) of the Company's yearly fuel consumption for 2014. In addition, the Company decided to enter into engagements with companies performing refueling services (Airports Authority concession holders) Paz Aviation Services and Mercury, in agreements in which each would provide 50% of the refueling services for the Company at BGN in 2014. The accumulated yearly scope of these agreements (providing jet fuel and refueling services) is estimated at $390 million (according to jet fuel prices in February 2014).

 In October 2013 the Company signed an agreement to extend the provision of maintenance services with Arkia Israeli Airlines Ltd. (hereinafter: “Arkia”). According to the agreement, the Company will continue to provide maintenance services for the two Arkia Boeing planes. The agreement will be in effect until October 2019. The March 2014 agreement concluded the agreement for the provision of maintenance services by the Company, signed in the past by Israir Aviation and Tourism Ltd.

 In February 2014 the Company signed a renewed agreement with the DFASS company, which includes a renewed purchase agreement for all duty free items from DFASS, equipping a new computerized system including a new website and providing commercial consultation.

 In February 2014 the Company entered into an agreement with an international company to sell two PW4056-3 engines (hereinafter: “the Engines”) owned by the Company and to lease them back to the Company. The total proceeds for the Engines are $7 million. The Proceeds were set according to market prices accepted in the industry for engines of an identical model and age and according to its maintenance Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

condition upon delivery and were paid upon delivery. The lease period is for 30 and 20 months, respectively. The Company was given the option to extend the lease period until the planned engine renovation date. For further details see Notes 13d and 36d to the Financial Statements.

In addition, the Company is party to agreements with regard to employees and their rights (see 9.4 above), agreements for the lease of real estate (see 9.1.1 above), agreements for the lease and financing of aircraft (see 7.11 and 8.10 above), loan agreements for a designated purpose (see 9.8.5 above), various agreements with airlines (see 7.2, 9.11.7 and 9.13 above), and insurance agreements (see 9.2 above). The Company also has an obligation to indemnify Company executives. For further details see Section 29a of Chapter D (Further Details on the Corporation's Business).

9.13 Cooperation Agreements

The Company is party to agreements with other airlines (interline agreements) that permit passengers on scheduled flights, subject to certain restrictions, to use flight tickets issued by one airline for the services of another airline. In addition, the Company is party to code sharing agreements, which permit an air carrier to market flights of another air carrier, as if they were its own flights. See 7.2 and 7.4 above for details. For legislative changes that could have a material effect on the Company's ability to enter into “code- sharing “agreements see Section 9.11.2(g) above.

Additionally, the Company has various operational agreements with various airlines, which include, inter alia, technical operations arrangements, leasing arrangements, aircraft maintenance and spare part agreements, mutual assistance in emergencies, the supply of aviation equipment and more. The Company also has arrangements with airlines regarding lounges, regarding frequent flyer collaborations, accounting for connecting flights, on matters of reservations and transport agreements (passengers or cargo).

9.14 Legal Proceedings

As of December 31 2013, legal claims filed against the Company amount to a total of $198 million, for which the Company listed a $7.7 million provision in its Financial Statements, based on the advice of the Company's legal counsel.

Regarding the motion filed to recognize a claim as a class action against the Company and other bodies to the amount of 100 billion NIS, which was rejected by the District Court as well as the appeal on this ruling that was rejected by the Supreme Court, see Note 22.c.a.(5) to the Financial Statements. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

Legal claims not quantified in monetary sums have also been filed against the Company. The sum of the provision in the Financial Statements includes provisions for non- quantified claims, as estimated by Company management.

For details on the most significant claims in which the Company and/or its subsidiaries are involved see Note 22c to the Financial Statements.

9.15 Goals and Business Strategy

As part of the medium and long term strategy being formed by Company Management, the Company is acting to adapt its activity by increasing frequencies and capacities and adapting its commercial operating model to models practiced in Europe. Within this framework, the Company shall initially start with short haul activity, starting from the Summer 2014 schedule, starting March 30 2014 by operating low cost flights under the new “UP” aviation brand, as described in 7.4 above, using Boeing 737-800 aircraft. As described above, flights will initially be operated according to this format to five European destinations, instead of the current format of Company flights to the destinations in question. The flight tickets purchased by passengers will include a basic basket of services and the option of adding additional services for a fee, similar to service formats at many airlines around the world.

In 2013 the Company faced the various factors influencing the Company’s activity, including the geopolitical situation and its impact on the aviation industry and on passenger traffic to and from Israel, changes in jet fuel prices and increased competition, among other reasons in light of the signing of the Open Skies agreement with the EU.

The Company’s key activities in 2013 were as follows:

a) Continued activity aimed at equipping and lowering the age of the aircraft fleet, and in particular purchasing eight new Boeing 737-900 aircraft, two of which joined the Company fleet in the reported year and two more are expected to join the fleet in 2014. The remaining planes will join the Company fleet by the first quarter of 2016.

b) Adapting means of production to the demand environment and profitability of the routes by adapting capacity and more efficient configuration, in order to optimize the route network.

c) Continued improvement in customer service, while providing an appropriate response to various populations and offering different services to customers (including the Economy Plus class and purchasing preferred seats), a significant improvement to the physical product, with emphasis on the luxury classes and Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

improving its compatibility to the needs of business passengers and performing customer retention activities, both at the flight reservation stage and during the flights.

d) Reducing the number of aircraft fleets operating in the Company's service and in particular shutting down the and 767-200 fleets, while placing an emphasis on making the fleet younger and adapting its activity to operational and environmental restrictions.

e) Continuing to provide a response to the extensive regulation applying to the Company in its various areas of activity, including aviation regulation unique to the Company’s activity as an airline and the relicensing process the Company is undergoing as part of the restoration of the State of Israel's safety rating as well as regulatory directives pertaining to the Israeli aviation industry and the Open Skies agreement with the EU.

f) Continuing the development of sources of income in maintenance areas while providing services to airlines, aircraft manufacturer and other maintenance centers and developing growth engines in areas close to the Company’s area of activity.

g) The continued implementation of technological systems, including technological systems from the field of commerce and improving the Company’s website and increasing direct sales, including establishing a designated site for the Up brand. An SAP system were implemented during the reported year in various financial areas.

h) Continuing with the comprehensive approach to matters of safety and the environment, including air pollution and noise hazards, in which the Company received various approvals and opens itself to regular inspection.

i) Investment in the field of corporate responsibility and community relations, and continuing extensive cooperation with various bodies in contributing to the community and the environment as well as continuing to nurture the human resource and excellence in the Company, including through the CEO’s “Excellence and People” fund.

j) Continuing with the Implementation of the internal enforcement plan in the field of securities and corporate law, in order to ensure the existence and enforcement norms in matters of observing the law, ethical rules and other codes of behavior by the Company, its executives and its employees and to confirm compliance by the Company and by individuals working at it with securities law. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

k) Nurturing the human resource, by updating work agreements, developing and updating employee training, remuneration and incentive systems. In this regard, in 2013 the Company continued developing result-contingent measurement and incentive process, and currently 25% of Company employees are influenced by such measurement and incentive programs.

Alongside the commercial changes in aviation activity, the Company is planning to operate the frequent flyer club according to a new format (as an independent entity), will expand the variety of partners, realization options and additional associated products, will expand the number of members in the frequent flyer club (in Israel and abroad) and will act to invest in the IT capabilities in the frequent flyer club. In addition, the Company is acting to launch a branded credit card in conjunction with various banking entities. For details see 7.6.4 above.

Implementation of the business strategy presented above by the Company constitutes forward-looking information as defined by the Securities Law, and is based upon the Company’s assumptions, assessments and forecasts as to its business environment, which could change, in whole or in part, from time to time, thus influencing the achievement of the program's goals and its results. Accordingly, actual results, in whole or in part, may not be realized as above, be realized in part or to be materially different than the results that are estimated, derived or implied from this information, inter alia, for the reasons detailed below.

Implementation of the strategy may be influenced by changes in the region’s geopolitical, economic and defense situation, which may influence both the ability to hold flights to certain destinations, and on jet fuel prices, which constitute a material element of the Company's expenses. Furthermore, changes in regulation and activity on the route network and in the aircraft fleet may impact the Company’s profitability. In addition, implementation of the strategy is subject to environmental demands, on increased competition as a result of the State of Israel's aviation policy and the expansion of the activity of low cost airlines or aviation pacts in the Israeli market and the implementation of the aviation agreement (“Open Skies") with the EU.

9.16 Projected Developments in the Coming Year

As part of the global aviation industry, the Company deals with exogenous economic factors that include, among other things, a slowdown in global growth rates, the Eurozone crisis, jet fuel prices, currency/interest rates as well as the regional geopolitical situation.

In 2014, in light of the fact that the Open Skies agreement with the EU will be coming into effect, the Company is expected to continue dealing with an increase in flight Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

offerings from existing airlines, as well as the introduction of new airlines, as well as a significant increase in low cost activity on routes to and from Israel.

The Company will continue to study the compatibility of its activities to trends and developments occurring in the Company's business-economic activity environment and in global aviation. These trends and changes require a constant in-depth examination of the Company’s activities, including an examination of the combination and profitability of the Group's route network in the areas of passengers and cargo and adapting the timetable and prices to the state of the market and competition.

The goals of the strategic program will be accomplished by taking to account, among other things, the manner in which the Company's procurement plan is being realized the Company's ability to cope with and prepare for toughening competition, and striving to improve the business results in 2014 by enhancing the mix of revenues, improving yields, implementing organizational efficiency measures and cutting expenses.

The information concerning the forecast of developments during the coming year represents Forward-Looking Information, as defined in the Securities Law. The information is supported, inter alia, by the Company’s assessments, forecasts or intentions as of the report date. Therefore, the actual developments during the coming year may be, in whole or in part, materially different than the developments assessed, derived or implied from this information, as the result of a large number of factors, including those listed in Section 9.15 above and the risk factors described in Section 9.18 below.

9.17 Financial Data on Segment-Based Reporting

For data on segment-based reporting see Note 32 to the Financial Statements. For explanations regarding developments in these segments, see Section a.5 of the Board of Directors Report.

9.18 Discussion of Risk Factors

Like other airlines, the Company’s activity is by external and internal factors that could lead to material changes in its profitability (positive or negative). The risk factors may be divided into macro risks, industry risks and risks that are unique to the Company. The major risk factors are:

Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

Macro Risks

9.18.1 Political or Security Events or Terrorist Acts

Political or security events or terrorist acts in the world or in the region have an immediate, negative effect on the demand for passenger and cargo transport and influence the price of jet fuel and the Company’s economic condition and the volume of its activity. The risk is that the impact on the Company's revenues will be caused as a result of security and geopolitical events in Israel or in target destinations, among other things in light of geopolitical events in the Syrian arena and the Iranian arena.

9.18.2 Exposure to Currency Risks

Most of the Company’s revenues and expenses are denominated in or linked to foreign currency (mainly the US dollar). The Company is exposed to a rise in the value of the shekel relative to the dollar with respect to current wage expenses and other liabilities denominated in shekels in the Company's balance sheet, principally with respect to termination of employee-employer relationships and vacation provisions. The revaluation of the shekel vis-à-vis the dollar increases the Company's current expenses and also increases, in dollar terms (without effecting cash flows), the Company's obligations related to termination of employee-employer relations.

Furthermore, natural internal protection exists for other foreign currencies (pound sterling, euro, rand etc.) carried out by comparing payments and receipts in each currency. In years when the volume of the receipts is not significantly different from the volume of payments in European currencies, the mixture serves as internal protection against exposure to these currencies, whereas in years in which a material difference exists between the payments and receipts and exposure is created for the Company with those currencies (mainly the euro), the Company considers the need to invest in financial derivatives to reduce the exposure created.

For details regarding the actions taken by the Company for hedging the exposure to currency risks see Section b.1.(5) to the Board of Directors’ Report, as well as Note 26f to the Financial Statements.

9.18.3 Changes in Economic Status

The aviation and tourism industries are sensitive to changes in economic activity affecting the demand for passenger and cargo transport. The expense structure of the aviation industry, which includes a high component of fixed expenses, makes it very difficult to implement procedures intended to conform the Company's supply to changes in short-term demand. During periods of an economic slowdown, the demand for air Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

transport is reduced for a variety of reasons, excess capacity is created and labor and flight equipment is underutilized. Consequently, the Company’s economic position may be worsened, as reflected in its business results.

9.18.4 Outbreak of Epidemics and Natural Disasters

Outsides factors such as natural disasters, fires and earthquakes, epidemics and so forth, may harm the Company's normal course of operations. Outbursts of epidemics and natural disasters (such as the Icelandic volcano and Japanese tsunami) have a negative effect on passenger traffic to the disaster areas and therefore may have a similar negative effect on the Company's business results.

9.18.5 Exposure to Variable Interest Rates

The Company finances part of its investments using credit from banking institutions. The Company’s loans and most of its deposits are in dollars. Most of the loans bear variable interest and, accordingly, any change in interest rates might materially affect the Company’s financing expenses and cash flow. In order to reduce exposure to this risk factor the Company has entered into interest risk hedging agreements. See Section b.1.(4) to the Board of Directors’ Report for details with regard to the actions taken by the Company to hedge the exposure to variable interest rates. These hedging agreements may expose the Company to changes in the fair value of said hedging agreements. For further details see Note 26g to the Financial Statements.

Industry Risks

9.18.6 Jet Fuel Prices

Jet fuel is a significant component of an air carrier's operating expenses. Jet fuel prices are subject to sharp fluctuations. The Company's profitability may be significantly harmed by changes or severe fluctuations in jet fuel prices. The Company employs hedging activities for part of its projected jet fuel consumption. This policy could change according to circumstances. As a result of this policy the Company faces an accounting risk due to fair value changes in the financial instruments used for hedging as well as the requirement for restricted deposits. Due to the great weight of jet fuel in the Company's operating expenses, every increase in jet fuel prices negatively affects its operating expenses and business results. For details regarding the actions taken by the Company for hedging its exposure to changes in jet fuel prices see Section b.1.(3) to the Board of Directors’ Report.

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9.18.7 Changes in Competition

The aviation industry is characterized by a high level of competition, which becomes more acute during periods of excess capacity. The entry of additional charter airlines into the market, including the entry of additional foreign scheduled carriers into the Israeli market or an increase in capacity of existing foreign carriers, the entry of additional Israeli carriers into the market and the appointment of additional Israeli carriers as Designated Carriers (in the fields of passengers and cargo), the entry of additional charter and low cost airlines, and the granting of operating licenses to additional Israeli airlines in the passenger and cargo areas lead to increased competition in the Israeli aviation industry, a situation that creates excess capacity, lowers the level of passenger and cargo transport prices and may reduce the Company’s share in activity in the industry and hurt the Company’s business results. This trend of increased competition intensified over recent years, with the entry of new airlines and the increased capacities and frequencies of airlines operating in the Israeli market (see 7.1.10 above for details). Special emphasis must be placed on the activities of the foreign airlines in the three largest aviation alliances, which operate in the Israeli market while cooperating in operations and trade, based on non-Israeli regulation (including competition laws practiced in Europe) allowing them to carry out code sharing agreements, merges and acquisitions and material commercial collaborations. In addition, changes in international agreements, including the aviation agreement between Israel and the EU (“Open Skies”), which was signed in June 2013 and the implementation of which may impact the Company’s activity.

9.18.8 Seasonal Influences

The operations of the Company are seasonal by nature and are focused during peak periods (see Section 7.9 above). Tourism traffic, mostly during the summer season and at holidays (Jewish and Christian), is higher than the annual average. The cargo transport field is also characterized by high seasonal fluctuations (for details see 8.8 above). As the component of the capital expenditures and fixed expenses out of the total Company expenses is significant, the impairment of operations during the peak season (due, for example, to political and security events) or the inability to obtain replacement aircraft, even if concentrated over a relatively short period, can have a substantial negative effect on the business results of that year.

9.18.9 Government Resolutions on Aviation and Licensing the Company as an Air Carrier

a) A change in the Government’s policy with respect to the Company’s status as a Designated Carrier for all or part of the routes on which the Company serves as Designated Carrier could materially affect the Company’s financial results, in general and according to the type of route. Additionally, Government resolutions Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

could change the Company's position and have a negative effect on its financial results.

b) The Company’s operating licenses as an air carrier and its rights as such are conditional upon the practical ownership and the effective control being in Israeli hands. The Company's ability to always know the extent of foreign ownership of its shares is limited to the records it administers, and, accordingly, a situation may exist in which the foreign owners of shares did not report their holdings to the Company (purchase or sale) and were not recorded in the shareholders' registry, so foreign ownership will exceed the permissible percentage or will be less than the percentage recorded in the shareholders’ registry, without the Company being aware of it. If the Company becomes aware that foreign ownership exceeds the permissible percentage, it will be able to act in conjunction with the Special State Share to reduce the percentage of foreign ownership. Should it be unable to do so and the foreign holdings in the Company’s shares exceed the permissible percentage, the Company could lose its status as a Designated Carrier. However, whenever the holder of the Special State Share and/or the Minister of Transportation believe that the actual control and the ability to direct the Company’s operations remains in the hands of the Board of Directors, of which two thirds of its members, including the Chairman, the CEO and Company officers, are Israeli citizens and permanent Israeli residents, the risk is minimal that the Company will lose its status as Designated Carrier just because of the rate of foreign ownership in the Company’s shares.

9.18.10 Operations in an Industry with a High Fixed-Cost Structure

The Company operates in the aviation industry, which has a structure of relatively high fixed costs and relatively low profit margins. Therefore, small changes in the level of revenues or expenses could have a direct effect on whether there will be earnings or losses.

9.18.11 Noise and Environmental Restrictions on Flight Operation

Every change in restrictions on night operations at BGN or other airports from/to which the Company flies and each additional restriction or prohibition on the operation of aircraft due to air pollution, noise, etc. might have a material effect on the Company's business results (for details see 9.10 above).

9.18.12 Effect of the Operations of Low Cost Airlines on the Israeli Market

Airlines with a low production cost structure (low cost carriers) have increased their market share substantially in recent years, principally in the United States and in Europe. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

This growth has negatively affected veteran airlines with higher production cost structures, and has caused a decrease in their market share and a drop in their yield due to fare reductions as the result of competition.

Most low cost airlines specialize in short flight legs. Under the terms of new aviation agreements signed in recent years airlines have begun operating in Israel with a format similar to that of low cost airlines which have not operated on Israeli routes before along with low cost airlines such as EasyJet (for details see Section 7.1.10 above). The entry of these and other airlines into the Israeli market could have a negative effect on the Company's business results, due to the increased capacity offered by these airlines at reduced prices.

9.18.13 Impairment of Flight Safety or Flight Security

9.18.13.1 In order to maintain flight security, the Company upholds security arrangements in accordance with the instructions of the authorized governmental agency. In order to maintain flight safety, the Company carries out the instructions and provisions stipulated by the relevant entities, including the instructions of the manufacturer and the Civil Aviation Authority. Damage to the Company's flights and/or its customers and/or its installations and/or its employees, due to an event connected with flight security and/or flight safety is liable to have a material negative effect on the Company's operations, inter alia as a result of harm done to reputation, the loss of revenues and customers and the Company's exposure to legal action.

9.18.13.2 The Company conducted an external examination of the Company’s operational procedure array in accordance with the IOSA standard operating in accordance with IATA instructions and guidelines. This examination was conducted in four separate inspections in 2006, 2008, 2010 and 2012 and at the conclusion of each inspection, the Company received confirmation that it had met IOSA requirements. The Company also conducts “crisis event” training exercises at the Company level once per period (with the last exercise conducted in conjunction with the CAA in early 2014), and updates its procedures according to global developments in the field (booklets, conferences and professional media).

9.18.14 Aviation Regulation

The Company's activities and its ability to expand the scope and layout of its activity, is dependent, among other things, upon various regulatory approvals granted by authorities in Israel and around the world. The absence of proper licensing and the failure to uphold international or local regulations may lead to increases in Company costs, to competitive Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

inferiority in comparison with the Company's competitors and may harm the Company's regular course of activity.

During the reported year, regulatory changes were made to aviation legislation applicable to the Company, and proposals were raised for changes to laws and regulations in the field of aviation regulation, for which the legislative process has yet to be completed. For details regarding aviation regulation see Section 9.11.2 above.

Risks Particular to the Company

9.18.15 Costs of Maintaining Flight Security

Since the Company is required to maintain security arrangements which are determined by a governmental body and it bears security expenses over which it has no control, most of which do not apply to foreign, competing airlines, this situation hurts its profitability, its competitive ability, and the development of a route network. A revised Government resolution was passed in 2013 according to which the Government shall bear the majority (97.5%) of security expenses of Israeli airlines. The changes in the rate of the State's participation in the Company's flight safety expenses, changes in the extent of safety measures the Company will be forced to take (due to security events or attempted attacks), as well as whether the Company will be forced to discontinue or limit its flights to additional destinations as a result of safety concerns, may have a material impact on the Company's operating results.

9.18.16 Restrictions on the Future Receipt of Credit and Failure to Meet Financial Criteria

The Company has undertaken towards its long-term loan providers to maintain a proper collateral ratio between the unpaid loan balance and the collateral pledged to the bank, as stipulated by each agreement. In addition, the terms stipulated in certain agreements relating to loans taken by the Company include the bank's right to demand immediate repayment of the loan balances owed to that bank if, in its opinion, based on reasonable criteria, a change had occurred that adversely affects the Company’s financial position or its operations or its business or its financial ratios, in a manner endangering or potentially endangering its ability to repay the bank loans. The failure of the Company to comply with financial covenants stipulated in the loan agreements, including with regard to the decrease in market value of the collateral, and/or the demand for immediate repayment of Company loans by the banks, might have a negative effect on the Company’s business results. In addition, single borrower and group of borrower limitations may apply to the Company, as well as limitations on the transfer of control and on changes to its ownership structure, taking the extent of the credit and the identity of the Company's controlling party into account. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

9.18.17 Business Restrictions

In light of legislative changes in the field of antitrust laws, the competitive ability of Israeli carriers, among them the Company, may be damaged, and this may lead to a negative impact on the Company's activities due to regulatory restrictions on the existence of international agreements in the Company's areas of activity or the non- approval of these agreements (existing or new) by the Restraint of Trade Authority (for details see 9.11.2 above). The gaps between Israeli antitrust law and antitrust law elsewhere in the world may impact the competitiveness of Israeli airlines, in particular in light of the mergers, acquisitions and aviation pacts common in international aviation.

For additional details regarding the impact of antitrust laws on the Company’s activity, including on the subject of monopolies, see 9.11.2 above.

9.18.18 The Municipal Status of BGN

From time to time, the addition of BGN to the jurisdiction of the city of is taken under consideration. If the transfer of BGN to the jurisdiction of any local authority should become a reality, the expenses of the Company might rise (due to the payment of municipal taxes which up to now have not been paid), and the matter will negatively affect its business results.

9.18.19 Labor Relations

Every interruption of operations of an air carrier due to sanctions or a strike causes a non- recoverable loss and damage to customer confidence. The situation in the industry and the increasing rate of competition necessitate continuing efforts to increase Company efficiency and to improve service to the customer public. These depend on stable labor relations in the Company, on the employees' identification with the Company and on readiness to cooperate and in an understanding with management.

Although the “industrial calm” in the Company has been maintained since 1983, excluding a small number of disruptions, the efficiency expressed in structural changes, in the reduction in the number of personnel (with the emphasis on permanent employees), and the reduction of labor costs, could cause a shakeup, even for a short period, in the delicate texture of labor relations in the Company. This could cause damage in the immediate term and hurt the Company’s goodwill over the longer term, and it might have a negative effect on the business results of the Company for that year and thereafter. Additionally, there could be difficulty in utilizing business opportunities and dealing with changes due to limitations in the labor agreements.

Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

9.18.20 Legal Proceedings

The Company is a party to legal proceedings, including claims the court was asked to recognize as class actions in Israel that may cause it to be charged with material amounts that cannot be estimated, and for which no provision has been made in the Company’s Financial Statements. The results of these proceedings may have a material impact on the Company due to their results.

9.18.21 Restrictions Due to Certain Provisions of the Special State Share

The restrictions relating to maintaining minimal flight capacity, especially for cargo aircraft, and the prospect of the State demanding to increase the minimal flight capacity with which the Company must comply, diminish operational flexibility and impose burdensome obligations (assurance of fitness). The indemnification in these cases does not cover the Company’s expenses. In addition, the Government Corporations Law gives the government the authority to issue instructions to the Company that are intended to protect the vital interests of the State with respect to the Company, in accordance with decrees resulting from Chapter 2H of the Government Corporations Law, that may restrict the Company's business judgment and, as a result, impact its financial results.

9.18.22 Dependence on Aircraft Manufacturer

The Boeing Corporation manufactured all of the aircraft in the Company's service. The discontinuation of Boeing's operations could cause temporary operational difficulties for the Company. The Company has a material dependence on Boeing both with respect to spare parts as well as with respect to engineering support. At the same time, the Company estimates that the likelihood of the discontinuation of this support is low.

9.18.23 Dependence on Regular Operations at the Home Airport (BGN)

Most of the Company’s activity is carried out at its home airport, BGN. Therefore, an interruption or breakdown in the normal operations of BGN and/or changes in the policies of granting takeoff and landing authorizations (slots) at the central airports in which the Company operates might have a material negative effect on the Company’s operations. Renovation works began on a BGN runways in 2010, and were completed in the first quarter of 2014. As a result of the conclusion of the renovation, the Minister of Transportation and Road Safety decide to change the operating hours at BGN. See Section 9.10.2 above for further information on the Minister of Transportation and Road Safety's January 21 2014 resolution.

Changing the operating hours may have a material impact on the Company's operational abilities and financial results. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

9.18.24 Flights on the Sabbath and Jewish Holy Days

The Company continues to operate pursuant to a 1982 Government resolution and does not operate passenger flights on the Sabbath and on Jewish holidays. For details regarding the agreement between the Company and the Committee of Rabbis for Sabbath Observance see Section 7.10 above. Non-fulfillment of the understandings regarding flights on the Sabbath and Jewish holidays, or a change of the Company's policies with respect to this subject, could cause a dispute with this customer sector, which could affect the Company's results due to a consumer boycott.

9.18.25 Information Systems and Information Security

The current operations of the Company, the business activities and the services that it provides are based upon information systems and databases. Some of the Company’s information systems are at the end of their life cycles and their replacement is not included in the Company’s work plan. The Company has established an IT backup facility, in order to deal with a comprehensive failure situation in the main computer room. Likewise, the Company is preparing a comprehensive plan on the subject of data security as a response to the increase in risk deriving from cyber-attacks. Until the preparations in the fields detailed above are completed, the risk exists of mishaps and failures in the operation of the Company's information systems, which may lead to the shutdown of crucial systems or the lack of sufficient support for certain periods of time.

The following table presents the risk factors described above according to their nature (macro risks, industry risks and risks particular to the Company), which have been ranked, as estimated by the Company’s management, according to their effect on the Company’s business as a whole - major, moderate and minor effect. The Company’s assessment as to the ranking of the risks was determined in consideration of the likelihood of the occurrence of the event and the measure of damage that might be caused to the Company, should the event take place.

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Extent of Risk's Effect on the Company Minor Effect Moderate Major Effect Effect Macro Risks Political events, security events or terrorist V actions Exposure to currency risks V Changes in the economic situation V Natural disasters and epidemic outbreaks V Exposure to variable interest risks V Industry Risks Jet fuel prices V Changes in competition V Seasonal influence V Government resolutions on aviation matters

and the Company's licensing as an air carrier V Operations in an industry with a high fixed- V cost structure

Noise restrictions and environmental matters V Effect of the activity of low cost airlines on V the market

Impairment of flight safety or flight security V Aviation regulation V Risks Particular to the Company

Minor Effect Moderate Major Effect Effect Costs of maintaining flight security V Restrictions on receipt of credit and failure to V meet financial criteria Business restrictions V Municipal status of BGN V Labor relations V Legal proceedings V Restrictions due to provisions of Special State V Share Dependence on aircraft manufacturer V Dependence on regular operations at home V airport (BGN) Saturday and religious holiday flights V Information systems and data security V

Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

El Al Israel Airlines Limited Report of the Board of Directors on the State of the Corporation's Affairs for the Period Ending December 31 2013

We hereby present the Report of the Board of Directors on the State of the Corporation's Affairs for the period ending December 31 2013.

1. General

The Company serves as the designated air carrier of the State of Israel on most international routes that operate to and from Israel.

The key activities of the Company and its subsidiaries are the transport of passengers and freight on scheduled flights, and on the matter of the transport of passengers, also on charter flights, between Israel and foreign countries and starting August 2010, on domestic flights as well (the Company discontinued its domestic flights toward the end of 2013).

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, in the leasing of aircraft, 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 and the leasing of planes. In the field of passenger transport, the Company competes in its flights to and from Israel with 2 Israeli airlines (Arkia and Israir), with over 60 foreign airlines that operate scheduled flights and over 50 foreign charter airlines. Revenues from this area of activity constituted 91.3% of all of the Company’s revenues in 2013. b) Cargo aircraft activity – in this segment, the Company transports cargo in cargo aircraft (starting June 2011 the Company has operated a single leased 747-400 aircraft).In the field of cargo transport, the Company competes with one Israeli airline (CAL) and with 7 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 3.4% of all of the Group’s revenues in 2013.

The Company has additional revenues that are not assigned to its major areas of activity, accounting for 5.3% of its total revenues.

For further details regarding the Company's areas of activity, see Section 5a of the Board of Directors Report.

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Explanations of the Board of Directors for the State of the Corporation's Affairs a.1 Financial Position (Consolidated Financial Statements)

31.12.2013 31.12.2012 change in in in thousands thousands thousands US dollars US dollars US dollars Current assets Cash and cash equivalents 86,140 52,810 33,330 Designated cash 811 1,205 (394) Short-term deposits 9,341 8,570 771 Restricted deposits 8,050 11,456 (3,406) Trade receivables 125,144 129,898 (4,754) Other receivables 22,144 23,333 (1,189) Derivative financial instruments 12,889 16,672 (3,783) Prepaid expenses 26,989 29,442 (2,453) Inventories 20,358 22,145 (1,787) Total current assets 311,866 295,531 16,335 Non-current assets Long-term bank deposits 1,422 1,451 (29) Investment handled using the book value method 17,660 *16,886 774 Investments in other company 1,228 1,244 (16) Fixed assets, net 1,154,271 1,128,959 25,312 Intangible assets, net 8,641 9,392 (751) Prepaid expenses 9,644 9,950 (306) Assets due to employee benefits 62,544 *45,319 17,225 Total non-current assets 1,255,410 1,213,201 42,209 Total Assets 1,567,276 1,508,732 58,544 Current liabilities Short-term borrowings and current maturities 164,891 160,316 4,575 Trade payables 126,308 144,832 (18,524) Other payables 39,954 52,243 (12,289) Provisions 17,005 16,333 672 Derivative financial instruments 165 126 39 Employee benefit obligations 109,551 97,954 11,597 Unearned revenues 269,971 252,915 17,056 Total current liabilities 727,845 724,719 3,126 Non-current liabilities Loans from financial institutions 475,453 474,225 1,228 Employee benefit obligations 77,260 *82,453 (5,193) Loan from others 458 2,441 (1,983) Derivative financial instruments 826 1,399 (573) Other payables 8,708 8,787 (79) Deferred taxes 38,778 *20,489 18,289 Unearned revenues 58,073 58,274 (201) Total non-current liabilities 659,556 648,068 11,488 Shareholders’ equity 179,875 *135,945 43,930 Total liabilities and equity 1,567,276 1,508,732 58,544

* Retroactive implementation of IAS 19 (revised) “Employee Benefits” – see Note 3 to the Financial Statements.

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The main changes in asset, liability and equity items as of December 31 2013 compared to December 31 2012 are:

Current Assets The Group’s current assets increased by $16.3 million relative to December 31 2012. The increase largely derived from an increase in cash and cash equivalents, while a decrease occurred in the other current asset items. The restricted deposits decreased as a result of a decrease in a deposit the Company provided as collateral in favor of a banking institution, in return for a loan received from that institution. A non-material decrease occurred in customers, payables, prepaid expenses and inventories. The following changes occurred to the Company's derivative financial instruments (presented in the Financial Statements under current assets and current and non-current liabilities):

The total net change in the fair value of jet fuel, interest and foreign currency hedging, amounted to a $3.3 million decrease compared to the fair value at the end of 2012 (jet fuel hedging – a $2.4 million increase, interest hedging – a $0.5 million increase, foreign currency hedging – a $6.2 million decrease), 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 balance sheet date. For further details see b1(3), b1(4) and b1(5) below and Note 26 to the Financial Statements

Non-Current Assets

The Company’s non-current assets increased by $42.2 million relative to December 31 2012, mainly due to an increase in fixed assets as a result of the purchase of 737-900 planes, spare parts and accessories and less accumulated depreciation. A $17.2 million increase also occurred in assets due to employee benefits, largely deriving from the profits of the compensation funds in the reported period.

Current Liabilities

The Company’s current liabilities increased by $3.1 million relative to December 31 2012. On the one hand, an increase occurred in unearned revenues as a result of an increase in sales relative to the corresponding period last year and an increase occurred in employment benefit liabilities, mainly due to an increase in vacation provisions, while on the other hand, the supplier item decreased as a result of a decrease in liabilities to the IATA clearinghouse and to engine restoration, and a decrease also occurred in payables, mainly as a result of the repayment of advance payments from agents and from payments made for cargo claims.

Non-Current Liabilities The Company’s non-current liabilities increased by $11.5 million relative to December 31 2012. On the one hand, an increase occurred in deferred tax liabilities, mainly as a result of the profits for the reported period, while on the other hand, a decrease occurred in employee benefit liabilities.

Equity Equity increased by $43.9 million in the reported period relative to December 31, 2012, mainly as a result of earnings in the reported period and an increase in capital reserves for employee benefit obligations, mainly as a result of compensation fund and pension profits.

As of December 31 2013, the Company has a working capital deficit of $416.0 million, compared to a deficit of $429.2 million on December 31 2012. The Company’s current ratio as of December 31 2013

B-3 Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding amounted to 42.8% compared to 40.8% as of December 31 2012. The main factors for the decrease in working capital deficit were the increase in cash items and the decrease in supplier and creditor items, offset by an increase in unearned revenue items and ongoing employee benefit obligations. 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. Therefore, a material part of the capital deficit is now cash-flow based in the short term. a.2. Analysis of Results of Business Activity

a.2.1 Market Data

Passenger and cargo Jan - December Jan - December change traffic at BGA 2013 2012 in thousands in thousands in thousands % Incoming tourists * 2,580 2,482 98 4% Departing Israelis * 4,276 3,860 416 11% Cargo import - tons ** 136.0 134.4 1.6 1% Cargo export - tons ** 139.5 147.1 (7.7) (5%)

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

Incoming Tourist & Departing Israeli Traffic, by Year (In Thousands):

4,276 5,000 3,857 3,860 3,397 3,588 4,000

3,000

2,580 2,000 2,314 2,438 2,482 1,963 1,000

0

Incoming tourists Departing Israelis

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

250

164.3 200 154.0 155.8 147.1 139.5 150

135.7 138.8 134.4 136.0 118.4 100

50

0

Export Import

a.2.2 Company Operating Data*

Jan - December Jan - December change 2013 2012 Passenger leg (scheduled and chartered) - in thousands 4,418 4,248 4% RPK (scheduled) - in millions 18,086 17,246 5% ASK (scheduled) - in millions 21,828 20,905 4% Load factor (scheduled) 82.9% 82.5% 0% The Company's market share (scheduled and chartered) 32.5% 33.6% (3%) Flown cargo, in thousand tons 92.8 92.8 0% RTK - in millions 477.5 485.3 (2%) Weighted flying hours (including leased equipment) - in thousands )**( 156.8 155.2 1% Average man-years (El AL only): Permanent 3,792 3,821 (1%) Temporary 2,104 2,099 0% Total 5,896 5,920 (0%)

Aircraft in operation - end of period - number of units 38 37 1 Average age of owned fleet at the end of the period - in years 11.8 12.9 (1.1)

* Operating data refers both to international and domestic activity.

** Total employees (permanent and temporary) in job slots – as of December 31 2013 – 5,749 and as of December 31 2012: 5,775

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.

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*** Weighted flight hours in Boeing 767/757 terms. Weighted value of the planes: Boeing 767/757 = 1.0; Boeing 747 = 2.0; = 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.

Operating Data, by Year (in Millions):

25,000 100% 21,336 21,477 21,828 20,261 20,905 20,000 18,086 17,400 17,245 17,246 90% 16,410 15,000

82.9% 80% 81.6% 82.5% 10,000 81.0% 80.3%

5,000 70%

RPK ASK L. F.

a.3 Statement of Operations Data For 2013 (Consolidated Financial Statements):

Jan - December Jan - December change 2013 2012 in % of in % of in thousands operating thousands operating thousands US dollars revenues US dollars revenues US dollars % Operating revenues 2,103,020 100% 2,015,642 100% 87,378 4% Operating expenses (1,754,167) (83.4%) *(1,701,669) (84.4%) (52,498) 3% Gross profit 348,853 16.6% 313,973 15.6% 34,880 11% Selling expenses (206,270) (9.8%) *(209,092) (10.4%) 2,822 (1%) General and administrative expenses (104,578) (5.0%) *(95,239) (4.7%) (9,339) 10% Other operating revenues (expenses), net (6) (0.0%) 2,803 0.1% (2,809) Operating profit before financing 37,999 1.8% 12,445 0.6% 25,554 205% Financing expenses (25,858) (1.2%) (38,413) (1.9%) 12,555 (33%) Financing income 25,106 1.2% 1,447 0.1% 23,659 1635% Company's share in earnings of affiliates, net 298 0.0% *1,426 0.1% (1,128) (79%) Profit (loss) before income taxes 37,545 1.8% (23,095) (1.1%) 60,640 Tax benefit (expenses) (12,103) (0.6%) *5,142 0.3% (17,245) Profit (loss) for the year 25,442 1.2% (17,953) (0.9%) 43,395

* Retroactive implementation of IAS 19 (revised) “Employee Benefits” – see Note 3 to the Financial Statements.

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The key factors that influenced the business results in 2013 compared with 2012 are:

Operating revenues – operating revenues increased by 4.3% relative to 2012. Passenger revenues increased by 4.9%, mainly as a result of the increase in passenger numbers. Cargo shipping revenues decreased by 3.3% largely as a result of the decrease in average revenue per ton/km.

Operating expenses – increase in 2013 by 3.1% relative to 2012, mainly as a result of an increase in salary expenses, as explained below, and as a result of an increase in passenger numbers and in flight hours.

• Operating salary expenses increased in 2013 relative to 2012, mainly as a result of the revaluation of the average rate of the NIS relative to the USD and from an increase in activity. Regarding the impact of the changes in the NIS/USD rate of exchange on the Company’s employee benefit obligations, see a.4 below.

• The Company’s jet fuel expenses increased by a moderate rate of 0.7% relative to 2012, but their share of the turnover dropped from 34.0% to 32.9%. Jet fuel prices decreased and influenced a decrease in expenses, a decrease in hedging receipts and increase in activities, offset by the price decrease. The total hedging receipts in 2013 amounted to $6.1 million compared to $22.4 million in hedging repayments in 2012. For further information on jet fuel price hedging see b.1.(3) below.

The Company’s security expenses saw a 52.2% decrease as a result of the increase in the State’s participation in security expenses. For further details, see Note 27.b.2 to the Financial Statements.

The Company's gross profit in 2013 amounted to $348.9 million, 16.6% of turnover compared to a gross profit of $314.0 million, 15.6% of turnover in 2012, an 11.1% improvement

Breakdown of Operating Expenses in 2013:

Jet fuel Meals Depreciation lease 39% 3% 6% expenses 5%

Airport fees & service security 10% expenses 1% Other expenses Air crew 3% expenses 3% Maintenance Wages and Air navigation of aircraft social benefits & 6% 19% communication 5%

Sales expenses – sales expenses underwent a 1.3% decrease compared to 2012, mainly as a result of a decrease in distribution expenses. The total rate of sales expenses from turnover amounted to 9.8% compared to 10.4% of turnover in 2012.

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Administrative and general expenses – administrative and general expenses items increased by 9.8% relative to 2012, primarily due to an increase in salary expenses as explained above.

Other income and expenses – over the course of 2013 the Company listed other net expenses to the amount of $6,000. The Company listed other net revenues to the amount of $2.8 million in 2012, mainly as a result of the sale and impairment of fixed assets.

Financing – net financing expenses in 2013 amounted to $0.8 million compared to $37.0 million in 2012, mainly as a result of foreign exchange rate hedging revenues compared to foreign exchange rate hedging expenses in 2012.

Pre-tax profit in 2013 amounted to $37.5 million, 1.8% of turnover, compared to a pre-tax loss of $23.1 million, 1.1% of turnover in 2012.

Income tax – in 2013 the Group listed tax expenses of $12.1 million, compared to a $5.1 million tax benefit in 2012, mainly as a result of the pre-tax profit the group derived in the reported year compared to the pre- tax loss in 2012.

Profit for the year amounted to $25.4 million, 1.2% of turnover, compared to a loss of $18.0 million, 0.9% of turnover in 2012.

Key factors that influenced the business results in the three-month period ending December 31 2013 compared with the same quarter last year:

October - December October - December change 2013 2012

in % of in % of in thousands operating thousands operating thousands US dollars revenues US dollars revenues US dollars % Operating revenues 499,008 100% 463,931 100% 35,077 8% Operating expenses (429,732) (86.1%) *(416,556) (89.8%) (13,176) 3% Gross profit 69,276 13.9% 47,375 10.2% 21,901 46% Selling expenses (53,268) (10.7%) *(50,151) (10.8%) (3,117) 6% General and administrative expenses (24,305) (4.9%) *(24,968) (5.4%) 663 (3%) Other operating revenues (expenses), net 45 0.0% (1,209) (0.3%) 1,254 Operating loss before financing (8,252) (1.7%) (28,953) (6.2%) 20,701 (71%) Financing expenses (5,928) (1.2%) (7,560) (1.6%) 1,632 (22%) Financing income 9,130 1.8% 1,791 0.4% 7,339 410% The Company's share of the profits of subsidiaries, net of tax 57 0.0% *32 0.0% 25 78% Loss before income taxes (4,993) (1.0%) (34,690) (7.5%) 29,697 (86%) Tax benefit 1,328 0.3% *8,545 1.8% (7,217) (84%) Loss for the period (3,665) (0.7%) (26,145) (5.6%) 22,480 (86%)

* Retroactive implementation of IAS 19 (revised) “Employee Benefits” – see Note 3 to the Financial Statements.

In the fourth quarter of 2013 the Company listed a loss of $3.7 million, 0.7% of turnover, compared to a loss of $26.1 million, 5.6% of turnover in the same quarter last year.

 An 8.4% increase was listed in the reported quarter in passenger revenues relative to the last quarter of 2012, mainly as a result of an increase in passenger numbers, and a 6.5% increase in cargo revenues, mainly due to an increase in the amount of cargo flown. Total operating expenses increased from $463.9 million to $499.0 million, a 7.6% improvement.

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 Operating expenses increased by 3.2% in the fourth quarter of 2013 compared to the same quarter last year, with salary expenses increasing largely as a result of the revaluation of the exchange rate of the NIS relative to the USD. The various operating expenses increased largely as a result of the increase in activity. On the other hand, a decrease occurred in security expenses, largely as a result of an increase in the State’s participation in these expenses and reimbursements received from the state in this quarter for the period starting July 2013.

 Gross profits in the fourth quarter of 2013 amounted to $69.3 million, 13.9% of turnover compared to $47.4 million, 10.2% of turnover, in the same quarter last year.

 Sales expenses increased by 6.2%, mainly as a result of advertising deals in this quarter (the receipt of the 737-900 planes and the launch of the UP brand).

