El Al Israel Airlines
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Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding EL AL ISRAEL AIRLINES LTD. 2015 ANNUAL REPORT CHAPTER A - Corporate Business Description CHAPTER B - Directors' Report CHAPTER C - 2015 Consolidated Financial Statements CHAPTER D - Additional Details of the Corporation EL AL ISRAEL AIRLINES LTD. Periodic Report For Thhe Year 2015 Chapter 1 Corporate Business Description Free Translation of the Hebrew Language Financial Report ‐ Hebrew Wording Binding TABLE OF CONTENTS Chapter 1: General 4 Chapter 2: Description of the General Development of the Corporation's Business 7 1. Description of the Corporation and the Development of its Business 7 1.1. General 7 1.2. Holdings Chart 7 1.3. Year of Incorporation and Manner of Incorporation 8 1.4. Changes in the Corporation's Business 8 2. Areas of Operations 9 3. Investments in the Corporation's Capital 9 3.1. General 9 3.2. Options 9 3.3. Status of Holdings of Interested Parties 9 4. Dividend Distribution 10 5. Financial Information regarding the Company's Operating Segments 10 5.1. Nature of the Adjustments 10 5.2. Explanation for the Developments in the Operating Segments 11 6. General Environment and Impact of External Factors on the Company 11 6.1. International Aviation Traffic 11 6.2. Israel Aviation Traffic 11 6.3. Fluctuations in Jet Fuel Prices 12 6.4. Foreign Currency Fluctuations 12 6.5. Interest Rate Fluctuations 12 Chapter 3: Description of the Corporation's Business by Operating Segments 13 7. Passenger Aircraft Operating Segment 13 7.1. General Information about the Operating Segment 13 7.2. Services in the Operating Segment 26 7.3. Segmentation of Revenues and Profitability of Services 31 7.4. New Services 31 7.5. Customers 32 7.6. Marketing and Distribution 32 7.7. Reservations Backlog 36 7.8. Competition 37 7.9. Seasonality 39 7.10. Production Capacity 39 A‐2 Free Translation of the Hebrew Language Financial Report ‐ Hebrew Wording Binding 7.11. Aircraft Fleet 40 8. Cargo Aircraft Segment 44 8.1. General Information about the Operating Segment 44 8.2. Services in the Operating Segment 47 8.3. Segmentation of Revenues and Profitability of Services 49 8.4. New Services 49 8.5. Customers, Marketing and Distribution 49 8.6. Backlog 49 8.7. Competition 49 8.8. Seasonality 51 8.9. Production Capacity 51 8.10. Aircraft Fleet 52 8.11. Raw Materials and Suppliers 52 9. Details About the Two Operating Segments 53 9.1. Fixed Assets and Facilities 53 9.2. Insurance 56 9.3. Intangible Assets 56 9.4. Human Capital 57 9.5. Raw Materials and Suppliers 68 9.6. Working Capital 70 9.7. Investments 72 9.8. Financing 76 9.9. Taxation 77 9.10. Environment and Corporate Responsibility 77 9.11. Restriction and Supervision of the Corporation's Business 82 9.12. Material Agreements 96 9.13. Cooperation Agreements 99 9.14. Legal Proceedings 99 9.15. Business Targets and Strategy 100 9.16. Expected Development in the Coming Year 103 9.17. Financial Information on Segmental Reporting 104 9.18. Discussion on Risk Factors 104 A‐3 Free Translation of the Hebrew Language Financial Report ‐ Hebrew Wording Binding Chapter 1: General El Al Israel Airlines Ltd is pleased submit the report of the description of the Corporation's business as of December 31, 2015, which reviews the description of the corporation and the development of its business, as occurred in 2015. The financial data contained within this Report are denominated in U.S. dollars unless otherwise stated. Percentage holdings are presented in numbers rounded to the nearest whole percentage, unless otherwise stated. Data appearing in this Report are true as of the date of the Report, unless otherwise stated. Data appearing in this Report as true as of the latest date prior to the approval of the Report, are updated as of March 15, 2016, unless otherwise stated. The materiality of the information contained within this Report has been examined from the Company's point of view; however, in some of the cases, additional description is given to provide a comprehensive picture of the descried subject. Definitions For purposes of convenience, the following abbreviations used in this Periodic Report shall have the meaning ascribed next to them: The "Board Report" - The Report of the Board of Directors of the Company on the state of the corporation's affairs for the year ended December 31, 2015. "Dollar" or "USD" - U.S. dollar "TASE" - The Tel-Aviv Stock Exchange Ltd. The "Financial Statements" - The consolidated financial statements of the Company for the year ended December 31, 2015, unless otherwise stated. The "State" - The State of Israel. The "Group" - The Company and its consolidated companies. The "Securities Authority" or Israel Securities Authority. "ISA" - The "Corporation" or the El Al Israel Airlines