 Administrative and general expenses decreased by 2.7% relative to the fourth quarter of 2012 and their share of turnover decreased from 5.4% to 4.9% in the reported quarter.

 The Company listed net financing revenues to the amount of $3.2 million in the fourth quarter of 2013, compared to net financing expenses of $5.8 million in the corresponding quarter last year, mainly as a result of exchange rate hedging revenues. a.4 Effect of Changes in the Exchange Rate on the Company's Accrued Severance Pay Liability

In 2013 the exchange rate of the shekel was revalued against the dollar by 7.0%, compared to a 2.3% revaluation in the exchange rate of the shekel vs. the dollar in 2012.

In the three month period ending December 31 2013 the exchange rate of the shekel increased against the dollar by 1.9%, compared with revaluation in the exchange rate of the shekel against the dollar of 4.6% in the same quarter last year.

US Dollar - NIS Exchange Rate:

4.2 3.923 3.912 3.821 3.715 3.733 3.9 3.648 3.618 3.537 3.471 3.6

3.3

3.0

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The Company has a net obligation to its employees for severance pay, retirement plans, sick pay, and vacation pay as of December 31 2013 to the amount of $74 million. Since most of these obligations are denominated in shekels, whereas the functional currency of the Company is the dollar, these obligations must be translated into dollars, which causes differences deriving from changes in the exchange rate of the shekel against the dollar. Exchange rate changes are not one-directional, and cause the listing of revenues or expenses in the Company's Financial Statements. These revenues or expenses do not impact cash flow or operating costs of the Company in the short run. In order to enable a comparison of the Company's business results for the long run, these revenues or expenses should be neutralized.

Expenses for this element to the amount of $4.3 million were listed in 2013, compared to 2012, in which the expenses for this element were recorded at $0.6 million.

The quarter ending December 31 2013 listed expenses for this component to the amount of $1.1 million compared with the same quarter last year, in which the expenses for this component were listed at $2.6 million.

Presented below are details of the business results, after neutralizing the effect of the exchange rate on the accrued severance pay element, as described above:

Before After neutralizing the exchange-rate effect For year ended on the accrued severance pay 31 December: 2013 2012 2013 2012 )in thousands US dollars( Operating expenses 1,754,167 1,701,669 1,750,279 1,700,997 Gross profit 348,853 313,973 352,741 314,645 Gross profit rate 16.6% 15.6% 16.8% 15.6% Selling, general and administrative expenses 310,848 304,331 310,329 304,313 Other operating income (expenses) ,net (6) 2,803 (157) 2,666 Operating profit before financing 37,999 12,445 42,255 12,998 Operating profit rate before financing 1.8% 0.6% 2.0% 0.6% Profit (loss) for the year 25,442 (17,953) 29,698 (17,400) Profit (loss) rate for the year 1.2% (0.9%) 1.4% (0.9%)

a.5 Segment Reporting

Presented below are operational segment data on a consolidated basis: a. General:

The Group has applied IFRS 8, "Operating Segments" (hereinafter "IFRS 8") starting January 1 2009.

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, cargo aircraft, charter flights and other revenues. In light of the above, the following are the Company's reported operating segments in accordance with IFRS 8:

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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 overseas offices are also included. b. Analysis of income and results by operating segments:

For year ended: passenger cargo others Adjustment Total 31.12.2013 aircraft aircraft consolidated in thousands US dollars operating revenues revenue from external customers 1,920,290 70,372 50,575 61,783 2,103,020 inter-segment revenues - - 46,117 (46,117) - Total segment revenues 1,920,290 70,372 96,692 15,666 2,103,020

segment results 224,877 )5,152( 42,478 262,203 Unassigned expenses (224,204) Operating profit before financing 37,999 Financing expenses (25,858) Financing income 25,106 The Company's share of the profits of subsidiaries, net of tax 298 Profit before income taxes 37,545 Tax expenses (12,103) Profit for the year 25,442

** Starting June 2011 the Company employs a single leased 747-400 cargo airplane.

For year ended: passenger cargo others Adjustment Total 31.12.12 aircraft aircraft consolidated in thousands US dollars operating revenues revenue from external customers 1,827,943 80,431 44,603 62,665 2,015,642 inter-segment revenues - - 48,557 (48,557) - Total segment revenues 1,827,943 80,431 93,160 14,108 2,015,642

segment results 187,727 (3,827) 26,825 210,725 Unassigned expenses *(198,280) Operating profit before financing 12,445 Financing expenses (38,413) Financing income 1,447 The Company's share of the profits of subsidiaries, net of tax *1,426 Loss before income taxes (23,095) Tax benefit *5,142 Loss for the year (17,953)

* Retroactive implementation of IAS 19 (revised) “Employee Benefits” – see Note 3 to the Financial Statements.

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For year ended: passenger cargo others Adjustment Total 31.12.2011 aircraft aircraft consolidated in thousands US dollars operating revenues revenue from external customers 1,829,492 99,442 45,359 68,293 2,042,586 inter-segment revenues - - 65,919 (65,919) - Total segment revenues 1,829,492 99,442 111,278 2,374 2,042,586

segment results 159,045 )678( 31,034 189,401 Unassigned expenses *(233,277) Operating profit before financing (43,876) Financing expenses (20,197) Financing income 20,474 The Company's share of the profits of subsidiaries, net of tax *1,432 Profit before income taxes (42,167) Tax expenses *(7,657) Profit for the period (49,824)

* Retroactive implementation of IAS 19 (revised) “Employee Benefits” – see Note 3 to the Financial Statements.

Passenger plane sector revenues increased by 5.1% relative to 2012, with a 19.8% increase in the contribution rate. This is mainly as a result of the increase in passenger numbers and in load factor and the decrease in sales incentives and security expenses.

Revenues from the cargo aircraft segment decreased by 12.5% and the negative contribution rate increased by 34.6% relative to 2012, primarily as a result of the drop both in the amount of cargo flown and in the revenue per ton of cargo.

Other revenues saw a 3.8% increase and their contribution rate increased by 58.4%, mainly as a result of the improvement in the contribution from subsidiary Sun D’Or; in total, the contribution increased from $210.7 from all segments in 2012 to $262.2 million in the reported year, a 24.4% improvement.

c. Analysis of revenues by flight destination:

America Europe Central Asia Rest of Total & the world in thousands US dollars Year 2013 Operating revenues 687,020 979,051 339,436 44,983 2,050,490 Non-segment revenues 52,530 Total consolidated revenues 2,103,020

Year 2012 Operating revenues 662,761 936,818 322,307 46,599 1,968,485 Non-segment revenues 47,157 Total consolidated revenues 2,015,642

Year 2011 Operating revenues 694,445 923,701 313,415 60,298 1,991,859 Non-segment revenues 50,727 Total consolidated revenues 2,042,586

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Revenues increased in 2013 to all flight destinations, except for “the rest of the world”, mainly as a result of an increase in passenger numbers, with the decrease in “rest of the world” destinations deriving from the discontinuation of activity on the Eilat route. a.6 Seasonal Factors The Group's activity is seasonal and focuses on peak periods. Heavy traffic of Israeli residents traveling abroad occurs primarily during the summer months and during holidays, while heavy incoming tourist traffic occurs during the summer months and during Jewish or Christian holidays or vacation time in their countries of origin. The peak of the Group's activity is in the third quarter, when passenger traffic in 2013, 2012, and 2011 constituted 31%, 30%, and 30%, respectively, of total yearly revenues.

Revenue breakdown by quarters and percentage of turnover in 2013 (in millions of dollars):

700 643.3 50% 600 529.7 499.0 500 431.0 40% 400 30% 300 30.6% 200 25.2% 23.7% 20% 100 20.5% 0 10% Q1-13 Q2-13 Q3-13 Q4-13 revenues % of revenues

a.7 Liquidity and Financing Sources

Jan - December Jan - December change 2013 2012 in thousands US in thousands US in thousands dollars dollars US dollars Cash flows from operating activities 185,242 78,270 106,972 Cash flows used for investing activities (153,656) (81,938) (71,718) Cash flows from (used for) financing activities 1,744 (28,878) 30,622 Net increase (decrease) in cash and cash equivalents 33,330 (32,546) 65,876

Operating Activities

The increase in cash flow from current activity in 2013 compared to the previous year derives mainly from the increase in pre-tax profits in the reported year compared to pre-tax loss in 2012, from loss from the adaptation of fair value of financial derivatives in the reported year relative to the profit from these item in 2012 as well as from an increase in employee benefit and provision items.

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Investment Activities

The Company used $170.7 million for investments in fixed assets in 2013. On the other hand the Company received $15.8 million from the realization of fixed assets. In total, the Company used $153.7 million for investment activity in 2013.

In 2012 the Company used $85.7 million for investment in fixed assets, $11.5 million for investment in pledged deposits and $3.0 million for investment in intangible assets. On the other hand, the Company received $18.5 million from the realization of fixed assets. In total, the Company used $81.9 million for investment activity in 2012.

Financing Activities

In 2013 the Company received loans to the sum of $154.6 million including loans for bridge financing of aircraft (PDP) for the purchase of 737-900 aircrafts, while on the other hand, the Company redeemed loans to the sum of $141.4 million, including loans for bridge financing of aircrafts (PDP) and payment of loan raising costs, as well as the repayment of net short-term credit to the sum of $11.5 million. In total, $1.7 million derived from financing activity in 2013.

In 2012 the Company repaid loans to the sum of $99.1 million. On the other hand, in 2012 the Company received loans to the amount of $60.6 million. Net short-term bank credit increased by an amount of $10.6 million. In total, $28.9 million were used for financing activity in 2012.

The Group’s total cash and cash equivalents and short-term investments as of December 31 2013 totaled $95.5 million, in addition to deposits pledged to a banking institution to the sum of $8.1, compared to $61.4 million in cash and cash equivalents and $11.5 million in deposits as of December 31 2012.

The average scope of Company bank loans over the course of 2013 amounted to $614 million ($682 million in 2012).

The average scope of trade payables received by the Company during 2013 was $160 million ($156 million in 2012).

The average scope of credit granted by the Company to its customers during 2013 was $157 million ($158 million in 2012).

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.

Regarding a table detailing the material loans based on the criteria established above, see Appendix B to the Board of Directors Report below.

Note that the Company has additional loans as of December 31 2013 that are not material as defined above, as detailed in this report.

In the matter of additional details pertaining to the Company’s loans and compliance with financial restrictions and covenants, see Note 18 to the December 31 2013 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

Presented below is a summary 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 $2.3 million. The Company has taken hedging measures to reduce the exposure, as detailed in b.1.(3) below.

Exposure to changes in interest rates – most 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 activity, every 1% increase in the Libor rate for a full year increases the Company's financing expenses by $6.1 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, each 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 $4.6 million. Likewise, a surplus of payments over receipts exists in euros, but at insignificant rates.

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 13f and Note 18e to the December 31 2013 Financial Statements.

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b1.(2) El Al 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.

The Company CEO is responsible for making decisions regarding the implementation of hedging agreements in practice in accordance with the Committee’s policy and guidelines.

The Company moderates the influence of these risks through the use of derivative financial instruments in order to hedge its exposure to risk. Use of the 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, the use of derivative financial instruments and non- derivative financial instruments and the investment of surplus liquidity. Compliance with policy and with permitted exposure levels is supervised by the Risk Management Committee on a regular and continuous basis.

The Market Risk Management Committee allows Company Management from time to time to deviate from said policy for limited amounts of time, in accordance with market developments.

The jet fuel hedging policy is as follows: hedging jet fuel quantities 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. The maximum hedging rate at the beginning of the period is 75% and the minimum hedging rate for the 12th month is 5%. Instruments and hedging levels shall be selected so that the Company limits its maximum exposure to cash securities. Over the course of the reported period, the Company adapted the implementation of the jet fuel hedging policy to rapidly-fluctuating market conditions, so that from time to time a deviation is created from the policy’s base lines, all of which involves regular reports to the Market Risk Management Committee and to the Board of Directors. As of this report, the Company is hedged according to its policy.

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. As of this report, the Company is hedged 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 adopted, 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. 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 December 31 2013, the Company had several agreements designed for hedging jet fuel prices, at a scope estimated at 32% of expected consumption for the next 12 months. Some of these transactions are recognized as hedging agreements for accounting purposes and some are not. The fair value of all jet fuel hedging instruments as of December 31 2012 is $8.1 million, presented in the Financial Statements as part of current assets under “derivative financial instruments". The Company listed an income of $1.6 million from these hedging agreements in the reported year. For details regarding changes occurring to jet fuel prices subsequent to the balance sheet date, see Section e.2.b of the Board of Directors Report.

b.1.(4) Hedging Interest on Loans

The Company executes hedges of the exposure in its long-term credit portfolio, due to changes in interest rates, in accordance with its policy as laid out in Section b.1.(2) above.

As of December 31 2013 these transactions are recognized as hedging agreements for accounting purposes. The fair value of these instruments as of December 31 2013 is a negative sum of $1.0 million, which is presented in the Financial Statements in the framework of current and non-current liabilities under “derivative financial instruments.”

After carrying out the hedging in question, as of December 30 2013, 22.9% of the balance of variable- interest loans received by the Company are hedged for a 12-month horizon (to January 2015), 51.1% of the balance of the loans received by the Company are at variable and non-hedged interest rates and 26.0% of the balance of the loans are at fixed interest for a period of 8 years, so that as of this report 48.9% of the Company’s loans are at fixed interest.

In the reported year the Company listed an expenses of $0.2 million due to these hedging agreements.

For information on changes in interest rates occurring subsequent to the balance sheet date, see Section e.2.c of the Board of Directors Report below.

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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. These transactions are recognized as hedging agreements for accounting purposes.

Over the course of 2013, the Company has entered into several financial transactions, intended to protect the Company from drops in NIS/USD exchange rates until August 2014.

The net fair value of these instruments as of December 31 2013 is $4.8 million, presented in the Financial Statements as part of current assets under "Derivative Financial Instruments".

In the reported quarter the Company listed income for exchange rate hedging agreements to the amount of $24.6 million.

For information on changes occurring in the NIS-USD exchange rate, see e.2.d below.

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 sensitivity analyses were performed relative to the fair value of the financial instruments as of December 31, 2013.

The following is a description of the models for examining the fair value sensitivity of the various financial instruments:

1. Interest hedge – Interest hedges are executed by means of financial instruments opposite Israeli banks. The base asset for these transactions is the Libor (London Inter-Bank Offered Rate) rate for various periods (3 months, 6 months, one year), according to which the interest return on the Company's variable-interest loans (plus a margin) is set.

Interest hedges are executed "back to back", in order not to create additional exposure of timing differences between the expiration date of the transaction and actual payment against the existing loans, so that the settlement dates match the repayment dates of the loans. On the loan repayment dates, the settlement amount is calculated for the next period, according to the market interest that prevailed on the two prior business days, and based on the structure of the transactions as determined in advance.

Interest hedge agreements in effect as of the end of 2013 are interest rate fixing transactions (IRS). These transactions are recognized as hedging agreements for accounting purposes.

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The fair value of interest hedges is calculated according to the projected Libor rate. In interest hedges in which the interest rate is fixed, the fair value is determined based on the difference between the projected interest and the interest published periodically by the world's leading banks, for the interest stated in the transaction, multiplied by the size of the hedge in each period. In hedge transactions that include options, the fair value is determined based on mathematical formulas for pricing options in recognized models.

2. Exchange rate hedging – exchange rate hedges carried out by the Company are executed using financial instruments in conjunction with banks in Israel and abroad.

The underlying assets for these transactions are the representative exchange rate for dollar/shekel currencies set by the Bank of Israel. Dollar/shekel exchange rate hedges are executed in order to hedge the cash flow exposure to the NIS as detailed in b.1.(5) above.

The yearly exposure rate is 1,600 million NIS. The transactions for hedging this exposure according to the Company's policy are monthly, corresponding with the conversion dates of dollars to shekels for the purpose of paying salaries and suppliers in Israel.

The Company’s transactions as of the end of 2013 are forward transactions according to which the Company fixes the exchange rate to the date on which it is required to perform a currency conversion. These transactions are recognized as hedging agreements for accounting purposes. The fair value of these transactions is calculated based on mathematical formulas for pricing derivatives in recognized models.

3. Jet fuel hedges – Jet fuel constitutes the most material component of Company expenses

Jet fuel hedge transactions are executed by the Company through via in financial instruments opposite the leading Israeli and global financial institutions and banks engaged in this market.

The underlying asset in these transactions is jet fuel in the various markets that serve as the basis for determining the jet fuel prices that the Company actually pays, and mainly Jet Aviation FOB Med. In addition to this market, the Company purchases jet fuel according to its price in other markets, of which the key ones are Singapore, US Gulf Coast and Northwestern Europe.

Jet fuel is an essential raw material for the Company for its operations – the Company is obligated to purchase the raw material in order to fly its planes, and there is no substitute or ability to alternate between the costs of these raw materials and other raw materials. The price of jet fuel is very volatile.

The market price of jet fuel is determined based on several parameters, including:

Crude oil prices include market expectations and supply and demand. The supply of oil and its products is limited physical and infrastructure factors (oil reserves, production infrastructures, refining, storage, transport, etc.), and by geopolitical and cartel influences of the large oil producers (OPEC).

Price fluctuations – Due to the meeting of the limited supply and the surging demand in recent years, any change, or expectations for change, in one of these factors, causes strong price fluctuations (such as levels of economic activity and global growth, wars and , shutdowns and problems at large oil refineries, international relations and more).

Seasonal demand for various crude distillates, including jet fuel (In the winter there is high demand for heating oil; in the summer there is high demand for gasoline. Likewise, transport costs vary, conforming to seasonal risks in sea shipping).

Production cost and infrastructure limitation – Distillate prices vary according to various constraints of the oil refining industry, refining infrastructures, storage and transport of oil and its products are limited,

B-19 Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding cost of their development is very high and their expansion takes many years (construction of a refinery takes 5-7 years).

Moreover, future prices for oil and its derivatives (including jet fuel) are affected strongly also by the power of the financial demands of institutional investors and speculators, which include these products in their investment portfolios.

In 2013 Brandt oil prices ranged between a low of $97.7 and a high of $118.9, with the price set at $110.8 at the end of December.

In view of the behavior of the markets, investment houses and the world's leading analysts are having difficulty in precisely and consistently estimating the price-change trends.

The forecasting ability of the various investment houses and analysts represent, at most, the immediate current estimate of the macroeconomic influences prevailing when the estimate was made. Furthermore, these estimates are calculated according to the different economic analyses of each analyst and investment house. Even the Forward curve structures are non-predictive, and at most, they represent the expectation and risk level embedded in the markets.

According to the structure of the Company's hedge transactions, on the settlement date vs. the financial entity with which the hedge was executed (settlement date of the trade), a calculation is made of the transaction's strike price vs. the average monthly price of the underlying asset (Asian options) (published by Platts, a division of McGraw-Hill companies, which is the authorized and leading international entity in the field of providing data services on the energy market) and constitutes an accepted point of reference with respect to the trading of oil and its derivatives. The payment or receipt for the transactions is based on the transaction's structure as designated in advance.

The financial instruments traded by the Company (mainly options on jet fuel) are traded over-the-counter (OTC) between the Company and the financial entities opposite which the trade is executed, and are not contracts traded directly on various exchanges.

The future price of the jet fuel, as traded in these instruments, is comprised of three main elements: crude oil price, the GasOil crack and the jet differential.

Each of these three elements is actually traded separately (between financial institutions and brokers), and priced separately. The pricing of each of the elements is affected by various factors, including the current price, duration, price fluctuations, supply and demand, seasonal factors, storage costs, transport, etc., and has a different effect on the overall price change of jet fuel.

This pricing is done differently by every financial entity, according to models and algorithms that they developed (based on models such as Black & Scholes, Monte Carlo, etc.), opposite the investment portfolio of that party.

In this report, we rely on fair value calculations made by the various financial entities with which the transactions were executed and which were provided the Company. These value calculations are also validated by feasibility tests conducted by the Company using the models and systems in its possession.

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 pertain to the fair value of the financial instruments as of December 31 2013.

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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 changes Gain (loss) from changes Increase 10% Increase 5% Fair value Decrease 5% Decrease 10% 3.818 3.645 3.471 3.297 3.124 NIS/$ NIS/$ NIS/$ NIS/$ NIS/$ Cash and cash equivalents (2,668) (1,397) 29,344 1,544 3,260 Designated cash (74) (39) 811 43 90 Short-term deposits (849) (445) 9,341 492 1,038 Trade receivables (185) (97) 2,038 107 226 Other accounts receivables (1,014) (531) 11,151 587 1,239 Derivative financial instruments (439) (230) 4,834 254 537 Long-term bank deposits (129) (68) 1,422 75 158 Total financial Assets (5,358) (2,807) 58,941 3,102 6,548 Borrowings and current maturities 457 239 (5,025) (264) (558) Trade payables 3,301 1,729 (36,316) (1,911) (4,035) Other payables - Current 588 308 (6,473) (341) (719) Loans from financial institutions 259 135 (2,845) (150) (316) Loan from others 24 12 (259) (14) (29) Other payables - Non Current 403 211 (4,437) (234) (493) Total financial liabilities 5,032 2,634 (55,355) (2,914) (6,150) Exposure in linkage balance sheet due to surplus of financial assets over financial liabilities (326) (173) 3,586 188 398 * Does not include exposure for the effect of the changes in the exchange rate on assets and liabilities due to employee benefits, see Section a4.

b. Sensitivity to changes in the EUR/USD exchange rate - in thousands of dollars:

Gain (loss) from changes Gain (loss) from changes Increase 10% Increase 5% Fair value Decrease 5% Decrease 10% 0.798 0.762 0.726 0.690 0.653 Euro/$ Euro/$ Euro/$ Euro/$ Euro/$ Cash and cash equivalents (415) (217) 4,566 240 507 Trade receivables (2,077) (1,088) 22,847 1,202 2,539 Other accounts receivables (166) (87) 1,828 96 203 Total financial Assets (2,658) (1,392) 29,241 1,538 3,249 Trade payables 1,947 1,020 (21,417) (1,127) (2,380) Other payables 12 6 (134) (7) (15) Total financial liabilities 1,959 1,026 (21,551) (1,134) (2,395) Exposure in linkage balance sheet due to surplus of financial assets over financial liabilities (699) (366) 7,690 404 854

* Does not include exposure for the effect of the changes in the exchange rate on assets and liabilities due to employee benefits, see Section a4.

B-21 Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding c. Sensitivity to changes in jet fuel prices on inventory (dollar/gallon) - in thousands of dollars:

Gain from changes Loss from changes Type of instrument Increase 10% Increase 5% Fair value Decrease 5% Decrease 10% 3.285 3.135 2.986* 2.837 2.687 $/gallon $/gallon $/gallon $/gallon $/gallon Jet fuel Inventorie 1,066 533 10,656 (533) (1,066)

* Jet fuel prices according to moving weighted average as of December 31 2013.

d. 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.

Gain from changes Loss from changes Type of instrument Increase 15% Increase 10% Increase 5% Fair value* Decrease Decrease 10% Decrease 15% 5% 3.458 3.308 3.157 3.007 2.857 2.706 2.556 $/gallon $/gallon $/gallon $/gallon $/gallon $/gallon $/gallon SWAP transactions - designed for hedging 25,965 17,310 8,655 7,163 (8,655) (17,310) (25,965) Options - not designed for hedging 5,073 3,251 1,519 892 (1,113) (2,121) (3,421) Total transactions - jet fuel hedge 31,038 20,561 10,174 8,055 (9,768) (19,431) (29,386)

* The price of diesel fuel in the Middle East as of December 31 2013 ($3.007/gallon), according to which the fair value of the Company's hedge transactions is computed.

e. Sensitivity of interest hedging to changes in market interest rates – in thousands of dollars:

According to the principles of the model, the Group executed interest hedges that respond in a similar way to market factors (IRS agreements not intended for hedging), since no loss of significant information is sustained that is required to understand the Company's exposure to the market risk, as a result of the grouping. On December 16 2008 a 75% change occurred to the dollar monetary policy, and therefore the following sensitivity analysis led to a 75% change in interest rates.

Gain from changes Loss from changes Type of instrument Increase Decrease Decrease Increase 75% Increase 10% 5% Decrease 5% 10% 75% in interest in interest in interest Fair value * in interest in interest in interest rate rate rate rate rate rate IRS transactions - designed for hedging 250 33 17 (991) (17) (33) (250)

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* Fair value was calculated according to the market Libor rate as of December 31 2013, at the following rates: 3- month Libor: 0.25%, 6-month Libor: 0.35%, and 12-month Libor: 0.58%, all as applicable and according to the relevant transaction. f. Sensitivity of NIS/USD exchange rate hedging to changes in market exchange rates – in thousands of dollars:

Loss from changes Gain from changes Type of instrument Increase 10% Increase 5% Decrease 5% Decrease 10% in exchange in exchange Fair value in exchange in exchange rate rate NIS/$ * rate rate 3.818 3.645 3.471 3.297 3.124 FORWARD transactions - designed for hedging (7,828) (4,101) 4,834 4,531 9,567

B-23 Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding b2. Linkage Basis Report The following is the consolidated linkage basis report for December 31 2013:

In, or linked to In Israeli In, or linked to In, or linked to Non-monetary Total the US dollar currency the euro the other items currencies (in thousands US dollars) Current assets Cash and cash equivalents 47,875 29,344 4,566 4,355 - 86,140 Designated cash - 811 - - - 811 Short-term deposits - 9,341 - - - 9,341 Restricted deposits 8,050 - - - - 8,050 Trade receivables 81,412 2,038 22,847 18,847 - 125,144 Other receivables 7,648 11,151 1,828 1,517 - 22,144 Derivative financial instruments 8,055 4,834 - - - 12,889 Prepaid expenses - - - - 26,989 26,989 Inventories - - - - 20,358 20,358 Non-current assets Long-term bank deposits - 1,422 - - - 1,422 Investment handled using the book value method - - - - 17,660 17,660 Investments in other company 1,228 - - - - 1,228 Fixed assets, net - - - - 1,154,271 1,154,271 Intangible assets, net - - - - 8,641 8,641 Prepaid expenses - - - - 9,644 9,644 Assets due to employee benefits - 62,544 - - - 62,544 154,268 121,485 29,241 24,719 1,237,563 1,567,276 Current liabilities Short-term borrowings and current maturities (159,866) (5,025) - - - (164,891) Trade payables (60,860) (36,316) (21,417) (7,715) - (126,308) Other payables (31,507) (6,473) (134) (1,840) - (39,954) Provisions (831) (16,174) - - - (17,005) Derivative financial instruments (165) 0 - - - (165) Employee benefit obligations (8,923) (97,899) (1,534) (1,195) - (109,551) Deffered revenues - - - - (269,971) (269,971) Non-current liabilities Loans from banking corporations (472,608) (2,845) - - - (475,453) Employee benefit obligations (13,152) (56,437) (785) (6,886) - (77,260) Loans from others (199) (259) - - - (458) Derivative financial instruments (826) - - - - (826) Other payables (4,271) (4,437) - - - (8,708) Deferred tax - - - - (38,778) (38,778) Deffered revenues - - - - (58,073) (58,073) Shareholders’ equity - - - - (179,875) (179,875) (753,208) (225,865) (23,870) (17,636) (546,697) (1,567,276) Monetary assets, net of monetary liabilities (monetary liabilities, net of monetary assets) (598,940) (104,380) 5,371 7,083 690,866 -

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The following is the consolidated linkage basis report for December 31 2012:

In, or linked to In Israeli In, or linked to In, or linked to Non-monetary Total the US dollar currency the euro the other items currencies (in thousands US dollars) Current assets Cash and cash equivalents 5,771 34,392 1,668 10,979 - 52,810 Designated cash - 1,205 - - - 1,205 Short-term deposits - 8,570 - - - 8,570 Restricted deposits 11,456 - - - - 11,456 Trade receivables 97,740 1,530 16,276 14,352 - 129,898 Other receivables 8,049 12,253 1,244 1,787 - 23,333 Derivative financial instruments 5,666 11,006 - - - 16,672 Prepaid expenses - - - - 29,442 29,442 Inventories - - - - 22,145 22,145 Non-current assets Long-term bank deposits - 1,451 - - - 1,451 Investment handled using the book value method - - - - *16,886 16,886 Investments in other company 1,244 - - - - 1,244 Fixed assets, net - - - - 1,128,959 1,128,959 Intangible assets, net - - - - 9,392 9,392 Prepaid expenses - - - - 9,950 9,950 Assets due to employee benefits - *45,319 - - - 45,319 129,926 115,726 19,188 27,118 1,216,774 1,508,732 Current liabilities Short-term borrowings and current maturities (155,558) (4,426) (84) (248) - (160,316) Trade payables (88,819) (27,579) (19,361) (9,073) - (144,832) Other payables (45,487) (351) (3,099) (3,306) - (52,243) Provisions (1,478) (14,855) - - - (16,333) Derivative financial instruments (126) - - - - (126) Employee benefit obligations (3,535) (93,928) (487) (4) - (97,954) Deffered revenues - - - - (252,915) (252,915) Non-current liabilities Loans from banking corporations (468,935) (5,290) - - - (474,225) Employee benefit obligations *(26,849) *(46,963) (613) *(8,028) - (82,453) Loans from others (163) (2,278) - - - (2,441) Derivative financial instruments (1,399) - - - - (1,399) Other payables (4,350) (4,437) - - - (8,787) Deferred tax - - - - *(20,489) (20,489) Deffered revenues - - - - (58,274) (58,274) Shareholders’ equity - - - - *(135,945) (135,945) (796,699) (200,107) (23,644) (20,659) (467,484) (1,508,732) Monetary assets, net of monetary liabilities (monetary liabilities, net of monetary assets) (666,773) (84,381) (4,456) 6,459 749,290 -

* Retroactive implementation of IAS 19 (revised) “Employee Benefits” - see Note 3 to the Financial Statements.

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c. Aspects of Corporate Governance

c 1. Charitable Contributions and Community Work El Al assigns a great deal of importance to making charitable contributions and assisting the needy in the community. As part of its activities, the Company contributed a total of $87 thousands in cash and cash equivalents, as well as 1,500,000 NIS in cash-equivalent donations in 2013.

Over the course of 2013, El Al continued and even increased its longstanding tradition of giving back to the community.

The activity continued to focus mainly on the following subjects:

1. El Al employee volunteer activities for various populations, including holocaust survivors without relatives, at-risk children, special-needs children, people with disabilities and the infirm, as well as volunteer work by Company employees in educational projects such as Together Teachers and Young Entrepreneurs. 2. In addition, volunteer activity takes place in the form of public relations work for Israel abroad by air crew, pilots and flight attendants, while staying abroad, as part of the Ambassadors Project, which is being conducted successfully in conjunction with the Foreign Ministry, the Jewish Agency and the STAND WITH US organization. 3. Support with money or money-equivalents, for the community: a. By management – within the framework of the Contributions Committee, the Company contributes donates sums of money, and in addition contributes assistance in the form of money equivalents, such as dozens of meals daily, free flight tickets and transport of special cargo free of charge. b. In addition, El Al has donated to organizations assisting the mentally disabled (AKIM, Etgarim, Pitchon Lev, Larger than Life, the Israeli Youth Diabetes Association). El Al has adopted the soldiers of the IDF’s 202nd Battalion as part of the Adopt a Warrior program. Within the framework of the GLOBALY Club, El Al transfers points for the purchase of flight tickets to the Make-a-Wish Foundation to fulfill the wishes of young cancer patients, to the AWIS in order to assist single soldiers in visiting their families abroad and to Taglit project in order to bring Israeli youths to Israel. c. By the employees themselves - whether in money or money-equivalents (home electrical appliances, clothing, books, games, etc.) to preschools for special-needs children, at-risk children’s homes and more. c 2. Directors with Accounting and Financial Capabilities Board members the Board of Directors considers to possess accounting and financial expertise in the reported year in light of their estimated education, experience, skills and knowledge of business/accounting subjects and financial statements are Mr. Nadav Palti, Mr. Yair Rabinowitz, Professor Yehoshua (Shuki) Shemer, Mr. Pinchas Ginsburg, and Ms. Ruth Dahan (Portnoy). For details see Regulation 26 of Part D (Additional Details on the Corporation) of the periodic report. Note that as of March 6 2014, Mr. Nada Palti no longer serves on the Company's Board of Directors.

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c 3. Disclosure Regarding Independent Directors The Company has not adopted in its bylaws the ordinance regarding the number of independent directors, in accordance with Section 219 (a) of the Companies Law, 1999. As of the approval of the statements, the number of independent directors, as defined by the Company, is 3 out of 9. c.4. Disclosure about Internal Auditor of Reporting Corporation 1. Information Regarding the Internal Auditor and Compliance with Conditions 1.1.1. Name of Auditor: Gil Ber. 1.1.2. Start of term in office: June 1 2008. 1.1.3. Qualifications: accountant, with a degree in accounting and business administration and certified in public administration and auditing (with honors). Holds CIA (Certified Internal Auditor - U.S.) and CRISC (Certified in Risk and Information Systems Control) certificates Has eighteen years’ experience in internal auditing, in financial statements auditing, in risk management and in consulting. Until his appointment Mr. Ber was a partner in Cost Forrer Gabbay & Kasierer (Ernest & Young) and was responsible for auditing and risk management. Within this framework he served as internal auditor for various companies and organizations. In addition, he serves as a regular lecturer at the Academic Track of the College of Management on budgeting and control subjects and a member of the Ilan Audit Committee. The Internal Auditor meets all compliance requirements set in Section 3(a) of the Auditing Law, 1992. The Internal Auditor complies with Section 146(b) of the Companies Law and Section 8 of the Internal Auditing Law, 1992. 1.1.4. The Internal Auditor has no holdings in Company securities or holdings in any related body in the reported year. 1.1.5. Starting from the date of his appointment, the Internal Auditor has had no business connections of any sort with the audited corporation or with any related body, with the exception of serving as Internal Auditor of Group subsidiaries. 1.1.6. The Internal Auditor is employed by the Company as a full-time Company employee.

2. The Internal Auditor's Appointment 2.1. The appointment of the internal auditor was approved by the Audit Committee on its April 21 2009 meeting and by the Company's Board of Directors on its April 30 2009 meeting and after considering the Auditor's education, skills and experience in corporate auditing and risk management to material degrees. 2.2. The Auditor was given duties and authorities in accordance with the Company's auditing procedure, the directives of which are based on the laws of the State of Israel. Pursuant to this, the Internal Auditor was tasked with proposing a work plan, to carry out an auditing plan accordingly and to distribute, in writing, reports containing findings, conclusions and recommendations.

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3. The Internal Auditor's Supervisor 3.1. The Internal Auditor is subordinated in the Company to the Chairman of the Board of Directors and the CEO of the Company, in accordance with the Company's bylaws.

4. Work Plan 4.1. The Internal Auditor's work plan is on a yearly basis. 4.2. The Internal Auditor's work plan is determined based upon the following considerations: 4.2.1. The risk embodied in an area of activity and profitability of the Company. 4.2.2. The effect of the area on the safety and security of passengers, employees and aircraft. Company profitability, passenger service, and regulation. 4.2.3. The existence of appropriate controls, applicability and efficiency in the audited area. 4.2.4. Suggestions by VPs and department heads. 4.2.5. Previous audit findings and the pace at which the recommendations submitted were implemented. 4.2.6. The need for follow-up in order to ensure a proper auditing process. 4.3. Establishment of the work plan involves the Chairman of the Company's Board of Directors, the members of the Audit Committee and the Company CEO. 4.4. The work plan proposal is received on a yearly basis from by the Chairman of the Company's Board of Directors, the members of the Audit Committee and the Company CEO. All of them approve the proposal in accordance with Section 149 of the Companies Law, 1999. 4.5. The work plan allows the Internal Auditor to exercise his judgment in deviating from the plan. 4.6. The Company Auditor is present at Board meetings in which material transactions are approved.

5. Audits Overseas or for Subsidiaries 5.1. The Company Auditor also serves as the Internal Auditor for all active subsidiaries and therefore the Auditor's work plan takes these companies into account. The Auditor's work plan also includes reviews of the Company's overseas activities.

6. Treatment of Complaints Pertaining to Flaws in the Management of the Company’s Business The Company Auditor was assigned the task of concentrating and presenting to the Audit Committee the method of treatment of complaints by Company workers regarding flaws in the manner in which it conducts its business. For this purpose, a regular mechanism has been established at the Company to handle these matters. The subject is studied and reviewed on a regular basis.

7. Scope of Employment 7.1. The Internal Auditor is employed full time by the Company and subordinate to him are seven full time auditors.

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7.2. 14,875 work hours were invested in auditing the Company and its overseas subsidiaries in 2013, as detailed below:

Work hours for the Work hours for the Work hours due to Total Company's activity in Company's activity investee Israel abroad * corporations ** 669,11 69,61 69111 679,41

* 75% of the Company's work hours for activities abroad were carried out in Israel ** Audits were carried out for 3 subsidiaries (including an investee abroad).

8. Auditing Proceedings 8.1. The Company's Internal Auditor conducts his work in accordance with the Companies Law, 1999, the Internal Audit Law, 1992 and according to generally accepted professional standards. 8.2. The Chairman of the Board and Audit Committee Chair hold a monthly meeting with the Internal Auditor regarding his work and regarding the professional standards according to which the Auditor operates. 8.3. The Audit Committee holds meetings in which it discusses the Internal Auditor's work and the audit standards. 8.4. Prior to the approval of the yearly audit plan the Chairman of the Board and Audit Committee Chair meets with the Internal Auditor to discuss the standards according to which the work plan was formulated, following which the audit committee discussed the proposed yearly audit plan and the standards according to which the proposal was formulated and approves it.

9. Access to Information 9.1. The Internal Auditor has free, continuous and direct access to any document or information held by the Company or by one of its employees, as well as access to any ordinary or computerized data base, to any data base and to any automatic data processing system in the Company, including financial data, as noted in Section 9 of the Internal Audit Law, 1992.

10. Internal Auditor Reports 10.1. The audit reports are submitted in writing. 10.2. The Internal Auditor produced 34 audit reports in 2013. The audit reports were submitted to the Chairman of the Board, the members of the Audit Committee of the Board of Directors, and to the Company's CEO. 10.3. In 2013, the Audit Committee convened 17 times to discuss the internal audit reports.

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11. Board of Directors' Evaluation of the Internal Auditor's Activity In the opinion of the Board of Directors, the scope, nature and continuity of the internal auditing activities and work plan are reasonable under the circumstances, and they achieve the internal audit objectives of the corporation, as they relate to all of the Company’s material and key activities.

12. Remuneration 12.1. The compensation of the internal auditor is based on the salary and associated benefits granted members of the senior management group and in accordance with Company policy. 12.2. In the opinion of the Company's Board of Directors, the compensation given to the Internal Auditor and its components do not impair his ability to apply his independent judgment in carrying out his assignments, inter alia, in view of the fact that the audit work is performed by the Internal Auditing Department, which features several Internal Auditors. c.5. Disclosure Regarding Independent Auditors' Fees

Below are the Company's fee expenses to the accounting firm of Brightman Almagor & Co. for auditing, tax services and other services:

Auditing and tax services

Hours Thousands of Dollars

3162 ,9117 762

3163 4961, 232

The increase in audit and tax service hours in 2013 relative to 2012 largely derives as a result of the examination of the SAP system in 2013, which began operating at the Company starting January 1 2013 as well as from the addition of audit hours due to subsidiaries Sun D’Or and TAMAM.

These fees were approved by the Company's Board of Directors and are reasonable and acceptable according to the nature of the Company and the extent of its activities.

c.6. Financial Statement Approval Process The body charged with ultimate control in the Company regarding the approval of the Financial Statements is its Board of Directors. Starting from the approval of the 2010 yearly Financial Statements the financial statement approval process is covered by directives set in the Companies Regulations (Directives and Conditions for the Financial Statement Approval Process), 2010 (hereinafter – “the Regulations”).

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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 and the Government Affairs and Regulations Committee. In the Board meeting held on September 15 2011 it was decided to split the Finance, Budget and Balance Sheet Committee to two committees: the Finance and Budget Committee, which will discuss various financial issues, including the Company’s budget, as well as a Balance Sheet Committee that will serve as a Financial Statements examination committee. At the head of both committees is the external director Mr. Yair Rabinowitz.

As of the approval of these Financial Statements, the Balance Sheet Committee (Financial Statement Examination Committee) consists of four members (most of whom are independent), as follows: Mr. Yair Rabinowitz, Prof. Yehoshua (Shuki) Shemer, Mr. Pinchas Ginsburg and Ms. Ruth Dahan (Portnoy). 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 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. In addition, the Chair of the Financial Statement Examination Committee reviews the key points of the Committee’s recommendations.

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.

The Balance Sheet Committee convened on March 16 2014 to formulate recommendations for the Board of Directors. Taking part in the meeting in question were the Committee members: Yair Rabinowitz, Professor Yehoshua Shemer, Mr. Pinchas Ginsburg and Ms. Ruth Dahan (Portnoy). Also taking part in the meetings in question were the Company CEO, Mr. Eliezer Shekedi, the CFO, Mr. Nissim Malki, the Legal Counsel and Company Secretary, Mr. Omer Shalev, Esq. and representatives of the independent auditor.

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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, if any, 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 December 31 2013 Financial Statements: a) The draft Financial Statements were provided to the members of the Board of Directors to study on March 13 2014. 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 Committee reviewed the Company’s financial results and viewed comparisons between the reported period and corresponding periods and the work plan, presented by the CFO. d) Pursuant to its meeting, the Committee studied the estimates and assessments carried out in relation to the Statements for the reported year, 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 drafts for the Financial Statements were provided to the members of the Board of Directors to study on March 13 2014, meaning 6 days before the discussion by the Board of Directors. h) The Committee’s recommendations were provided to the members of the Board of Directors in writing on March 16 2014, meaning 2 business days before the discussion by the Board of Directors. 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. i) On March 18 2014 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 December 31 2013 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, Tamar Moses-Borowitz, Yehuda Levi, Yair Rabinowitz, Professor Yehoshua Shemer, Pinchas Ginsburg, Shlomo Hannael, Kimmerling, Ruth Dahan Portnoy.

B-32 Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding c.7 Remuneration of Interested Parties and Senior Executives

On January 8 2014 a special meeting of the Company’s shareholders approved the Company’s executive remuneration policy (hereinafter: “the Remuneration Policy) as well as the revision of the management services agreement of the Chairman of the Company’s Board of Directors, Mr. Amikam Cohen, as detailed in the Company shareholders meeting summons report published by the Company on December 2 2013 and the meeting summons revision report published by the Company on December 30 2013.

For details regarding the remunerations given senior Company executives in accordance with agreements with the Company, see Regulation 21 in Chapter D of this periodic report.

Upon their approval, the considerations guiding the Company's Board of Directors in determining salary payments to Company executives, were made after examining their contribution to the development of the Company's business, taking into account the provision of services required for the Company, particularly in light of the current need to develop its business, as well as taking into account the knowledge, experience and skills possessed by these executives in the Company’s areas of activity, the state of its business and its financial results, as well as the payment given executives in corresponding positions at companies with characteristics similar to those of the Company.

Pursuant to the 2013 periodic report approval process, a discussion was held at the Company’s Board of Directors on the terms of employment and service of each executive, detailed in Regulation 21 of the Securities Regulations (Periodic and Immediate Reports) 1970 (“the Reporting Regulations”). The Board of Directors studied whether the remuneration sums are compatible with the remuneration policy. For the sake of the discussion, the Board of Directors was presented with relevant data regarding each of the Company’s executives, as required in accordance with Regulation 21 of the Reporting Regulations and in accordance with Parts B and C of the Sixth Addendum to the Reporting Regulations.

After conducting the examination in question, the Board of Directors found that the remuneration given each of the officers in question was in accordance with the remuneration policy. Regarding the outgoing Company CEO, Mr. Eli Shekedi, who as reported by the Company1 his employment agreement included provisions pertaining to the yearly bonus, which were not in accordance with the Company's remuneration policy, the Board of Directors examined the bonus given Mr. Shekedi and found that the bonus in question was in accordance with the terms of his employment agreement, which establish entitlement to a result- based bonus, results that were achieved in the reported year. Accordingly, and taking into account Mr. Shekedi’s extensive contribution to the Company’s activity and the monetary results in the reported year, the Company Board of Directors believes that the remuneration paid Mr. Shekedi is fair, worthwhile and reasonable.

1 See the report on the Company’s general meeting summons for the approval of the Company's remuneration policy dated December 30 2013.

B-33 Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding c.8 Internal Enforcement Plan

In December 2011 the Company’s Board of Directors approved, after receiving the recommendations of the Corporate Governance Committee, the key points of the Company’s internal enforcement plan in the field of securities and corporate law (hereinafter: “the Internal Enforcement Plan”).

The internal enforcement plan expresses the Company’s recognition of the importance of compliance with the law on behalf of Company employees, executives, Board members and relevant service providers and concentrates the Company's policy on the subject of preventing and treating violations, including a policy for the evaluation of the damages of violations and preventing their recurrence.

The goal of the internal enforcement plan is to assimilate and enforce norms in matters of observing the law, ethical rules and other codes of behavior by the Company, its executives and its employees and therefore to confirm compliance with securities law on behalf of the Company and by individuals working at it.

The enforcement plan includes means for the internal identification of potential violations and failures, the purpose of which, among other things is to locate and correct failures, improve reporting processes, identify and treat cases of conflict of interest, prevent the loss of internal information out of the Company and to prevent prohibited influence on trade in Company shares. To be clear, the internal enforcement plan may constitute a tool employed by the CEO and the Board of Director pursuant to the observance of their oversight obligation and may be held in the Company’s favor in the event of any violation of securities law.

The internal enforcement plan adopted by the Company includes an outline for the activities of the Company’s internal enforcement array and key procedures including: the Board of Directors’ work procedure; the procedure for defining the positions and authorities of the Audit Committee; the procedure for transactions with related parties; the Board of Directors’ conflict of interest procedure; the executive remuneration procedure; the reporting (non-financial) procedure; internal information procedure; as well as the delivery of information to the media and to the capital markets.

The Company's Board of Directors approved and adopted the internal enforcement plan and its central procedures and also, at the recommendation of the CEO, appointed the Company’s legal counsel and secretary, Omer Shalev, as the Company’s internal enforcement supervisor (hereinafter: “the Supervisor”).

Over the course of 2013 the Supervisor took various actions as part of the implementation of the enforcement plan among Company workers and executives, including training on the subject of internal enforcement provided by the Supervisor to workers and executives at the Company, its subsidiaries as well as entities providing service to the Company, surveys were conducted among Company employees to examine the effectiveness of the internal enforcement plan, initiated inspections were carried out to examine the implementation of enforcement procedures.

Over the course of 2013, a survey was conducted to locate compliance risks in the field of securities law and corporate law (hereinafter: “the Survey”) by an external body, in which the Company’s activity was examined in terms of the Securities Law and the Companies Law and resulting regulations and as part of this examination, the controls employed by the Company were examined in order to confirm their compliance with the various legal requirements, including the work procedures anchored within the framework of the internal enforcement plan and the actions carried out in Company in light of the enforcement plan. The parties preparing the survey found that the work processes carried out at the Company provide a proper response for preventing violations in the field of securities law and corporate law and, and in addition, recommendations were provided to tighten the controls.

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The Supervisor provides the member of the Corporate Governance Committee, as part of the Enforcement Supervisor’s Report, a description of the actions taken over the course of the reported period as part of the implementation and assimilation of the enforcement plan, a review of compliance incidents and the measures taken to deal with such incidents and prevent the recurrence of similar cases in the future as well as an updates file on legislative amendments, Securities Authority instructions and material decisions made as part of legal proceedings in the field of securities law and corporate law.

d. Disclosure Provisions with Regard to Financial Reporting by the Corporation d.1. Events Subsequent to the Balance Sheet Date Regarding events subsequent to the balance sheet date, see Note 36 to the December 31 2013 Financial Statements. 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 2013 Financial Statements. d.3. Explanation of the Subjects to which the Company's Independent Auditors Draw Attention in their Opinion on the Financial Statements The Company’s accountants direct your attention, in their opinion in the Financial Statements, to Note 1.c.(1) to the Financial Statements regarding the “open skies” agreement and to Company management's estimate that implementation of the agreement may have a negative impact on the Company’s financial status and operating results. At the same time, Company management estimates in 2014, no material impact is expected on the Company’s activity, among other things in light of the government resolution regarding the increase in the state’s participation in the security costs of Israeli airlines and following the activation of the new UP aviation brand. Furthermore, due to the expected additional gradual implementation of the agreement in the summer 2015 season, the Company estimates that as of this date it will carry out the actions required to deal with the situation in question, as well as well as to that stated in Note 1.c.(2) to the Financial Statements regarding the actions the Company is carrying out in order to deal with the state of the Company’s business as well as the cash flow deriving from its ongoing activity in accordance with the Company’s work plan approved by the Board of Directors and management’s estimates regarding the Company’s ability to uphold its commitments in the foreseeable future, as well as to Note 22c to the Financial Statements regarding exposure the approval of class actions against the company and the Company’s exposure to these class actions.

B-35 Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

e. Additional Information e.1 Dividend Distribution Policy On November 20, 2007, the Company's dividend policy was updated. Pursuant to the new dividend policy, the Company will distribute dividends from time to time at the discretion of the Board of Directors and subject to the Company's needs. On the issue of the dividend distribution policy, see Note 25d to the December 31 2013 Financial Statements. e.2 Disclosure regarding Changes in the Economic Environment, the Implications of the Capital Market Crisis and Market Risks a. 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.

The following are changes occurring to jet fuel prices, interest rates and NIS exchange rates from the end of the year until immediately before the publication of the December 31 2013 Financial Statements: c) As of the reported date (December 31 2013), the market price of jet fuel (before fees and supplier margins) weighted according to the markets in which the Company purchases jet fuel, was 301.52 cents per gallon, while as of a date immediately prior to the approval of the report this price was 283.9 cents per gallon, a 5.6% decrease; note that jet fuel expenses constitute nearly 33% of the Company's turnover, and therefore changes in price may have a material impact on its financial results. Since the beginning of 2014 the fluctuations in jet fuel trading has continued and the average effective price the Company is expected to pay for jet fuel consumption (after hedging) in January - March 2014 is lower than the average effective price it paid during the fourth quarter of 2013. At the same time, the fair value of jet hedging instruments shall be set in accordance with price changes which occurred since the end of the year and the completion of accounting for some of the transactions. As of December 31 2013, the Company had agreements designed for hedging jet fuel prices, at a scope estimated at 32% of expected consumption for 2014. 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 34% of the expected consumption for the period from March 2014 to March 2015. c) The three-month LIBOR interest rate dropped by 8% from 0.25% as of the report date to 0.23% near the approval of the Statements; the impact of the change in LIBOR rates in the payment of interest on loans will be evident in the next repayment period of each loan. The interest payments on Company loans for the first quarter of 2014 shall be made according to interest rates in previous quarters. The Company possesses hedging agreements for Libor rates (see Section b.1.(4) above), the fair value of which is expected to drop as a result of the decrease in Libor interest rates. d) On a date near the publication of the Financial Statements, no material change had occurred in the exchange rate of the NIS vs. 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 (March 31 2014).

Amikam Cohen Eliezer Shekedi Chairman of the Board Chief Executive Officer

March 18 2014

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Appendix A to the Report of the Board of Directors on the State of the Corporation's Affairs for the Period Ending

December 31 2013

Minimal Disclosure Required for Value Estimates and in their Regard, and Rules Pertaining to their Addition to Reports as per Securities Authority Guidelines in Accordance with Section 8b of the Securities Regulations (Periodic and Immediate Reports), 1970. Assessment of the Total Value of the 777-200 747-400 Fleets a. Introduction

International Accounting Standard 36 establishes rules regarding the accounting treatment, presentation and disclosure required in the event of the impairment of assets.

The purpose of the standard is to establish procedures the corporation must implement in order to ensure that these assets are not presented in sums higher than their recoverable amount. An asset is presented in the Financial Statements at higher than its recoverable amount when its book value is higher than the sum received from the use or sale of the asset. In the event that the asset has an impairment, IAS 36 demands that the corporation recognize an impairment loss.

The following document presents the key points of the value estimate performed by El Al Israel Airlines Ltd. (hereinafter "El Al" or "The Company") in order to determine whether the depreciation of its 777-200 and 747-400 fleets (hereinafter "the Fleets") was to be recognized according to IAS 36, in accordance with Securities Authority directives.

This document was prepared in accordance with guidelines from the Securities Authority as per Section 8b of the Securities Regulations (Periodic and Immediate Reports), 1970, regarding minimal required disclosure for value assessments and in their regard and rules regarding their addition to reports.

b. Specification and Identification of Asset Group

The asset group for which the test was conducted includes the 777-400 fleet which consists of 6 aircraft owned by the Company and the 747-200 fleet which consists of 6 aircraft owned by the Company.

c. Opinion Validity Date

March 2014.

d. Value Assessor

The value assessment was performed by El Al management.

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e. Circumstances under which the IAS 36 Value Assessment was Conducted

The book value of the aircraft fleet is higher than its market value as appearing in price lists published by AVAC – the Aircraft Value Analysis Company and Airclaims - ASCEND World Wide.

Note that use of the market value of the aircraft on the basis of AVAC and Airclaims price lists is common practice among airlines around the world as well as among financing banks and has been used by El Al in its various commitments with banks.

IAS 36 states that a provision for depreciation must be made when the book value of an asset surpasses its recoverable amount. A recoverable sum is calculated as asset's the fair value less costs to sell, or its value in use, whichever is higher.

Fair value less costs to sell is the sum that may be received from the sale of the asset in a good faith agreement between a willing buyer and a willing seller. The value in use of an asset is the current value of estimated future cash flow expected to derive from continuous use of the asset and its sale at the end of the period of use. The Company considers the market value of the assets as published by AVAC and Airclaims as representing the fair value of these aircraft. As of this value assessment, the Company has examined the value in use of the aircraft in its possession and in its service, the depreciated value of which in the Company's December 31 2013 Financial Statements exceeds their fair value less costs to sell.

As of this value assessment, the fair value less costs to sell of the 777-200 fleet amounts to a total of $354 million, compared to the depreciated retained cost in the books of those aircraft as of December 31 2013, which amounts to a total of $441 million.

The fair value less costs to sell of the 747-400 fleet amounts to a total of $113 million, compared to the depreciated retained cost in the books of those aircraft as of December 31 2013, which amounts to a total of $178 million.

f. Assessment Method

The value assessment was conducted according to the discounted cash flow method. According to this approach, assessed cash flows expected for the Company from the use of the aircraft fleet were discounted. The following are key assumptions used in calculating value:

 The expected contribution from the aircraft fleet is based on results in practice for 2013, and is projected forward unchanged across the economic life span of the entire aircraft fleet, unless expressly noted otherwise. The Company uses this method consistently in assessing the value of its aircraft fleet.

The Company believes that based, among other things, on the examination of the estimates included in value assessments in the past, this is the best estimate for the expected contribution from the aircraft fleets, except if the Company knows any unusual events on the date the value assessment was prepared.

 Useful life: for the 777-200 fleet - 10 years of activity (and sale of the aircraft at fair value less cost to sell at the end of the 10 year period), for the 747-400 fleet - 5 years of activity (and sale of the aircraft at fair value less cost to sell at the end of the 5 year period).

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 Cash flow expected from activity: management calculated that the net cash flow from the operation of the 777-200 aircraft fleet is expected to amount to $86 million in 2013 ($63 million after imputed tax), and the cash flow from the operation of the 747-400 aircraft fleet is expected to amount to $117 million ($86 million after imputed tax). This cash flow was calculated based on revenues from the aircraft fleet less commissions and variable expenses that may be assigned to the fleet in question and less fixed cash flow expenses such as security, maintenance, operations and sales expenses that may be allocated relative to the cost of these aircrafts' operation.

 Scrap value at the end of useful life (meaning after 10 years for the 777-200 fleet and 5 years for the 747-400 fleet): calculated based on AVAC and Airclaims projections and totaling $146 million for the 777-200 fleet (after capitalization and after an imputed tax of $63 million) and $55 million for the 747-400 fleet (after capitalization and after an imputed tax of $31 million).

 Discount rate: for the purpose of discounted cash flows expected from the operation of the aircraft fleet and discounting their scrap values, use was made of a discount rate that reflects the operational risk of the aircraft fleet, based on the Company’s weighted discount rate.

As a rule, and based on past equipment, aircraft purchase largely takes place (some 85%) through bank loans, with the balance of the price after discounts (15%) from the Company's means (in the last financing transactions conducted by the Company, the portion of the component financed until then by equity, was also financed by foreign capital).

 This model makes use of a capitalization rate that reflects the time value of the money and the specific risks embodied in the activity. The capitalization rate is estimated according to the following formula:

D = discount rate that reflects the operational risk of the aircraft fleet.

D= Ke*(e%) + Kd*(d%)*(1-Tc)

Equity Price = Ke

Rate of equity out of total equity and debt = e%

Price = Kd

Rate of debt out of total equity and debt = d%

The Company’s long-term effective tax rate = Tc

The average weighted capitalization interest rate after tax according to this calculation amounted to 5.5%.

The capitalization interest after tax of 5.5% is equivalent to the capitalization interest before tax of 19% for the 747-400 fleet and 12% for the 777-200 fleet, which would have produced a similar result in the value in use calculation of the aircraft fleet.

The price of equity (Ke): is determined using the Capital Asset Pricing Model (CAPM) according to the following formula:

Ke=Rf +β * (Rm-Rf) + α with:

Rf = rate of risk-free interest based on the average interest rate of dollar debentures over the course of the average period of expected cash flow, some 3%.

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β = the relative risk coefficient reflecting the relative risk involved in a certain investment and based on the level of correlation between the activity’s yield and the yield of the capital market as a whole – 0.47.

(Rm-Rf) = the average risk premium on the market – 7.3%

α= added risk specific to the Company – 2%.

The price of equity according to the above formula amounts to 9%.

Debt price (Kd): use was made of a 6.6% debt price, constituting a worthwhile interest rate on long- term debt for the Company.

Tax rate (Tc): use was made of the corporate tax rate applicable starting 2014 – 26.5%.

 The Company assumes that the aircraft in question shall be used as passenger aircraft for the next 5-10 years.

 The Company did not assume the need to make any unexpected investments in these aircraft in order to permit their continued use.

g. Value set using the Discounted Cash Flow Method for the 777-200 fleet (in millions of dollars):

1 2 3 4 5 6 7 8 9 10 Total Total discounted 62 58 55 53 50 47 45 42 40 38 094 cash flow Total discounted Scrap Value 36 36 (After 10 Years)

Total value of the above assets based on the discounted cash flow method: $553 million.

The following is a sensitivity analysis of the value of these aircraft for changes in discount price, changes in jet fuel prices and for changes in the contribution of cash which according to the Company constitute key elements that may alter value in use projections:

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Discount 0% 4.5% 5% 5.5% 6.0% 6.5% 7.0% Rate After Tax

Yearly Contribution After Tax

In Millions of Dollars

57 544 530 517 504 492 480 469

60 569 555 541 527 515 502 491

63 596 581 567 553 539 527 514

66 619 603 588 574 560 547 534

69 643 627 612 597 583 569 556

Fuel price sensitivity analysis, use of the asset across 10 years:

Fuel Price Yearly NPV Reduced Difference of Contribution Value NPV Vs. (Cent per Reduced Gallon) Value

In Millions of Dollars

272 67 583 441 142

287 65 568 441 127

302 63 553 441 112

317 61 538 441 79

332 59 523 441 82

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h. Value set using the Discounted Cash Flow Method for the 747-400 fleet (in millions of dollars):

1 2 6 0 5 Total

Total discounted cash flow 84 79 75 71 68 633

Total discounted 61 61 residual value (after 5 years)

Total value of the above assets based on the discounted cash flow method: $408 million.

The following is a sensitivity analysis of the value of these aircraft for changes in discount price, changes in jet fuel prices and for changes in the contribution of cash which according to the Company constitute key elements that may alter value in use projections:

Discount 4% 4.5% 5% 5.5% 6.0% 6.5% 7.0% Rate After Tax

Yearly Contribution After Tax

In Millions of Dollars

78 387 383 378 373 369 364 360

82 406 400 396 391 386 381 377

86 423 418 413 408 403 398 393

90 442 436 431 426 421 416 411

94 460 454 449 443 438 433 428

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Fuel price sensitivity analysis, use of the asset across 5 years:

Fuel Price Yearly NPV Reduced Difference of Contribution Value NPV Vs. (Cent per Reduced Gallon) Value

In Millions of Dollars

272 90 426 178 248

287 88 417 178 239

302 86 408 178 229

318 84 398 178 220

333 82 389 178 211

i. Summary

The following table presents the summarized value assessment for the 777-200 fleet as of December 31 2013:

Recoverable Sum – Fair Value Value in Use Whichever is Work Carried Assessment Relevant Work Less Costs to (Value in use) Higher Out Date Regulation Method Sell for El Al for El Al

In Millions of Dollars

Examination December 31 Accounting Discounted 650 556 556 of aircraft fleet 2013 Standard 36, cash flow investment Impairment (DCF) depreciation (6 of Assets. planes)

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Should an Impairment be Listed in the Books?

The Aircrafts' Depreciated The Recoverable Sum of Should an Retained Cost as of the Same Aircraft to El Impairment be Listed December 31 2013 Al, as of December 31 in the Books? 2013

In Millions of Dollars

001 556 No

The following table presents the summarized value assessment for the 747-400 fleet as of September 30 2013:

Recoverable Sum – Fair Value Value in Use Whichever is Work Carried Assessment Relevant Work Less Costs to (Value in use) Higher Out Date Regulation Method Sell for El Al for El Al

In Millions of Dollars

Examination December 31 Accounting Discounted 116 044 044 of aircraft fleet 2013 Standard 36, cash flow investment Impairment (DCF) depreciation (6 of Assets. planes)

Should an Impairment be Listed in the Books?

The Aircrafts' Depreciated The Recoverable Sum of Should an Retained Cost the Same Aircraft to El Impairment be Listed As of December 31 2013 Al, in the Books? As of December 31 2013

In Millions of Dollars

134 044 No

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This value estimate is accurate as of the balance sheet date.

The expected contribution from the aircraft fleet is based on results in practice for 2013, and is projected forward unchanged across the economic life span of the entire aircraft fleet, unless expressly noted otherwise.

Changes in the projected assessments detailed above may alter the value assessment and the Company may subsequently be required to perform depreciation due to impairment.

B-45 Appendix B to the Report of the Board of Directors on the State of the Corporation's Affairs for the Period Ending

December 31 2013

The Company’s Material Loans and Credit Frameworks: - As of December 31 2013*

Covenants Clearance Board Financial Requirement to Ratio of

Scope of Scope of Attribute Value Value of Unpaid Principal and Balloon Final Loan Loan Aircraft Loans Principal Loan of Collateral to Collateral to Balance Interest Balance Repayment Characteristics Loans (Thousands Securities: Interest Repayment Start Uncleared Uncleared (Thousands Repayment (Thousands Date of Dollars) (Thousands Date Balance Balance as of of Dollars) Frequency of Dollars) of Dollars) December 31

2013 Local banking 424 9444 7,19111 6419611 3 777-200 Variable: Quarterly Between 77,800 January 13 July 27 2017 institution (***) aircraft, Libor + 6,700 and 2000 3 737-800 margin 9,570 130% aircraft, 2.31%- (**)125% Upholds 1 737-700 2.75%. financial aircraft covenants

2 747-400 aircraft Foreign banking 444 36,976, 67,9,71 2 777-200 Variable: Quarterly Between 59,299 July 23 2019 institution with aircraft Libor + 2,376 and 2007 EXIM guarantee margin of 4,466 - - (-0.01%) to 0.8% EXIM (***) 424-,11 6629316 4194,, 3 737-800 Fixed Quarterly 2,360 April 17 April 15 aircraft 3.62%- 2009 2021 4.01% May 20 May 20 - - - 2009 2021 June 22 June 22 2009 2021 The U.S. capital 424-,11 ,79277 ,79277 2 737-900 Fixed Quarterly 1,966 November November 1 market with Ex- aircraft 2.45% (providing 26 2013 2025 Im's guarantee payment at - - - the beginning of the period). * The credit currency of all of the loans detailed above is the U.S. dollar. ** With the exception of one 747-400 aircraft, taken as collateral at a ratio of 50%. ***A cross-default mechanism exists between the various loans of the same banking institution.

Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

The Company’s Material Loans and Credit Frameworks: - As of March 18 2013*

Covenants Clearance Board Financial Requirement to Ratio of Value Scope of Scope of Unpaid Principal and Balloon Final Loan Attribute Value of Collateral Loan Aircraft Loans Principal Balance Interest Balance Loan Repayment of Collateral to to Uncleared Characteristics Loans (Thousands Securities: Interest Repayment (Thousands Repayment (Thousands Start Date Date Uncleared Balance as of of Dollars) (Thousands of Dollars) Frequency of Dollars) Balance March 20 of Dollars) 2013 Local banking 424 9444 7,19111 61,9711 3 777-200 Variable: Quarterly Between 449,11 January 13 July 27 2017 institution (***) aircraft, Libor + 6,700 and 2000 3 737-800 margin 9,570 135% aircraft, 2.31%- (**)125% Upholds 1 737-700 2.75%. financial aircraft covenants

2 747-400 aircraft Foreign banking 444 36,976, 6719137 2 777-200 Variable: Quarterly Between 1,93,, July 23 July 23 2019 institution with aircraft Libor + 2,376 and 2007 EXIM guarantee margin 4,466 - - (-0.01%) to 0.8% EXIM (***) 424-,11 6629316 1,936, 3 737-800 Fixed Quarterly 2,360 April 17 April 15 aircraft 3.62%- 2009 2021 4.01% May 20 May 20 2021 - - - 2009 June 22 June 22 2021 2009 The U.S. capital 424-,11 6,,9,,7 6,19,3, 4 737-900 Fixed – Quarterly 1,966-1,970 November June 25 2026 market with Ex- aircraft 2.623% (providing 26 2013 Im's guarantee 2.45% payment at the - - - beginning of the period).

* The credit currency of all of the loans detailed above is the U.S. dollar. ** With the exception of one 747-400 aircraft, taken as collateral at a ratio of 50%. ***A cross-default mechanism exists between the various loans of the same banking institution. Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

El Al Israel Airlines Limited

Consolidated Financial Statements

For 2013

Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

El Al Israel Airlines Limited

2013 Consolidated Financial Statements

Table of Contents

Page

Independent Auditors’ Report C - 1 - C - 2

Financial Statements

Consolidated Balance Sheets C - 3 - C - 4

Consolidated Statements of Operations C - 5

Consolidated Statement of Comprehensive Income C - 6

Consolidated Statement of Changes in Equity C - 7 - C - 9

Consolidated Cash Flow Reports C-10 - C-11

Notes to the Consolidated Financial Statements C-12 - C-102

Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding

Independent Auditors' Report to Shareholders of EL AL Israel Airlines Ltd. On the Matter of the Inspection of Components of Internal Controls of Financial Reporting In Accordance with Section 9.b.(c) of the Securities Regulations (Periodic and Immediate Reports), 1970

We have inspected components of the internal controls of the financial reporting of El Al Israel Airlines Ltd. and its subsidiaries (hereinafter together “the Company”) as of December 31 2013. These control components have been determined as explained in the following paragraph. The Company's Board of Directors and management are responsible for maintaining effective internal controls over financial reporting, and for evaluating the effectiveness of the internal controls over financial reporting which is included in the periodic report for the date in question. Our responsibility is to express our opinion on the internal control elements of the Company’s financial reporting, based on our audit.

Components of internal control of financial reporting inspected were determined according to Audit Standard 104 of the Institute of Certified Public Accountants in Israel “Inspection of Components of Internal Controls for Financial Reporting”, and its amendments (hereinafter “Audit Standard 104”). These components are: (1) organization-level controls, including controls of the process of preparing and closing financial reporting and general controls of information systems; (2) controls of passenger revenues from the sale of flight tickets (with the exception of subsidiaries); (3) controls of frequent flyer club; (4) controls for fixed assets – aircraft, engines and spare parts; (5) controls for derivative financial instruments; (6) controls for fuel expenses; (7) controls for salary expenses for employees in Israel (with the exception of senior employees and executives); (8) controls for actuary calculations for Israeli employees (with the exception of senior employees and executives) (all of the above together are referred to as the “Audited Control Components”).

We have conducted our audit in accordance with Audit Standard 104. According to this standard, we were required to plan the audit and carry it out with the aim of identifying the inspected control components and achieve a reasonable level of assurance as to whether these control components were upheld effectively in all material aspects. Our audit included achieving an understanding of the internal controls over financial reporting, evaluations of the risk of the presence of any material weakness in the inspected control components, as well as testing and evaluating those control components based on the evaluated risk. Our audit, regarding those control components, also included additional procedures that we believed to be necessary under the circumstances. Our audit referred solely to the audited control components, unlike an internal audit on all processes material to financial reporting, and therefore our opinion refers to the audited control components only. Furthermore, our audit did not refer to mutual influences between audited and unaudited control components and therefore, our opinion does not bring such negative impacts into account. We believe that our audit provides a sufficient basis for our opinion in the context described above.

Due to their understandable limitations, internal controls over financial reporting in general, and components thereof in particular, may fail to prevent or discover a misrepresentation. Likewise, conclusions regarding the future on the basis of any present effectiveness assessment may be exposed to the risk that the controls become inappropriate due to changes in circumstances or that the application of the policy or the procedures changes to the worse.

In our opinion, the Company has upheld in an effective manner, in all material aspects, its audited control components as of December 31 2013.

We have also conducted an audit, in accordance with generally accepted Israeli auditing standards, of the Company’s Consolidated Financial Statements for December 31 2013 and 2012 and for each of the three years of the period ended December 31 2013 and our report, published March 18 2014, includes our unreserved opinion of those Financial Statements, as well as directing attention to the "Open Skies" Agreement, to the state of the Company’s business and exposing the Company to class actions, based on our audit and on the reports of the other auditing accountants.

Brightman Almagor Zohar & Co. Certified Public Accountants

Tel Aviv, March 18 2014

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

We have audited the consolidated balance sheets of El Al Israel Airlines Limited (hereinafter – "the Company") as of December 31 2013 and 2012 and the Statements of Operations, Statement of Comprehensive Earnings, Changes in Shareholders' Equity and Cash Flow for each of the three years in the period ended December 31, 2013. The Company's Board of Directors and management are responsible for these Financial Statements. Our responsibility is to express an opinion on these financial statements based on our audit.

We did not audit the financial statements of consolidated subsidiaries, whose assets included in the consolidation represent approximately 0.2% and 0.7% of total consolidated assets as of December 31 2013 and 2012, and whose revenues included in consolidation constitute 1.2%, 0.8% and 1.2% of total consolidated revenues for the years ended December 31 2013, 2012 and 2011, respectively. Furthermore, we did not audit the financial statements of an associated company on a book value method, the investment in which amounted to a total of $14,945 thousands and 13,691 thousands as of December 31 2013 and 2012, respectively, and the Company's share of its results for the year ended December 31 2013 and 2012 amounted to a total of $207 thousands and $1,466 thousands, respectively. The financial statements of these companies were audited by other accountants, the statements of whom have been produced to us and our opinion, inasmuch as it refers to sums included for the companies, is based other reports from these other accountants.

We conducted our audit in accordance with generally accepted Israeli auditing standards, including standards set in the Accountants Regulations (The Accountant’s Method of Operation), 1973. These Standards require that we plan and perform the audit with the aim of obtaining reasonable assurance that the Financial Statements are free of any material misrepresentations. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. The audit also includes an examination of the accounting rules implemented and of the material estimates made by the Company’s Board of Directors and management, as well as an evaluation of the propriety of presentation on the Financial Statements as a whole. We believe that our audit and the reports of the other CPAs provide an adequate basis for our opinion.

In our opinion, based on our audits and the reports of other accountants, the Financial Statements referred to above adequately reflect, in all material respects, the financial status of the Company and its subsidiaries as of December 31 2013 and 2012 and the results of their operations, changes to their equity and their cash flows for each of the three years in the period ended December 31, 2013, in accordance with International Financial Reporting Standards ("IFRS") and with the provisions of the Israeli Securities Regulations (Yearly Financial Statements), 2010.

Without qualifying the above conclusion, we direct your attention to the following:

 To Note 1.c.(1) to the Financial Statements regarding the “Open Skies” agreement and to Company management's estimate that implementation of the agreement may have a negative impact on the Company’s financial status and operating results. At the same time, Company management estimates in 2014, no material impact is expected on the Company’s activity, among other things in light of the government resolution regarding the increase in the state’s participation in the security costs of Israeli airlines and following the activation of the new UP aviation brand. Furthermore, following the expectation that an additional gradual implementation of the agreement may occur in summer 2015, the Company estimates that as of this date all of the actions needed to deal with the situation in question will have been carried out.  To Note 1.c.(2) to the Financial Statements regarding the actions the Company is carrying out in order to deal with the state of the Company’s business as well as the Company’s cash flow deriving from its ongoing activity in accordance with the Company’s work plan approved by the Board of Directors and management’s estimates regarding the Company’s ability to uphold its commitments in the foreseeable future.  To Note 22c to the Financial Statements regarding exposure to the approval of lawsuits as class actions and the Company’s exposure to these class actions.

We have also audited, in accordance with Audit Standard 104 of the Institute of Certified Public Accountants in Israel “Inspection of Components of Internal Controls for Financial Reporting”, and its amendments, components of internal controls of the Company’s financial reporting as of December 31 2013, and our March 18 2014 report includes an unreserved opinion regarding the effective existence of those components.

Brightman Almagor Zohar & Co. Certified Public Accountants

Tel Aviv, March 18 2014

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El Al Israel Airlines Ltd. Consolidated Balance Sheets

As of December 31 Note 2 0 31 2 0 32 Thousands of Thousands of Dollars Dollars

Assets

Current Assets

Cash and cash equivalents 5 041,68 5110,8

Designated cash 5 0,, ,1185

Short-term deposits 7 9136, 01578

Restricted deposits 4 01858 ,,1654 Trade receivables 0 ,151,66 ,191090 Other receivables 9 111,66 131333 Derivative financial instruments 14 ,11009 ,41471 Prepaid expenses ,8 141909 191661 Inventories ,, 181350 111,65 Total current assets 3,,1044 195153,

Non-Current Assets Long-term bank deposits ,1611 ,165, Investments handled using the book value method ,1 ,71448 *,41004 Investment in other company ,1110 ,1166 Fixed assets, net ,3 ,1,56117, ,1,101959 Intangible assets, net ,6 0146, 91391 Prepaid expenses ,8 91466 91958

411566 *6513,9 Assets due to employee benefits ,9 Total non-current assets ,115516,8 ,11,3118,

Total assets ,15471174 ,15801731

* Retroactive implementation of IAS 19 (revised) “employee benefits” – see Note 3.

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

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El Al Israel Airlines Ltd. Consolidated Balance Sheets

As of December 31 Note 2 0 31 2 0 32 Thousands of Thousands of Dollars Dollars Liabilities and Equity

Current Liabilities Short-term borrowings and current maturities ,5 ,46109, ,4813,4 Trade payables ,4 ,141380 ,661031 Other payables ,7 391956 511163 Provisions 11 ,71885 ,41333 Derivative financial instruments 14 ,45 ,14 Employee benefit obligations ,9 ,89155, 971956 Deffered revenues 18 149197, 15119,5 Total current liabilities 7171065 71617,9

Non-Current Liabilities Loans from banking corporations ,0 6751653 6761115 Employee benefit obligations ,9 771148 *011653 Loans from others ,0 650 1166, Derivative financial instruments 14 014 ,1399 Other payables ,7 01780 01707 Deferred taxes 13 301770 *181609 Deffered revenues 18 501873 501176 Total non-current liabilities 4591554 4601840

Total liabilities ,1307168, ,13711707

Equity 15 Share Capital ,5518,1 ,5518,1 Share premium 101887 101887 Capital reserve from transactions with a former 1371,11 1371,11 controlling shareholder Capital reserve in respect of share-based payment 71567 71567 Capital reserve in respect of cash flow hedging 01878 01994 Capital reserve in respect of translation differences of ,1481 *),81) foreign activity Capital reserves in respect of re-measurements of a 459 *),7185,( defined benefit Accumulated loss )1501,66( *)1031504( Total equity ,791075 ,351965

Total liabilities and equity ,15471174 ,15801731

* Retroactive implementation of IAS 19 (revised) “employee benefits” – see Note 3.

Amikam Cohen Elyezer Shkedi Nissim Malki Chairman of the Board of Directors Chief Executive Officer Chief Financial Officer

Certification date of Financial Statements: Ben-Gurion Airport, March 18, 2014.

The accompanying Notes constitute an integral part of the Consolidated Financial Statements. - C 4 -

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El Al Israel Airlines Ltd. Consolidated Statements of Operations

For the Year Ended December 31 Note 2 0 31 2 0 32 2 0 11 Thousands of Thousands of Thousands of Dollars Dollars Dollars

Operating revenues 27a 11,831818 118,51461 118611504 Operating expenses 27b ),17561,47( *),178,1449( *),17461050(

Gross Profit 3601053 3,31973 1771710

Sales Expenses 27c )1841178( *)1891891( *)1,51913( Administrative and general expenses 27d ),861570( *)951139( *)971300( Other revenues (expenses), net 27e )4( 11083 )01193(

)3,81056( )38,1510( )31,1486(

Profit (loss) from regular activities 371999 ,11665 )631074(

Financing expenses 28 )151050( )3016,3( )181,97( Financing income 29 151,84 ,1667 181676 Financing revenues (expenses), net )751( )341944( 177

The Company's share of the profits of subsidiaries, net of tax 190 *,1614 *,1631

Profit (loss) before taxes on income 371565 )131895( )611,47(

Tax benefit (taxes on income) 23 ),11,83( *51,61 *)71457(

Profit (loss) for the year 151661 ),71953( )691016(

Profit (loss) per 1 NIS NV ordinary share. (In USD) Basic profit (loss) per share 3, 8085 )8086( )80,8(

Diluted profit (loss) per share 3, 8085 )8086( )80,8(

Weighted average of number of shares (in thousands) used in the calculation of profit (loss) per share Basic 69517,9 69517,9 69517,9 Diluted 69517,9 69517,9 69517,9

* Retroactive implementation of IAS 19 (revised) “employee benefits” – see Note 3.

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

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El Al Israel Airlines Ltd. Consolidated Statement of Comprehensive Income

For the Year Ended December 31 2 0 31 2 0 32 2 0 33 Thousands of Thousands of Thousands of Dollars Dollars Dollars

Profit (loss) for the year 151661 ),71953( )691016(

Other comprehensive income (loss)

Sums not classified to profit/loss in the future, net of tax:

Profit (loss) from the re-measurements of a defined benefit, net of tax ,717,8 *41510 *),01188(

Sums classified to profit/loss in the future, net of tax:

Exchange rate differences due to the translation of foreign activity, net of tax ,1786 *091 *)996(

Profit (loss) in respect of cash flow hedging, net of tax )914( 91553 )351439(

Other comprehensive profit (loss) for the year, net of tax ,01600 ,41973 )561033(

Total profit (loss) for the year 631938 )908( ),861457(

* Retroactive implementation of IAS 19 (revised) “employee benefits” – see Note 3.

The accompanying Notes constitute an integral part of the Consolidated Financial Statements. - C 6 -

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El Al Israel Airlines Ltd. Consolidated Statements of Changes in Equity

For the Year Ended December 31 2013

Capital Capital Reserve Reserve Capital from Capital Capital due to Reserves Transacti Reserve Reserve Trans- in Respect ons with a in in lation of Re- Former Respect Respect Differ- Measurem Share Controlli of Share- of Cash ences of ents of a Share Pre- ng Share- Based Flow Foreign Defined Accumu- Capital mium holder Payment Hedging Activity Benefit lated Loss Total Thousands of Dollars Balance as of January 1 2013 ,5518,1 101887 1371,11 71567 01994 )97( - )1051,48( ,5,1617 Re-measurements of net liabilities in respect of defined benefit - - - - - *)5( *),7185,( *,1576 ),51601(

Balance as of January 1 2013 after adjustment ,5518,1 101887 1371,11 71567 01994 ),81( ),7185,( )1031504( ,351965

Annual profit ------151661 151661 Other comprehensive profit (loss) - - - - )914( ,1786 ,717,8 - ,01600 Total comprehensive income for the Year - - - - )914( ,1786 ,717,8 151661 631938

Total equity as of December 31 2013 ,5518,1 101887 1371,11 71567 01878 ,1481 459 )1501,66( ,791075

* Retroactive implementation of IAS 19 (revised) “employee benefits” – see Note 3.

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

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El Al Israel Airlines Ltd. Consolidated Statements of Changes in Equity

For the Year Ended December 31 2012 Capital Reserve from Capital Trans- Reserve Capital actions Capital Capital due to Reserves in with a Reserve Reserve Translati Respect of Former in in on Re- Control- Respect Respect Differ- Measure- Share ling of Share- of Cash ences of ments of a Share Pre- Share- Based Flow Foreign Defined Accumulated Capital mium holder Payment Hedging Activity Benefit Loss Total Thousands of Dollars Balance as of January 1 2012 ,5518,1 101887 1371,11 71600 )557( ),1886( - )1441319( ,591739 Re-measurements of net liabilities in respect of defined benefit - - - - - *,8 *)131579( *494 )111073( Balance as of January 1 2012 after adjustment ,5518,1 101887 1371,11 71600 )557( )996( )131579( )1451433( ,341044 Loss for the year ------),71953( ),71953( Other comprehensive income - - - - 91553 091 41510 - ,41973

Total comprehensive loss for the year - - - - 91553 091 41510 ),71953( )908(

Share-based payment - - - 59 - - - - 59 Total transactions with Company shareholders Whether within the framework of their position as shareholders - - - 59 - - - - 59

Total equity as of December 31 2012 ,5518,1 101887 1371,11 71567 01994 ),81( ),7185,( )1031504( ,351965

* Retroactive implementation of IAS 19 (revised) “employee benefits” – see Note 3.

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

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El Al Israel Airlines Ltd. Consolidated Statements of Changes in Equity

For the Year Ended December 31 2011

Capita l Reser Capital ve due Reserve to Capital from Trans- Reserve Trans- lation s in actions Capital Capital Differ- Respect with a Reserve Reserve ences of Re- Former in in of Measur Control- Respect Respect Foreig e-ments Share ling of Share- of Cash n of a Share Pre- Share- Based Flow Activit Defined Accumu- Capital mium holder Payment Hedging y Benefit lated Loss Total Thousands of Dollars Balance as of January 1 2011 ,5518,1 101887 1371,11 71,90 351801 - - )1,41693( 1651910 Re-measurements of net liabilities in respect of defined benefit ------*)51379( *406 )61495( Balance as of January 1 2011 after adjustment ,5518,1 101887 1371,11 71,90 351801 - )51379( )1,51089( 16,1133 Loss for the year ------*)691016( )691016( Other comprehensive loss - - - - )351439( *)996( ),01188( - )561033( Total comprehensive loss for the year - - - - )351439( )996( ),01188( )691016( ),861457(

Share-based payment - - - 198 - - - - 198 Total transactions with Company shareholders whether within the framework of their position as shareholders - - - 198 - - - - 198

Total equity as of December 31 2011 ,5518,1 101887 1371,11 71600 )557( )996( )131579( )1451433( ,341044

* Retroactive implementation of IAS 19 (revised) “employee benefits” – see Note 3.

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

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El Al Israel Airlines Ltd. Consolidated Statement of Cash Flow

For the Year Ended December 31 2 0 31 2 0 32 2 0 33 Thousands Thousands of Thousands of Dollars Dollars of Dollars

Cash Flow from Operating Activities Annual profit (loss) 151661 ),71953( )691016( Adjustments Required for the Presentation of Cash Flow from Operating Activities – Appendix A ,591088 941113 ,,,1786

Cash deriving from operating activities, net ,051161 701178 4,1008

Cash Flows from (for) Investment Activity Acquisition of fixed assets (including general engine overhauls and ),781739( )051471( ),871300( payments on account of aircrafts purchase) Proceeds from the realization of fixed assets ,51033 ,01533 ,11971 Investment in intangible assets ),1536( )31887( ),17,6( Realization (investment) in restricted deposits 31684 ),,1654( - Decrease (increase) in short-term deposits, net )77,( )307( 551301 Investment in long-term deposits for service providers ),63( )155( )151( Repayment of long-term deposits for service providers 191 385 554

Cash used for investment activity, net ),531454( )0,1930( )681666(

Cash Flows for Financing Activity Payment for loan raising costs )91068( ),1887( - Receipt of long-term loans from financial institutions ,561335 541377 101779 Repayment of long-term loans from financial institutions ),19170,( )951363( )051004( Receipt of other long-term loans 3,1 61139 6139, Repayment of other long-term loans ),1014( )31773( ),1347( Increase (decrease) in short-term credit, net ),,1654( ,81419 7188,

Cash deriving from (used for) financing activities, net ,1766 )101070( )671801(

Increase (decrease) in cash and cash equivalents 331338 )311564( )151464(

Balance of cash and cash equivalents at the beginning of the year 5110,8 051354 ,,,1881

Balance of cash and cash equivalents at the end of the year 041,68 5110,8 051354

The accompanying Notes constitute an integral part of the Consolidated Financial Statements. - C 10 -

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El Al Israel Airlines Ltd. Consolidated Statement of Cash Flow

For the Year Ended December 31 2 0 31 2 0 32 2 0 33 Thousands of Thousands Thousands Dollars of Dollars of Dollars Appendix A –

Income and expenses not involving cash flows: Depreciation and amortization (including disposal of accessories, disused components and consumables used and impairment of fixed and intangible assets) ,341973 ,301455 ,611540 Adjustment of value of long term deposits for trade payables ),86( )0( 50 The Company's share in profits of subsidiaries, less dividends received, 47 )177( ),1631( net of tax Deferred taxes, net ,,1709 )5131,( 71505 Increase (decrease) in liabilities in respect of employee benefits and in ,61,58 ),715,4( )131085( provisions Net capital gain from the sale of fixed assets )318,9( )61,77( )31518( Benefit value of employee stock option plan - 59 198 Loss (profit) from adjustment of fair value of derivatives via profit/loss 11136 ),01649( ),41019( Purchase of jet fuel hedging options - )11776( )1,1,58( Receipts from the sale of jet fuel hedging transactions - - 361388 Profit from shares and options received for no consideration - )11661( )31561( Revaluation of options received for no return 405 ),38( ,1045 Change in designated cash 396 411 ),1017(

Changes in asset and liability items: Decrease (increase) in trade receivables 61756 91795 )0104,( Decrease (increase) in other accounts receivable ,1340 61655 )41913( Decrease (increase) in prepaid expenses 11759 )31081( )676( Decrease (increase) in inventories ,1707 61334 )71715( Increase (decrease) in trade payables ),01516( ),51978( 11098 Increase (decrease) in other payables ),11340( ),61850( ,11943 Increase in deffered revenues ,41055 131165 51173

,591088 941113 ,,,1786

Appendix B – Payment (Receipt) of Interest, Taxes and Dividends, Classified Under Cash Flow from Operating Activities

Interest payments ,51359 141573 141904

Interest receipts )587( ),1333( )11561(

Tax payments – advances in respect of excessive expenses 665 371 ,40

Dividend receipts )345( ),1,69( -

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

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

Note 1 – General

a. General description of the Company and its activities:

El Al Israel Airlines is the Israeli designated carrier on most routes to and from Israel, other than a number of routes on which other Israeli carriers were granted the status of designated carriers. 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 in leasing flight equipment, 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.

b. Failure to Include Separate Financial Information:

In accordance with Regulation 4 of the Periodic and Immediate Reports Regulations, the Company did not include in its periodic report for the year ending December 31 2013 separate financial information as per Regulation 9c of the Securities Regulations (Periodic and Immediate Reports), 1970. The reason no separate information was included by the Company was in light of the negligible impact the financial statements of the investee companies 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 flows from operating activities of up to 5% of all assets, revenues, profits and cash flows from operating activities in the consolidated statements – accordingly, ignoring the impact of uncommon exceptional occurrences. For information regarding transactions and commitments between the Company and its consolidated companies see Note 34.

c. 1) On April 21 2013, a government resolution was reached on the subject of the approval of the European- Mediterranean aviation agreement between the State of Israel and the European Union and its member states (hereinafter: “the Agreement” and “the Resolution”, respectively). Following this resolution, on April 22 2013 an agreement was reached with the Ministry of Finance that arranged issues pertaining to the financing of security for Israeli aviation. In accordance with the key points of the summary in question, on May 1 2013, the state’s participation in the defense expenses of Israeli airlines will increase to 72.5% (instead of 70%) and a fixed participation surcharge, fully financed by the state, shall be given at an additional 12.5%. It was also agreed that starting from the implementation of the Open Skies Agreement, as defined in the government resolution dated December 25 2011, the fixed participation surcharge shall be increased by an additional 12.5%. The summary and the agreement regarding the arrangement of the civil aviation security array’s activity shall remain in effect until December 31 2019.