Ltd. "Company" or "El Al" - A‐4 Free Translation of the Hebrew Language Financial Report ‐ Hebrew Wording Binding "Fifth Freedom of the Air" - Carrying passengers or cargo between two foreign countries by a third-country air carrier. For example, El Al carries cargo between Liege and New York. "Sixth Freedom of the Air" - Carrying passengers or cargo between two foreign countries with a stopover in the air carrier's country of origin. For example, a flight operated by a European airline from Israel to the U.S. through an airport in the country of origin of the European airline. "Companies Law" - The Companies Law, 5759-1999. "Government Companies The Government Companies Law, 5735-1975. Law" - "Securities Law" - The Securities Law, 5728-1968. "IATA" - International Air Transport Association. The "Date of the Report" - December 31, 2015. "Knafaim" - Knafaim Holdings Ltd. the "Latest Date Prior to the March 15, 2016, unless otherwise stated. Approval of the Report" - "Sun d'Or" - Sun d'Or International Airlines Ltd. "NIS" - New Israeli shekel. The "Reporting Year" - The year 2015. The "2003 Prospectus" - The prospectus published by the Company on May 30, 2003, as amended on June 3, 2003 and June 4, 2003. "ASK" - Available Seat Kilometer - Available Seat-KM: number of seats offered for sale, multiplied by the distance flown. "ATK" - Available Ton Kilometer - Available Ton-KM: the capacity available to carry passengers (translated into tons), multiplied by the distance flown. A‐5 Free Translation of the Hebrew Language Financial Report ‐ Hebrew Wording Binding "RPK" - Revenue Passenger Kilometer – 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 – occupancy rate on cargo flights. "PLF" - Passenger Load Factor – occupancy rate on passenger flights (percentage of used seats). A‐6 Free Translation of the Hebrew Language Financial Report ‐ Hebrew Wording Binding Chapter 2: Description of the General Development of the Corporation's Business 1. Description of the Corporation and the Development of its Business 1.1. General The main activity of the Company is air transportation of passengers and cargo (including baggage and mail) in Israel and overseas, by means of passenger aircraft and one cargo aircraft. The Company's passenger aircraft mainly operate scheduled flights as well as charter flights. The Company was appointed as the designated air carrier of the State of Israel on most international routes to and from Israel. For further information on the matter and on the meaning of the term "Designated Carrier" and the Government Resolution regarding the "Open Sky" policy, see Sections 7.1.1, 7.1.2, 7.1.10 and 9.11.7.2 below. The Group is engaged in activities related to the air transport operations, such as the sale of duty-free products, food production and supply mainly to the Company's aircraft, providing security services, ongoing maintenance services and overall maintenance services to aircraft of other airlines at Ben Gurion Airport, and managing travel agencies abroad. The business environment in which the Company operates is international civil aviation and tourism to and from Israel, which is characterized by seasonal fluctuations and high level of competition that aggravates in times of excess capacity. In the area of passenger transport, in 2015 the Company competed with two Israeli airlines (Arkia and Israir), about 60 foreign airlines that operated scheduled flights and about 50 foreign charter airlines, of which about 30 airlines operated flights on a regular basis. Airline companies compete in different areas, mostly over prices, flight frequency and schedule, operational accuracy, type of equipment, aircraft configuration, passenger service and more. The competition is with airlines operating scheduled flights between different destinations, charter flights between the same destinations and/or Sixth Freedom flights. In the area of cargo transport, nine airlines operating cargo aircraft on flights to and from Ben Gurion Airport competed in 2015 with the Company's operations, in addition to C.A.L. Cargo Airlines Ltd. Moreover, the Company competes with most scheduled airlines operating passenger aircraft and carrying cargo in their bellies. For further details regarding competition, see Sections 7.8 and 8.7 below. 1.2. Holding Diagram A diagram of the structure of the Company's holdings in active investee companies, as of the Latest Date Prior to the Approval of the Report, is provided below (percentages set out in the chart reflect the Company's holding in the investee companies): A‐7 Free Translation of the Hebrew Language Financial Report ‐ Hebrew Wording Binding El Al Israel Airlines Ltd. Sun d’Or International Airlines Ltd. 100% Tamam Aircraft Food Industries (Ben‐Gurion Airport) Ltd. 100% Katit Ltd. 100% Superstar Holidays Limited (UK) 100% Borenstein Caterers Inc.