On April 24 2013, the Company Board of Directors ratified the agreement in question and on April 28 2013 the government passed a resolution approving the agreement in question. Following the government's resolution, the Minister of Finance and the Minister of Transportation, National Infrastructure and Road Safety appointed a work team (“Inter-Ministerial Committee”), headed by the General Manager of the Ministry of Transportation, to examine the issues that arose during the discussion held by the government to approve the agreement. On December 31 2013 State elements approved the increase in the State’s participation in the security expenses of Israeli airlines by an additional 12.5%, so that the State’s participation rate would amount to 97.5%. According to the announcement of the State elements, the approval for the increase in participation rate in question shall be given retroactively starting July 16 2013, the date on which the State confirmed that the terms set in the government resolution on the implementation of the Open Skies Agreement had been met in such a manner that awards the Israeli airlines the increased participation rate.

The Open Skies agreement between the State of Israel and the EU was signed in Luxembourg on June 10 2013. Pursuant to the agreements, all airlines in the EU will be able to operate direct flights to Israel from any location in the EU and Israeli airlines will be able to operate flights to airports throughout the EU. The agreement will

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come into effect gradually starting from this year over a period of five years, in which seven weekly flights will be added between Israel and various European destinations each year, with the yearly growth rate being more limited in a small number of central European airports – three or four added weekly flights per year. Upon coming into effect, the agreement will replace all of the bilateral agreements between Israel and the EU states and gradually cancel restrictions on the number of carriers, frequencies, capacities and types of aircraft expected to travel between the State of Israel and the EU. The inter-ministerial committee for the examination of the demands of Israeli airlines submitted its recommendations to the Minister of Transportation, as follows: • The committee recommends that the IAA (Israeli Airports Authority) examine and deal with the demands made by Israeli airlines to allow them to operate out of BGN’s Terminal 1, while adapting the airport taxes applicable to them to the reduced tax rate paid by low-cost foreign airlines using Terminal 1.

• Regarding the demands made by Israeli airlines to compare competition laws in Israel to competition laws in Europe and to revoke the requirements in this area regarding engagements between regional carriers, the committee supports the advancement of the legislative arrangement that is expected to apply the chapter on binding arrangements in the Israeli Antitrust Law on arrangements between foreign airlines pertaining to flight routes to and from Israel.

• Regarding amendments to the Consumer Protection Law, the committee recommended that the Ministry of Transportation act, in coordination with the Consumer Protection Authority, to update legislation in this field in order to reduce gaps between Israeli and European law, regarding transaction cancellation dates, as requested by Israeli airlines. Furthermore, the committee recommended that the Ministry of Justice act to formulate a position as soon as possible on the subject of adopting the Cape Town Treaty in Israel (dealing with international interests in mobile airborne equipment), as requested by the airlines.

• The committee rejected the request to cancel the fee for incoming passengers and include it in the departing passengers fee. In addition, the committee rejected the demand to give precedence to Israeli airlines in flying state representatives to destinations outside the country.

As part of the medium and long term strategy being formed by Company Management, the Company is acting to adapt its activity by increasing frequencies and capacities and adapting its commercial operating model to models practiced in Europe. Within this framework, the Company shall initially start with short haul activity, starting from the Summer 2014 schedule, starting March 30 2014 by operating flights under a the new UP aviation brand. Flights will initially be operated according to this format to five European destinations, instead of the current format of Company flights to the destinations in question. The flight tickets purchased by passengers will include a basic basket of services and the option of adding additional services for a fee, similar to service formats at many airlines around the world.

In 2014, in light of the fact that the Open Skies agreement with the EU will be coming into effect, the Company is expected to continue dealing with an increase in flight offerings from existing airlines, as well as the introduction of new airlines, as well as a significant increase in low cost activity on routes to and from Israel. The Company estimates that the expected increase in the offerings of flights on behalf of existing airlines as well as the introduction of new airlines upon the implementation of the agreement, may have a negative impact on Israeli airlines, including the Company, following the additional intensification of competition.

The Company will continue to study the compatibility of its activities to trends and developments occurring in the Company's business-economic activity environment and in global aviation. These trends and changes require a constant in-depth examination of the Company’s activities, including an examination of the combination and profitability of the Group's route network in the areas of passengers and cargo and adapting the timetable and prices to the state of the market and competition.

The Company estimates that an additional gradual implementation of the agreement may occur in summer 2015, the Company estimates that as of this date all of the actions needed to deal with the situation in question will have been carried out.

2) The Company listed a $25.4 million profit during the reported year and a $185.2 million positive cash flow from operating activity and $179.9 million in equity, while on the other hand, the Company concluded the reported year with a $416.0 million working capital deficit. Over the course of the reported period, Company

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dealt with increased competition and adjusted the scope of its operational activity to the scopes of commercial demand.

As of this report, the Company secured financing for 4 out of the 8 737-900 aircrafts purchased from the Boeing Corporation, two of which were received at the Company in 2013 and an additional two will be received over the course of 2014. The Company is acting to arrange source of finance for the additional four aircrafts of this model expected to be received in 2015 and 2016.

As noted in Note 18, some of the credit agreements require compliance with a certain ratio of loan balances to securities (the balance of the debt to the bank compared to the market value of the pledged aircraft). In the event that the Company does not meet the ratio in question, it may be required to provide additional collateral. Note that as of the balance sheet date and near the signing of the Financial Statements, the Company is upholding the required ratio.

Company management estimates that carrying out these actions as well as the Company’s cash flow from ongoing activity, in accordance with the Company's work plan approved by the Board of Directors, will allow the Company to meet its obligations in the foreseeable future.

Note 2 – Principal Accounting Policies

a. Statement regarding the implementation of International Financial Reporting Standards (IFRS):

The Group's consolidated financial statements have been compiled in accordance with International Financial Reporting Standards (IFRS) and clarifications thereto issued by the International Accounting Standards Board (IASB).

b. The Financial Statements have been prepared in accordance with provisions of the Securities Regulations (Annual Financial Statements), 2010 (hereinafter “Financial Statement Regulations").

c. Balance sheet presentation format:

The Group presents assets and liabilities in the Balance Sheet divided into current and non-current items.

d. The Company’s operating cycle is 12 months.

e. Format of analysis of expenses recognized in profit/loss:

The Company’s expenses in its Statement of Operations/Report on Comprehensive Earnings are presented based on the activity characteristic.

f. Foreign currency:

(1) Functional and Presentation Currency

The financial statements of each Group company are compiled in the currency of the major economic environment in which it operates (hereinafter: "the Functional Currency"). For the purpose of financial statement consolidation, the financial standing and results of each Group company are translated to the USD, which is the Company's functional currency. The Company's Consolidated Financial Statements are presented in USD.

(2) Translation of Transactions in Currencies other than the Functional Currency

When compiling the financial statements of each Group company, transactions executed in currencies other than said company's functional currency (hereinafter: "Foreign Currency") are recorded at the exchange rates effective as of the transaction date. Upon each balance sheet date, monetary items denominated in foreign currency are translated using the exchange rate effective as

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of that date; non-monetary items measured at historical cost are translated using the exchange rate effective as of the date of the transaction involving the non-monetary item.

(3) Recognition of Exchange Rate Differentials

Exchange rate differentials are recognized in the statement of operations in the period in which they were generated, with the exception of exchange rate differentials for transactions intended to hedge certain foreign currency risks, see Note 2n.

(4) Translation of Financial Statements of Investees the Functional Currency of which is Not the USD

In order to present the Consolidated Financial Statements, the assets and liabilities of foreign activity, including goodwill and attributed cost surpluses, are presented according to the exchange rates in effect as of the end of the reported period. Income and expense items are translated according to the average exchange rates in the reported period, unless a significant fluctuation has occurred in exchange rates. In such a case, these items are translated according to the exchange rates on the date the transactions took place, and the translation differences are recognized in other comprehensive earnings under “exchange rate differences from the translation of foreign activity.” These exchange rate differences are charged to gain/loss upon the realization of the foreign activity due to which the translation differences were created as well as upon the partial realization of foreign activity involving loss of control or the transition from investments treated according to the book value method to a financial asset.

g. Investments in affiliated companies:

An affiliated company is an entity in which the Group has material influence and which is not a consolidated company. Material influence is the power to participate in decision making with regard to financial and operational policies of the affiliated company, which does not constitute control or joint control of said policies. In testing the existence of material control, potential voting rights, which can be realized or immediately converted to the shares of the held entity, are taken into account.

The Group examines the existence of signs of decreased value of investments treated according to the book value method. Such impairment occurs when there is objective evidence that expected future cash flow from investment in such asset has been negatively impacted.

h. Cash and cash equivalents:

Cash and cash equivalents include bank deposits available for immediate withdrawal as well as limited term deposits the use of which is unrestricted and whose term to maturity, at the time of investment, is no greater than three months. Deposits the redemption date of which on the date of investment in them exceeds three months and is no greater than one year are classified under short term deposits. Deposits intended for a defined purpose are classified under designated cash.

i. Fixed assets:

(1) General:

Fixed assets are tangible items held for use in providing services or for leasing to others which are expected to be used for more than one period.

The Company presents its fixed asset items using the following cost model: Fixed asset items are presented in the balance sheet at cost, net of accumulated amortization and net of accumulated impairment, if any. The cost includes the acquisition cost of the asset, as well as costs than can be directly attributed to bringing the asset to the location and state required for its operation in the manner intended by management. On the matter of testing the amortization of fixed assets see Note 2k. - C 15 -

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(2) Amortization of fixed assets:

Fixed assets are amortized separately for each component of depreciable fixed asset item having a significant cost relative to the total item cost. Amortization is calculated systematically, using the straight line method over the expected useful life of the item components, starting on the date on which the asset is ready for its intended use, accounting for the expected residual value at the end of its useful life. Assets under a financial lease are amortized over their expected useful life on equivalent basis of owned assets, or over the term of the lease, if shorter.

The cost of overhauling aircraft engines is recognized as an asset on the balance sheet, amortized over the period of economic benefit expected from said overhaul (based on estimated number of engine hours). The salvage values, depreciation method and useful life span of the asset are reviewed by Company management once per year. Changes are treated as changes in estimates, on a prospective basis. Gain or loss generated from sale or obsolescence of an asset is determined by the difference between proceeds from its sale and its carrying amount, and is recognized in the statement of operations.

The cost of accessories and spare parts included with fixed assets is determined using the weighted moving average method. Accessories and spare parts attributed to a specific fleet are amortized over the average remaining life time of said fleet. Accessories and spare parts not attributed to a specific fleet are amortized according to the balance of the average life time of the Company's entire aircraft fleet. Accessories and spare parts with no movement or slow movement are included at depreciated values according to management estimate. Regarding the Company’s depreciation rates see Note 13.b.2.

(3) Consecutive costs:

The cost of replacing part of a fixed asset item capable of being reliably estimated is recognized as an increase in carrying amount upon creation, although future economic benefits attributed to the item are expected to flow to the entity. Regular maintenance costs are charged to the Statement of Operations upon creation.

j. Intangible assets:

Rights for the use of security equipment are included at their cost to the Company, and are amortized using the straight line method based on the anticipated period of economic use, subject to impairment review. The life span estimate and amortization method are reviewed at the end of each fiscal year, with the impact of changes to the estimate treated on a prospective basis. Software is included at its cost to the Company and is amortized using the straight line method based on its expected period of economic use.

k. Aircraft impairment:

At the end of each reported period, the Company evaluates the book value of its aircraft fleets, with the aim of establishing whether there are any signs pointing to an erosion in the value these fleets. If any such indications exist, the fleet's recoverable sum is estimated in order to determine the impairment loss created, if any. The recoverable sum is the fleet’s fair value or its value in use, whichever is higher. When estimating value in use, aircraft fleet contribution estimates are discounted to their present value using a (post-tax) discount rate that reflects the current market estimates for time value of the money and the specific risks for the fleet for which the contribution estimate has not been adjusted. If the recoverable sum for the aircraft fleet is estimated to be lower than its book value, the book value of the fleet is depreciated down to its recoverable sum. Impairment loss is immediately recognized as an expense in the statement of operations.

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Company management believes that recoverable amounts for aircraft should be studied relative to their depreciated cost after grouping aircraft fleets, and that it is incorrect to review the recoverable amount of each aircraft separately relative to its depreciated cost. Regarding the determination of the recoverable sum, see Note 4.b.(3).

l. Financial assets measured at depreciated cost and the effective interest method:

(1) Financial Assets Measured at Depreciated Cost and the Effective Interest Method

The Group's financial assets in this category include trade receivables, deposits and other accounts receivable at fixed or fixable installments which have no quote on an active market. Loans and accounts receivable are measured at depreciated cost using the effective interest method, net of any impairment, if such exists. Interest revenues are recognized using the effective interest method, except for short-term trade receivables and other accounts receivable – when interest amounts to be recognized in respect thereof are not material.

The effective interest method is the method for calculating the depreciated cost of a debt instrument, as well as for the allocation of interest income across the instrument’s life span. The effective interest rate is the rate that precisely capitalizes future projected cash flow (including commissions, transaction costs and so on), throughout the debt instrument’s life span, or (when more correct) a shorter period, to the current value of the instrument upon first recognition.

(2) Impairment of Financial Assets Measured at Depreciated Cost

These financial assets are reviewed for indications of impairment upon each balance sheet date. Such impairment occurs when there is objective evidence that expected future cash flow from the investment has been negatively impacted due to one or more events that have occurred subsequent to the initial recognition of the financial asset.

Indications of impairment may include, among other things:

. Significant financial difficulties on behalf of the issuer or the debtor; . Failure to make current principal or interest payments; . Expectation that the debtor would become bankrupt or would re-structure their debt.

For financial assets presented at depreciated cost, impairment is recognized as equal to the difference between the financial asset's book value and the present value of future cash flow expected from them, discounted using their original effective interest rate. As for trade receivables, their carrying amount is decreased, if necessary, using a provision for doubtful debt. The provision is specifically calculated. When trade receivables are not collectible, they are written off against the provision account. Collection, in subsequent periods, of amounts previously written off is credited against the provision account. Changes in carrying amount of the provision account are recognized in the statement of operations.

m. Financial liabilities:

Financial liabilities include credit and loans, trade receivables and other accounts receivable. Such liabilities are initially recognized at fair value, net of transaction costs. Subsequent to initial recognition, other financial liabilities are measure at amortized cost using the effective interest method. Except for suppliers and other short-term payables, when the interest sums that need to be recognized are not material.

The effective interest method is a method for calculating the net amortized cost of a financial liability and of the allocation of interest expenses over the relevant period. The effective interest rate is the rate that precisely discounts the projected flow of future cash receipts or payments over the course of the expected life span of the financial liability to its book value, or, as the case may be, for a shorter period.

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n. Derivative financial instruments and hedge accounting: (1) General

The Group uses a range of derivative financial instruments to manage exposure to changes in price of jet fuel, interest rates and foreign currency exchange rates. Derivative financial instruments are initially recognized at their fair value upon the contracting date and at each subsequent balance sheet date. Changes to the fair value of derivative financial instruments are generally recognized in the statement of operations. The timing of recognition in the statement of operations of changes in fair value of derivative financial instruments designated as hedging, when such hedging is effective and meets all conditions for qualification as a hedging relationship, depends on the nature and type of hedging, as set forth below.

The balance sheet classification of derivative financial instruments is determined based on the contractual term of the derivative financial instruments. If the remaining contractual term of the derivative is longer than 12 months, the derivative is stated as a non-current item on the balance sheet; if the remaining term is shorter than 12 months, the derivative is classified as a current item.

(2) Hedge Accounting

The Company applies cash flow hedge accounting, and to this end it has designated certain derivative financial instruments in respect of exposure to jet fuel prices and to interest rate changes.

In order to hedge jet fuel prices, the Company has entered into multiple transactions in respect of expected fuel purchases for terms of up to one year from the balance sheet date.

In order to reduce exposure to adjustable interest rates applicable to Company loans, the Company has entered into multiple contracts designated to fix interest rates. Interest hedging instruments used by the Company are aligned with repayment schedules of the loans they are designated to hedge in the related periods.

In order to reduce exposure do to the USD/NIS exchange rate, the Company conducted several transactions the purpose of which was to hedge several of the Company's expected NIS payroll payments.

The hedging relationships are documented by the Company upon contracting the hedging transaction. This documentation identifies the hedging instrument, hedged item, hedged risk, hedging strategy applied as well as a review of the fit of this strategy to overall Group policy for each hedge type. Furthermore, starting on the start date of hedge relationship and throughout its term, the Company documents the degree to which the hedging instrument is effective in offsetting exposure to changes in cash flow due to the hedged risk for the hedged item.

The effective portion of changes in value of financial instruments designated as cash flow hedges is immediately recognized in equity under “capital reserve in respect of cash flow hedging" and the non-effective portion is immediately recognized in the Statement of Operations.

Cash flow hedge accounting is discontinued when the hedging instrument expires, is sold or realized or when the hedging relationship no longer meets the minimum hedging conditions. Subsequent to discontinuation of hedge accounting, the amounts charged to equity are charged to gain/loss when the hedged item or the hedged anticipated transactions are recognized in the Statement of Operations. On the date the results of the hedging agreement are charged to gain/loss the results of the jet fuel hedging agreements are charged to operating expenses and forward agreements for the purchase of foreign currency (including in the matter of salary expenses) and the replacement of exchange rates are charged to financing expenses.

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o. Revenue recognition basis and attributing commissions to agents:

(1) Revenues from sale of flight tickets are included as unearned revenues under current liabilities until the service is provided or up to 2 years from the sale date, whichever is earlier.

Air passenger revenues also include revenues where the service is provided by the Company, whereas flight tickets are sold by other airlines.

Furthermore, air passenger revenues also include revenues due to code sharing agreements with other airlines. In these cases, when the service is provided by the other airlines, while the sale is made by the Company, revenues are stated on net basis, which means that the group collects the receipts deriving from the transportation of passengers, passes on the share of the other airline, and lists revenue for the difference between them only.

(2) Regarding the frequent flyer programs, the Company applies IFRIC 13 – Customer Loyalty Programs. Accordingly, service sales transactions in which the Group grants its customers bonuses are treated as multi-component transactions, and the payment received from the customer will be allocated to its different components based on the fair value of the credit award. The proceeds charged to bonus are recognized as income when the points are redeemed and the Company's obligation to provide the service is upheld. Revenues from the sale of frequent flyer club points to business partners are largely included under unearned revenues until their use.

(3) Air cargo revenues are charged as revenue in the Statement of Operations when the service is provided.

(4) Agent commissions referring to revenues not yet recognized are included in the Financial Statements under "prepaid expenses", and will be recognized as selling expenses in the Statement of Operations concurrent with the recognition of revenue.

p. Engine maintenance and refurbishment expenses:

Engine maintenance and refurbishment expenses not constituting an overhaul are charged to the Statement of Operations upon the actual execution of the engine maintenance or refurbishment work.

In cases where the Company has entered into agreements of an insurance nature, the Company records expenses as specified in the insurance agreements, and the cost of refurbishment is incurred by the insurer.

q. Expenses for securing company services:

Company contribution to government expenses for securing company services are recognized in the statement of operations when incurred, based on the Company's share of said expenses.

r. Leases:

General

Lease agreements are classified as financial leases when terms of the contract transfer all material risk and rewards arising from ownership to the lessee. All other leases are classified as operational leases.

Financing Lease

In financing lease transactions in which the Group leases assets from a different entity, the Group recognizes the asset on the date of the beginning of the lease at its fair value or the current value of the minimum lease payments, whichever is lower. The commitment to provide minimum lease payments to the lessor is presented in the Balance Sheet as a financial liability due to a lease. In consecutive periods, current payments are allocated due to the financial lease between the financing component and the - C 19 -

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liability component, in such a manner that a fixed interest rate is received calculated according to the balance of the liability. The part allocated to the financing component is charged to profit/loss.

Operating Lease

Rental fee expenses in respect of operational leases (primarily aircraft leases) are recognized based on the straight line method over the term of the lease. In lease agreements where no leasing fee, or a reduced leasing fee, is paid at the start of the leasing period and where other benefits are obtained from the lesser, the Company recognizes expenses based on the straight line method for the duration of the lease.

s. Provisions:

(1) General

Provisions are recognized when the Group has a legal or implied obligation due to a past event, where use of reliably measurable economic resources is expected to discharge said obligation.

The amount recognized as provision reflects management's best estimate of the amount to be required for settling the current obligation upon the balance sheet date, accounting for risk and uncertainty associated with said obligation. When the provision is measured using expected cash flows for settlement of the obligation, the carrying amount of the provision is the present value of expected cash flows. When any sum or portion thereof needed to settle the obligation in the present is expected to be returned by a third party, the Group recognizes the asset, on the basis of the return, up to the level of the provision recognized, only when it is virtually certain that the remedy will be accepted, and thus it may be estimated reliably.

(2) Lawsuits

These Financial Statements include appropriate provisions with regard to lawsuits filed against Group companies which Group management believes would not be rejected or eliminated, although Group companies contest these claims.

These lawsuits are treated in accordance with IAS 37. Pursuant to these provisions, provisions are included in respect of claims likely to materialize (probability higher than 50%), which Group management believes, based on advice of legal counsel, to be appropriate to the circumstances of each and every case.

t. Share-based payments:

Share-based payments to employees, settled using Group equity instruments, are measured at fair value upon their grant date. The Group measures, upon the grant date, the fair value of equity instruments granted by using the Black & Scholes model. When the equity instruments granted do not vest until employees complete a defined period of service, the Group recognizes the share-based payment agreements in its financial statements over the vesting period against an increase in equity, under “capital reserve in respect of share-based payment”. Upon each balance sheet date, the Company estimates the number of equity instruments expected to vest.

u. Deferred taxes:

Group companies generate deferred taxes in respect of temporary differences between the value of assets and liabilities for tax purposes and their carrying amount in the financial statements. The deferred tax balances (assets or liabilities) are calculated using the tax rates expected upon their realization, based on the tax rates and taxation legislation enacted, or effectively enacted, by the balance sheet date. Deferred tax liabilities are usually recognized in respect of all temporary differences between the value of assets and liabilities for tax purposes and their carrying amount in the financial statements. Deferred tax assets are recognized in respect of all deductible temporary differences up to the sum for which taxable revenue is expected to allow for the utilization of the deductible temporary difference. - C 20 -

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Deferred tax assets and liabilities are stated on an offset basis, when an enforceable legal right exists to offset tax assets against tax liabilities, and when they refer to taxes on revenue imposed by the same tax authority, where the Group intends to settle the tax assets and liabilities on net basis. The Company and several consolidated companies are jointly assessed for taxes on revenue, therefore deferred tax assets and deferred tax liabilities of said companies are presented on offset basis.

v. Employee benefits:

(1) Post-Employment Benefits

Post-employment benefits at the Group include: pensions, severance pay liability, adjustment pay to executives, redemption of sick pay and certain benefits to Company retirees. Some post- employment Company benefits are defined contribution plans and some are defined benefit plans. Expenses in respect of Company liability to deposit funds to a defined contribution plan are recognized in the statement of operations upon provision of employment services for which the Company is liable to make said deposit.

Expenses in respect of defined benefit plans are recognized in the statement of operations based on the Projected Unit Credit Method, using an actuarial estimation prepared upon each balance sheet date. The present value of Company obligations in respect of defined benefit plans is determined by discounting expected future cash flows expected from the plan using market yield of government bonds denominated in the currency in which plan benefits are to be paid, and having a term to maturity approximately equal to the expected plan settlement date. In accordance with the Group’s accounting policy, the net interest cost is included in the Statement of Operations (under salary expenses) and other comprehensive earnings.

Actuary profits and losses are charged to other comprehensive earnings upon creation. Actuary profits and losses charged to other comprehensive earnings will not be reclassified to gain/loss on a later date.

Plan assets are measured at fair value. Interest income on plan assets is determined on the basis of the discount rate of the liability and is charged to profit/loss as p-art of the net interest cost. The difference between interest income on the plan assets and the comprehensive yield on the plan assets is charged to other comprehensive earnings and will not be reclassified to gain/loss on a later date.

Company liability in respect of a defined benefit plan, presented on the Company balance sheet includes the present value of the liability in respect of defined benefit net of the fair value of plan assets.

(2) Other Long-Term Employee Benefits

Other long-term employee benefits are benefits expected to be utilized or payable in a period over 12 months from the end of the period in which the service qualifying for the benefit was rendered. Other employee benefits at the Company the anniversary bonus. This benefit is recognized in the statement of operations using the Projected Unit Credit Method, using actuarial estimates prepared upon each balance sheet date. The present value of Company obligation in respect of the benefit in question is determined by discounting expected future cash flows expected from the plan using market yield of government bonds denominated in the currency in which benefits are to be paid, and having a term to maturity approximately equal to their expected settlement date. Actuary profits and losses for other long-term employee benefits are charged to profit/loss upon creation.

(3) Short-Term Employee Benefits

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Short-term employee benefits at the Company include Company liability in respect of wages and bonuses. These benefits are recognized in the statement of operations when generated. The benefits are measured according to the non-capitalized sum the Company projects it will pay for realization of this entitlement. The difference between the short-term benefits to which an employee is entitled and the amount paid for them is recognized as a liability.

(4) Vacations

According to the Yearly Vacation Law, 1951, Company employees are entitled to a number of paid vacation days for each work year. In accordance with the law in question and an amendment thereof established in the agreement between the Company and its employees, the number of vacation days to which each employee is entitled is determined in accordance with the employee's seniority. The Company predicts that the unused vacation days as of the end of the year in which the service awarding the benefit was provided shall not be used in full prior to 12 months from that date, and therefore the obligation due to them is measured as other long-liabilities, as detailed below. In the matter of the presentation of the liability in the Balance Sheet, despite the fact that this liability is measured as a long-term benefit, the vacation liability is presented in current liabilities under employee benefit liabilities, due to the fact that the Group does not have an unconditional rights to postpone the clearance of the liability to 12 months from the end of the reported period.

(5) Early Retirement Plans

Company liability in respect of early retirement plans are recognized in the statement of operations when the Company is committed to a formal employment termination plan, including, at least, the site, position and estimated number of employees to be terminated, the benefits to which terminated employees are eligible and the date on which the plan would be executed. Furthermore, the time until implementation is complete should be such that material changes to the plan are unlikely. The benefit level is determined using the discount rate for government bonds. On the recognition date the Company recognizes a liability at its current value for the completion of employee pension payments until the statutory retirement age, and attributes expenses to the Statement of Operations throughout the plan period. The Company's liability is changed to gain loss on the date on which the Group is unable to withdraw from the offer.

w. Earnings per share

The Company calculates basic earnings per share as regards gain or loss, attributed to holders of Company shares by dividing the income or loss attributed to holders of Company ordinary shares by the weighted average number of ordinary shares outstanding during the reported period. In order to calculate diluted earnings per share, the Company adjusts the earnings or loss attributed to holders of ordinary shares, and the weighted average number of shares outstanding, for impact of all potentially dilutive shares.

x. Classification of interest paid, dividends paid and interest and dividends received in the Cash Flow Report:

The Company classifies cash flows for interest and dividends it received as well as cash flows for interest paid as cash flows used for or derived from operating activity.

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y. Additional Balance Sheet:

Company management has decided not to present an additional balance sheet, despite the fact that it had applied a new accounting policy retroactively and restated its comparison data, as detailed in Note 3.

Company management believes that as the above retroactive implementation of a new accounting policy has a non-material impact on the data reflected in the December 31 2011 Balance Sheet, the presentation of an additional report for December 31 2011 shall be, under the circumstances, irrelevant to the understanding of the Financial Statements and makes no contribution to the users of the Financial Statements for the receipt of financial decisions or for understanding the influence of certain transactions and events on the Company's financial status. In addition, Note 3 in question provides disclosure regarding balances in which material changes occurred as of December 31 2011.

Note 3- New Financial Reporting Standards and Clarifications Published

New standards, revisions to standards and interpretations impacting the current period and/or previous reported periods:

. IAS 1 Revision (Revised) “Presentation of Financial Statements” (Regarding the Presentation of Other Comprehensive Earnings Sums in the Report on Comprehensive Earnings)

IAS 1R states that sums included in the Statement of Other Comprehensive Earnings will be separated and presented in one of two groups – sums that will be classified to profit/loss in the future and sums that will not be classified to profit/loss in the future.

In addition, the revision states that in the event that the Other Comprehensive Earnings sums are presented before tax, the tax influence shall be presented separately for each of the groups. This Standard has been applied retroactively to yearly reporting periods starting January 1 2013 or subsequently. Accordingly, the Group separated the other comprehensive earnings sums in the Statement of Comprehensive Earnings.

. IAS 19, Employee Benefits (2011)

The Company has been implementing IAS 19 Employee Benefits (revised 2011) starting January 1 2013. The following are the key revisions:

 Actuary profits or losses will be charged to other comprehensive income and will not be classified to profit/loss at a later date. Accordingly, the Group stopped implementing the strip method.

 Short-term employee benefits will include benefits that are expected to be cleared in full within 12 months from the end of the year in which the crediting service was granted by the employee. Accordingly, vacation benefits measured as short-term benefits on a non-capitalized basis, were measured as long-term benefits on the basis of actuary assumptions, and as a result, as of January 1 2013 the sum of the commitment due to them increased by $1,028 thousands.

 Severance pay as a result of a voluntary retirement encouragement offer shall be recognized as a liability on the date on which the Group is unable to withdraw from the offer.

According to the standard’s transition orders, the standard is implemented retroactively.

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The influence of the retroactive implementation on the balance sheet for previous periods:

As of December As of January 31 2012 1 2012 Thousands of Dollars

Increase (decrease) in assets due to net employee benefits 11958 )41,30(

Increase in investments handled using the book value method* ,39 ,

Increase in liabilities due to net employee benefits )161155( )161597(

Decrease in deferred tax liability 51406 71048

Decrease in capital reserve in respect of re- measurements of a defined benefit ,7185, 131579

Increase in surpluses ** ,1576 494

* As a result of the retroactive implementation in an associate company (Maman Cargo Terminals and Handling Ltd.). ** Including the influence of the retroactive implementation of the standard.

The influence of the retroactive implementation on the Statement of Operations for previous periods:

For the Year Ended December 31 2032 2033 Thousands of Dollars

Decrease in operating expenses 713 1, Decrease in sales and marketing expenses 118 3 Decrease in general and administrative expenses 137 6 Increase (decrease) in the Company's share of the profits of associates, net of tax* ,53 )9( Increase in tax expenses )161( )7( Total influence on profit or loss 079 ,1

Increase (decrease) in exchange rate differences due to the translation of foreign activity, net of tax* ),5( ,8 Increase (decrease) in other comprehensive earnings due to re- measurements of a defined benefit 41510 ),01188( Total influence on other comprehensive earnings 415,3 ),01,98(

Total influence on comprehensive earnings 71391 ),01,70(

As a result of the retroactive implementation of the standard, the surplus balance as of January 1 2011 increased by $684 thousands and the balance of equity as of January 1 2011 decreased by $4,695 thousands relative to the same balance presented as of this date in previous periods.

* As a result of the retroactive implementation in an associate company (Maman Cargo Terminals and Handling Ltd.). ** Including the influence of the retroactive implementation of the standard.

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. IAS 1 (Revised), “Presentation of Financial Statements” (on the matter of presentation of the balance sheet for the beginning of the previous period)

This revision states that in cases in which an entity implements an accounting policy retroactively and/or restates and/or reclassifies items in its Financial Statements, which has a material impact on the balance sheet from the beginning of the period prior to the reported year, it must present a balance sheet as of that date. In addition, the clarification made clear that companies are not required to present notes regarding that additional balance sheet. The revision shall apply retroactively to yearly reporting periods starting January 1 2013 or subsequently. The Company conducted tests regarding the influence of the implementation of IAS 19 Employee Benefits (2011) on the 2011 balance sheet, and due to lack of materiality it was decided that another balance sheet would not be presented as of that date.

. IFRS 12 “Disclosure of Interests in Other Entities”

This standard establishes disclosure requirements pertaining to the rights of an entity in consolidated companies, joint arrangements, affiliates and non-consolidated structured entities. The purpose of the disclosure is to assist in the evaluation of the character and the risks associated with the rights in the said entities and the effect of these rights on the financial statements of the reporting entity.

This Standard is applied retroactively to yearly reporting periods starting January 1 2013 or subsequently.

. IFRS 13 “Fair Value Measurement”

This standard replaces the detailed fair value measurement directives in the various international financial reporting standards, with instructions collected in a single standard that will act as a guide for measuring fair value. Accordingly, instructions were established for the measurement of fair value for all of the items measured at fair value in the balance sheet or for disclosure purposes.

In accordance with IFRS 13, fair value is defined as the price that would have been received from the sale of an asset or the sum that would be paid for the transfer of a liability, in an orderly transaction between market participants in the date of measurement.

The standard establishes the different approaches for measuring fair value and notes that use must be made of evaluation techniques that make the best possible use of observed market data. Regarding non-financial assets, it was determined that in order to measure their fair value, their best possible use must be assessed, with their fair value estimated on that basis.

The amendment is applied on a prospective basis to yearly periods starting January 1 2013 or subsequently.

Note 4 - Critical Accounting Considerations and Key Sources for Estimates of Uncertainties

a. General:

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.

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b. Critical accounting considerations and key sources for estimates of uncertainties:

(1) Provisions for Legal Proceedings

For claims quantified and not quantified in monetary sums, pending against the Company as of December 31 2013, see Note 22c. In order to review of the legal validity of the aforementioned claims, as well as to determine the probability of their realization to the Company's detriment, Company management relies on the opinion of legal and professional counsel. After the Company's counsel have formed their legal opinion and the Company's probability with regard to the claim subject, whether the Company would have to bear its outcome or may postpone it, Company management estimates the amount to be included in the financial statements, if any. As the outcome of these lawsuits would be determined by the Court, said outcomes may differ from the Company’s estimates and thus have a material impact on the Company’s financial status and operating results.

(2) Employee Benefits

The present value of the Company's severance pay liability, as well as that of a pension plan, vacation pay and other employee benefits, is based on multiple data determined based on actuarial estimate, using multiple assumptions, including with regard to discount rate. Changes in actuarial assumptions may impact the carrying amount of the Company's severance pay and pension liabilities. The Company estimates the discount rate annually, based on the discount rate for government bonds. Other key assumptions are made based on prevailing market conditions, as well as on the Company's past experience. For further details of assumptions used by the Company, see Note 19.

(3) Aircraft Impairment

As noted in Note 2k above, if signs indicating deterioration are evident in an aircraft fleet, the Company conducts an estimate of the recoverable sum of that aircraft fleet. The recoverable sum is the fair value of the investment less sales costs or its value of use, whichever is higher. In estimating value in use, the Company estimates future cash flows expected to derive from extended use of the asset and its realization at the conclusion of the exercise 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. Regarding the key assumptions used in calculating the cash flow capitalization, see Note 13e. Material differences in these estimates, or in part of them, may impact the value of the recoverable sum of these aircraft.

(4) Frequent Flyer Clubs

As stated in Note 2o, for establishing the balance of unearned revenues for frequent flyer points accumulated as of the report date and yet unused, the Company based its calculations on the sales prices of frequent flyer points to business partners (after adjustments) and on the Company's experience on the matter of point usage projections. Changes in Management’s estimates regarding point values may impact the Company's revenues.

(5) Useful Lifespan of Fixed Assets and Parts

Company aircraft are amortized throughout their useful lifespan. Flight equipment such as accessories and parts is amortized throughout the lifespan of the relevant fleet of aircraft. As stated in Note 2.i.2, Company Management studies the useful lifespan of all fixed asset items once per year. Actual changes in the balance of useful lifespan will lead to changes in impairment rates.

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(6) Fair Value of Financial Instruments

The Company presents derivative financial instruments at fair value. As stated in Note 2l, the fair value of financial instruments classified as second grade is based on the use of observed data, direct or indirect, see Note 26k.

Note 5 – Cash and Cash Equivalents a. Composition: As of December 31 2 0 31 2 0 32 Thousands of Thousands of Dollars Dollars

Cash and bank balances 681547 651909 Short-term deposits 651573 4101, Total cash and cash equivalents 041,68 5110,8

b. Designated cash – as of December 31 2013 the Company has a balance of designated cash to the amount of $811,000, originating from the establishment of the “Excellence and People” fund. For further details, see Note 33e.

Note 6 - Pledged Deposits

As of December 31 2013 the Company has a balance of pledged deposits to the amount of $8,050,000, originating from a deposit the Company provided as collateral in favor of a banking institution, in return for a loan received from that institution. See also Note 18.e.1.

Note 7 - Short-Term Deposits

As of December 31 2013 – an NIS deposit worth $9,341,000 (including accrued interest) deriving from the proceeds of option (Series 1) exercises received by the Company, greater than the sum of the "deficit" in the compensation fund of the entitled employees – as stated in Note 19.c.(3).b (as of December 31 2012 the deposit in question equaled $8,570,000).

The Company is studying the existence of limitations regarding its ability to make use of the above balance of the proceeds according to the agreement with the State and with the workers' representatives. The Company approached the Accountant of the Ministry of Finance on this matter in order to examine its eligibility to issuing surpluses. As of the publication of these Financial Statements the issue has yet to be resolved with the General Accountant at the Ministry of Finance. Until the matter is resolved, the deposit is presented against an obligation to the State of Israel

Note 8 - Trade Receivables

a. Composition: As of December 31 2 0 31 2 0 32 Thousands Thousands of of Dollars Dollars

Open accounts 941,,3 *961540 Credit card companies 141068 101453 Airlines (see 1 below) 71684 ,81973

,381359 ,361,96 Less - provision to doubtful debt )511,5( *)61194(

,151,66 ,191090

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1. Most accounts between airlines are settled through the International Air Transport Association (IATA) clearing system. 2. The average credit for Company services provided is 27 days (in 2012: 28 days). Group customers are not required to pay interest for this period. The Group has, in general, several types of trade receivables in Israel and abroad: IATA agents, non-IATA agents and business customers. The credit rating of IATA agents is established in accordance with BSP parameters for passenger agents and CASS for cargo agents. The bodies in question require bank guarantees for these agents in accordance with IATA rules. In addition, the Company holds insurance for the credit risk of IATA agents in Israel. This insurance does not cover all the Company's exposure to credit risk. As of non-IATA agents, the Company requires guarantees and/or collateral, while for its business customers the Company holds credit risk insurance. The balance of Group trade receivables as of December 31 2013 includes a total of $3,269,000, the repayment date of which has passed (as of December 31 2012: $4,079,000), but the Group, based on its past experience and on the payables' credit rating, has not made a provision to doubtful debts for them, as in its opinion they are collectible. The Group does not hold collateral for these debts.

The average debt period of trade receivable debts the repayment date of which has passed as of December 31 2013 is 36 days (as of December 31 2012 – 39 days).

b. Age of customer debts deviating from credit days established for which no provision to doubtful debts has been included:

As of December 31 2 0 31 2 0 32 Thousands of Dollars

0-30 days ,19,4 11343 31-60 days 778 568 61-90 days ,96 477 Over 90 days 309 699 Total 31149 61879

*) Reclassified.

c. Movement in provision to doubtful debt: As of December 31 2 0 31 2 0 32 Thousands of Dollars

Balance at the beginning of the year 61194 11591 Loss from impairment due to receivables 11108 ,1054 Doubtful debts erased ),1355( - Sums recovered over the year )4( ),51( Balance at the end of the year 511,5 61194

In determining the likelihood of payment of trade receivables, the Group reviews changes in customer credit quality from when the credit was extended through the reporting date. Concentration of credit risks is limited in light of the large customer basis and its distribution into various branches and geographical regions.

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d. Age of trade receivable debts for which a provision for doubtful debts was made:

As of December 31 2031 2032 Thousands of Thousands of Dollars Dollars

0-30 days - 318 31-60 days - 65 61-90 days ,33 73 Over 90 days 51801 31050 Total 511,5 61194

Note 9 - Other Receivables

Composition: As of December 31 2 0 31 2 0 32 Thousands of Dollars

Government institutions ,31756 ,,1551 Deposits at trade payables 31894 11146 Other receivables 51196 915,7

111,66 131333

Note 10 – Prepaid Expenses

Composition: Current As of December 31 2 0 31 2 0 32 Thousands of Thousands of Dollars Dollars

Commissions due to unused flight tickets ,51378 ,51900 Frequent flyer point commissions ,1303 ,1348 Aircraft and engine leases 51033 51791 Others 61683 41381

141909 191661

Non-Current As of December 31 2 0 31 2 0 32 Thousands of Thousands of Dollars Dollars

Frequent flyer point commissions 11,77 11,1, Aircraft leases 71647 71019

91466 91958

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Note 11 - Inventory

Composition:

As of December 31 2 0 31 2 0 32 Thousands of Thousands of Dollars Dollars

Jet fuel for consumption ,81454 ,11463 Materials and foodstuff 41,05 41884 Chemicals 3136, 31383 Other ,74 ,93 181350 111,65

Note 12 - Investment in Investees

a. Subsidiaries:

The Group's subsidiaries:

Country of Incorpo- Holding Rate in the Rights Extent of Investment in Company name ration of the Capital of Subsidiary Subsidiary (*) As of December 31 As of December 31 2 0 31 2 0 32 2 0 31 2 0 32 % % Thousands Thousands of Dollars of Dollars Held Directly Tamam (1) Israel ,88% ,88% ,1389 996 Borenstein (2) U.S.A. ,88% ,88% 61010 61944 Superstar (3) U.K ,88% ,88% ),90( ),85( Sun D'Or (4) Israel ,88% ,88% 3 3 Katit (5) Israel ,88% ,88% - -

(*) The extent of the investment in a company held directly is calculated as a net sum based on the consolidated statements, charged to the shareholders of the parent corporation, of total assets less total liabilities, plus loans given investees,

(1) Tamam Aircraft Food Industries (BGN) Ltd. ("Tamam")

Tamam is primarily engaged in the production and supply of prepared kosher meals for airlines. Most of Tamam’s sales are to the Company and a small fraction to other airlines and customers. Tamam provides the Company with catering and food services on its aircraft at prices specified by agreements. In accordance with its agreement with the Israel Airports Authority ("IAA"), it may use the area owned by IAA in exchange for agreed-upon authorization fees based on Tamam's turnover. Tamam estimates that it will have to relocate its plant from its present location and move to a new location. This move is not expected to occur prior to 2018.

(2) Borenstein Caterers Inc. (USA) - (“Borenstein”)

Borenstein, a wholly owned subsidiary, is a US corporation operating out of New York’s JFK, and is mostly engaged in the production and delivery of prepared kosher meals for airlines and other institutions, with the Company being its most important customer, holding all of its shares. The Company is Borenstein’s main customer, and all of its shares held by the Company.

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(3) Superstar Holidays Ltd. (England) – (“Superstar”)

Superstar – a company registered in England and Wales and fully owned by the Company, is a tourism wholesaler, marketing tourism packages as well as airline tickets to travel agents and individual travelers. Superstar has branches in a number of cities abroad.

(4) Sun D'Or International Airlines Ltd. ("Sun D'Or")

The Group's charter operation are carried out through Sun D’Or. Sun D'Or leases the entire capacity of aircraft to third parties, or the capacity of part of an aircraft to a number of partners at prices agreed upon in advance. In addition, Sun D'Or also deals in the sale of tour packages by way of tourism wholesalers as well as online sales. Sun D’Or has an unlimited commercial operator’s license. On March 20 2011 the CAA informed Sun D’Or that it would be revoking Sun D’Or’s operator’s license starting April 1 2011. Following the revocation of Sun D’Or’s operator’s license, and following Sun D’Or’s appointment as “designated carrier” to various destinations by the Ministry of Transportation these appointments were transferred to the Company, except for the Eilat-Moscow route. Following the revocation of its operator’s license, Sun D’Or continues to serve as a tourism organizer, while preserving the “Sun D’Or” label for charter flights it markets and which are carried out by the Company (on weekdays) and by other airlines (on weekend and holiday flights).

(5) Katit Ltd. ("Katit")

Katit is a fully-owned Company subsidiary which operates several restaurants for Company employees at Ben Gurion Airport, commissaries in the Company's office buildings and the King David Lounge at BGA. In return for the services Katit provides the Company, the Company covers the surplus of operating costs over expenses created by Katit at any time.

b. Affiliated companies:

(1) The Group's material affiliated companies:

Location of Country of Main Rate of Voting Name of Type of Nature of Incorporati Business Stake Rights Associate Investment Activity on Activity in Capital Rights in Entity As of December 31 As of December 31 2013 2012 2013 2012

Cargo Terminals and Cargo Handling Ltd. ("Maman") strategy treatment Israel Israel ,5% ,5% ,001% ,001%

(*) The Company holds under 20% of Maman’s ordinary shares. At the same time, the Company has the right to appoint 2 out of 11 Board members. In addition, the Company holds allocated options exercisable as regular shares at a rate close to 10% of Maman’s issued and paid-up capital. As a result, the Group has a material influence on Maman's financial and operational policy, presented in its Consolidated Financial Statements according to the book value method.

The following is additional information regarding the associate held directly by the Company.

Holding Value in Scope of Investment Accordance with Name of Associate in Associate Stock Exchange Stock Market Prices As of December 31 As of December 31 2013 2012 2013 2012 Thousands of Dollars Thousands of Dollars

Cargo Terminals and Handling Ltd. 14,945 ,3149, The Tel Aviv 9,431 9,446 ("Maman") Securities Exchange

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(2) Securities exercisable as rights in the equity of associate held directly by the Company:

Securities Exercisable as Rights Exercisable Name of Associate to Equity Immediately As of December 31 2013 2012 Thousands of Dollars

Cargo Terminals and Handling Ltd. 1,864 2,436 ("Maman") Options into shares

Option Terms

The Company holds 4,666,665 options, immediately exercisable as 10% of the associate’s shares. The exercise bonus for each option is 4.2 NIS. The options’ expiry date is November 7 2016.

(3) Dividends Received from Associates

A dividend was received from Maman in 2013 to the sum of $365,000 (2012: $1,149,000). On February 26 2014 Maman declared a dividend of $1,095,000 (the Company's share: $164,000) which has yet to be received as of the balance sheet date.

(4) Concise Financial Information on the Group's Material Affiliated Companies

For the Year For the Year For the Year Ending Ending Ending December 31 December 31 December 31 2013 as 2012 as 2011 as Presented in Presented in Presented in Maman’s Maman’s Maman’s Financial Financial Financial Statements Statements Statements Thousands of Dollars

Revenues ,1713,1 ,861167 ,,,1839 Gross profit ,61346 ,51875 ,41834 Operating profit 411,0 ,8163, ,81971 Other comprehensive income (loss) )406( 144 ),43( Comprehensive income ,1397 51046 41670 Profit attributable to parent company owners 1180, 51590 4146,

As of December As of December 31 2013 as 31 2012 as Presented in Presented in Maman’s Maman’s Financial Financial Statements Statements Thousands of Dollars

Current assets 931514 89,247 Non-current assets ,361,56 ,131760 Current liabilities 561109 681659 Non-current liabilities 741,90 0,1961 Capital attributable to parent company owners 971,93 981596 - C 32 -

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As of December 31 2013 2012 Thousands of Dollars

Net assets 971,93 981596

Company share of net assets ,61579 ,31116 Adjustments: Option warrants exercisable as shares ,1046 11634 Cost surplus balance 344 647 Book value of associates ,41089 ,41,17

Composition of Investment in Maman As of December 31 2 0 31 2 0 32 Thousands of Thousands of Dollars Dollars

Cost of shares ,11,35 ,11,35 Option warrants exercisable as shares ,1046 11634 Portion of profits accumulated from purchase date, less dividends ,137, ,1466 received, net of tax. Capital reserve from translation differences ,1639 )00( Total investment in Maman ,41089 ,41,17

(5) Associates the financial statements of which were not attached to the Company's statements:

Reason the financial statements Names of associates the financial statements of which were not of the associates were not attached to the Company's statements: attached

Cargo Terminals and Handling Ltd. (Maman) Public company

Composition of investments handled using the book value method: As of December 31 2 0 31 2 0 32 Thousands of Dollars

Maman ,41089 ,41,17 Kavei Chufsha Ltd. 036 761 Air Tour ,3 ,3 Aki 6 6 Total ,71448 ,41004

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Note 13 - Fixed Assets and Flight Equipment a. Composition: Payments On Account Aircraft Of Machinery Computers Vehicles Buildings and Aircraft and and and and Flight and Ground Offices Workshop Installations(1) Equipment (2) Engines(3) Equipment Furniture Equipment Total Thousands of Dollars Cost As of January 1 2013 ,,415,, 111,61335 4013,, 431509 ,65181, 01485 114,41371 Classification - 301,,0 )301,,0( - - - - Additions 11570 ,801737 6914,3 ,1944 4191, 916 ,781739 Disposals - )3741988( - )536( )17,( )31,05( )3081098(

As of December 31 2013 ,,91809 ,19061198 791084 45181, ,5,147, 41366 11684111,

Accumulated Depreciation As of January 1 2013 031583 ,11811653 - 551764 ,371473 01830 ,160716,3 Yearly 3138, 911157 - 009 51616 ,01 ,811853 depreciation Disposals - )3361517( - )97( )64( )11064( )33715,4(

As of December 31 2013 041086 9481,03 - 541530 ,63185, 51376 ,115,1958

Depreciated Cost: As of December 31 2013 311105 ,18161,87 791084 01603 01418 978 ,1,56117,

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Payments On Account Aircraft Of Machinery Computers Vehicles Buildings and Aircraft and and and and Flight and Ground Offices Workshop Installations(1) Equipment (2) Engines(3) Equipment Furniture Equipment Total Thousands of Dollars Cost As of January 1 2012 ,,61450 113881873 331464 411585 ,681813 01679 114591306 Classification - ,196, ),196,( - - - - Additions ,1005 6,1738 341484 ,143, 31418 188 051471 Disposals )66( ),191689( - ),1,47( )9,( )76( ),381705(

As of December 31 2012 ,,41699 111,61335 4013,, 411949 ,631551 01485 114,6117,

Accumulated Depreciation As of January 1 2012 081631 ,1,911915 - 56104, ,381708 71973 ,1644197, Yearly 31,86 901358 - 915 515,8 ,6, ,801838 depreciation Disposals )66( )001011( - )450( )9,( )76( )091409( As of December 31 2012

031691 ,11811653 - 551,10 ,341,99 01868 ,160513,1

Depreciated Cost: As of December 31 2012 331887 ,18,,1001 4013,, 7106, 71353 545 ,1,101959

Yearly 5%-0% See b.2 - 5%-18% 5%-33% ,8%-18% depreciation rate (Mainly 10%) (Mainly (Mainly 15%) 33%)

(1) See h. below. (2) See b. below. (3) See c. below.

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Free Translation of the Hebrew Language 2013 Annual Report - Hebrew Wording Binding b. Boeing aircraft and flight equipment:

1. Composition: 2 0 3 1 2 0 3 2 Amount Aircraft Fleet Accumulated Accumulated Operated and Model Cost Depreciation Balance Cost Depreciation Balance As of December 31 2013 Thousands of Dollars

747-400 6 Passenger aircraft 487,721 353,738 133,983 6071179 31414,7 ,481441 Spare engines 8,249 6,907 1,342 41488 51387 ,1193 Engine overhauls 411788 31433 591847 961,79 631518 581459 5501478 3461170 ,961391 5001850 3751666 1,114,6

747-200F - Cargo aircraft - - - 6,19,4 6,19,4 - Spare engines - - - ,7160, ,7160, - Engine overhauls - - - ,51406 ,51406 - - - - 75180, 75180, -

757-200 * - Passenger aircraft - - - 781545 471906 1150, Engine overhauls - - - ,71,84 91700 713,0 - - - 07147, 771771 91099

737-700/800/900 ** 10 Passenger aircraft 365,027 101,656 263,371 17413,, 0416,, ,091988 Spare engines 5,961 1,104 4,857 5194, 796 51,47 Engine overhauls 5,1341 151711 151468 391541 131,74 ,41304 6111358 ,101601 1931040 31,1036 ,,8130, 1,,1653

767-200 *** - Passenger aircraft 43,648 42,746 981 ,181471 ,,11794 71074 Spare engines - - - ,1469 ,1317 311 Engine overhauls - - - 351761 14180, 9144, 631460 611764 981 ,501843 ,681186 ,71059

777-200 **** 6 Passenger aircraft 669,059 256,741 412,318 4401418 1101,41 6681650 Spare engines 11,395 5,186 6,209 ,,1395 61565 41058 Engine overhauls 3,1,1, - 3,1,1, 411161 3,1,1, 3,1,1, 7,,1575 14,1917 6691460 7611157 1431010 6701619

22 ,17341163 7971633 93010,8 ,19711946 ,186117,8 9381156

Accessories and Spare Parts - 1601867 ,411758 051197 16,137, ,591763 0,1410 General ,19061198 9481,03 ,18161,87 111,61335 ,11811653 ,18,,1001

* The activities of two aircraft (EBU and EBV) were discontinued in November 2012. ** Including three aircraft leased via financial lease. *** The activity of two aircraft (EAE and EAF) was discontinued in May and October 2013, respectively, see Note 13.d.2 and 13.d.3. **** Including three aircraft leased via financial lease.

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2. Depreciation Rates

The yearly depreciation rate of each aircraft is determined taking into account its residual value, as it appears in the prevailing aircraft price list, which estimate the value of an aircraft for the year management assesses the use to the Company of that aircraft will end.

The following are depreciation rates for Company aircraft relative to cost (after deduction of residual value) for 2013:

Average Yearly Aircraft Fleet Depreciation Rate

737 400% 767-688 70,% 747 407% 777 506%

As of December 31 2013, the balance of years remaining for the Company's aircraft fleet is between one and 20 years.

The annual depreciation rate of the spare engines (engine body) was determined according to the average number of years remaining for that fleet of aircraft to which the engines are allocated.

Engine overhauls are depreciated according to potential engine hours that the overhaul added to that engine, and according to an estimate of the projected engine hours for that aircraft fleet in the coming years.

As of December 31 2013, the balance of years remaining for general engine overhauls ranges between 2 months and 11 years.

Accessories and spare parts allocated to a specific aircraft fleet are depreciated over the average remaining life of that fleet. Accessories and spare parts that are not allocated to a specific fleet are depreciated at according to the average remaining life of the entire Company fleet.

c. Payments on Account of Aircraft and Flight Equipment – Composition

As of December 31 2031 2032 Thousands of Dollars

Advance payment on account of the future purchase of aircraft from 791514 401104 Boeing, see Note 13.d.1 Others 108 15 791084 4013,, d. Aircraft and Engine Purchase and Sales Agreements:

1. In February 2011 an agreement was signed with aircraft manufacturer Boeing for the purchase of four new Boeing 737-900ER aircraft and two additional aircraft of the same model convertible to purchase options. In addition, the Company was granted the option to purchase two additional aircraft of this model. In addition, the Company’s Board of Directors approved the purchase of an engine to serve as an additional reserve engine for the aircraft fleet from CFM International SA. In this Agreement the Company was granted conversion rights for other models as well as associated rights. The comprehensive value of the agreement is estimated at between $215 million and $230 million (respectively for four to six aircraft, as purchased in practice, without the option). Furthermore, the parties agreed upon conditions for the use of advance payments made by the Company to Boeing for previous agreements. The first planes were received by the Company in October and November 2013.

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In July 2012 an agreement was signed confirming the purchase of two additional Boeing 737-900ER aircraft (hereinafter: “the Fifth and Sixth Aircraft”). This purchase constitutes a waiver of the Company’s conversion right from purchase to the purchase option of the Fifth and Sixth Aircraft and comes ahead of the option's expiry date on October 15 2012. In October 2012 a revision was signed to the agreement on the subject of bringing forward the arrival date of the fifth plane from October 2015 to March 2014 as well as adapting the terms of the advance payments (PDPs) for the fifth aircraft while changing the payment dates in accordance with the terms agreed upon by the parties.

On October 22 2013 the Company Board of Directors approved the realization of the option to purchase two additional 737-900ER aircraft from Boeing (“the Option Planes”). Confirmation of the purchase of the Option Planes constitutes the completion of a comprehensive purchase agreement with aircraft manufacturer Boeing of eight 737-900ER aircraft as signed in February 2011. The value of the Option Plane agreement is similar to previous transactions for these planes, and reflects an average market value of aircraft of this model and similar production year, in accordance generally accepted industry prices list and subject to adjustments and investments in accordance as agreed upon by the parties, including linkage of aircraft prices, using an agreed-upon linkage formula. The Company expects to receive the Option Planes over the course of February and March 2016. The payment terms for the Option Planes provide the Company with sufficient time to prepare for financing their purchase under the current format.

In the matter of the loan agreement signed by the Company with a foreign bank in March 2012 bank to finance the advance payments for the purchase of the first two 737-900ER aircraft, see Note 18.b.1.

In the matter of increasing the sum of the loan signed by the Company with a foreign bank in March 2013 bank to finance the advance payments for the purchase of two additional 737-900ER aircraft, see Note 18.b.1.

Regarding the finance agreement the Company signed with a Canadian bank for the purchase of four Boeing 737-900ER and the issue of debentures in the U.S. Capital market, for the first two aircraft, see Note 18.b.2.

Regarding the financing of two additional Boeing 737-900ER planes carried out through the issue of debentures with a Canadian bank on the U.S. capital market, see Note 36b.

2. In May 2013 an agreement was signed for the sale of a Boeing 767-200 aircraft (EAE) manufactured in 1990 to a foreign company. The proceeds set in the agreement papers for the aircraft were determined according to market prices accepted in the industry for aircraft of an identical model and age and according to their maintenance condition upon delivery. The plane's delivery was completed in May 2013. The Company listed capital gains of $2.3 million in its Q2 2013 Financial Statements for the transaction.

3. The Company’s Boeing 767-200ER (EAF) plane ended its commercial service over the course of October 2013. This aircraft was the last of its fleet of Company aircraft and upon its removal from commercial service this fleet’s activity at the Company has been discontinued. The Company listed additional depreciation to the sum of $3.4 million in the reported period for this aircraft. Following the departure of the plane from service, in February 2014 the Company carried out a transaction for the sale and re-lease of two engines, which produced a capital gain of $4.7 million, for details see Note 36d.

4. Regarding the agreement the Company signed in March 2014 for the purchase of a Boeing 767-300 (EAJ) from a foreign company, see Note 36e. e. Aircraft Impairment

As noted in Note 2k above, if signs indicating deterioration are evident 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 of use, whichever is higher. In estimating value in use, the Company estimates future cash flows expected to derive from extended use of the asset and its realization at the conclusion of the exercise 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. The following are key assumptions used in calculating value in use: 1. The expected contribution from the aircraft fleet is based on results in practice for 2013, and is projected forward unchanged across the economic life span of the entire aircraft fleet, unless expressly noted otherwise. 2. Useful life – for the 777-200 fleet - 10 years of activity on average, for the 747-400 fleet - 5 years of activity on average. - C 38 -

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3. The weighted average discounted rate after tax of 5.5% is equivalent to the discounted rate before tax of 19% for the 747-400 fleet and 12% for the 777-200 fleet.

Over the course of the reported period, the Company examined the recoverable value of aircraft fleets in which signs of deterioration were evident. It was found that the recoverable sum for each aircraft fleet surpasses its depreciated cost as of that date. Accordingly, no provision for the devaluation of aircraft was made in these Financial Statements. f. Ratio of Loan Balance to Collateral

As of this report, no difference exists in the loan balance to guarantee ratio, see Note 18.f.1. g. Unrestricted Assets

The value of the Group's total fixed assets as of December 31 2013 is $1,154 million. The Group's key assets are aircraft, spare engines and advance payments on account of future aircraft purchases, the depreciated cost of which as of December 31 2013 is $1,019 million. The depreciated cost of the Group's main assets, as stated, that are not restricted by a third party amounts to a total of $16 million. In addition, as of the balance sheet date, the Group possesses parts and fixed assets to the amount of $174 million, free of any encumbrance. h. Buildings and installations: As of December 31 2 0 3 1 2 0 3 2 Accumulated Accumulated Cost Depreciation Balance Cost Depreciation Balance Thousands of Dollars

Building, aircraft hangers, warehouses, workshops and offices at BGN. 081,41 511,33 101819 701164 691098 101354 Leasehold improvements of 161376 181016 31558 131750 ,91011 31934 rented offices Freehold offices 31819 11313 784 1197, 11154 7,5 Passenger and cargo ,,1516 ,,1516 - ,,1516 ,,1516 - terminals ,,91809 041086 311105 ,,41699 031691 331887

i. Assets Pledged as Collateral

For details regarding the Group's assets pledged as collateral for the Group's liabilities, see Note 35 below.

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Note 14: - Intangible Assets

Composition: Usage Rights to Security Equipment Software (*) (**) Total Thousands of Dollars Cost Balance as of December 31 2013 61565 ,31967 ,01691

Depreciated cost As of December 31 2013 ,1863 71590 0146,

Cost Balance as of December 31 2012 61566 ,31174 ,71018

Depreciated cost As of December 31 2012 ,13,0 01876 91391

Yearly depreciation rate 7%-18% 18%

(*) Usage rights for security equipment

The Company pays a relative portion of the security costs of the Government of Israel pertaining to safeguarding the Company's passengers and aircraft from acts of war and terror, as set from time to time in Government resolutions. Accordingly, the Company lists under intangible assets the payments made for its share in financing the protective systems and security inspection equipment. The Company has an arrangement with the Ministry of Defense, according to which this equipment will be used by the Company exclusively over its anticipated useful economic life.

(**) Software:

This section mainly covers the SAP Project, Amadeus Project, SIS Project and payments on account of the Control 200 Project. Stage A of the implementation of the financial SAP system has been completed and the Company began using the system on January 1 2013. This stage largely consists of the General Ledger, the payment system (AP) and the receipts system (AR) at the main office and at the Company's representatives.

Note 15 - Short Term Borrowing and Current Maturities a. Composition: As of December 31 2 0 31 2 0 32 Thousands of Thousands of Dollars Dollars

Current maturities of long-term loans ,561934 ,391376 Current maturities of other loans 11698 1181, Bank overdraft 71645 ,0191, ,46109, ,4813,4

Yearly interest (in %) 801-508 803-40,

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Note 16 - Trade Accounts Payable a. Composition: As of December 31 2 0 31 2 0 32 Thousands of Thousands of Dollars Dollars

Open accounts ,1119,5 ,331593 Airlines 31393 ,,1139 ,141380 ,661031 b. The average credit period granted as a result of goods purchasing is 42 days (2012: 43 days), for which the Group does not pay interest.

Note 17 - Other Payables

a. Current Liabilities

Composition: As of December 31 2 0 31 2 0 32 Thousands of Thousands of Dollars Dollars

Airport taxes payable 141,,3 151605 Interest payable on long term loans 11,73 116,0 Deposits received for passenger groups 11417 ,,1551 Payables due to cargo claims ,1635 6133, Other payables 71484 01657 391956 511163 . . b. Non-Current Liabilities

Composition: As of December 31 2 0 31 2 0 32 Thousands of Thousands of Dollars Dollars

Payables due to cargo claims 6117, 61358 Lease incentives (see Note 24c). 61637 61637 01780 01707

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Note 18 - Long-Term Loans

a. Composition:

As of December 31 2 0 31 2 0 32 Thousands of Thousands of Dollars Dollars

Loans at variable interest 6031,46 5611568 Loans at fixed interest ,451789 031193 4601073 4151033 Less – current maturities ),571614( ),6,1395( 69,1667 6061630

Less – balance of loan arrangement costs ),51534( )71771( 67519,, 6741444

Yearly interest from banks and others (in %) 801-40, 803-40,

Effective yearly interest from banks and others (in %) 801-509 807-505

b. Additional information:

1. Following the receipt of a loan from a foreign bank for financing advance payments for the purchase of two 737-900ER aircraft from aircraft manufacturer Boeing, the first of which was delivered to the Company over the course of October 2013 and the second was delivered over the course of November 2013, in April 2013 the parties signed an agreement to increase the sum of the loan from this foreign bank to finance the advance payments for the purchase of two additional aircraft of that model, to be delivered to the Company over the course of March and July 2014 (“the Additional Loan”). The sum of the Additional Loan for the aircraft is $30 million. The loan is for a period of one year until the arrival of the first plan and one year band four months until the arrival of the second plane and bears interest of LIBOR plus a margin. To guarantee the Additional Loan’s repayment, the Company assigned its rights to the airplanes to the foreign bank in accordance with the purchase agreement with Boeing. The Additional Loan Agreement includes the parties’ commitments to finance the aircraft’s purchase transaction, after the collateral of the U.S. Ex-Im Bank was received for the purchase transaction for the four aircraft. Over the course of 2013 a total sum of $60 million was received, presented in the balance sheet under short-term credit and current maturities.

2. The financing for the purchase of the four new Boeing 737-900 ER aircraft purchased by the Company was planned to be carried out by a foreign bank, guaranteed by the Export Import Bank of the United States (hereinafter: “Ex-Im”), however, following the postponement of the U.S. federal budget approval and the shutdown of the federal government (including Ex-Im), the Company arranged financial bridging solutions to finance the first plane of its type between the parties involved in the transaction in question, for a period of up to one month, which allowed the Company to receive the first plane on the original delivery date – October 8 2013. Upon the end of the federal government shutdown, on November 5 2013, the Company closed the finance agreement according to its original format and signed the finance agreement papers for the purchase of 4 Boeing 737-900ER aircraft (“the Planes”) with a Canadian bank, guaranteed by Ex- Im. The total scope of the loan framework for the purchase of the planes purchased in March 2011 is up to $190 million. The relative share of the loan for the first plane was received on November 5 2013 and was used to redeem the bridge loan outline the Company received, during the U.S. government shutdown, as - C 42 -

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described above. The balance of the loan framework was supposed to have been received, as requested by the Company, for each of the remaining three planes, upon receipt and in accordance with the terms set in the transaction papers. Instead, the Company decided to perform a private issue of debentures for all four aircraft as detailed below. The loan was taken for a period of 12 years from the receipt of each plane and its redemption was supposed to have been carried out in equal quarterly payments, at the start of each quarter. The uncleared balance of each loan bore variable interest based on LIBOR interest plus a margin of 0.2% starting from its provision until the end of the first year of the loan period. Pursuant to the loan agreement, the Planes were pledged as collateral 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. Pursuant to the finance agreement documents, the Company was given the option to make a private issue of debentures for the loan guaranteed by Ex-Im on the U.S. capital market, before each plane is received or during the first year of the loan period, regarding each of the planes (together or separately), at fixed or variable interest and for a period of up to the end of the loan period. Such an issue ill replace the relevant loan. Inasmuch as after 12 months from the receipt of each plane no private issue has taken place of debentures for the loan guaranteed by Ex-Im taken for the purchase of that plane, as noted above, then the interest for this loan would have increased to a rate equal to LIBOR plus a margin of 0.50%-0.55%. Accordingly, on November 18 2013, the Company gave its approval to the Canadian bank to issue debentures on the U.S. capital market in order to replace the financing taken from the Canadian bank in question for the purchase of the first Boeing 737-900ER aircraft delivered to the Company on October 8 2013 and for the purchase of an additional aircraft of this model delivered to the Company on November 26 2013. The debentures were issued by a special purpose company (SPC) by the name of Rimon LLC, which was established as part of the financing agreement, for comprehensive financing amounting to $94.3 million US (“the Issue Sum”). The debentures shall bear fixed yearly interest of 2.45% (“the Interest”) and shall be redeemed in 48 equal quarterly interest and principal payments, in advance, for a period of 12 years. Out of the sum of the issue, a total of $47.6 million replaced the loan taken from the Canadian bank for the purchase of the first plane, so that this sum was returned to the same bank and the balance was used to purchase the second plane. Note that the repayment of SPC’s debt in favor of the holders of debentures issues is guaranteed by the Export Import Bank of the United States to the sum of the issue and the interest. Inasmuch as the Ex-Im collateral is realized and the aircraft realization funds will not suffice to cover the sum of the collateral realized, then the Company will be committee to return the balance of the debt to Ex-Im, as accepted in aircraft financing agreements. On November 25 2013 the issue of debentures on the U.S. capital market, carried out by SPC Rimon LLC, was completed. The issuing process was completed in accordance with the terms detailed ion the issuing papers and in the financing transaction papers, which include, among other things, the Company’s obligations and presentations as generally accepted in these types of transactions, starting from the issue of the debentures until the debt’s full repayment at the conclusion of the period. The transaction papers refer, among other things, to events in which the debt may be redeemed immediately in the event of arrears in payments toward the debt owners or toward other loans financed by Ex-Im or in the event that according to Ex-Im’s reasonable judgment an event had occurred that may have a material negative impact on the Company’s ability to meet its obligations and its business its assets and its financial status. The issuing funds for the second plane were received upon the plane's delivery, on November 26 2013.

3. Regarding the approval, from March 3 2014, given by the Company to the Canadian bank to issue debentures on the U.S. capital market for the purchase of two additional Boeing 737-900 aircraft (the third and fourth planes), see Note 36b.

c. As for hedging transactions to fix variable interest rates – see Note 26g.

d. Early repayment

Most existing loans as of December 31 2013 may be repaid early by the Company. In addition, some of the loan agreements taken by the Company feature a he right on behalf of the bank to immediately redeem the balances of the loan toward the relevant bank in the event of actions such as mergers or - C 43 -

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transfers of control without the bank's advance written consent, and also include the bank's right to demand the additional repayment of the balances of the loan in the event of other standard occurrences generally accepted in financing transactions.

e. Restrictions and financial covenants of long-term loans:

1. Ratio between loan balances and collateral:

Some of the credit agreements set a ratio of loan balances to securities, see table below (the balance of the debt to the bank compared to the market value of the pledged aircraft at a ratio of between 65% and 80%)*. An examination of compliance with the ratio should be conducted once a year (in some agreements – twice a year) based on certain stipulated international professional publications. The Company has also undertaken that should the actual ratio be lower than the above ratio, the Company will provide additional collateral, or repay its bank loans earlier, in order to fulfill the ratio requirement. The Company has provided aircraft in its possession as additional collateral for loans taken by the Company to finance its aircraft fleet; for further details, see Note 35.

Uncleared Scope of Unpaid Balance to Aircraft Final Loan Loan Loans Balance Loan Value of as Repayment Characteristics (Thousands (Thousands Start Date Collateral Collateral Date of Dollars) of Dollars) Ratio Requirement 3 777-200 aircraft,

3 737-800 Local banking 000,000 301,300 aircraft, 1 3110312000 2010012030 00% institution (**) 737-700 aircraft 2 747-400 aircraft (*) 1 747-400 aircraft Local banking 300,000 11,111 1 737-700 2010013000 3110012030 10% institution aircraft (***)

(*) With the exception of one 747-400 aircraft, taken as collateral at a ratio of 50%.

(**)A cross default mechanism exists between the various loans of the same banking institution.

(***) Over the course of December 2012, following their sale, two 757-200 planes (EBU and EBV) were freed of liens. As a result, the Company made a deposit as collateral in favor of the banking institution.

As of December 31 and near the report date, the Company is meeting the required ratio of loans to securities.

2. Single borrower and group of borrowers limitation:

The directives of the Supervisor of Banks in Israel include restrictions according to which the debt of a “single borrower” and of a ”group of borrowers” to a bank in Israel shall not exceed a given percentage of that bank’s shareholders’ equity. From time to time, these directives may affect the ability of some of the banks in Israel to grant additional credit to the Company. Due to the change in the holdings in the Company, whereby K’nafaim is the controlling shareholder and holds more than 25% of the Company’s issued share capital, the Group is considered a part of the K’nafaim group with respect to the borrower-group restriction placed on the granting of bank credit. In addition, in light of the weight of the Company’s long-term liabilities to banks in Israel, the Company may encounter difficulties raising additional credit in significant amounts from Israeli banks. - C 44 -

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3. Arrangement with banks prior to privatization:

a. In 2004, management requested that BLL agree that the transfer of control to K’nafaim would not give the BLL the right to demand immediate repayment. In this regard, BLL informed the Company that it had no objection to the change of control in the Company whereby K’nafaim would increase its holdings in the Company in a manner that would cause it to be the controlling party in the Company.

BLL’s consent is contingent upon the fulfillment of the following conditions:

1. The controlling parties in K’nafaim would be the Borowitz family. The term “control” for this purpose is as defined in the Banking Law (Licensing), 1981.

2. The change in ownership referred to above would take place no later than June 5, 2007.

Subject to the above, it was agreed that BLL would not exercise its right to demand immediate repayment of outstanding debts and liabilities of the Company solely as the result of the above-mentioned change in control.

b. Within this framework, K’nafaim informed BLL that, in light of the Company’s present outstanding debt to BLL, and due to the fact that the Company’s Board of Directors will, from time to time, formulate a profit distribution policy for the Company, then as long as the open principal balance of the outstanding debt of the Company to BLL is not less than $50 million, K’nafaim will not support a resolution for profit distribution at a rate exceeding 60% of distributable retained earnings of the Company from time to time, unless following consultation with BLL regarding any amount in excess of 60%. As of the balance sheet date, the balance of the Company’s outstanding debt sum is lower than the threshold set.

f. Liens and collateral – see Note 35.

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Note 19 - Obligations Deriving from Employee Benefits

a. Composition: As of December 31 2 0 31 2 0 32 Thousands of Thousands of Dollars Dollars

Post-employment benefits as part of a defined benefit plan: Retirement benefits 01316 41144 Liability due to retirement and severance pay )561,06( )3616,4( Pension funds ,41896 *161476 Redeemed sick pay 631560 391,70 ,31701 351781 Other long term employee benefits: Benefits due to anniversary grant ,1837 ,1103 Other 930 ,1505 ,1975 11040 Termination benefits At-will retirement plans ),186,( ),1331( Current maturity - ),86( ),186,( ),1634(

Short term employee benefits: Wages, salaries and social benefits 691715 661410 Vacation and rest days 591014 531314 ,89155, 971956 Presentation in balance sheet: Assets due to employee benefits: Non-current, net 411566 *6513,9 411566 6513,9 Employee benefits obligations: Current ,89155, 971956 Non-current, net 771148 *011653 ,0410,, ,081687

b. Division by Linkage Conditions

As of December 31 2013 As of December 31 2012

In Other In Other In Dollars Currencies In Dollars Currencies Thousands of Dollars Thousands of Dollars

Post-employment benefits within the framework of defined benefits plans: ,91898 )51380( *1319,1 *,,1798 Other long term employee benefits 930 ,1837 ,1864 ,1011 Severance Benefits - ),186,( - ),1634( Short term employee benefits: - ,89155, - 971956 Total employee benefit obligations 181810 ,861139 161950 ,,81,38

* Retroactive implementation of IAS 19 (revised) “employee benefits” - see Note 3. - C 46 -

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c. Post-Employment Benefits:

(1) Defined Deposit Plans

a. Retirement and Severance Compensation Plans

Israeli labor and severance compensation laws require that the Company and subsidiaries pay compensation to employees upon retirement or dismissal. The calculation of liability as a result of the termination of employee-employer relationships is carried out in accordance with the valid employment agreement and is based on the employee's salary which, in management's opinion, creates the right for compensation.

Most of the Company's employees joined the pension agreement starting 1992. Starting from that date, each new employee is required to join the Company’s pension agreement.

The Company and its subsidiaries have approval from the Ministry of Labor and Welfare in accordance with Section 14 of the Severance Pay Law 1963, according to which its current deposits in pension funds and insurance policies exempt it from any additional obligations towards its employees, for whom the aforementioned sums were deposited. The Group shall have no legal or implied obligation to make additional payments if the plan has insufficient assets to pay for all employee benefits pertaining to the employee's service in the current and in previous periods. The total sum of expenses charged to the statement of operations for defined deposit plans in the year ended December 31 2013 is $16,209,000 (2012: $15,336,000, 2011: $14,354,000)

b. Pension Agreement

Beginning September 1992, the social rights of part of the Company’s employees have been regulated within the context of a pension agreement. Pursuant to this agreement, an employee joining the comprehensive pension must insure a portion of his salary in the pension plan and the balance can be directed to executive insurance or to the provident fund of the Company's employees. After the agreement was signed, new employees must be insured by the comprehensive pension. The agreement stipulates that the Company's payments to the pension fund and an approved fund (executive insurance or provident fund) for an employee joining the pension plan, will come in lieu of its severance pay obligation to that employee, pursuant to Section 14 of the Severance Pay Law, 1963, for that part of the salary and for that period as to which the payments were made. Up to the date of joining, the employee is entitled to severance pay based on his last salary.

During 2005, amendments were made to the Income Tax Regulations (Rules for Approving and Managing Provident Funds), which change the rules for deposits and withdrawals of monies in pension insurance plans, inter alia, with regard to the reduction of the maximum amount that may be insured in capital insurance. In June 2005, the Company, the New Workers’ Histadrut – Professional Union Department and the Employees' Association of El Al Employees signed a special collective agreement that enables the adjustment of the provisions to the new rules, as selected by the employees.

(2) Defined Benefit Plans

a. Severance and Retirement Compensation Obligations

Israeli labor law and the Severance Compensation Law, 1963 (hereinafter: the Law) require that the Company and subsidiaries pay compensation to employees upon retirement or dismissal. The retirement age is currently 62 for women and 67 for men. Therefore, according to the plan, employees employed by the Group for at least one consecutive year (and under the circumstances defined in law) who have been dismissed after the period in question shall be entitled to severance pay. The severance rate listed in the law is the employee's last salary for each year of work.

As part of the plan, the Company and its subsidiaries are require to deposit sums at a rate required by law in order to ensure the accumulation of severance pay owed to employees as noted above. As - C 47 -

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determined in an expansion order (combined wording) for mandatory pension in accordance with the Collective Agreements Law 1957 (hereinafter: “the Expansion Order”) in the reported year, the rate of the Company’s compensation provisions amounts to 5%, which will be deposited in a pension fund/insurance fund. The Company is entitled to deposit the severance pay completion of up to 8.33% of the salary components for which the Company makes provision to a provident fund (to a personal compensation fund in the employee’s name or to a stipend provident fund).

The plan detailed above exposes the Company to the following risks: “investment risk”, meaning the risk that the plan assets will bear a negative yield and this reduce the plan assets in such a manner that they will not suffice to cover the commitment, “salary risk”, meaning the risk that actuary assumptions regarding the expected salary increase will be estimated short of the salary increase in practice, thus exposing the Company to the risk that the obligation will increase accordingly. The obligation in question was calculated using actuary tables. Actuary estimates were also conducted by Ogen Ltd., a member of the Israeli Actuary Association. The current value of the defined benefit obligation and the costs pertaining to current and past services, were measured using the projected entitlement unit method.

b. Executive Insurance Agreement

The agreement between the Company and the Phoenix Israeli Insurance Company Ltd., which became effective December 1, 1990, was extended until the end of the effective period of the executive insurance policies that were issued under its auspices to employees. According to the stipulations of the pension agreement, redirecting part of the pension salary to executive insurance is conditional upon joining comprehensive pension. Executive insurance may be considered solely a savings plan or a savings plan with specified insurance (insurance against work disability and/or life insurance). The provisions for insurance are at the rate of 18.33% of the insured salary, of which 8.33% is for severance pay, 5% for a provident fund on the Company’s account and 5% for a provident fund on the employee’s account.

(3) Severance pay

a. General -

Employees who received tenure by September 1992 are entitled to severance pay for their employment until then, computed on the basis of one month for each year of employment. With regard to the employment period thereafter, the above-mentioned employees are entitled to severance pay if they have not joined a pension plan, or a combined plan of pension, managers' insurance and savings in a provident fund (at their personal election) according to the rules prescribed in the collective labor agreement. Employees who subsequently received permanent status in the Company were then obligated to join the pension plan by selecting the appropriate pension combination, but are not entitled to severance pay. Prior to the privatization date, the Company had concluded arrangements with the employees for assuring severance pay and with the State of Israel to assure financing sources. See item b. below.

b. Arrangements with the employees for assuring severance pay and with the State of Israel to assure financing sources:

Until the pension agreement was signed, Company personnel employed in Israel who were covered by the collective agreement had no pension insurance. According to the provisions of the collective agreement, since January 1983, the Company makes deposits (for employees who did not join the pension) of 8.33% of the current wages of the employees in a provident fund for severance pay in Israeli banks. The deposits are in the Company’s name. Since the Company did not deposit monies for severance pay in a severance pay provident fund until January 1983, and since January 1983, severance pay was paid to retired employees from the money accrued in the provident funds for severance pay, a substantial shortfall was created in the provident fund for severance pay, which was filled in by deposits from the Company’s and the State’s option money by virtue of the stock issue. In June 2003, an agreement was signed between the State, the Company and the employees’ association, according to which the State and the Company agreed to act to cover the deficit between the provisions for severance pay recorded in the Company’s accounts (“Provision”) and the monies actually deposited - C 48 -

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into the severance pay provident fund (“Fund”) and which is connected to the eligibility of employees who had been employed by the Company at the date that the Company entered receivership in 1982 and who continued to be employed in June 2003 ("the Eligible Employees"). On the date of the agreement, the deficit amounted to 516,240,000 NIS and was CPI-linked linked bearing 5.05% yearly interest, starting June 1, 2003. Under this agreement, the State and the Company transferred the immediate proceeds which they received from the sale of securities in the pursuant to the 2003 Prospectus (“the initial offering”), less expenses, to the severance pay fund for the eligible employees (the balance of the severance pay funds includes the above proceeds). The State and the Company also undertook to transfer to the severance pay fund of the eligible employees, any amount that was raised from the conversion of convertible securities that were issued in the initial offering or from the sale of securities in other offerings which would be executed through the date of the end of the last exercise date (June 5, 2007). After making the above State and Company deposits, the deficit in the fund for eligible employees, as defined in the agreement between the Company and the State signed on the eve of the Company's privatization, was covered. After making the above deposits and fully covering the deficit in the severance pay fund, as required by the agreement, the Company deposited 32.4 million NIS (including interest accrued as of the reporting date), representing the balance of the offering proceeds, in a separate account (included in short-term deposits as of December 31, 2013 against the listing of an obligation to the State of Israel, see Note 7 to the Financial Statements). The Company approached the Accountant of the Ministry of Finance on this matter in order to examine its eligibility to issuing surpluses. As of the publication of these Financial Statements the issue has yet to be resolved with the General Accountant at the Ministry of Finance.

(4) Redemption of Sick Pay

Pursuant to the collective labor agreement, employees are entitled to 30 fully paid sick days per year, which may be accrued throughout the employee’s employment at the Company. Upon retirement from the Company, in mandatory retirement or retiring after attaining the age of 45, permanent employees (other than executives, beginning from their transition to personal employment contracts) are entitled, if they retired under terms entitling them to severance pay, to receive a grant for unused sick days, at a rate of up to 26.6% of the value of the unused days. The liability for this bonus was determined on the basis of the rights accrued for those eligible employees who reached the age of 45 as of the Financial Statements date (except for new employees, for whom the accumulation is limited), plus an estimate regarding younger employees who will also achieve the conditions granting the right to receive sick day pay.

(5) Temporary Employees

Pursuant to the labor agreement signed by the Company and the temporary employees, these employees have joined the comprehensive pension plan, and the Company deposits monthly amounts for them on a current basis. These deposits cover the Company’s obligations for the termination of employee-employer relationships for its temporary employees. As regards the special collective labor agreement signed between the Company's employees, the workers' representatives and the Histadrut – see Note 19.c.(12) below.

(6) Flight Crew Personnel

Air-crew personnel are entitled, according to an agreement, to receive the higher of severance pay for their period of employment through December 1979, computed on the basis of their last salary, or their salary for the month of December 1979 (net of the part of the salary for which severance pay had been paid in the past - 20%), linked to the Israeli CPI, whichever is higher. As for the period subsequent to December 1979, the Company's liability for severance pay is computed on the basis of their last salary.

(7) Senior Company Executives

Company executives are employed under personal employment agreements. Certain officers are entitled to receive for their work period, beyond the severance pay required by law, additional severance pay equal to one month per year for their work period according to their last total salary, subject to the - C 49 -

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approval of the relevant Company elements. It is hereby made clear that new officers shall not be entitled to such additional compensation.

(8) Employees Posted Abroad

The Company employs abroad, among others, permanent workers, consisting of Israeli residents dispatched to fill managerial positions abroad (“posted’). As of December 31 2013, 25 employees out of all of the Company's overseas employees (318) were Israelis posted abroad. Similar to State emissaries abroad, the salaries of those posted during their service abroad (hereinafter “Salary Abroad”) are also different from Israeli salaries, considering the standard of living and taxation abroad, and also the fact that the salary is subject to income tax and social taxation, both abroad and in Israel. The salary abroad, including participation in car maintenance, is paid to the posted employee based on “net salary” (taxes, including social taxation and the grossing-up abroad, are paid by the Company). If the salary abroad or special payments in excess of the tax-exempt ceiling are subject to tax in Israel, the Company assumes the Israeli tax. In addition to the salary abroad, the Company also bears the rental costs of those posted as well as tuition expenses for their children. These payments (up to a certain ceiling) are tax-exempt in Israel, but are liable for tax according to the laws of the different countries. The Israeli salary of the posted employee (salary according to rank and position, had they been employed in Israel) serves as the determining salary by the Company for the purpose of making provisions for severance pay, for compensation (or pensions and or executive insurance) and to an advanced education fund, as is stipulated in the posting letter. Benefits after the termination of employee-employer relationships for those employees are determined on the basis of wages paid to employees at their level that they are employed in Israel.

(9) Local Employees in Company Branches Abroad

Most Company employees abroad, other than the Israeli posted employees, are engaged under collective labor agreements between the Company and the union in that country, or under employment agreements with the employees’ representatives, with a few under agreements between the employers' organization (foreign airlines) and the umbrella organization of airline employees, or under other agreements. The employment terms of Company personnel in certain countries are not covered by a collective agreement but rather stipulated by the Company, in accordance with the acceptable practice in the airline industry or the national airlines in those countries. In some branches, the employees are engaged under personal contracts or through a contractor.

Some of the branches are committed to pay severance pay according to law or agreement while other are obliged to adhere to national or other pension insurance. The Company transfers regular payments for the pension insurance.

Some of the local employees of the Company who are residents of the U.S. and the U.K benefit from pension plans ("the plans"), with the pension cost of the branch employees being paid for by the Company. The cost of the pension is computed as a multiple of the "years of eligibility" for the pension multiplied by the rate of salary determined as entitled to pension. Retirement commencing at the age of 65 ordinarily entitles the employee to full benefits. The pension-plan assets, which are invested mainly in marketable securities, are not owned by the Company. The Company is obliged to cover any deficit that would be created in the value of the funds’ assets relative to any actuarial obligation, should such deficit be created. An extension was signed to the agreement with the U.S. trade union on February 15 2011 for the period between January 1 2011 and December 31 2013. In February 2014 negotiations began for the renewal of the agreement; at this stage the parties failed to reach an accord and are not yet ready to sign a new agreement. Regarding the pension fund in the UK, starting from 2005 the fund does not accept new workers and no addition rights are accumulated pursuant to the principal.

(10) Security Personnel

Payments for the discontinuation employee-employer relationships to personnel employed by the Company or by a governmental entity providing protection for the Company's services are made from the State’s aviation security budget. Regarding security personnel employed directly by the Company, a - C 50 -

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provision is made for the discontinuation of employer-employee relations, less the State's participation in these expenses. Most of the security workers employed by government bodies have no employee- employer relationship with the Company, and accordingly, no provision was included in these Financial Statements to cover such payments. For details regarding the security personnel suit, see Note 22.c.(a).6.

(11) Employees of Subsidiaries

Employment terms of the Company's main subsidiaries in Israel are regulated by labor agreements, pursuant to which the obligation for termination of employee-employer relationships is computed on the basis of their last salary and of pension arrangements, as applicable. The employment terms of the main foreign subsidiaries are regulated by collective labor agreements in those countries and in accordance with local laws and practices.

(12) Collective Agreement

a. General

In addition to labor legislation and extension orders, the terms of employment of Company personnel employed in Israel, with the exception of the executives and other personnel employed under personal contracts, are organized in special collective agreements that are signed from time to time between the Company and the New General Workers Histadrut (above and hereinafter – “the General Histadrut”) and also by procedures that are published from time to time by management.

Section 6(e) of Chapter A of the collective agreements states that “During the negotiations period, but for no more than six (6) months from the date on which it is no longer in effect, this agreement shall remain in effect and at the conclusion of the 6 months in question, shall be considered a collective agreement for an unspecified period and shall be covered by Section 14 of the Collective Agreements Law, 1957.

Company management has informed the workers’ representatives of its request to engage in negotiations to renew the work agreement, noting the key subjects regarding which Company management intends to negotiate.

The negotiations have not yet led to a binding agreement, and therefore Section 6(e) shall apply, meaning that after June 2013 the collective agreement became an agreement for a non-specified period in accordance with Section 14 of the Collective Agreements Law, and therefore each party may cancel it with two months advance notice. The collective agreement signed in November 2008 expired on December 31 2012. Discussions for the renewal of the agreement are held between the parties starting November 2012.

b. Special Collective Agreement for Generation A Employees (hereinafter – “Generation A Agreement”)

The special collective agreement applies to all of the Company’s permanent employees in Israel, including air crews. The agreement does not apply to senior employees (executives and others), who have personal employment agreements, nor to temporary employees who have their own special collective agreement.

The agreement regulates all of the terms of employment of the permanent employees, and stipulates, inter alia, work procedures, basic rights and obligations, productivity incentives, appointments and stationing abroad, internal tenders, insurance, pension arrangements, dismissal procedures, response to disciplinary violations, rights to free and discounted airline tickets and a conflict resolution apparatus.

The agreement forbids strikes and sanctions, unless the strike has been declared by the Histadrut in compliance with the Law for Settling Labor Disputes, 1957, and subject to the Histadrut constitution, including a vote via secret ballot by all employees.

According to the agreement, all permanent employees of the Company are ranked based on an enterprise wage ranking, which has no connection to national rankings. There are a number of rankings: ground employee ranking; “veteran” air crew personnel ranking; a separate ranking at lower wages for “new” air crew personnel; “veteran” crew personnel ranking and a separate ranking at lower wages for “new” flight attendant crew personnel.

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In addition, the agreement includes a commitment to maintain work discipline, references to bonuses and salary additions dependent on the Company’s profitability, instructions regarding the discontinuation of work, shifts, rest times and promotion plans.

c. Special Collective Agreement for the Employment of Temporary Personnel (“the Temp Agreement”)

The terms of employment of the temporary employees have been arranged in a special collective agreement that, on May 20, 2004 was extended to December 31, 2008. The agreement stipulates the maximum length of employment of temporary employees, in accordance with the type of work and the department in which the worker is employed. The agreement regulates all of the terms of employment of temporary employees, including wages, bonuses, provisions for comprehensive pensions, insurance, sick leave, rights to airline tickets, etc. The agreement was extended as part of the November 2 2008 Special Collective Agreement to December 31 2012. On November 31 2013 the agreement was extended by an additional year, and from this date it became an agreement for a non-specified period with each party entitled to cancel the agreement with 60 days’ notice.

As special collective agreement pertaining to temporary flight attendants and temporary employees in the administrative sector was signed in February 2011. According to the agreement, a special reserve of 150 employees from each sector shall be established, who shall remain employed for an additional period of up to ten years as temporary employees. The working conditions of these employees shall be equivalent to full-time second generation workers, with the exception of the education fund. These employees shall adhere to the second generation employee disciplinary code. Dismissal of such employees due to incompatibility shall be via a consensual on par committee or following arbitration. The agreement shall remain in effect for three years with the option of extending it by an additional two.

d. Special Collective Agreement (Ground Crew- “Permanent Intermediate Generation”).

The agreement was signed on May 20, 2004. It pertains to employees who began working prior to January 1, 1999 and is intended to apply different terms to them than those stipulated in the agreement for generation A than those stipulated for the Next Generation. The agreement was extended in the special collective agreement and as of today the agreement is for a non-specified period with each party entitled to cancel the agreement with 60 days’ notice.

e. Special Collective Agreement (Air Steward Crew Personnel -“Permanent Intermediate Generation”).

The agreement was signed May 20, 2004, and pertains to flight attendants who began employment prior to September 1, 1996 and flight attendants who commenced employment between January 1, 1996 and December 31, 1997, and is intended to apply different terms to them than those stipulated in the agreement for Generation A and for those stipulated for the Next Generation. The agreement was extended in the special collective agreement and as of today the agreement is for a non-specified period with each party entitled to cancel the agreement with 60 days’ notice.

f. Special Collective Agreement (Securities)

The agreement was signed on May 20, 2004. It obligates the Company to act to create balance among all personnel whose employment is organized by special collective agreements (Generation A, Interim Generation, Next Generation), in order to avoid the preference of one field over another and also regards granting future wage increments to different fields. The agreement stipulates, inter alia, that the number of permanent employees in certain professions may not be less on various dates than those stipulated in the agreement. The agreement was extended in the special collective agreement and as of today the agreement is for a non-specified period with each party entitled to cancel the agreement with 60 days’ notice.

g. Special Collective Agreements for Ground Crews and Air Steward Crews (Shortening Stay Over)

In July 2006 and in July 2007, a number of special collective agreements were signed between the Company and the New General Workers Histadrut - the Division for Professional Unions and the - C 52 -

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employees' representatives, relating to ground crews and flight attendant crews for improving the Company's operational flexibility by removing existing restrictions on flying direct flights without any intermediate stopover and shortening the stay of the crews in North America. The agreement was extended in the special collective agreement and as of today the agreement is for a non-specified period with each party entitled to cancel the agreement with 60 days’ notice.

h. Special Collective Agreement for 1st Generation Employees for the Deposit of Severance Pay in a Fund in the Employee’s Name

The agreement was signed on December 22 2011, in light of a legislative arrangement that came into effect on January 1 2011, and which no longer allows the deposit of severance pay in the main compensation fund. In accordance with the agreement, 1st Generation employees for whom severance pay was deposited in the main fund as of December 31 2010, shall have money deposited starting January 1 2011 in the compensation component of the provident fund in the employee’s name.

(13) Chief Actuary Assumptions as of the Balance Sheet Date:

As of December 31 2 0 31 2 0 32 2 0 33 % % %

Nominal discount rate 30,% 301% 309% Projected salary increase rates 305% 305% 307% Replacement and departure rates: Until 39 years of age 60,% 60,% 508% Between the ages of 40 and 49 100% 100% 308% Between the ages of 50 and 54 108% 108% 108% Between the ages of 55 and 59 ,08% ,08% ,08% Between 60 and retirement 805% 805% 805%

The Group makes use of a discount rate appropriate to the market's yields from government bonds.

In the event that use is made of the discount rate of corporate bonds, this is expected to have a material impact on the Group's Financial Statements. A decrease shall occur in the sum of the defined benefit plan to the amount of $12,176 thousands (2012: $11,671 thousands 2011: $14,040 thousands) as well as a $986 thousands increase in employee benefits (2012: $936 thousands 2011: $1,140 thousands).

Sensitivity Analyses for Chief Actuary Assumptions

The following sensitivity analyses were determined based on possible reasonable changes in actuary assumptions as of the end of the reported period. The sensitivity analysis does not rely on any mutual dependence that exists between the assumptions:

 If the discount rate increased by one percentage point, the defined benefit obligation would have decreased by $18,594 thousands.

 If the projected salary increase rate increased by one percentage point, the defined benefit obligation would have increased by $16,919 thousands.

Influence of Defined Benefit Plans on the Group’s Future Cash Flows

Financing Policy

Each of the Group members finances the liability for its employees and as employer, deposits 8.33% of each employee's monthly salary each month.

The Group’s deposits for defined benefit plans over the course of the coming year are expected to amount to a total of $3.5 million. - C 53 -

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The average weighted life span of the defined benefit liability as of December 31 2013 is 6 years. (2012: 6 years)

(14) Sums Recognized in the Statement of Operations for Defined Benefit Plans

For the Year Ending December 31 2 0 31 2 0 32 2 0 33 Thousands of Thousands of Thousands of Dollars Dollars Dollars

Current service cost 41078 41151 41105 Interest cost 01447 91567 ,817,3 Yield on plan assets )711,7( )91,63( ),81707( Real yield transferred from compensation to remuneration 169 369 174 Exchange rate differences 647 ,146, 770 Changes in the period 358 ,97 61417 91304 01063 ,,1091

The expense was included in the following items: Operating expenses 71530 71134 914,4 Sales Expenses 517 34, 488 Administrative and general expenses ,131, ,1164 ,1474 91304 01063 ,,1091

(15) Movement in the Current Value of Obligation due to Defined Benefit Plan:

For the Year Ending December 31 2 0 31 2 0 32 Thousands of Thousands of Dollars Dollars

Opening balance 1601969 166130, Current service cost 41078 41151 Interest cost 01447 91567 (Profits) losses due to re-measurements: Actuarial losses deriving from changes in demographic assumptions ,5, ,13 Actuarial losses deriving from changes in financial assumptions 758 900 Actuarial gains (losses) deriving from experience due to demographic assumptions )91646( ,1,44 Changes in the period 358 ,97 Benefits paid ),41969( ),91441( Exchange rate changes ,31063 51959 Closing balance 1531,47 160195,

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(16) Movement in the Fair Value of the Plan's Assets

For the Year Ending December 31 2031 2032 Thousands of Thousands of Dollars Dollars

Opening balance 1,31169 188191, Yield on plan assets 711,7 91,63 Profits due to re-measurements: Actuarial profits deriving from changes in financial assumptions ,51531 ,8190, Deposits by employer 51898 514,6 Benefits paid ),61031( ),71379( Real yield transferred from compensation to remuneration )169( )369( Exchange rate changes ,31374 613,0 Closing balance 1391303 1,31169

(17) Adjusting the current value of the commitment for the defined benefit plan and the fair value of the plan's assets to assets and liabilities recognized in the balance sheet:

As of December 31 2031 2032 Thousands of Thousands of Dollars Dollars

Present value of funded obligations ,961783 ,961874 Less - fair value of the plan's assets )1391303( )1,31169( )661408( ),91,73( Current value of unfinanced liability 501646 561075

Net liability deriving from defined benefit commitments ,31706 351781

(18) Composition of the plan's assets: Fair Value of the Plan's Assets as of December 31 2031 2032 Thousands Thousands of Dollars of Dollars

Shares 711175 461673 Government bonds 471733 561,17 Corporate bonds 531515 541419 Cash, cash equivalents and deposits 161197 1,1397 Other investments 1,1553 ,41413 1391303 1,31169

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Risk Management Strategy

Compensation money in Israel has been deposited in central compensation funds under the management of the Israeli economy's leading investment houses. Since 2011, entitled workers’ funds have been deposited in personal funds, particularly in the Company employee remuneration fund. In the U.S. and UK the Company is carrying out deposits for its employees belonging to the pension funds, to funds under the management of recognized investment houses.

(19) Actual Yield from the Plan's Assets and Compensation Rights

For the Year Ending December 31 2031 2032 Thousands of Thousands of Dollars Dollars

Projected yield on the plan's assets 711,7 91,63 Actuary gains ,51531 ,81044 Actual yield on the plan's assets 111769 181889 d. Other Long-Term Employee Benefits

(1) Jubilee Bonus

Employees reaching 20, 30 and 40 years of seniority at the Company are entitled to a gift granted during the yearly “decades ceremony” held by the Company.

(2) Paid Vacation

According to the Yearly Vacation Law, 1951, Company employees are entitled to a number of paid vacation days for each work year. In accordance with the law in question and an amendment thereof established in the agreement between the Company and its employees, the number of vacation days to which each employee is entitled is determined in accordance with the employee's seniority.

Employees are entitled to 22 vacation days per year (with the exception of a minority entitled to 30 days per year), and to accrue the balance of unused vacation days. Vacation days are first used from the current year's allotment and later from a balance passed forward from the previous year (on an LIFO basis). Employees who have left the Company prior to making use of the balance of his accrued vacation days is entitled to payment for the balance of these vacation days upon leaving.

(3) Chief Actuary Assumptions as of the Balance Sheet Date – see Note 19.c.(13) above.

(4) Sums Recognized in the Statement of Operations for Long Term Employee Benefits

For the Year Ending December 31 2031 2032 2033 Thousands of Dollars

Current service cost 01 48 40 Interest cost 46 67 67 Exchange rate changes ,3, 30 ),3,( Changes in the period ),1855( ,64 ),1671( )770( 19, ),1600( - C 56 -

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The expense (income) was included in the following items:

Operating expenses )415( 136 )64( Sales Expenses )66( ,4 )3( Administrative and general expenses ),89( 6, )0( Other expenses and revenues - - ),163,( )770( 19, ),1600(

(5) Movement in the Current Value of Obligation due to Other Long Term Employee Benefits:

For the Year Ending December 31 2031 2032 Thousands Thousands of Dollars of Dollars

Opening balance 11040 1149, Current service cost 01 48 Interest cost 46 67 Benefits paid ),,5( ),,5( Changes in the period ),1855( ,64 Exchange rate changes ,3, 39 Closing balance ,1975 11040

e. Early retirement plans:

(1) General

Between 2000 and 2013, the Company's management adopted resolutions relating to early retirement programs for 703 employees, for which provisions were recorded in the Company's accounts. As of December 31 2013, all the employees had concluded their actual retirement from the Company within the framework of the above programs. The December 31 2013 Financial Statements include the balance of a provision to a total amount of $9.5 million for financing the retirement of 254 employees. Within that framework the Company deposited funds for assuring early retirement pension payments to employees. The balance of the deposits as of December 31 2013 is $10.6 million. The total net surplus asset for retirement plans as of December 31 2013 is $1.1 million. As part of the Company's privatization, the State of Israel provided guarantees to uphold the Company's commitments, in favor of Mivtachim and Clal with respect to the retirement programs, which amounted as of December 31 2013 to a total of $0.7 million. As the Company formulates and decides upon consensual retirement programs in the future, subject to the cooperation of the employees’ representatives, the Company will not be entitled to receive additional guarantees from the State of Israel. Additional retirement programs will be executed with Company guarantees.

In order to carry out the retirement plans, agreements were reached between the employees and the Company, between the employees and financial institutions, and between the Company and financial institutions. In the framework of these agreements, the financial institutions serve as the payer, making the pension payments to the retirees. As security for the Company’s obligations to the retirees, the State provided guarantees, according to which, inter alia, the Company will make periodic deposits (mostly, for one year in advance) to the financial institutions or will pledge a deposit in a commercial bank, a sum identical to the total sums that the Company must pay as pension to its retirees for the coming year, and the Company’s payments to the retirees will be made from these monies. From time to time, the financial institutions estimate the anticipated costs of the retirement plan, and the Company updates its estimates to the extent necessary, according to actual costs and the experience gained on

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the subject. As of December 31 2013 the Company has not furnished guarantees to third parties to secure the employee retirement plan.

(2) Composition of Balance Sheet Balance As of December 31 2031 2032 Thousands of Thousands of Dollars Dollars

Termination benefit obligation 91519 ,51396 Assets of plan to finance obligation ),81578( ),41714( ),186,( ),1331(

(3) Presentation in Statement of Operations For the Year Ending December 31 2031 2032 2033 Thousands of Thousands of Thousands of Dollars Dollars Dollars

Other expenses 579 666 ,1035

(4) Chief Actuary Assumptions as of the Balance Sheet Date – see Note 19.c.(13) above.

f. Short-Term Employee Benefits

a. Paid vacation days – composition:

As of December 31 2031 2032 Thousands of Thousands of Dollars Dollars

Wages, salaries and social benefits 691715 661410 Vacation and rest * 591014 531314 Total ,89155, 971956

* Regarding presentation and measurement, see Note 2.v.(4).

b. Sums charged to the Statement of Operations:

For the Year Ending December 31 2031 2032 2033 Thousands of Dollars

Current service cost 141191 161367 161453 Interest cost 11,54 11368 11543 Exchange rate changes 61,61 ,1359 )61516( Benefits paid )161588( )1,1447( )111138( Changes in the period 596 )651( 0,1 01406 51917 ,1176 - C 58 -

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c. Movement in the current value of the obligation:

For the Year Ending December 31 2031 2032 Thousands of Thousands of Dollars Dollars

Opening balance 531314 601,00 Current service cost 141191 161367 Interest cost 11,54 11368 Benefits paid )161588( )1,1447( Changes in the period ),1380( ),116,( Exchange rate changes 31048 ,1359 Closing balance 591014 531314

g. Further Information - Related Parties

For information on current employee benefit obligations given to related parties see Note 33.

Note 20 - Unearned Revenues

a. Current Liabilities

Composition:

As of December 31 2 0 31 2 0 32 Thousands of Thousands of Dollars Dollars

From the sale of flight tickets 1331873 1,5156, For frequent flyer points 341090 371376

149197, 15119,5

b. Non-Current Liabilities

Composition:

As of December 31 2 0 31 2 0 32 Thousands of Thousands of Dollars Dollars

For frequent flyer points 501873 501176

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Note 21 - Operational Leasing Arrangements

(1) As of December 31 2013, the Company holds 16 leased aircrafts.

(2) Aircraft and Engine Leases in the Reported Period

a. In January 2013 the Company signed an agreement with Wells Fargo Bank Northwest, National Association for the lease of a 737-800 aircraft (EKU) for a period of 72 months (with the option of departure with advance notice after 48 months). The plane was manufactured in 2006 and was received at the Company in March 2013. The lease was classified as an operational lease in the Financial Statements.

b. In March 2013 the Company signed an extension and revision to the agreement to lease a 767-300ER aircraft (EAP), from CIT Aerospace International for an additional period until November 19 2014, while waiving the exercise of the existing exit option in the agreement between the parties. The lease was classified as an operational lease in the Financial Statements.

c. In March 2013 the Company signed an extension of the lease agreement of a 747-400F (ELF) with Bank of America Leasing Ireland Co. limeted for an additional period of 72 months, starting August 1 2013, with the Company given the option of ending the lease after 48 months. The lease was classified as an operational lease in the Financial Statements.

d. Regarding the agreement the Company signed in February 2014 for the sale of two PW4056-3 engines, and their re-lease, see Note 36d.

(3) Payments Recognized as Expenses For the Year Ending December 31 2013 2012 2033 Thousands of Dollars Aircraft and engine leases 05187, 081776 7,1017 Land and structure usage rights (*) 31714 31787 1107, 001797 06160, 761490

(*) The Company has a land and structure lease agreement with the Israel Airport Authority; see Note 24c.

(4) Commitments for Minimal Future Leasing Payments for Non-Revocable Operational Leases

Minimal leasing fee obligations do not include payment for maintenance reserves for operational aircrafts and engine leases.

Regarding minimal future lease payment liabilities for non-revocable operational leases, the Group shall recognize the following liabilities:

As of December 31 2013 2012 Thousands Thousands of Dollars of Dollars

2013 - 411081 2014 501490 501468 2015 53115, 691017 2016 63117, 39105, 2017 onward ,051444 182,248 3681004 3931340

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As of December 31 2013 2012 Thousands Thousands of Dollars of Dollars Leasing incentives

Presented under other payables – non-current 61637 61637

Note 22 - Provisions

a. Current Liabilities

Composition: Total As of December 31 2031 2032 Thousands of Thousands of Dollars Dollars

Legal proceedings (see c.) 71446 71743 The State of Israel (see Note 19.c.(3).b). 9136, 01578 ,71885 ,41333

b. Movement: Civil Legal Cargo The Proceed- Claim State of ings Provision Israel Other Total Thousands of Dollars

Balance as of January 1 2012 41478 ,51,,0 01,03 118 381,9, Additional provisions recognized ,1166 - ,98 - ,1636 Updating existing provisions 566 - - - 566 Sums used during the period )571( )91088( - - ),81371( Sums canceled during the period )107( - - )118( )587( Classified to other payables - )513,0( - - )513,0( Exchange rate influence ,46 - ,97 - 34, Balance as of December 31 2012 71743 - 01578 - ,41333

Balance as of January 1 2013 71743 - 01578 - ,41333 Additional provisions recognized 134 - - - 134 Updating existing provisions ,,6 - ,1, - 135 Sums used during the period )435( - - - )435( Sums canceled during the period )11,( - - - )11,( Exchange rate influence 687 - 458 - ,1857 Balance as of December 31 2013 71446 - 9136, - ,71885 - C 61 -

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c. Legal Proceedings

As of December 31 2013, legal claims filed against the Company amount to a total of $198 million, for which the Company listed a $7.7 million provision in its Financial Statements, based on the advice of the Company's legal counsel. In addition, a motion was filed to recognize a claim as a class action against the Company and other bodies to the sum of 100 billion NIS, which was rejected by the District Court and for which an appeal was filed before the Supreme Court. On February 26 2014, at a hearing held at the Supreme Court, the appellants decided to accept the Court’s recommendation to retract the appeal and accordingly, the Court rejected their appeal. Legal claims not quantified in monetary sums have also been filed against the Company. The above provision in the financial statements also includes provisions for non-quantified claims, as estimated by Company management. 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 is reference to material claims filed against the Company:

1. In June 2006, a suit was filed against the Company and against the State of Israel – Ministry of Finance in the Tel Aviv District Labor Court by 94 claimants who had been employed by the Company and who had taken early retirement between 2001 and 2003. The claimants in their suit have appealed for declaratory relief/order of performance to amend their retirement agreements in a manner in which the retiree will receive the early pension stipend, including fringe benefits, until the legal retirement age, instead of until the age of 65. Alternatively, the claimants appealed to revoke the retirement agreements. Alternately, the claimants appealed to revoke the retirement agreements. The claimants quantified the claim at 20.2 million NIS ($5.8 million). In January 2009 the court ordered that this claim be consolidated with two additional claims. In addition, 9 similar claims were filed. The total sum of the additional claims is 3.3 million NIS ($0.9 million as of the balance sheet date). In October 2010 a partial ruling was issued, stating that early retirement agreements must be reinterpreted, so that instead of 65 years of age they shall be considered valid until 67. The partial ruling also stated that within 60 days of the ruling, basic agreed-upon calculation principles shall be submitted to calculate the sums. On June 25 2012 a final ruling was given on the case and the Company was compelled to pay the plaintiffs a total of 20 million NIS. The Company has appealed the ruling and the National Court delayed its execution until a ruling was made on the appeal. The Company made a suitable provision for this claim in its Financial Statements.

2. On May 15 2011 Company’s main office received a motion to approve a claim as a class action (hereinafter: “the Motion”), which was filed against the Company in the Tel Aviv District Court on May 9 2011. The motion was filed by a Company passenger, whose flight had been canceled on May 5 2011 following the contamination found in the jet fuel. In the motion, the sum of the claimant’s personal claim was set at a total of 5,000 NIS and the general damage estimated by the claimant for the entire Group including all purchasers of flight tickets from the Company whose flights had been canceled under the circumstances in question (estimated by the claimant at some 2,500 passengers) amounts to 12.5 million NIS for the entire Group. In the opinion of Company management, based upon the advice of its legal counsel, the Company is not expected to be found liable in this claim. The case was sent to mediation. No provision was made for this claim in the Financial Statements.

3. Regarding the motion to approve a suit as a class action, which was rejected in June 2012 by the Haifa District Court, an appeal of the court ruling in question was filed on October 9 2012. This motion was on the matter of plaintiff's argument according to which the Company is overcharging cancellation fees for off-site transactions at a rate exceeding the maximum rate permitted in accordance with the Consumer Protection Law, for which no precise sum was set, but which was estimated by the plaintiff at “tens of millions of NIS at the least.” No provision was made for this claim in the Financial Statements.

4. In March 2012, a motion was filed to approve the filing of a derivative suit to the Economic Department of the Tel Aviv District Court by a Company shareholder. The sum of the claim amounts

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to 120 million NIS. The motion includes a request that the Court approve the claim as a derivative action against a number of executives serving in the Company in 2003 and who no longer serve in the Company, on the grounds that these executives involved the Company in fixing one or more price component in the field of airborne cargo shipping to and from the United States in the relevant period. According to the Motion, the Company was caused damage to the sum of the Claim, on the basis of the settlement the Company reached in its legal proceedings in the U.S. A ruling has yet to be given in these proceedings.

5. In this regard, note that following the monetary demands filed by entities who announced their lack of inclusion in the settlement with the group of claimants within the framework of the U.S. civil suit, on the subject of air cargo transportation service prices, a settlement was signed with these entities equal to the sum of the provision made in the Financial Statements.

6. A motion to approve a claim as a class action was filed in December 2012 against the Airports Authority, the Company, Israir Aviation and Tourism Ltd., Arkia Israeli Airlines Ltd. and the General Security Services, at the Nazareth District Court, and was rejected in December 2012. An appeal was filed before the Supreme Court in February 2013. The subject of the motion is the plaintiff’s claim that Israeli Arabs, while departing and/or arriving at Israel, are discriminated against due to the unique security screening they undergo. The personal sum of each plaintiff’s claim amounts to 100,000 NIS. The number of potential plaintiffs is estimated by the plaintiffs at one million Arab citizens. No provision was made for this claim in the Financial Statements. Regarding the rejection of the appeal submitted by the plaintiffs before the Supreme Court, see above.

7. On February 4 2013 the Company received a statement of claim filed against it at the Tel Aviv District Labor Court by 130 security workers who, as alleged in the statement of claim, were/are employed by the Company as assistant security officers sent to various destinations as needed, for flight security duties. The plaintiffs are demanding that the court issue a declaratory remedy according to which it will be decided that the collective work agreement arranging the rights of workers at the Company applies to the plaintiffs and to give monetary remedies for the various salary components. The Company has yet to submit a statement of defense. The Company made a provision for this claim in its Financial Statements, based on the opinion of its legal counsel.

8. On February 7 2013 the Company received at its offices a motion to approve a claim as a class action (hereinafter: “the Motion”) filed before the Central District Court against the Company and against British Airways, Lufthansa and Swiss Air. The motion was filed by “Hatzlacha the Consumer Movement for Promoting a Fair Economic Society” on behalf of customers shipping cargo to or from Israel (with the exception of to and from the U.S.), after no other plaintiff was found, as noted in the motion. The motion alleged a binding agreement to fix various elements of cargo shipping prices, published by various authorities around the world in February 2006 and the grounds of the claim are in accordance with the Restraint of Business Law. The total damages listed in the motion amount to 613 million NIS, of which 473 million NIS is attributed to the Company. A motion to dismiss filed by the Company and the additional defendants has been rejected. The proceedings are in their preliminary stages. No provision was made for this claim in the Financial Statements.

9. On May 22 2013 the Company’s main offices received a motion to approve a claim as a class action, which was filed before the Tel Aviv-Jaffa District Court. The claimant claims in their motion that the Company has avoided upholding the Aviation Services Bill (Compensation and Assistance due to Flight Cancellation or Changes in Conditions), 2012 In the motion, the sum of the personal claim was set at a total of 3,000 NIS and the general damage for the Group as a whole, according to personal estimates not supported by documentation, amounts to 98.5 million NIS. In the opinion of Company management, based upon the advice of its legal counsel, no provision was made for this claim in the Financial Statements.

additional legal claims totaling approximately $7 million exist against the Company, for which the Company has made provisions in its Financial Statements based on the advice of its legal counsel.

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Note 23 - Taxes on Income

a. Deferred Tax Balances

The composition of deferred tax liabilities (assets) are detailed below:

Charged to Transferred Other from Other Compre- Comprehensive Balance as of Balance as of Recognized in hensive Earnings to December 31 January 1 2013 gain/loss Earnings Gain/Loss 2013 Thousands of Thousands of Thousands Thousands of Thousands of Dollars Dollars of Dollars Dollars Dollars Timing differences Cash flow hedges )11994( 565 00 )565( )11980( Fixed assets )1191835( 41575 - - )1111648( Financial assets at fair value via gain/loss )709( 565 - - )166( Provisions, doubtful debt and employee benefits obligations 111399 31666 - - 151063 Actuary gain/loss due to defined benefit plan 51406 - )41598( - )984(

Total )1861737( ,,1,89 )41581( )565( )1881475(

Unused tax losses and benefits Losses for tax purposes ** ,061160 )11135,( - - ,4,1097

Total )181609( ),,1161( )41581( )565( )301770(

Charged to Transferred Other from Other Compre- Comprehensive Balance as of Balance as of Recognized in hensive Earnings to December 31 January 1 2012 gain/loss Earnings Gain/Loss 2012 Timing differences Cash flow hedges 635 )7,8( )3163,( 7,8 )11994( Fixed assets )1611338( ,31195 - - )1191835( Financial assets at fair value via gain/loss 11180 )11997( - - )709( Provisions, doubtful debt and employee benefits obligations 141315 )31914( - - 111399 Actuary gain/loss due to defined benefit plan 71048 - )11,74( - 51406

)1851581( 51441 )51487( 7,8 )1861737( Total

Unused tax losses and benefits Losses for tax purposes ** ,051857 )089( - - ,061160

Total )181665( 61053 )51487( 7,8 )181609(

** The balance of income tax losses as of the end of the 2013 and 2012 tax years amounted to a total of $598 million and $720 million, respectively. - C 64 -

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b. Effective Tax 2031 2032 2033 Thousands of Thousands of Thousands of Dollars Dollars Dollars

Profit (loss) before taxes on income and before profits of affiliates according to Statement of Operations 371167 )16151,( )631599(

Statutory tax rate 15% 15% 16%

Tax expenses (revenues) according to statutory tax rate 913,1 )41,38( ),81643(

Tax surcharge due to: Nondeductible expenses 688 900 3,1

Adjustments due to changes in tax rates 1139, - ,71080

Total taxes on income (tax benefit) presented in Statement of Operations ,11,83 )51,61( 71457

c. Tax Laws Applicable to Group Companies

On February 26, 2008, the Knesset passed the third reading of the Income Tax Law (Inflationary Adjustments) (Amendment No. 20) (Limitation of Effective Period), 2008 ("the Amendment"), whereby the Adjustments Law will cease being effective in the 2007 tax year, and starting from the 2008 tax year, the provisions of the law will not apply, except for the transitional provisions, the purpose of which is to prevent distortions in the tax computations.

In accordance with the Amendment, starting tax year 2008, the adjustment of taxable income to a real basis of measurement shall no longer be calculated. In addition, depreciation of fixed assets and sums of losses transferred for tax purposes shall no longer be linked to the CPI, in such a manner that theses sums will be adjusted to the CPI of the end of the 2007 tax year, and their link to the CPI shall be discontinued from that date onward.

The Dollar Regulations will continue to apply to the Company even after the effective period of the Adjustments Law ends.

According to the Income Tax Regulations (Rules Concerning the Maintenance of Accounting Records of Airlines with Foreign Investments and of Certain Partnerships and the Determination of their Taxable Income), 1986, the results of the Company and some of its subsidiaries are measured for tax purposes on a dollar basis. Some of the subsidiaries are assessed jointly with the Company.

The Company is deemed an industrial company under the Law for the Encouragement of Industry (Taxes), 1969 and, accordingly, is entitled to accelerated depreciation rates on aircraft and equipment.

Pursuant to the Income Tax Regulations - Depreciation, 1941, the Company is entitled to depreciate the cost of owned aircraft and spare engines at an annual rate of 30% and 40% of cost, respectively.

Overseas subsidiaries are subject to the tax codes in effect in their countries of residence.

Most of the countries in which the Company operates representative offices are signatories to treaties or mutual arrangements for the prevention of redundant taxation, which exempt the Company from income taxes on their operations in these countries.

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On January 13 2013 Tax Authority published an income tax circular (01/2013) on the matter of generally accepted accounting rules regarding yearly financial statements in accordance with Section 131 of the Income Tax Ordinance (New Version), 1961. Regarding all companies, the Tax Authority's position is that the generally accepted accounting rules for tax purposes include, among other things, the International Financial Reporting Standards (IFRS) – standards and interpretations adopted by the International Accounting Standards Board (IASB).

In accordance with the Value Added Tax Law, 1975, transactions for the sale of flight tickets to and from Israel, or from one destination abroad to another, as well as cargo transport by air to and from Israel, have been defined as transactions regarding which the VAT rate is zero.

The “Arrangements Law” was published in August 2013 (hereinafter – “the Law”). A prominent tax change set in the Law was an increase in corporate tax to 26.5% starting from the 2014 tax year (a 1.5% increase).

As a result of the legislation in question, an increase occurred in the Company's deferred tax liabilities as of December 31 2013 to the sum of $2.4 million charged against tax expenses in profit/loss for 2013.

d. Final Tax Assessments

The Company has received final tax assessments up to and including 2002. In addition, the Company has received tax assessments considered final up to and including tax year 2009. Key subsidiaries have received tax assessments considered final for up to and including tax year 2009.

Note 24 - Pending Liabilities, Guarantees and Commitments

a. Pending Liabilities

In the matter of lawsuits see Note 22c above.

b. Guarantees

The Company provided guarantees to third parties to the amount of $6,500 thousands (2012: $6,773 thousands).

c. Engagements with the Israel Airports Authority (IAA)

1. The Company has a usage right (permit) to 29 hectares of land at BGN until December 31 2010, with an option to renew it for an additional 25-year period. The Company announced its intent to exercise the above option in accordance with the agreement, and is currently negotiating with the IAA to extend the agreement by an additional term.

2. On October 19, 2004, an amendment was added to this agreement, according to which in addition to the payment for the land, the Company will pay the IAA annual usage fees for certain fully depreciated buildings and installations. An expense of $3.7 million was listed in the Company’s books in 2013 for the land and building component.

3. The Company has a usage fee agreement (permit) with the IAA for a passenger service warehouse in BGN 4,350 square meters in size. The yearly usage fees are 2.5 million NIS ($0.7 million). This agreement was extended to December 31 2016.

4. On November 1 2011 the Airports Authority announced that it would be extending and amending the contract for the operation of the Company's passenger lounge in Terminal 3 by an additional period until May 31 2014 under the following conditions: yearly usage fees to the sum of 18 million NIS ($5.2 million as of the report date).

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The yearly cost is revised based on the CPI only. Additionally, agreements were signed to grant permission for other areas in Terminal 3 until November 2014, in return for rental fees of 7.8 million NIS a year ($2.2 million as of the report date).

d. Regarding engagements for the purchase of planes and engines, see Note 13d.

Note 25 - Equity

a. The Company's share capital:

Registered Issued and Paid-Up Share Shares Share Shares Special Ordinary Special Ordinary 1 NIS NV 1 NIS NV 1 NIS NV 1 NIS NV NIS NIS NIS NIS

Balance as of December 31 2013 , ,188818881888 , 69517,91,35 Balance as of December 31 2012 , 55818881888 , 69517,91,35

b. The rights accompanying the Special State Share:

On May 18, 2003 the Company issued the State of Israel a special, unsellable, nontransferable share. This share was designed to protect the State’s vital interests, in accordance with the following Government resolutions:

 Maintaining the Company as an Israeli company, subject to Israeli law;  Keeping the operating capability and the flight capability of carrying passengers, and cargo, above a minimum established level;  Preventing any hostile interests from taking over the Company;  Maintaining security and safety arrangements as determined by state bodies on behalf of the State.

In addition, on October 12, 2004, the Knesset’s Finance Committee approved the issuance of an order under the Government Corporations Act requiring the Company to employ, at any time, Israeli crew members, and – in Israel – Israeli ground personnel, in a number not lower than that required for continuous and simultaneous operations in an emergency of all the aircraft fleets constituting the minimal flying capacity which the Company is required to maintain as stipulated by directives of the Special State’s Share. As of the approval date of the financial statements, the provisions of this order did not obligate the Company to make any changes in its method of operations or composition of employees.

c. Shares Held by Company Employees

The employees association (Holdings in Trust of El-Al Employees Ltd.) (hereinafter – “the Employees Association”) held Company shares by virtue of a right to purchase shares granted by the State pursuant to the 2003 prospectus. On December 5 2013 the Employees’ Corporation ceased serving as a Company interested party. To the best of the Company’s knowledge, as of December 31 2013, the Employees’ Corporation does not hold Company shares.

d. Dividend Distribution Policy

Pursuant to this policy, the Company will distribute a dividend from time to time, at the discretion of the Board of Directors and subject to the Company's needs.

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Implementation of this policy is subject to any relevant law provisions as well as the assessment of the Company's Board of Directors of the Company’s ability to meet its present as well as forecast liabilities and taking into account its liquidity, and present as well as future business plans and activities. The adoption of this policy does not diminish the authority of the Board of Directors of the Company to decide upon a change, amendment and/or abolition of the currently established dividend policy and/or to approve any additional distributions that comply with the law and/or to decide on a reduction of actual distributions or to preclude them altogether should it be warranted by changes from time to time in the Company’s liquidity, operations and conditions. For details regarding arrangements with Bank Leumi regarding the distribution of dividends, see Note 18.e.3.b.

e. Senior Employee Option Plan

1. In February 2006, May 2006 and November 2007 the Company adopted 3 worker option plans, which were granted to Company senior executives and managers. The amount of options allocated in each plan was: 17,092,129, 3,072,536 and 2,195,852, respectively. Each option is exercisable into one ordinary Company share worth 1 NIS NV. The theoretical exercise price of one option into one share in each plan is 2.9733 NIS, 1.8894 NIS and 2.01 NIS, respectively. The options’ vesting period in each plan is: 4 years starting from January 1 2007 (with one quarter of the options vesting each year), 3.5 years (one quarter will be unfrozen on June 30 of each year from 2007 to 2010) and 3.5 years (one quarter will be unfrozen on July 1 of each of the years from 2008 to 2011), respectively. All options granted but not exercised will expire and be nullified 3 years from the date each option vested.

Number of Options Plan A Plan B Plan C

Outstanding as of January 1 2013 ,194518,6 3361889 304115, Expired ),194518,6( )3361889( ),931,17( Outstanding and exercisable as of December 31 2013 - - ,931,16

2. Service agreement and option allocation to the Chairman of the Company's Board of Directors:

On January 21 2009 the Company's Board of Directors decided to appoint Mr. Amikam Cohen as Chairman of the Company's Board of Directors (hereinafter: “the Chairman”), starting February 1 2009.

On April 30 2009 the Audit Committee and the Company's Board of Directors approved a service agreement with the Chairman (hereinafter "the Service Agreement"). On June 24 2009 the General Meeting of the Company's shareholders ratified the Service Agreement. According to the Service Agreement, the Chairman shall provide the Company with active Chairman services as expected in publicly-owned companies in the field of activity of the Company and of its subsidiaries, as they exists on the date the service agreement was made and as may be from time to time (hereinafter – "the Services"). In return for the services, the Chairman shall be entitled to the following: (a) a monthly salary of 90,000 NIS plus VAT linked to the CPI (hereinafter – "the Remuneration"); (b) 4,650,000 non-tradable options exercisable as 4,650,000 regular 1.00 NIS NV Company shares; (c) benefits pertaining to the receipt of flight tickets; and (d) reasonable expense reimbursements for travel, hosting and mobile telephone expenses made by the Chairman in the context and for the purpose of providing the services subject to the law and in accordance with Company procedure. The remuneration and the remaining benefits and payments detailed above constitute full remuneration to the Chairman for the provision of services, including for his services as Company director, and with the exception of these he shall be entitled to no additional benefit and/or wage and/or remuneration from the Company of any form, including directors' salary (participation remuneration and yearly remuneration) for his as a Company director. In the event that the Chairman ceases serving as Chairman or the Board and continues serving as a director at the Company, he shall be entitled only to a Director's salary (participation remuneration and yearly remuneration) in accordance with the remuneration paid Company directors at the time as well as flight ticket entitlements awarded Company directors.

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The aforementioned options constituted, as of the signing of the Agreement, 0.95% of the Company's issued and paid-up share capital. The options were granted as part of the Company's 2006 option plan and were issued to the Trustee for the Chairman in accordance with Section 102 of the Income Tax Ordinances (New Version), 1961, in the capital gains track and may be exercised as Company shares, subject to adjustments and as detailed below: The exercise price of each option shall be NIS 0.885, the closing price of a Company share on February 1 2009, which is when the Chairman of the Board began his tenure. The right to exercise the options shall vest in three equal yearly portions (one third each year) throughout the Chairman’s first three years. The number of options and/or the vesting price, as the case may be, shall be subject to adjustments as detailed in the Service Agreement, including adjustments due to dividends, due to mergers/acquisitions or acceleration due to changes in control. The Chairman of the Board of Directors shall be entitled to exercise any batch of options vesting to Company shares, starting from the vesting date of each batch and until 26 months from the vesting date of that batch (hereinafter regarding the options vested – “the Exercise Period”), except if the options or any portion thereof have expired before the end of the Exercise Period and all in accordance with the options plan. All of the options granted the Chairman of the Board of Directors and not exercised as Company shares by the end of the exercise period shall expire and cannot be exercisable. As of this report the Chairman of the Board of Directors holds 1,550,000 options, after some have expired in accordance with the terms of the plan. In accordance with the value assessment provided by an independent outside value assessor, and in accordance with the calculation made by the value assessor in accordance with the Black & Scholes model (as well as reference to Binomial options pricing model for comparison), the value of the options, based on the following parameters, for the date on which the option plan was approved by the Company's General Meeting on June 24 2009 was 1,310 thousand NIS. The parameters used by the assessor to determine the value assessment were, among other things, the value of the Company's stock on June 24 2009 (0.879 NIS), the exercise price set at 0.885 NIS, the options' average lifespan, the fact that the options are granted in three portions and the fluctuations of the Company's share throughout the vesting period. An expense of $1,000 was listed in 2012 for the options granted the Chairman of the Board of Directors. No expense was listed in 2013 for the options granted the Chairman of the Board of Directors. The parties' entry into the Service Agreement was retroactive starting February 1 2009 until the date the Chairman ends his service as Chairman of the Company's Board of Directors for any reason. In spite of the above, the Service Agreement can be revoked by either of the parties for any reason with advance written notice of 90 (ninety) days. On January 8, 2014, the general meeting approved the revision to the management fees to the Chairman of the Board of Directors, starting January 1 2014. The management services provided by the Chairman of the Board of Directors shall be at no less than 40% employment. In return for the management services, the Chairman of the Board of Directors shall be entitled to a monthly salary of 53 thousands NIS plus VAT linked to the CPI. In addition, the Chairman of the Board of Directors shall be entitled to a yearly bonus, in accordance with the yearly bonus mechanism set in the Company’s remuneration policy, at a rate that will not exceed 90% of the level of the bonus the CEO is entitled to (2% of the Company’s yearly pre-tax profit and no more than 3 million NIS). The remaining instructions not expressly changed in the revision shall continue to apply in accordance with the existing management services agreement.

3. Allocation of Options to the Company CEO

The Company granted the CEO 9,914,382 options exercisable as 9,914,382 ordinary 1.00 NIS NV Company shares, which constituted, as of the signing of the option agreement (approved pursuant to the approval of the Employment Contract) (“the Options Agreement”), 2% of the Company's issued and paid- off stock capital, 1.90% fully diluted. The options were granted on February 7 2010 in accordance with the Company's 2006 option plan and in accordance with the Options Agreement with the CEO. The options were placed in trust for the CEO in accordance with Section 102 of the Income Tax Ordinance, on a capital gains track, and are exercisable as Company shares, subject to adjustments and as detailed below: The right to exercise the option shall vest in three equal yearly portions (one third each year) throughout the CEO's first three years. In the event of the discontinuation of the CEO's employment within six months after a change of control event (as defined in the Options Agreement), all options allocated to the - C 69 -

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CEO the vesting date of which has yet to be reached shall vest immediately, and they shall be exercisable within 12 months from the date on which the CEO stopped working in practice. The exercise price of each option shall be 0.965 NIS, the closing price of a Company share on November 1 2009, which is when the CEO began his tenure. Any portion of options vested may be exercised up to six months from the vesting date of that portion, or at the end of twelve months from the actual end of the CEO's employment, whichever comes first. The amount of options and/or the exercise price, as the case may be, shall be subject to adjustments as detailed in the Options Agreement, including adjustments due to dividends and due to merger/sales agreements. In accordance with the value assessment provided the Company by an independent outside value assessor, and in accordance with the calculation made by the value assessor in accordance with the Black & Scholes model (referring to Binomial options pricing model for comparison), the value of the options as of January 6 2010 is 3,847 thousands NIS (on the date of the approval of the commitment the value of the options was 3,293 thousands NIS). The parameters used by the assessor to determine the value assessment were, among other things, the value of the Company's stock on January 6 2010 , the exercise price set at 0.965 NIS, the options' average lifespan, the fact that the options are granted in three portions and the fluctuations of the Company's shares throughout the vesting period. An expense of $58 thousands was listed in 2012 for the options granted the CEO. No expense was listed in 2013 for the options granted the CEO.

Note 26 - Financial Instruments

a. Composition:

Derivative financial assets: Current Assets Non-Current Assets Total Assets As of December 31 As of December 31 As of December 31 1 8 ,3 1 8 ,1 1 8 ,3 1 8 ,1 1 8 ,3 1 8 ,1 Thousands of Dollars Derivative financial instruments, intended as hedging items: Jet fuel hedging agreements 71,43 11678 - - 71,43 11678 Forward agreements for the purchase of foreign currency 61036 ,,1884 - - 61036 ,,1884 ,,1997 ,31674 - - ,,1997 ,31674 Derivative financial instruments measured at fair value via gain/loss: Jet fuel hedging agreements 091 31,94 - - 091 31,94

Total derivative financial assets: ,11009 ,41471 - - ,11009 ,41471

Derivative financial liabilities:

Current Liabilities Non-Current Total Liabilities As of December 31 As of December 31 As of December 31 18,3 18,1 18,3 18,1 18,3 18,1 Thousands of Dollars

Derivative financial instruments designated as hedging items Interest rate swap agreements ,45 ,14 014 ,1354 99, ,1601 Derivative financial instruments measured at fair value via gain/loss: Jet fuel hedging agreements - - - 63 - 63

Total other financial liabilities ,45 ,14 014 ,1399 99, ,1515

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b. Capital Management Policy

The Group manages its capital in order to ensure that the Group's entities may continue to exist as "going concern" while increasing the yield of its shareholders, by preserving an optimal ratio of debt to capital. The capital structure of the Company consist of net debt, which includes the loans detailed in Note 18, less cash and cash equivalents and shareholders' equity which includes issued capital, capital reserves and retained earnings as detailed in the Report of Changes in Shareholders' Equity.

c. Principal Accounting Policies

Details regarding principal accounting policies and methods adopted, including recognition conditions, the basis of measurement and the basis according to which revenues and expenses were recognized relative to each group of financial assets, financial liabilities and capital instruments, are presented in Note 2.

d. Financial Risk Management Goals

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. The Company CEO is responsible for making decisions regarding implementing hedging agreements in practice in accordance with the Committee’s policy and guidelines. The Company's financial sector provides services to its business activity, provides access to local and international financial markets, supervises and manages the financial risks involved in the Company's activities by way of internal reports that analyze levels of exposure to risk according to degree and strength. These risks include market risks (currency risk, interest rate risk and jet fuel price risk) and liquidity risk. The instructions regarding hedging activities are given by the Company CEO and are carried out by the Finance Department. 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 the 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, the use of derivative financial instruments and non- derivative financial instruments and the investment of surplus liquidity. Compliance with policy and with permitted exposure levels is supervised by the Risk Management Committee on a regular and continuous basis. The Market Risk Management Committee instructs Company Management from time to time to deviate from said policy for limited amounts of time, in accordance with market developments.

e. Market risk

The Group's activity primarily exposes it to financial risks of changes in the prices of jet fuel (see h. below) in the exchange rates of foreign currency (see f. below), and changes in interest rates (see g. below). The Group holds a variety of derivative financial instruments in order to hedge its exposures to market risks, which include:

. Swap agreements and options for projected purchases of jet fuel for the reduction of exposure to changes in jet fuel prices.

. Forward agreements for swapping foreign currency for the reduction of the Company's exposure from salary and local supplier payments in NIS. . IRS swap agreements to reduce the risk deriving from increases in interest rates.

Over the course of the reported period, no change occurred in market risk exposure factors. As for changes occurring in hedging policy in the reported year, see 26f, 26g and 26h below.

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f. Currency Risk

Most of the Company's revenues and expenses are in dollars, and the Company is exposed to changes in the rate of the USD vs. other currencies in which it has revenues and expenses, primarily for most salary expenses paid in Israel in NIS. Accordingly, a change in the shekel/dollar exchange rate influences the Company's shekel expenses in dollar terms. In addition, in the case of a devaluation of the euro in relation to the dollar, the excess of receipts over payments in euro reduces the Company's revenues. The Company also has balance sheet exposure to a devaluation of the dollar vis-à-vis the NIS due to the excess of financial liabilities over financial assets denominated in a currency other than the dollar (mostly, the NIS).

The book values of the Group's chief financial assets and liabilities denominated in a currency that are not its operating currency are as follows:

Assets Liabilities As of December 31 As of December 31 2013 2012 2013 2012 Thousands of Dollars

In or linked to the EUR 19116, ,91,00 1,155, 111566 NIS 50196, 781687 551355 66134,

On May 1 2013 the Company conducted sales transactions of certain financial instruments within the framework of its exchange rate hedging portfolio (NIS/USD), for the period between May 2013 and November 2013, the key points of which are closing the existing hedging positions for the period in question while realizing the profits of the hedging transactions to the sum of $17.3 million. The receipts in cash and the listings as profits were carried out on the original dates on which these transactions were redeemed (in accordance with the original redemption dates of the transactions sold). As a result of the sale, the Company recognized earnings to the sum of $17.3 million in 2013, classified from other comprehensive earnings to profit/loss.

Foreign Currency Sensitivity Analysis

The Group is exposed primarily to the NIS and the euro. The following table details sensitivity to a 10% increase or decrease in the appropriate exchange rate. 10% is the sensitivity rate used in reports to key administrative personnel, and this index represents Management's estimates regarding the likely possible change in exchange rates. The sensitivity analysis includes existing balances of financial items denominated in foreign currency and adapts their translation at the end of the period to a 10% change in foreign currency rates.

A positive number in the table represents an increase in profit/loss and an increase in equity, and a negative number represents a decrease in profit/loss and a reduction in capital.

The influence of a 10% increase in the dollar versus the other currencies, before tax influence:

NIS Influence Euro Influence As of December 31 As of December 31 2031 2032 2031 2032 Thousands of Dollars

Profit or (loss) )314( )316,,( )499( 385

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Forward Agreements for Foreign Currency Swaps

From time to time, the Company examines the need to invest in derivative financial instruments to reduce its exposure to currency risks. When it holds a derivative financial instrument, the Company is exposed to changes in the fair value of these financial instruments resulting from changes in their market value. Starting from late 2010 the Company hedges its expected cash flow exposure at a rate of 75% for the coming 12 months on a monthly basis. The extent of the hedging shall be determined by management.

In order to reduce its cash flow exposure due to the USD/NIS exchange rate, the Company from time to time enters into hedging agreement; these agreements are recognized as cash flow hedging for accounting purposes. The fair value of the forward agreements for foreign currency swaps as of the balance sheet date was established using published future exchange rates and yield curves deriving from published interest rates matching the repayment dates of the contracts denominated in foreign currency.

Cash Flow Hedging

The following table details the base sums of the transactions and the remaining terms of forward agreements for foreign currency swaps, as they exist as of the balance sheet date:

Sums of Asset Exchange Rate Transactions Fair Value Thousands of Thousands of USD – NIS Dollars Dollars Cash Flow Hedging

Up to 12 months 3046-3071 081985 61036

Regarding the Group's accounting policy in the matter of cash flow hedging, see Note 2n.

Over the course of the year equity after tax decreased by $4,702 thousands (in 2012 equity after tax increase by $17,267 thousands), due to the effectiveness of cash flow hedging as protection against cash flow risk due to exchange rates.

In 2013 the Company entered into a number of additional financial transactions intended to protect the Company from drops in the exchange rate of the USD vs. the NIS for periods ending August 2014. These transactions are recognized as cash flow hedges for accounting purposes.

Sensitivity Analysis of Forward Agreements for Foreign Currency Swaps

The sensitivity analysis is determined on the basis of exposure to foreign currency exchange rates of derivative and non-derivative financial instruments as of the balance sheet date. The sensitivity analysis was prepared under the assumption that the sum of assets as of the balance sheet date remained unchanged throughout the entire reporting period. For the purpose of internal reports on foreign currency rate risk for key management personnel, an increase or decrease rate of 10% was used, representing Management's policy regarding reasonable changes in foreign currency exchange rates.

Assuming that the NIS/USD exchange rates increased/decreased by 10% in 2013 (2012: 10%) with all other parameters remaining fixed, the influence on pre-tax equity would be as follows:

Capital reserves as of December 31 2013 would increase/decrease by $7.8 and $9.6 million, respectively (as of December 31 2012 they would increase/decrease respectively by $26.5 and $26.5 million, respectively).

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g. Interest Risk

The Group is exposed to interest risk as the Company has taken loans at variable interest rates. The risk is managed by the Group by maintaining an appropriate ratio between variable interest and fixed interest loans, by making use of interest rate swap contracts. The hedging actions are evaluated regularly in order to adapt them to projections regarding the desired interest rate and hedged risk. An optimal hedging strategy is ensured by adapting the Group's loan mixture and conducting back to back hedging against the payoff tables of existing loans.

In accordance with the Company’s interest hedging policy, the Company hedges its cash flow exposure to the LIBOR interest rate (exposure deriving from Company loans), at a scope of up to 50% of its total exposure for a horizon of up to 5 years. Interest rate hedging shall is carried out using financial instruments (such as IRS) or by taking some of the loans at fixed interest.

The Group's exposure to interest rates for financial assets and liabilities is described in the section on liquidity risk management in this Note below.

Over the course of the reported year no material change occurred in interest risk exposure factors or in the way the Group manages or measures risk.

Interest Rate Swaps

Within the framework of interest rate swap agreements, the Group entered into contracts to replace differences between fixed and variable interest rate sums calculated for agreed-upon listed principal sums. These contracts allow the Group to reduce the risk from variable interest rates to the fair value of an issued debt at fixed interest and exposure of the cash flow of a debt issued at variable interest. The fair value of the interest rate swaps as of the balance sheet date is established by capitalizing future cash flows using curves as of the balance sheet date and the credit risk inherent in the contract as stated below. The average interest rate is based on the balances existing at the end of the year.

Cash Flow Hedging

All of these transactions are recognized as hedging agreements for accounting purposes as of December 31 2013. The following tables detail the fixed contractual interest rate, unpaid balance and the fair value of the interest rate swap agreements of hedging agreements recognized as cash flow hedging for accounting purposes, which existed as of December 31 2013 and December 31 2012:

Paying Fixed Interest Receiving Fixed Interest Rate Interest Fixed by Contract Unpaid Balance Fair Value – Liability As of December 31 As of December 31 2031 2032 2031 2032 2031 2032 Thousands Thousands Thousands Thousands % % of Dollars of Dollars of Dollars of Dollars

Up to one year 8047 800, ,601965 361675 ),45( ),14( Between one and two ,0,8 8047 ,,51588 ,4,1065 )014( )449( years Between two and - ,0,8 - ,361190 - )407( three years 1461665 33814,0 )99,( ),1601(

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The interest swap agreements are cleared on a quarterly basis according to the payoff table of the loan for which the hedging agreement was made. The Group intends to pay off the differences between variable and fixed interest rates on a net basis.

Regarding the Group's accounting policy in the matter of cash flow hedging, see Note 2n.

As of December 31 2013 and December 31 2012 the Company had no interest rate hedging agreements not recognized as economic hedges.

Interest Rate Swap Agreements Recognized as Cash Flow Hedging for Accounting Purposes

Over the course of 2012 three agreements were signed with an Israeli banking corporation, which are recognized for accounting purposes as hedging transactions, in which the variable Libor interest component was replaced by a fixed component. These transactions were carried out as follows: the first on an opening principal balance of approximately $35 million, gradually declining based on a loan amortization schedule over a one year period starting November 2012. This transaction was concluded in November 2013. The second transaction on an opening principal balance of $162 million, gradually declining based on the loan’s amortization schedule, over a period of one year and three months starting January 2012. This transaction was concluded in January 2014. The third transaction on an opening principal balance of $111 million, gradually declining based on the loan’s amortization schedule over a one year period starting January 2014. No additional interest rate hedging agreements were carried out in 2013.

The fair value of these interest rate swap instruments recognized as cash flow hedging for accounting purposes as of December 31 2013 is a $991 thousands liability (as of December 31 2012, a $1,482 thousands liability). Over the course of the year, equity increased by $383 thousands after tax, due to the effectiveness of cash flow hedging as protection against cash flow risk due to interest rates (in 2012: a decrease in equity after tax to the amount of $1,110 thousands).

Interest Rate Sensitivity Analysis

The sensitivity analysis is determined based on the exposure to interest rates of derivative and non- derivative financial instruments as of the balance sheet date. The sensitivity analysis with regard to liabilities bearing variable interest has been prepared assuming that the sum of the liability as of the balance sheet date was the same throughout the reported year. For the purpose of reporting internally to key management personnel on interest rate risk , use was made of increases and decreases of 75% (in 2012 – increases and decreases of 75%), representing Management's estimates regarding likely changes in interest rates.

Assuming that interest rates increase/decrease by 75% in 2013 (2012: 75%) and the remaining parameters remain unchanged, the pre-tax influence on equity was as follows:

- Capital reserves as of December 31 2013 would increase/decrease by $250 thousands and $250 thousands, respectively (as of December 31 2012 they would increase/decrease by $776 thousands and $790 thousands, respectively).

h. Jet Fuel Price Risk

The Market Risks Management Committee prescribes the scope and manner of hedging of future consumption of jet fuel (hereinafter: jet fuel). The significance of the financial hedging of jet fuel prices is to guarantee the range of jet fuel purchase prices. In the event of a decrease in jet fuel prices, which is guaranteed beyond the range, then the Company pays the difference. In the event of an increase in jet fuel prices, the Company receives the difference from the guaranteeing company (mainly banks). The goal of the hedge of jet fuel prices is to hedge the Company's exposure to changes in global jet fuel prices. The Company is exposed to changes in the fair value of these financial instruments as a result of changes in market prices. - C 75 -

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Starting from the end of 2010, the Company’s jet fuel hedging policy is as follows: Jet fuel hedging will be carried out for a period of 12-24 months forward, on a monthly basis and at decreasing rates; For the coming month the Company shall hedge at least 60% and at most 75% of its jet fuel consumption. These percentages will decrease by 5% each month until the 12th month. For the 13-18th months Company management will be given the option of hedging up to 20% of the Company’s expected jet fuel consumption (with no minimum hedging obligation). For the 19-24th months Company management will be given the option of hedging up to 10% of the Company’s expected jet fuel consumption (with no minimum hedging obligation). Hedging shall be carried out using various financial instruments as decided by management (price fixing, options and various option structures), using appropriate base assets such as jet fuel, crude oil or refined oil. At least 20% of the hedging shall be carried out using options, and the balance via options and/or price fixing, at Company management’s full discretion.

Over the course of the reported year the Company adapted the implementation of the jet fuel hedging policy to rapidly-fluctuating market conditions, so that from time to time a deviation is created from the policy’s base lines, all of which involves regular reports to the Market Risk Management Committee and to the Board of Directors. As of December 31 2013, the Company had agreements designed for hedging jet fuel prices, at a scope estimated at 32% of expected consumption for 2014. 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 34% of the expected consumption for the period from March 2014 to February 2015.

The total net fair value of the jet fuel hedging agreements as of December 31 2013 amounted to $8.1 million (of which $7.2 million was for transactions recognized as cash flow hedging for accounting purposes), compared to a total of $5.6 million as of December 31 2012. The change in fair value derives mainly from the purchase and expiry of jet fuel hedging agreements over the course of 2013.

Over the course of the year equity after tax increased by $3,393 thousands, due to the effectiveness of cash flow hedging as protection against cash flow risk due to changes in jet fuel prices (in 2012: a decrease in equity after tax to the amount of $6,604 thousands).

Sensitivity Analysis of Jet Fuel Prices

The following sensitivity analysis was established based on the exposure to fuel price risks on the reported date. Use was made of increase or decrease rates of 15%, which represent Management's estimates regarding possible changes in jet fuel prices.

If jet fuel prices were 15% higher/lower in 2013 (2012: 15%), the pre-tax influence would be as follows:

- Capital reserves for jet fuel hedging agreements as of December 31 2013 would increase/decrease by $25.9 million and $25.9 million, respectively (as of December 31 2012 they would increase/decrease by $22.1 million and $22.1 million, respectively). And - The profit for the year ending December 31 2013 would increase/decrease by $5.1 million and $3.4 million, respectively. (For the year ending December 31 2012 the loss would have increased/decreased by $12.5 and $10.2 million, respectively);

Regarding the liquidity risk of the derivative agreements for the reduction of the exposure due to changes in jet fuel prices, see j. below.

i. Credit Risk Management

Credit risk refers to the risk that the opposite side fails to meet its contractual obligations and cause a financial loss to the Group.

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The Company and its subsidiaries have cash, cash equivalents and long and short-term investments deposited mainly with large, highly rated financial institutions. The Company and its subsidiaries do not anticipate any losses resulting from credit risk. Most of the revenues earned by the Company and its subsidiaries are derived from a large number of customers (mainly travel and cargo agents), characterized by their dispersal throughout several countries. Exposure to risk from the extension of credit to customers is limited because of their relatively large number and dispersal, as mentioned above. In Israel, insurance on credit (limited in amount) is granted to travel and cargo agents. Overseas agents are covered by collateral to the extent generally accepted in that country. The Company regularly examines customer compliance with credit terms and includes in its financial statements an appropriate allowance for doubtful debts.

The carrying amounts of financial instruments listed in the Financial Statements presented net from devaluation represent the Group's maximum exposure to credit risk, this without taking the value of any security achieved into account.

j. Liquidity Risk Management

Liquidity risk is the risk that the corporation encounters difficulty meeting its financial obligations when payment for them is due. The corporate approach for the management of liquidity risks is to ensure, as much as possible, a sufficient level of liquidity to uphold obligations on time. The corporation ensures the presence of sufficient levels of cash on demand to pay for expected operating costs, including the sums needed to uphold financial obligations. The above does not take into account the potential influence of extreme scenarios that cannot be easily predicted.

Interest and Liquidity Risk Tables

1. Financial Assets and Liabilities Not Constituting Derivative Financial Instruments

The following tables list the Company's outstanding contractual maturities in respect of financial assets (liabilities) that do not constitute financial derivatives. These tables were prepared based on the non-capitalized cash flows, based on the earliest date by which the Group may be required to receive the asset or repay the liability. The table contains cash flows both for interest and for principal.

Fifth Year First Year Second Year Third Year Fourth Year Onward Total Thousands of Dollars As at December 31 2013:

Interest instruments ),49161,( )091040( )971,76( ),601844( ),991,99( )7831710(

Trade payables ),141380( ),141380(

Trade receivables ,151,63 ,151,63

As at December 31, 2012

Interest instruments ),551348( )9113,9( )011409( )091588( )1441353( )404111,(

Trade payables ),661031( ),661031(

Trade receivables ,191090 ,191090

- For details regarding the Company's financing, see also Note 30.

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2. Derivative Financial Instruments

The following table details the Group's liquidity analysis regarding its derivative financial instruments. The table was prepared based on cash receipts (payments) for derivative instruments repaid on a net basis and non-discount gross cash receipts/payments for those derivatives requiring net payoffs. When the payment or receipt sum is not fixed, the sum for which disclosure was made is set taking into account projected interest rates as described by the interest receipt curve in effect on the balance sheet date.

Over 3 Over 1 Months Year and Up to 1 3-1 and Up to Up to 4 Month Months 1 Year Years Total Thousands of Dollars

As of December 31 2013:

Foreign currency swap 741 760 3139, - 6198, agreements Interest rate swap agreements )687( - )705( - ),1,91( Agreements to reduce the exposure from changes in fuel prices ,1109 11863 61941 - 01196

,1466 1179, 71540 - ,11883

As of December 31 2012:

Foreign currency swap 086 097 ,81438 - ,1133, agreements Interest rate swap agreements ),67( - )5,0( )974( ),146,( Agreements to reduce the exposure from changes in fuel prices ,1835 ,13,3 ,1581 - 31058 ,1491 111,8 ,,14,6 )974( ,61568

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k. Analysis of Financial Instruments by Linkage Instrument and Type of Currency

As of December 31 2031 2032 In NIS, Non- In NIS, Non- In Dollars Linked In Dollars Linked Derivative Financial Assets Derivative financial instruments, intended as hedging items: Contracts to reduce the exposure from changes in fuel prices 71,43 - 11678 - Foreign currency swap agreements - 61036 - ,,1884 71,43 61036 11678 ,,1884

Derivative financial instruments measured at fair value via gain/loss: Contracts to reduce the exposure from changes in fuel prices 091 - 31,94 - Total derivative financial assets: 01855 61036 51444 ,,1884

Derivative Financial Liabilities Derivative financial instruments, intended as hedging items: Interest rate swap agreements )99,( - ),1601( -

Derivative financial instruments measured at fair value via gain/loss: Contracts to reduce the exposure from changes in fuel prices - - )63( - Total derivative financial liabilities )99,( - ),1515( -

l. 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:

Book Value Fair Value Book Value Fair Value As of As of December December 31 As of December As of December 31 31 2013 2013 31 2012 2012 Thousands of Thousands of Thousands of Thousands of Dollars Dollars Dollars Dollars

Long term fixed interest loans (Level 2) ,451789 ,431173 031193 091401

The fair value of these loans is based on calculating the current value of cash flows according to an interest rate of 3.10% as of December 31 2013 (1.85% as of December 31 2012), as used for similar loans with similar characteristics. The increase in the book value and the fair value of the loans derives from offerings on the U.S. capital market in 2013.

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m. Details of Assets and Liabilities Measured at Fair Value in the Balance Sheet

So as to measure the fair value of its assets or liabilities, the Group classifies them according to a regarding that includes the following three levels:

Level 1: Quoted prices (unadjusted) in active markets for similar assets or identical liabilities the entity has access to on the measurement date. Level 2: Data other than quoted prices included in Level 1, which may be observed for the asset or liability, directly or indirectly. Level 3: Data that may not be observed for the asset or liability.

Classification of the assets or liabilities measured at fair value is based on the lowest level significant use was made in measuring the fair value of the asset or liability as a whole. The following are the Group’s assets and liabilities measured at fair value in the Company’s balance sheet, in accordance with their measurement levels:

Assets Measured at Fair Value in the Balance Sheet

Level 2 2031 2032 Thousands of Dollars Derivative financial instruments, intended as hedging items: Jet fuel hedging agreements 71,43 11678 Forward agreements for the purchase of 61036 ,,1884 foreign currency ,,1997 ,31674 Derivative financial instruments measured at fair value via gain/loss: Jet fuel hedging agreements 091 31,94 Total derivative financial assets: ,11009 ,41471

Liabilities Measured at Fair Value in the Balance Sheet Level 2 2031 2032 Thousands of Dollars Derivative financial instruments, intended as hedging items: Interest rate swap agreements )99,( ),1601(

Financial liabilities measured at fair value via Statement of Operations: Jet fuel hedging agreements - )63( Total derivative financial liabilities: )99,( ),1515(

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Note 27 - Statement of Operations Details

a. Operating Revenues:

Composition: For the Year Ending December 31 2031 2032 2033 Thousands of Dollars

Flying passengers ,10601758 ,17411396 ,17711745 Less – discounts )41047( )41700( ),01710( ,106,1003 ,17551484 ,17561837 Flying cargo and mail ,011634 ,0017,7 1,,1334 1181613,9 ,19661313 ,19451373 Others 70178, 7,13,9 7711,3 11,831818 118,51461 118611504

b Operating Expenses

1. Composition: For the Year Ending December 31 2031 2032 2033 Thousands of Dollars

Fuel 4981911 4041,49 4041375 Salary and associated * 3351581 *1901418 *33,1870 Airport fees and services ,011945 ,731131 ,791,9, Maintenance of aircraft, flight and ground ,801361 ,831814 ,881468 equipment Air navigation and flight communication 9411,0 911777 ,851403 Depreciation ,86161, ,891474 ,871908 Insurance 41658 41841 71808 Aircraft leasing fees 0,1140 771,91 7,1017 Meals and supplies 651963 6,1691 651680 Air crew expenses 581838 601339 69130, Security expenses less the State's ,51637 3311,1 681834 participation (see 2 below) Cost of duty-free products ,,1844 ,81484 ,,1614 Other expenses 151483 1,1144 101753 ,17561,47 ,178,1449 ,17461050

* Including expenses due to employee benefits and retroactive implementation of IAS 19 (revised) “employee benefits” – see Note 3.

2. Participation in security costs:

Following Note 1.c.(1) above in the matter of the approval by State elements to increase the State’s participation in the security expenses of Israeli airlines by an additional 12.5%, so that the State’s participation rate would amount to 97.5%. As a result of the increase in the State's participation rate, the Company received supplementary pay from the State that was listed in its Financial Statements by reducing operating expenses for 2013.

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c. Sales expenses:

Composition: For the Year Ending December 31 2031 2032 2033 Thousands of Dollars

Agent commissions ,,91610 ,131945 ,1614,7 Salary and associated * 601884 *691673 *531415 Advertising and public relations ,81940 015,, ,81,33 Others 171040 171,63 171560 1841178 1891891 1,51913

d. General and administrative expenses:

Composition: For the Year Ending December 31 2031 2032 2033 Thousands of Dollars

Salary and associated * 401690 *4,1683 *461513 Professional services 7156, 41589 41938 Communications 11,56 11,,3 1118, Rental fees and office maintenance ,31,0, ,11893 ,8110, Insurance 11859 11,30 1113, Other expenses ,,1,65 ,81903 ,,1111 ,861570 951139 971300

* Including expenses due to employee benefits and retroactive implementation of IAS 19 (revised) “employee benefits” – see Note 3.

e. Other expenses (revenues), net:

1. Composition- For the Year Ending December 31 2031 2032 2033 Thousands of Dollars

Expenses in respect of employee retirement plans, net (See Note 19e and paragraph 2 below) (2) 610 387 ,1195 Expenses due to legal actions (see Notes 22c) 11,,9 060 ,61079 Capital gains from the realization of fixed assets (see 3 below) (4) )318,9( )61,01( )31518( Update of provision due to settlement with Social Security and Income Tax - - )51836( Others 670 116 473 Total 4 )11083( 01193

2. The Company had no new retirement plans in 2013, 2012 and 2011. The retirement plan expenses also includes the revaluation of liabilities for existing retirement plans following the yearly

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revaluation of the stipend as well as the revaluation of the shekel vis-à-vis the dollar as well as a capitalization coefficient for the retirement plans.

3. Capital gain was primarily included in 2013 from the sale of the Boeing 767 aircraft for $2.3 million. Capital gains to the amount of $9.4 million were included in 2012 from the sale and re-lease of two CFM 7B-56 CFM engines, capital loss of $5.9 million from the sale of two Boeing 757- 200ER aircraft, as well as capital gains to the amount of $0.4 million from the sale of a Boeing 757-200.

Capital gains to the amount of $3 million were included in 2011 mainly from the sale and re-lease of a Trent 895 engine.

Note 28 - Financing Expenses For the Year Ending December 31 2031 2032 2033 Thousands of Dollars

Interest with respect to loans ,61,04 ,41675 ,31874 Expenses due to interest hedging agreements 718 130 ,1394 Expenses due to the revaluation of Maman options and shares, see Note 12b. 404 - ,1045 Exchange rate hedging expenses (regarding salary expenses) - ,31533 - Commissions and other bank expenses 51,,4 6118, 31054 Exchange rate differences due to balances not in the Group's functional currency 51,58 31944 6 151050 3016,3 181,97

Note 29 - Financing Income

For the Year Ending December 31 2031 2032 2033 Thousands of Dollars

Interest due to short term bank deposits 33, 596 ,1596

Revenues from foreign currency hedging 161485 - ,61363 agreements (regarding salary expenses) Exchange rate differences due to balances not in - 665 31911 the Group's functional currency Revenues due to the revaluation of Maman options - ,38 - and shares, see Note 12b. Others ,78 170 4,5 151,84 ,1667 181676 Note 30 - Means of Finance

As of December 31 2013, the Company has guaranteed credit frameworks from Israeli banking corporations for current activity to the sum of $26 million plus $2 million for the activity of its current loan account. Independent frameworks exist for deal room activity for hedging in the yields of jet fuel, foreign currency and interest to the scope of $52 million. As of December 31 2013 the Company was not required to provide any collateral for its hedging transactions.

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Note 31 - Earnings per Share For the Year Ending December 31 2031 2032 2033 a. Base Profit per Share

Earnings (loss) per year charged to the shareholders of the parent company (in 151661 *),71953( *)691016( thousands of dollars)

Weighted average of number of ordinary shares used to compute basic earnings per share (in thousands) 69517,9 69517,9 69517,9

b. Diluted Profit per Share

Earnings (loss) used to calculate diluted earnings per share (in thousands of dollars) 151661 ),71953( )691016(

Weighted average of number of ordinary shares used to compute diluted earnings per share (in thousands) 69517,9 69517,9 69517,9

* Retroactive implementation of IAS 19 (revised) “employee benefits” – see Note 3.

c. Instruments that could potentially dilute basic earnings per share in the future, but which were not included in the calculation of the diluted revenue per share as their influence was anti-diluting:

For the Year Ending December 31 18,3 18,1 18,, Number of options issued in the framework of share-based payment arrangements (in ,,1450 ,71158 18119, thousands)

Note 32 - Segment-Based Reporting

a. General:

The Group has applied IFRS 8, "Operating Segments" (hereinafter "IFRS 8") starting January 1 2009. 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 operational 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.

Passenger aircraft activity includes revenues (without deducting discounts) from the transport of passengers including baggage, transporting freight in the belly of passenger aircraft, mail transport and the contribution from the sale of duty free products.

Cargo aircraft activity includes revenues from airborne cargo shipping fees. In this area of activity, the Company offers cargo transport services in cargo aircraft from Israel to destinations to and from Israel; cargo transported from one foreign country to another foreign country (Fifth Freedom), for example from Liège to New York; or cargo transported in the context of Sixth Freedom (indirect flights via stopovers in the home country of the airlines), for example from Asia to Europe or the U.S. with a stopover in Israel. During the reporting year, the services offered by the Group in this field of operations were cargo transport services to one destination in Europe on scheduled flights, three destinations in Europe on - C 84 -

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charter flights and one destination in North America. Moreover, the Company offers cargo services to many additional destinations by means of the Company’s passenger aircraft or by means of cooperative arrangements with other airlines and also by means of land transport from the airport.

Starting June 2011 the Company has employed a single leased Boeing 747-400 cargo airplane.

The Company’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.

The Company's chief operational decision maker does not receive reports regarding measurement of segment assets and therefore, in accordance with the revision The Company's chief operational decision maker does not receive reports on segment asset measurement and therefore, in accordance with the revision to IFRS 8, this information is not included in the segment reporting.

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

Segment-based earnings represent the contribution made by each segment. Each segment's contribution is determined as follows: revenues created from operating segments less variable expenses involved in the operation of passenger airplane and cargo airplane flights, which include, inter alia, fuel expenses (not including fair value changes of jet fuel hedging agreements); airport fees and taxes, variable maintenance costs, air navigation and communication, passenger food and supplies, aircraft leasing fees, discounts and commissions granted passengers or paid to travel agents, air crew expenses including salaries and variable security costs. Unassigned costs primarily include salary costs (with the exception of air crew costs), changes in the fair value of hedging transactions not recognized for accounting purposes and other fixed costs.

For the Year Ending December 31 2013 Passenger Cargo Adjustme Aircraft Aircraft Others nts Total In Thousands of Dollars Revenues Revenues from outside customers ,19181198 781371 581575 4,1703 11,831818 Inter-segment revenues - - 641,,7 )641,,7( - Total segment revenues ,19181198 781371 941491 ,51444 11,831818

Segment results 1161077 )51,51( 611670 - 1411183

Unassigned expenses )1161186(

Operating profit 371999

Financing expenses )151050( Financing income 151,84 The Company's share of the profits of subsidiaries, net of tax 190 Profit before taxes on income 371565 Tax benefit ),11,83( Yearly profit 151661

In 2013 the Company attributed depreciation expenses to the amount of $90.8 million to the passenger aircraft segment did not attribute depreciation expenses to the cargo aircraft segment.

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For the Year Ending December 31 2012 Passenger Cargo Adjustme Aircraft Aircraft Others nts Total In Thousands of Dollars Revenues Revenues from outside customers ,10171963 08163, 661483 411445 118,51461 Inter-segment revenues - - 601557 )601557( - Total segment revenues ,10171963 08163, 931,48 ,61,80 118,51461

Segment results ,071717 )31017( 141015 - 1,81715

Unassigned expenses *),901108(

Operating profit ,11665

Financing expenses )3016,3( Financing income ,1667 The Company's share of the profits of subsidiaries, net of tax *,1614 Loss before taxes on income )131895( Taxes on income *51,61 Yearly loss ),71953(

In 2012 the Company attributed depreciation expenses to the amount of $92.2 million to the passenger aircraft segment did not attribute depreciation expenses to the cargo aircraft segment.

For the Year Ending December 31 2011

Passenger Cargo Adjustme Aircraft Aircraft Others nts Total In Thousands of Dollars Revenues Revenues from outside customers ,10191691 991661 651359 401193 118611504 Inter-segment revenues - - 4519,9 )4519,9( - Total segment revenues ,10191691 991661 ,,,1170 11376 118611504

Segment results ,591865 )470( 3,1836 - ,09168,

Unassigned expenses *)1331177(

Operational loss )631074(

Financing expenses )181,97( Financing income 181676 The Company's share of the profits of subsidiaries, net of tax *,1631 Loss before taxes on income )611,47( Taxes on income *)71457( Yearly loss )691016(

In 2011 the Company attributed depreciation expenses to the amount of $90.3 million to the passenger aircraft segment and $2.6 million to the cargo aircraft segment.

* Retroactive implementation of IAS 19 (revised) “employee benefits” – see Note 3. - C 86 -

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Presentation by Geographical Segments

East and The Rest North Central of the America Europe Asia World Total In Thousands of Dollars 2013 Revenues- Segment revenues 4071818 979185, 3391634 661903 118581698 Revenues not attributed to 511538 segments Total revenues in the 11,831818 consolidated report

2012 Revenues- Segment revenues 441174, 93410,0 3111387 641599 ,19401605 Revenues not attributed to 671,57 segments Total revenues in the 118,51461 consolidated report

2011 Revenues- Segment revenues 4961665 913178, 3,316,5 481190 ,199,1059 Revenues not attributed to 581717 segments Total revenues in the 118611504 consolidated report

Note 33 - Agreements with Related and Interested Parties

a. General

The Company's parent company is K'nafaim Holdings Ltd. (hereinafter “K’nafaim”), which is under the control the Borowitz family.

b. K’nafaim and its Controlling Shareholders:

In June 2004, K’nafaim became an interested party in the Company. Starting January 2005 K’nafaim became the Company’s controlling shareholder as of December 31, 2013, K'nafaim holds 36.3% of the Company's shares. The following is a general description of the transactions, their characteristics and scopes: included in the framework of operating revenues in 2013 was a revenue of $255,000 from a company controlled by K’nafaim, in 2012 income was included to the amount of $215,000 and in 2011 income was included to the amount of $151,000.

Within the framework of operating expenses, transactions with K'nafaim and companies in which its controlling parties have a personal interest to the amount of $1,243,000 were included in 2013. Expenses totaling $711,000 were included in 2012 and $1,143,000 were included in 2011.

Within the framework of sales expenses, transactions via a third party with Company in which the controlling parties at K’nafaim have a personal interest, in the field of advertising, to the amount of $583,000 were included in 2013. Expenses totaling $587,000 were included in 2012.

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General and administrative expenses include $100,000 in expenses for directors’ insurance in 2013 (sums of $100,000 in 2011 and 2012). Regarding the collective insurance agreement, see f. below.

c. Transactions with additional related and interested parties:

1. Exceptional Transactions with Controlling Shareholder

a)The inclusion of K’nafaim, the Company’s controlling shareholder, in the Company’s aviation insurance – following the Company's report from November 26 2009 on the matter of the Company’s engagement with its controlling shareholder K’nafaim Holdings in a joint transaction for the purchase of aviation insurance for a period of five years (hereinafter respectively: “the Original Report”, “K’nafaim” and “the Joint Transaction”), on November 21 2012 the Audit Committee approved the feasibility of the engagement period in the joint transaction in accordance with Section 275.(a).(2) of the Companies Law, which allows that approval of exceptional transaction of a public company with its controlling shareholder for a period exceeding three years in cases in which the Audit Committee approved that the engagement in the period in question is feasible under the circumstances. As detailed extensively in the original report for the approval of by the joint transaction, the Company purchases a certain amount of insurance coverage for K’nafaim within the framework of its insurance policies. The Company’s Audit Committee reexamined the terms of the joint transaction and confirmed that the five-year engagement was reasonable under the circumstances, for the following reasons: no material changes occurred in the insurance coverage or in the premium paid by the Company due to the inclusion of the K’nafaim insurance policies in the entire period in which such coverage existed for K’nafaim; no change is expected in the terms of the insurance for the period until the conclusion of the joint transaction (until the end of 2014); the Company was given the right to discontinue the engagement at any time subject to 60 days advance notice; at the conclusion of the engagement period, and in the event that the parties are interested in continuing with the joint transaction, the engagement will be presented for re-approval as required by law.

b) The rights of the retiring Chairman of the Board of Directors Prof. Israel (Izzy) Borowitz to Company flight tickets for himself and his family – Prof. Israel (Izzy) Borowitz is one of the controlling shareholders of K’nafaim, the Company’s controlling shareholder. The transaction was approved by the Audit Committee, the Company’s Board of Directors and by the general meeting, which convened on December 30 2008.

c) Approval of financial compensation to the Company’s directors (including directors considered Company controlling shareholders) – the transaction was approved by the Audit Committee, the Company’s Board of Directors and by the Company’s general meeting, which convened on March 4 2009. On May 16 and following the provisions of Amendment 16 to the Companies Law the general meeting ratified the compensation (including the right to flight tickets for reduced prices) to which the members of the Company’s Board of directors serving now and/or which will service from time to time at the Company are entitled, including directors constituting Company controlling shareholder and excluding external directors and directors the terms of the remuneration of which was arranged specifically for three additional years. Regarding the independent directors, note that the Company Board of Directors, in its January 23 2014 meeting, confirmed that these shall not be entitled to flight ticket benefits as part of the terms of their service and employment.

d) The employment of Mr. Nimrod Borowitz as the manager of the Company's Strategic Partnerships Project – Mr. Nimrod Borowitz is the son of Mr. David Borowitz (a controlling shareholder of K’nafaim, the Company’s controlling shareholder, and husband of Tamar Moses Borowitz, the Deputy Chairman of the Board of Directors and a controlling shareholder of K’nafaim). The transaction was approved by the Audit Committee, the Company’s Board of Directors and by the general meeting, which convened on March 4 2009. On May 2 2012 and following the provisions of Amendment 16 to the Companies Law, the general meeting approved the extension of the terms of the employment of Mr. Nimrod Borowitz, C.P.A, as manager of the Company's Strategic Partnerships Project by an additional 3 years.

e) Group directors and executives are insured by director and officers' liability insurance in the framework of the insurance coverage prepared by K'nafaim, in accordance with an agreement with K’nafaim. On December 31 2011 the General Meeting approved the Company’s engagement, from time to time, in - C 88 -

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policies insuring the liability of directors and executives in the Company, its subsidiaries and affiliates (including directors and executives who are controlling shareholders and their representatives), for an accumulated period of three years from the general meeting’s ratification (hereinafter: “the Framework Agreement”). During the period in question the Company shall be entitled, from time to time, and without requiring additional approvals from the general meeting, so long as the Company's’ Audit Committee and Board of Directors confirm that the policies purchased meet the terms of the framework agreement and are compatible with market conditions and the Company receives no objections in accordance with Section 1c of the Relief Regulations, to renew the policy in effect or replace it, with the same insurer or another insurer, whether by itself (hereinafter: “Independent Insurance”) or by joining an insurance policy purchased by K'nafaim Holdings Ltd. (hereinafter: “K'nafaim”) for subsidiaries and related companies (hereinafter: “Group Insurance”), for all of the directors and executives serving at the Company, at its subsidiaries as well as executives operating on behalf of the Company or on behalf of its subsidiaries in affiliates (including controlling shareholders), all in accordance with the terms detailed in the meeting assembly papers.

On March 16 2014 the Company’s Audit Committee and Remuneration Committee and on March 18 2014 the Company Board of Directors approved the continuation of an engagement with Menorah Mivtachim Insurance Ltd. for the renewal of the director and officer insurance policy, including for directors considered Company controlling shareholders, for an additional period starting February 1 2014. This insurance is within the framework of a collective insurance policy prepared by K'nafaim for its executives, in subsidiaries and affiliates, in accordance with the framework agreement and in accordance with the remuneration policy for Company officers, which was ratified by the general meeting of the Company's shareholders on January 8 2014 (hereinafter: “the Framework Agreement”). The liability limit pursuant to the purchased insurance policy matches the terms of the framework agreement, amounting to $100 (one hundred) million U.S. as well as an added 20% from the above limit for legal defense expenses in Israel. The policy period is between February 1 2014 and May 31 2015 (a period of 16 months). In accordance with the terms of the policy, the Company's share of the insurance fees is a sum of $161,000 a year (and relative to an 16 month period - $215,000), which constitutes 72% of the insurance fees for the group policy, a sum lower than the maximum premium sum set for the Company’s share in accordance with the framework agreement.. The deductible is between $10,000 and $75,000 US (according to the type and nature of the suit) and is lower than the maximum sum set in accordance with the terms of the framework agreement. The Audit Committee and Company Board of Directors approved the engagement in accordance with Regulation 1(3) of the Companies Regulations (Relief in Transactions with Interested Parties), 2000 and determined that the engagement is compatible with the terms set in the framework transaction. A summary of the arguments presented by the Company’s Audit Committee, Remuneration Committee and Board of Directors to approve the engagement: Entering into the insurance policy benefits the Company as it allows its directors and executives to fulfill their duties properly, taking the risks involved in their duties and the legal responsibilities borne by the directors and executives into account; the engagement is in accordance with the Company’s remuneration policy; the very act of purchasing the insurance policy reduces the Company’s indemnification obligation toward the directors and executives in accordance with the letters of indemnification granted the directors and executives by the Company; the engagement matches the terms set in the framework agreement. The cost of the policy premium, as described above, is lower than the policy cost ceiling as set in the terms of the framework agreement; engagements in executive liability insurance agreements are generally accepted engagements with Israeli public companies; the terms of the engagement are identical for all of the Company’s executives, including executives who are also controlling shareholders, as they were in the past and as they will be from time to time; furthermore, engagement in the insurance policy is carried out in accordance with market conditions and will have no material impact on the Company’s profitability, property or liabilities.

2) Non-Exceptional and Non-Negligible Transactions with Controlling Shareholder

a) Subsequent to the balance sheet date, on March 18 2014, the Company Board of Directors approved an extension to the Company’s engagements with the Yediot Group for 2014-2015, as detailed below: (1) an engagement for the purchase of advertising spaces in the various media owned by the Yediot Acharonot Group; (2) a cargo transportation engagement (newspapers) from Ben Gurion Airport to JFK in new York; (3) an engagement to purchase newspapers and magazines in Israel belonging to the Yediot Acharonot Group intended for distribution to passengers on Company flights. The engagements with the Yediot Acharonot Group were classified as transactions in which the Company controlling shareholder has a personal interest, as the Yediot Acharonot Group is owned by the brother of Ms. Tamar Moses- - C 89 -

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Borowitz, who serves as Deputy Chairman of the Company’s Board of Directors and is a controlling shareholder of K’nafaim, the Company’s controlling shareholder. The Company’s Board of Directors examined the engagements in question and came to the conclusion that the engagements benefit the Company. The Audit Committee determined that these engagements do not constitute exceptional transactions. Note that in addition to the engagements in question, the Company engaged with the Yediot Acharonot Group in a business client agreement for the purchase of flight tickets. The engagement in question was approved by the Board of Directors on March 18 2014 as a “negligible transaction”, after being classified as a non-exceptional engagement by the Audit Committee. In addition, on May 23 2012 the Company Board of Directors approved the engagement of subsidiary Sun D’Or with the Yediot Group to purchase advertising space on the website for Sun D’Or, for 2012 to 2014. Taking the terms of the agreement into account and in light of the fact that the agreement was carried out for economic reasons, the Company Board of Directors determined that the engagement in question benefited the Company. The Audit Committee determined that Sun D’Or’s engagement with the Yediot Acharonot Group does not constitute an exceptional transaction.

b) Subsequent to the balance sheet date, on January 22 2014 the Company Board of Directors approved the continued engagement of the Company with Kenes International Conferences Ltd. (hereinafter: “Kenes”) in a business customer agreement to purchase flight tickets in 2014-2015. Note that the engagement with Kenes was classified as a transaction in which a controlling shareholder has a personal interest, as Prof. Israel (Izzy) Borowitz, a controlling shareholder in K’nafaim, serves on the Kenes board of directors. The Company’s Board of Directors examined the engagement in question and came to the conclusion that the engagement benefit the Company. The Audit Committee determined that the engagement in question does not constitute an exceptional transaction.

c) On December 25 2013 the Company's Board of Directors approved the extension of the Company’s engagement with CTV Media Israel Ltd. (hereinafter: “CTV”) to receive billboard advertising services for 2014 and 2015. The engagement with CTV was classified as a transaction in which a Company controlling shareholder has a personal interest as Ms. Tamar Moses-Borowitz, Deputy Chairman of the Company Board of Directors and a controlling shareholder of K’nafaim, the Company’s controlling shareholder, and Mr. Nadav Falti, who served as a Company director upon the approval of the decision in question, hold part of CTV’s shares indirectly and served as directors on its board. Furthermore, Professor Israel (Izzy) Borowitz, a K'nafaim controlling shareholder, holds part of CTV’s shares indirectly. The Company’s Board of Directors examined the engagement in question and came to the conclusion that the engagement benefit the Company. The Audit Committee determined that the engagement in question does not constitute an exceptional transaction.

d) On December 9 2013 the Company Board of Directors approved the Company’s engagement with Gadot Chemical Tanks and Reservoirs Ltd. (hereinafter: “Gadot”) in a business customer agreement for the purchase of flight tickets as well as the Company’s engagement with Gadot Trade and Distribution (hereinafter: “Gadot Trade”) a fully-owned Gadot subsidiary, in an agreement to supply chemical materials needed for the ongoing maintenance of aircraft accessories and ground equipment. The engagements are for periods starting December 2013 and ending December 31 2014 (for the business customer agreement) and starting December 2013 to December 31 2016 (for the chemical materials purchase agreement) as well as the ratification of similar engagements starting November 2008. Note that the engagements with Gadot and Gadot Trade (hereinafter: “the Gadot Group” were classified as transactions in which the Company controlling shareholder has a personal interest as the son of Mr. Yehuda (Yudi) Levi, Deputy Chairman of the Company’s Board of Directors and a controlling shareholder of K’nafaim, has served as Deputy CEO and CFO of Gadot since November 2008. The Company’s Board of Directors examined the engagements in question and came to the conclusion that the engagements benefit the Company. The Audit Committee determined that these engagements do not constitute exceptional transactions as this term is defined in the Companies Law.

e) On December 9 2013 the Company Board of Directors approved an engagement between the Company and Clicksoftware Technologies Ltd. (hereinafter: “Clicksoftware”), in a business customer agreement for the purchase of flight tickets as well as the Company’s engagement with Clicksoftware in an agreement to provide support and maintenance services in the personnel management system. The engagements are for periods starting December 2013 and ending February 31 2014 as well as the ratification of similar engagements starting July 2011. Note that the engagements with Clicksoftware were classified as transactions in which a controlling shareholder has a personal interest, as Prof. Israel (Izzy) Borowitz, a controlling shareholder in K’nafaim, has served on the Clicksoftware board of directors since July 2011 and as Chairman since July 2013.

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The Company’s Board of Directors examined the engagements in question and came to the conclusion that the engagements benefit the Company. The Audit Committee determined that these engagements do not constitute exceptional transactions.

f) On November 12 2013 the Company’s Board of Directors approved the Company’s engagement with the Shalem Academic Center (hereinafter: “the Shalem Center”) in a business customer agreement for the purchase of flight tickets, starting May 2013 until December 2015. Note that the engagement with the Shalem Center was classified as a transaction in which a controlling shareholder has a personal interest, as the Deputy Chairman of the Company’s Board of Directors, Mr. Yehuda (Yudi) Levi, a controlling shareholder in K’nafaim, the Company’s controlling shareholder, has been a shareholder and director of the Shalem Center since May 2013. The Company’s Board of Directors examined the engagement in question and came to the conclusion that the engagement benefit the Company. The Audit Committee determined that the engagement in question does not constitute an exceptional transaction.

g) On June 29 2011 the Company's Board of Directors ratified an engagement with the Dori Media Group (hereinafter: “Dori Media”) in a business customer agreement under generally accepted terms for business customers with similar scopes of activity, according to which the Company will grant benefits to the Firm’s employees in the purchase of flight tickets, if they choose to make use of the Company’s services, starting May 2011 and ending May 2012 as well as for an additional extension period of one year under the same terms. On May 23 2012 the Company's Board of Directors approved the extension of the Company's engagement with Dori Media. The extension was classified by the Audit Committee as a non-exceptional transaction, in which Company's executives and the Company’s controlling shareholders may have a personal interest, as the Deputy Chairwoman of the Board of Directors at the Company and the Company’s controlling shareholder, Mrs. Tamar Moses Borowitz, is the indirect controlling shareholder of Dori Media and sits on the Dori Media board of directors. In addition, the Deputy Chairman of the Company’s Board of Directors, Mr. Yehuda (Yudi) Levi – is a member of Dori Media’s board of directors and Board member Mr. Nadav Falti, who served on the Company Board upon the approval of the decision in question, is the CEO and President of Dori Media and holds Dori Media shares indirectly.

h) On October 26 2010 the Company Board of Directors approved the engagement of with QAS Israeli Ltd. (hereinafter: “QAS”), in which the Company controlling shareholder has a 50% stake, in an agreement to provide ground services at BGN by the Company to QAS. The Company provides QAS with ground services at Ben Gurion Airport in return for a payment reflecting the market price for similar services, at non-material amounts. QAS deals in the supply of ground services to foreign airlines at Ben Gurion Airport and is interested in the Company carrying out some of the services QAS provides the airlines, such as towing aircraft, providing electrical power to aircraft and providing aircraft accessories. The agreement is for an unlimited term and each party may terminate it with 60 days’ notice. This agreement was approved by the Company Board of Directors as a non-exceptional transaction.

i) On January 21 2009 the Company’s Board of Directors approved a commitment with the law firm of Goldfarb, Levi, Eran, Meiri, Tzafrir & Co. for the treatment of various legal issues. The engagement was brought to the approval of the Board of Directors as a transaction in which a controlling shareholder has a personal interest, as the Company's controlling shareholder, the Deputy Chairman of the Board Yehuda (Yudi) Levi, Esq., has a personal interest due to the fact that he is a partner-manager of the law firm in question. The Board of Directors approved the engagement as a non-exceptional transaction.

j) On November 7 2007 the Company’s Board of Directors approved the Company’s engagement with the “VIP Lounge Partnership, from Dan Hotels and QIS – Limited Partnership” (hereinafter: “VIP Loungers”), which operates lounges at Ben Gurion Airport, in an agreement to host members of the El Al club flying on flights for foreign airlines in the lounge owned by VIP Lounges as well as in a mutual hospitality agreement with passengers on code sharing flights. Note that the VIP Lounges engagements in question were classified as transactions in which a Company controlling shareholder has a personal interest as K’nafaim, the Company’s controlling shareholder, holds 50% of the stock capital of QIS Israel Ltd., a limited partner in VIP Lounges. The Company’s Board of Directors approved the engagements in question as non-exceptional transactions. Following an inspection by the Company’s enforcement supervisor in which a calculation was made on the total scope of the engagement between the Company and VIP Lounges, it was found that the scope of the comprehensive engagement in question in each of the years between 2010 and 2013 exceeded by non- material sums a sum of 200,000 NIS, a quantitative parameter decided upon by the Company’s Board of Directors as the upper threshold for classifying a transaction as a “negligible transaction.” - C 91 -

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d. Negligible Transaction

On March 18 2014 the Company Board of Directors updated the rules and guidelines for the classification of a transaction made by the Company or one of its subsidiaries with an interested party as a negligible transaction as set in Regulation 41(a)(6) of the Securities Regulations (Yearly Financial Statements), 2010 (“the Financial Statements Regulations”). These rules and guidelines shall serve the Company in determining the extant of disclosure in the periodic report and in the prospectus (including in shelf proposal reports) as regards transactions by the Company, a corporation under its control or an investee, with a controlling shareholder or in which the controlling shareholder has a personal interest in its approval as defined in Regulation 22 of the Securities Regulations (Periodic and Immediate Reports), 1970 (“Periodic and Immediate Report Regulations”) and Regulation 54 of the Securities Regulations (Prospectus Details and Prospectus Draft – Structure and Form), 1969 (“Prospectus Details Regulations”), as well as to determine the need to submit an immediate report for such a transaction by the Company, as set in Regulation 37(a)(6) of the Periodic Report Regulations (the types of transactions set in the Financial Statements Regulations, the Periodic Report Regulations and the Prospectus Details Regulations denoted above, shall be called “Transactions with Interested Parties”). Accordingly, The Company's Board of Directors has determined that in the absence of special qualitative considerations deriving from the circumstances of the matter, an Interested Party Transaction carried out over the normal course of the Company’s business, under market conditions and which has no material impact on the Company, shall be considered a "negligible transaction" if all of the following conditions are met: (a) The scope of the yearly engagement (on a calendar year basis) denoted in it does not exceed 1 million NIS. In the event the Company does not have full rights in the transaction covered by a specific engagement, the engagement shall be determined based on the Company's relative portion of the transaction. (b) The Company is not required to issue an immediate report on the transaction in accordance with Regulation 36 of the Periodic and Immediate Reports Regulations or any other law. (c) The transaction does not deal in terms of service and employment (as defined in the Companies Law, 1999, hereinafter: “the Companies Law”) of an interested party or their relative. As a rule, any interested party transaction shall be examined separately in order to examine its classification as a “negligent transaction” on the basis of the relevant criteria in the Company’s latest consolidated and yearly audited Financial Statements. Relevant criteria for examining a transactions are, for instance: (1) total sales the subject of the Interested Party Transaction; (2) the total cost of the sales the subject of the Interested Party Transaction; or – (3) the extant of assets the subject of the Interested Party Transaction; (4) the extant of liabilities the subject of the Interested Party Transaction; (5) the extent of the expense or yield the subject of the Interested Party Transaction. In cases in which, according to the Company's judgment, all of the aforementioned criteria are irrelevant for the determination of the negligibility of the Interested Party Transaction, the transaction shall be considered negligible, in accordance with a different relevant criterion, determined by the Company, so long as the relevant criterion used for this transaction shall not exceed 1 million NIS per calendar year. Despite the above, separate transactions constituting part of the same engagement or ongoing transactions or very similar transactions carried out frequently and repeatedly, shall be examined as a single transactions on a yearly calendar basis for the purpose of examining their classification as a negligible transaction and such cases, the cumulative scope of the engagement during a calendar year shall not exceed 1 million NIS. Over its regular course of business, the Company carried out, during the reported year or as of the date the report was filed or which are still in effect as of the report date, transactions with controlling shareholders defined as “negligible transactions”, of the following types and with the following characteristics: Granting discounts for flight tickets according to a business customer agreement; the purchase of screens and their installation in the Company’s offices and providing ongoing content, production and maintenance service for the Company; catering services for passengers whose flights have been delayed; security screening services for VIP travelers in the Masada Lounge; undercover inspections on Company flights and during security screening for Company flights; controls for the Company’s website, transportation services for passenger boarding and disembarkation, and providing various food-related services via subsidiary TAMAM.

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e. Agreement with the Company CEO:

On October 21 2009, the Company's Board of Directors decided to appoint Mr. Eliezer Shekedi as the Company's CEO; he began serving on January 1 2010. On January 6 2010 the Company’s Audit Committee and Board of Directors approved the engagement with the CEO via the employment contract (hereinafter: “the Employment Contract”) which came into effect retroactively starting November 1 2009, the key points of which being the following: The CEO shall be subordinate to the Company’s Board of Directors. The CEO's gross monthly salary shall be 115,000 NIS, linked to the Consumer Price Index on the basis of the known index, with the basis index being the CPI published December 15 2009.

The CEO shall be entitled to a bonus comprised of the following three components: "Profit bonus" - a sum equal 2.0% of the Company's yearly pre-tax profit as it appears in the Company's consolidated and audited yearly Financial Statements (“the Yearly Statements") for each calendar year during the CEO's tenure as Company CEO ("the Tenure"), starting 2010, when such a profit was achieved and for any portion of such a calendar year; as well as: "One-time bonus" – a one-time bonus to the amount of two million NIS for the first calendar year over the course of the tenure in which the Company achieved a pre-tax yearly profit, this in accordance with the yearly statements for the year in question ("the base year") and an additional (and final) one-time sum of one million NIS for an additional calendar year over the course of the tenure, in which the Company achieved a pre-tax yearly profit, this in accordance with the yearly statements for the year in question; as well as – "A result improvement bonus" - a sum of 2.0% of the aggregate improvement to the Company's yearly pre-tax profit, starting from the base year until the end of the tenure, according to the yearly statements. This bonus shall be paid the CEO for the base year and for each subsequent calendar year in which an improvement occurred (if any) in the yearly profit in question compared to the previous peak year in the tenure, with "previous peak year" in this regard being a previous calendar year, starting from the base year, in which the Company's highest pre-tax profit was achieved to date for which the bonus in question is paid. Eligibility for this bonus shall apply only if (a) a pre-tax yearly profit was achieved for the calendar years during the tenure in accordance with the relevant yearly reports; as well as – (b) under the condition that the profit in question is larger than the pre-tax profit achieved in the previous peak year, and – (c) due to the difference (delta) only between the two profit sums in question (with the exception of for the base year in which the bonus in question is calculated for the entire pre-tax yearly profit for that year). The CEO shall be entitled to social benefits such as executive insurance provisions or pension funds, loss of work ability and education fund, as are commonly granted Company senior executives. In addition, the CEO shall be entitled to 30 paid sick days per year (which may be accumulated to up to 120 days, but not redeemed), 16 recovery days per year, as well as 25 vacation days per year (which may be accumulated, unlimited in amount and redeemable). In addition, the CEO shall be entitled to reasonable personal and hospitality expenses, spent as part of his duties and in return for appropriate receipts/ invoices. The employment contract was set for an unlimited term and established that each party may discontinue the agreement subject to providing advance notice as follows: (a) during the first year of work – if the Company has discontinued the agreement or if the discontinuation received both parties’ consent, the advance notice period shall be 3 months from the end of work in practice or by December 31 2010, whichever is later, and if the agreement is discontinued by the CEO the period shall be 3 months in length; (b) if advance notice on the agreements discontinuation is delivered during the second year of work – if the Company has discontinued the agreement or if the discontinuation received both parties’ consent, the advance notice period shall be 152 months from the end of work in practice, and if the agreement is discontinued by the CEO the period shall be 6 months in length; (c) if the advance notice regarding the discontinuation of the agreement is delivered after the completion of the second year of work, the advance notice period shall be 12 months from the end of work in practice, whether it was discontinued by the Company, by the CEO or with their mutual consent. In this regard, the “end of work in practice” means the date set by the Board of Directors (or a Board committee) as the date on which the CEO’s work at the Company ended in practice. Upon the discontinuation of the CEO's employment, for any reason, with the exception of criminal circumstances, the CEO shall be entitled to, in addition to the payments specified above, a retirement bonus to the amount of a single monthly salary multiplied by the

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amount of years he worked at the company (not including the advance notice period), including for a portion of a work year, this according to the CEO's last pay slip. This agreement includes confidentiality and non-compete clauses, according to generally accepted practice, for a 12 month period from the actual discontinuation of work. The Company shall provide the CEO with a mobile phone, a telephone line and home fax machine and shall bear full maintenance and usage costs as well as payments for calls. The Company shall provide the CEO and his household with a Licensing Group 6 vehicle. The Company shall bear all costs involved in the use and maintenance of the vehicle, according to Company practice and its procedures as updated from time to time. The Company shall pay the tax payments borne by the CEO for the vehicle and telephone at his disposal. The CEO shall be entitled to flight tickets for himself and for his family according to Company practice regarding any person serving as CEO, this according to existing Company procedures, updated from time to time. Regarding options granted the Company CEO, see Note 25.e.3. In accordance with the employment agreement described above, and in accordance with the Company’s 2013 business results, the CEO is entitled to a bonus of $1,060,000 for 2013. As a result of making a “non-material adjustment of comparison numbers” in the Company’s June 30 2012 and September 30 2012 statements, the Company’s pre-tax yearly earnings for 2010 were reduced by $793,000. As in accordance with the agreement signed between the Company and Mr. Eliezer Shekedi, the Company CEO, the total bonus paid Mr. Shekedi for 2010 was derived from the Company’s total pre-tax profit, a sum of 56,650 NIS (before tax) (some $16,000) was returned by Mr. Shekedi to the Company in 2013 by offsetting it from his salary, reflecting the relative influence of the “non-material adjustment of comparison numbers” made in the Company’s statements on the Company’s yearly pre-tax profit for 2010. A similar sum was transferred to the Company from the excellence fund.

On December 1 2013 Mr. Shekedi announced his decision to conclude his duties after four years in office (he began serving on January 1 2010). Mr. Shekedi shall conclude his service on March 31 2014, the date on which the advance notice period noted above will begin. Note that the date for the conclusion of the employer/employee relationship with the outgoing CEO was set for December 31 2014. On October 29 2014, the Company's Board of Directors decided to appoint Mr. David Meimon as the Company's CEO starting March 20 2014. Mr. David Meimon has served as the Company VP of Commerce and Aviation Relations since 2011.

Excelling Employees Fund As part of the terms of the Company CEO’s employment and at the CEO's request, the Board of Directors approved the establishment of a CEO fund for the remuneration of excelling employees, to the amount of 2 million NIS. This fund was established after the Company's financial results in 2010 showed an improvement of over 50% over 2009. In addition, on March 22 2011 the Company CEO informed the Company Board of Directors, at his own initiative, that he had decided to transfer to the Excellence and People fund, established in 2011, a sum equal to 50% of the yearly bonus owed him for 2010, in accordance with the term of his employment, meaning a total of 5.7 million NIS (gross). It was decided that use of this fund shall be at the discretion of the CEO to provide incentives to excelling Company employees who are not Management members, and its goal shall be the development, encouragement and promotion of the subject of excellence in the Company and personal excellence. The purpose of the fund was to create a challenging environment that encourages excellence, to systematically and continuously encourage the fulfillment of the personal and team capabilities and the accomplishment of exceptional achievements, to encourage personal and group investigation that will lead to progress in thought and action and to advance individual creative and progressive thought.

The fund was intended for the advancement and realization of three main areas:

. The person/team behind the excellence – 10 El Al CEO prizes for excellence for employees/teams each year for the next three years who will prove a “final result” in one of the following indices: increasing profitability, improving service, reducing expenses, increasing revenues, improving products, increasing customer numbers, improving availability, improving precision, improving processes, streamlining and safety improvement suggestions.

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. Supportive environment – creation of a positive dynamic at the Company for encouraging excellence by compensating the group from which the excellence arose in the nearby work circle

. Excelling in all of the Company’s profession – 56 of the Company's workers were selected each year and are granted monetary awards in order to encourage long-term excellence.

. High-value education– reinforcing affiliation of Company members to history, heritage and Jewish values. The goal is for all Company members to tour Jerusalem through the fund and visit Yad Vashem.

The Company established a committee to study the proposals made by the Company’s employees including their compliance with criteria set for the purpose of winning prizes. The Company CEO, in a special ceremony, awards the CEO’s prizes for excellence to the winning proposals.

In light of the discontinuation of the fund’s financing in March 2014, the fund’s activity in this format is expected to conclude.

f. Directors’ and Executives’ Insurance and Indemnification

On May 10 2005 the shareholders’ meeting approved an advance commitment to indemnify executives (no exemption to executives was approved). According to this decision, the extent of the indemnification shall be 25% of the Company’s equity according to its December 31 2004 Financial Statements or 25% of its the Company’s equity reported in the latest yearly consolidated financial statements upon payment of the indemnification, whichever is lower.

On December 29 2011 the Company's general meeting ratified the revision to the letters of indemnification for Company directors and executives (serving now or who will serve in the future, including directors and executives who are Company controlling shareholders, in order to reflect, mainly, the provisions of the Managerial Enforcement Law.

g. Transactions between the Company and Board member Pinchas Ginsburg (hereinafter: “Ginsburg”) or persons operating on his behalf (including corporations under his control):

Pinchas Ginsburg (serving on the Company's Board of Directors) and I. Hillel & Co. Ltd. (“I. Hillel”), in his full possession, received the approval of the Holder of the Special State Share on September 3 2006 according to which the Holder agrees that individuals members of Pinchas Ginsburg’s family and I. Hillel may hold the Company’s shares together at a rate lower than 15% of the Company’s issued stock value. Note that Pinchas Ginsburg has a personal interest, directly or indirectly, in various transactions carried out by the Company and/or related companies, as detailed below: (a) I. Hillel carries out, from time to time, transactions with the Company and with Sun D’Or for the purchase of flight tickets for Company and Sun D’Or flights as well as Sun D’Or charter flights; (b) the Company and Sun D’Or enter, from time to time, into transactions with Airtour, half of the shares of which are held by the Company and the other half are held, to the best of the Company's knowledge, by travel agents, including I. Hillel. Mr. Ginsburg also serves on the Board of Directors of Air Tour. These transactions are essentially the purchase of light tickets, providing outsourcing services by Airtour in ticketing areas, making reservations and providing ground services; (c) Pinchas Ginsburg acts as the general sales agent for (“Thai”) in Israel. Ginsburg’s compensation is based on commissions deriving from the sale of Thai flight tickets in Israel. Agreements are in place between the Company and Thai regarding the transport of passengers and the transport of cargo, including code sharing and interline agreements. Furthermore, by virtue of Mr. Ginsburg being the general sales agent for Thai in Israel, Mr. Ginsburg is entitled to free flight tickets from the Company, in accordance with IATA ruling no. 788 based on the reciprocity principle, according to which airlines around the world, including the Company, request free flight tickets from each other for their officers and airline representatives. A report on Mr. Ginsburg’s use of the Company’s tickets in accordance with IATA ruling 788 is provided the Company Board of Directors at the end of each calendar year. In light of Mr. Ginsburg’s personal interest in all of the transactions in question, the Company's Board of Directors approved, as non-exceptional transactions, the transaction procedure pertaining to commitments between the Company and Thai as well as the transaction procedure between the Company and Airtour and between Sun D’Or and Airtour as well as framework agreements between I. Hillel and/or Mr. Ginsburg (hereinafter – “the Interested Party”) and the Company and Sun D’Or (all of the transactions in question shall hereby be referred to as “the Commitments”). The basic principles of the transaction - C 95 -

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procedures and framework agreements are as follows: (1) once per year the Company’s Board of Directors shall set the maximum yearly proceeds for transactions with the interested party (hereinafter – “the Maximum Sum”); (2) all commitments pursuant to the maximum sum shall be at market prices and under market conditions; commitments not under market conditions shall require the advance approval of the Audit Committee and Company Board of Directors; (3) a supervising element shall be appointed to supervise that all of the commitments are carried out under market conditions and who shall provide the Company's Audit Committee, at the end of each calendar half, a written report regarding commitments carried out in the previous half and their conditions; (4) insomuch as the Audit Committee determines that a deviation had occurred from market prices and conditions in any of the commitments (“Deviating Commitments”), the discussion of these Deviating Commitments shall be passed on to the Company’s Board of Directors for its decision on the steps required for their approval. Note that as of this report, no deviating transactions have been found; (5) extending the commitments shall be subject to the approval of the Company's authorized organs.

h. Remuneration of Key Management Personnel For the Year Ending December 31 2031 2032 2033 Thousands of Thousands of Thousands of Dollars Dollars Dollars

Short-term benefits 51747 31998 4,476 Post-employment benefits 597 56, 525 Share-based payment - 59 103 41346 61598 5,284

i. Benefits Granted Interested Parties 2031 2032 2033 Thousands of Thousands Thousands Dollars of Dollars of Dollars

Chairman services and commissions fees (including bonuses due to options) to interested parties employed by the Company 334 169 350 Number of people to whom the benefit refers , , , Remuneration for directors not employed by the 639 6,0 657 Company Number of people to whom the benefit refers ,8 ,3 ,3

j. Balances with Interested and Related Parties As of December 31 2013 2012 Thousands of Thousands of Dollars Dollars

Other interested parties /related parties

Within the framework of current assets –

Trade Receivables Related party – affiliate 1149, 314,5 Related party and interested party , ,8, 11491 317,4

Total highest debit balance during the balance 91,54 71900 year

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As of December 31 2031 2032 Thousands of Thousands of Dollars Dollars

In the framework of current liabilities -

Related party and interested party ,1837 7,9

Current Liabilities due to Employee Benefits

Related party ,1736 *531

*Reclassified

As of December 31 18,3 18,1 Thousands of Thousands of Dollars Dollars Affiliates

In the framework of non-current financial assets -

Investment in shares and options ,41089 ,41767

k. Transactions with Interested and Related Parties 2031 2032 2033 Thousands of Thousands of Thousands of Dollars Dollars Dollars Interested Parties/Related Parties

Revenues from interested and related parties

Flight tickets 531488 *6714,9 *6019,9 Cargo transport 1818,3 1,1794 161347 Maintenance services 155 1,5 ,5,

Operating Costs - Transactions with controlling party ,1163 7,, ,1,63 Services from interested party 4,377 11656 ,1119 Receipt of shares and options from affiliate free - )11661( )31561( of charge

Sales Expenses - Primarily commissions and marketing fees 31893 31583 31848 (subsidiaries) Primarily agent commissions (to interested - - 6,5 parties) Advertising services from interested party (via 503 507 944 third party)

Administrative and general expenses 11411 ,1393 ,1778

*Reclassified

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Note 34 - Transactions and Engagements with Subsidiaries

1. As stated in Note 1b, the Company did not include separate financial information in its 2013 and 2012 periodic reports in accordance with Regulation 9c of the Securities Regulations (Periodic and Immediate Reports), 1970, due to the negligibility of the added information. The Company fully owns several companies the activity of which complements the primary activity conducted within the framework of the Company. These companies do not act independently, but are in effect specific components of the Company's array of activities consolidated in the form of companies and this from regulation and other administrative reasons (salary agreements etc.). These companies are not material relative to the Company as the extant of assets, liabilities and revenues managed as part of the subsidiaries are negligible relative to the extent of the assets, liabilities and revenues managed within the framework of the Company. Therefore, publication of separate Financial Statements will not provide additional material information to the reasonable investor.

2. The Company has entered into agreements with its subsidiaries as follows:

a. Activity between the parent company and its subsidiaries:

Investment Credit and Debit Account Company Type of Activity Yearly Turnover Account as of 2013 2011 2013 18,2 31.12.20,3 31.12.20,2 Thousands of Thousands of Dollars Dollars Thousands of Dollars Leasing of aircraft and providing Sun D’Or associated services. 46,117 48,557 3 3 2,142 528 Commissions 48 63 Purchasing food for Company Tamam flights from BGN 24,923 22,697 1,309 994 2,640 2,604 Purchasing food for Company Borenstein flights from New York 6,598 6,336 4,828 4,966 478 703 Management fees 245 197 Loan to parent company (1) 3,000 3,000 Interest from parent company (1) 69 69 Sale of flight tickets and ground Superstar arrangements 12,070 10,094 (198) (105) 89 322 Loans from parent company (2) 935 914 Purchasing food for employees and food services in the King David Katit Lounge in Terminal 3 3,571 3,153 1,150 1,112

(1) In December 2011 the Company received a $3,000,000 loan from Borenstein for a period of three years, at a 2.3% annual interest rate paid December 15 every year.

(2) In September 2007 the Company provided Superstar with a £205,000 loan. In October 2010 the Company provided an additional £110,000 loan. In November 2012 the Company provided an additional £250,000 loan. The three loans have no repayment date and bear no interest.

b. Mutual activity between subsidiaries:

Credit and Debit Account Company Type of Activity Yearly Turnover as of 20,3 20,1 31.12.2013 31.12.20,1 Thousands of Dollars Thousands of Dollars TAMAM -Katit Food purchasing 363 138 146 113 Flight Ticket Superstar– Sun D'Or Purchasing - 11,09 - 86 - C 98 -

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Note 35 - Liens and Collateral

As stated in Note 13g above, the Company's assets free of liens as of December 31 2013 are aircraft and reserve engines worth $16 million as well as parts and other fixed assets to the amount of $174 million. With the exception of these assets, the assets are restricted in favor of loans granted by the lending banks.

The following details the Company’s liabilities secured by liens:

Year Aircraft Type of of Register Lien Details Aircraft Manu- Code facture Fixed and specific first-tier pledge and lien for an Israeli bank on all of the Company's rights to the planes. The pledge and lien include all the engines, the rights deriving from the lease or use of the aircraft or contracts or insurance policies and rights to ECA indemnification or insurance proceeds for the aircraft in question. 777-200ER ECB 2001 In addition, a first-tier floating lien was registered on all the ECC engines and auxiliary equipment installed on the above- mentioned aircraft from time to time, as well as the insurance rights with respect to them. No additional lien may be registered on those assets and the assets may not be transferred without the bank’s advance, written consent. Fixed and specific first-tier pledge and lien in favor of a trustee for collateral (for ECD). The pledge and lien include all the rights deriving from contracts connected to the plane, rights to ECD 2002 indemnification or insurance proceeds for the aircraft or their 777-200ER ECE 2007 engines, or any part related to it and all rights deriving from the ECF 2007 lease agreement for the aircraft. In addition, the Company assigned by way of a pledge in favor of a foreign company, all of the existing and/or future rights arising from insurance policies for the aircraft. Fixed and specific first-tier pledge and lien (for ELA and ELB for an overseas banking corporation, for ELC and ELE for an Israeli bank and for ELD for Israeli banks) on all of the Company's rights to the planes. The pledge and lien include all the engines, ELA 1994 the rights deriving from the lease or use of the aircraft or contracts ELB 1994 or insurance policies and rights to indemnification or insurance ELC 1995 747-400 proceeds for the aircraft in question. In addition, a first-tier ELD 1999 floating lien was registered on all the engines and auxiliary ELE 1994 equipment installed on the above-mentioned aircraft from time to ELH ,994 time, as well as the insurance rights with respect to them. No additional lien may be registered on those assets and the assets may not be transferred without the bank’s advance, written consent. Fixed and specific first-tier pledge and lien for an Israeli bank on all of the Company's rights to the planes. The pledge and lien include all the engines, the rights deriving from the lease or use of EKA the aircraft or contracts or insurance policies and rights to EKB indemnification or insurance proceeds for the aircraft in question. 737-800 EKC 1999 In addition, a first-tier floating lien was registered on all the 737-788 EKD engines and auxiliary equipment installed on the above- EKE mentioned aircraft from time to time, as well as the insurance

rights with respect to them. No additional lien may be registered on those assets and the assets may not be transferred without the bank’s advance, written consent.

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Year Aircraft Type of of Register Lien Details Aircraft Manu- Code facture Fixed and specific first-tier pledge and lien in favor of a trustee for collateral on all of the Company's rights to the planes. The pledge and lien include all the rights deriving from contracts EKH connected to the plane, rights to indemnification or insurance EKJ 2009 737-800 proceeds for the aircraft, engines, or any related to it and all rights EKL under from the lease agreement for the aircraft.

In addition, the Company assigned by way of a pledge in favor of a foreign company, all of the existing and/or future rights arising from insurance policies for the aircraft. Fixed and specific first-tier pledge and lien in favor of a trustee for collateral on all of the Company's rights to the planes. The pledge and lien include all the rights deriving from contracts connected to the plane, rights to indemnification or insurance EHA 737-988 18,3 proceeds for the aircraft, engines, or any related to it and all rights EHB under from the lease agreement for the aircraft. In addition, the Company assigned by way of a pledge in favor of a foreign company, all of the existing and/or future rights arising from insurance policies for the aircraft.

Additional liens:

1. In order to secure the Company’s liabilities for the utilization of credit lines provided to it by an Israeli banking corporation (including the furnishing of bank guarantees), the Company signed agreements to place specific liens in favor of a banking institutions on the Company's right to receive money from the sale of flight tickets from a limited number of agents. In addition, the Company placed a lien on its property on 32 Ben Yehuda St. in favor of this banking institution.

2. A lien in favor of a foreign bank on a spare engine for the 777-200 fleet, purchased with the financing of an overseas bank, for which the foreign bank provided collateral. The lien includes rights deriving from insurance, compensation and remuneration.

3. Regarding the leased aircraft in the 737-800 fleet (marked EKS and EKF), liens on all of the insurance policies pertaining to the asset for a foreign company. No additional lien may be registered on those assets or the assets may not be transferred without the owner's consent.

4. A lien in favor of the Ex-Im American Import and Export Bank on a spare engine for the 737 fleet, purchased with a direct loan from Ex-Im, for which the bank provided collateral. The lien includes rights deriving from insurance, compensation and remuneration.

Note 36 - Events Subsequent to the Balance Sheet Date

a. On October 29 2014, the Company's Board of Directors decided to appoint Mr. David Meimon as the Company's CEO. Mr. David Meimon has served in various positions at the Company since 2005 and currently serves as the Company VP of Commerce and Aviation Relations. Mr. Meimon will begin serving as CEO starting March 20 2014, after an overlap period with Company CEO Mr. Eliezer Shekedi. The employment agreement between Mr. Meimon and the Company is for an unlimited period of time in which Mr. David Meimon will serve as Company CEO as full-time employment. Each party (Mr. Meimon or the Company) may terminate the agreement with 6 months advance notice. It is hereby made clear that the Company may waive Mr. Meimon's services during the advance notice period and in the event of dismissal under special circumstances (as defined in the employment agreement) the Company shall be entitled to dismiss Mr. Meimon immediately with no advance notice and no payment for the dismissal and for severance pay. Mr. Meimon shall be entitled to a comprehensive monthly salary of 97,500 NIS (“Comprehensive Salary”) The comprehensive salary shall be linked to the Consumer Price Index or any other index that replaces it an shall be updated on a yearly basis, in January, according to the increase in CPI in the past year, less price of living

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increases paid since the last update date of the comprehensive salary. So as to remove all doubt, if the CPI drops, the comprehensive salary will not decrease. Mr. Meimon shall be entitled to a yearly bonus equal to 2% of the Company’s yearly earnings (before tax) and no more than 3 million NIS, in accordance with the terms, restrictions and instructions set in the remuneration policy, as it may be from time to time, including provisions regarding threshold conditions for the receipt of a bonus, deferred long-term remuneration as well as in the matter of reducing the sum of the bonus by the Company Board of Directors. In accordance with the term of the remuneration policy, Mr. Meimon will be asked to repay the Company for any excess payments paid by them as part of the terms of their employment, in the event that they were paid on the basis of data proven to be incorrect and restated in the Company’s Financial Statements published in a period of three consecutive years from the publication of the report on the basis of which the remuneration was repaid. Upon Mr. Meimon’s departure from the Company, following the conclusion of his employment agreement for any reason (except for termination under special circumstances) and his complete retirement from the Company, Mr. Meimon shall be entitled, in addition to a pension agreement, to severance pay at a rate of one month per year for his employment period at the Company according to his last salary as VO as of the signing of the employment agreement as Company CEO for his years of service as VP; as well as his final salary as VP for his years of service as CEO. As is its practice, the Company shall make deposits in a provident fund for Mr. Meimon (as defined in Section 47 of the Income Tax Ordinance) as part of a comprehensive pension insurance policy and/or executive insurance or other framework, as decided upon by Mr. Meimon and with the Company’s consent (“Pension Arrangement”). The Company’s payments to the pension arrangement shall come in lieu of such severance pay in the general approval regarding employer payments to pension funds and insurance funds in lieu of severance pay as per Section 14 of the Severance Pay Law. Mr. Meimon shall be entitled to provisions to a provident fund in accordance with generally accepted practices. The Company shall provide Mr. Meimon with a License Group 6 car, and if the licensing groups are canceled, then a car of a similar level. Subject to the law, expenses involved in maintaining and using the vehicle shall be borne and paid for by the Company. The Company shall embody the value of tax applicable for the use of the vehicle. The Company shall provide Mr. Meimon with a mobile telephone and reimburse the CEO's expenses for his home telephone. Mr. Meimon shall be entitled to expenses reimbursements in Israel and abroad according to Company procedures and in accordance with the rates and sums applicable to the Company from time to time. Mr. Meimon and his family shall be entitled to flight tickets (vacation service and/or discounted) during his service period as well as after his retirement from the Company, in accordance with Company procedure. To be clear, approval of the terms of Mr. Meimon's employment as Company CEO is subject to the approval of a special General Meeting of the Company's shareholders expected to convene on April 2 2014.

b. Following Note 18.b.2 above, regarding the aircraft financing agreement (“the Financing Agreement”), on march 3 2014 the Company gave its approval to the Canadian bank to perform an offering of the debentures on the U.S. capital market for the purpose of purchasing two additional Boeing 737-900 aircraft, the first of which is expected to be delivered to the Company on March 25 2014 and the second in July 2014 (“the Planes” and “the Plane Delivery Dates”, respectively). The debentures will be issued by a special purpose company (SPC) by the name of Rimon LLC, which was established as part of the financing agreement, for comprehensive financing amounting to $94.55 million US (“the Issue Sum”). The debentures shall bear fixed yearly interest of 2.623% (“the Interest”) and shall be redeemed in 49 quarterly interest and principal payments, in advance, for a period of 12 years. The repayment of the SPC’s debt in favor of the holders of debentures issued is guaranteed by the Export Import Bank of the United States (Ex-Im) to the sum of the issue and the interest. Inasmuch as the Ex-Im collateral is realized and the aircraft realization funds will not suffice to cover the sum of the collateral realized, the Company will be committee to return the balance of the debt to Ex-Im, as accepted in aircraft financing agreements. The issuing process shall be completed in accordance with the terms detailed in the issuing papers and in the financing agreement papers, which include, among other things, commitments and presentations by the Company as is generally accepted in these types of transactions, starting from the date the debentures were issued until the full repayment of the debt at the conclusion of the period, and referring, among other things, to events in which the debt may be redeemed immediately in the event of arrears in payments toward the debt - C 101 -

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owners or toward other loans financed by Ex-Im or in the event that according to Ex-Im’s reasonable judgment an event had occurred that may have a material negative impact on the Company’s ability to meet its obligations and its business its assets and its financial status. The issuing money shall be used to pay for the Planes upon delivery. On March 10 2014 the issue of debentures on the U.S, capital market, carried out by SPC Rimon LLC for the Planes, was completed.

c. Following the Company’s signing of a loan agreement with a fully-owned subsidiary of aircraft manufacturer Boeing, in March 2014 the parties agreed to extend the signing date of an agreement for the lease of 2 787 aircraft or alternately, an agreement to purchase one or more 787 or 77 aircraft, to December 15 2014 or some later date, as agreed by the parties.

d. Following that noted in 13.d.3, in February 2014 the Company made an agreement with an international company to sell two PW4056 (hereinafter: “the Engines”) owned by the Company and to lease them back to the Company.

The total proceeds for the Engines are $7 million (hereinafter: “the Proceeds”) The Proceeds were set according to market prices accepted in the industry for engines of an identical model and age and according to its maintenance condition upon delivery and were paid upon delivery. The lease period is for 30 and 20 months, respectively (hereinafter: “the Lease Period”) The Company was given the option to extend the lease period until the planned engine renovation date. The Company is expected to list capital gains of $4.7 million in its Financial Statements for the first quarter of 2014 for the transaction. The lease shall be classified as an operational lease in the Financial Statements.

e. In March 2014 the Company completed its purchase of a 767-3000 aircraft (EAJ) from a foreign company from which the Company had leased the plane for the past ten years. For the purchase of the aircraft, the Company shall pay a total of $4.75 million in 24 monthly payments, starting January 2014. Upon completion of the plane's purchase, the Company sold a PW4060 engine to a foreign company in return for a total of $0.7 million. The sale is not expected to create a profit or capital loss for the Company.

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