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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
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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
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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
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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" -
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"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.
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"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).
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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):
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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. (USA) 100%
Air Consolidators Israel Ltd. 50%
Tour Air Israel Ltd. 50%
Holiday Lines Ltd. 20%
Maman‐Cargo Terminals & Handling Ltd. 15%
1.3. Year of Incorporation and Type of Incorporation
El Al Israel Airlines Ltd. was incorporated on November 15, 1948, in the name of "El Al Israel National Airlines Ltd.", and on May 16, 1951, changed its name to its current name.
1.4. Changes in the Corporation's Business
Until June 6, 2004, the Company was a "Government Corporation" under "privatization" (within the meaning thereof in the Government Companies Law). For further details, see Section 9.11 below "Restrictions and Supervision of the Corporation's Business".
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To the best knowledge of the Company, the Government currently owns approximately 1.1% of the issued share capital of the Company, thus the Company still holds the status of a "Mixed Company". In addition, the Government owns the Special State Share (for details regarding the Special State Share and the rights attached thereto, see Section 9.11.9 below).
2. Areas of Operations
The Company has two reportable operating segments. For details, see Note 21 to the Financial Statements.
(A) Air Transport on Passenger Aircraft
In this segment, the Company carries passengers and cargo (including mail and baggage) in the belly passenger aircraft and provides them with related services such as the sale of duty-free products. Revenues from the segment constitute approximately 90.8% of the total revenues of the Company in 2015.
(B) Air Transport on Cargo Aircraft
In this segment, the Company carries cargo in a dedicated 747-400 Boeing aircraft designed to carry cargo. Revenues from the segment reached approximately 3.45% of the total revenues of the Company in 2015.
Apart from the operating segments specified above, the Company has other activities that are not included in these segments nor are they material to the Company's operations1, the total revenues of which constitutes approximately 5.7% of the total revenues of the Group in 2015.
3. Contributions to the Capital of the Corporation
3.1. General
No contributions have been made to the Company's capital during the Reporting Year.
3.2. Options
As of the Latest Date Prior to the Approval of the Report, none of the Company's officers hold any options.
3.3. Status of Holdings of Interested Parties
The distribution of holdings of the Company's shares as of the Latest Date Prior to the Approval of the Report is provided below:
1 Food production and supply to passengers on flights, provision of security services, ongoing maintenance and overall maintenance services to aircraft of other airlines at the Ben-Gurion Airport and management of travel agencies worldwide. A‐9
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Knafaim Public 43.57% 36.30%
Ginsburg Group 9.98% Altshuler Delek Group Shaham 5.04% Group 5.11%
In January 2016, Altshuler Shaham Group became an interested party of the Company. According to information provided to the Company, Altshuler Shaham Group holds the Company's shares through investee companies engaged in the management of trust funds, provident funds and pension funds annd is also engaged in insurance,, as well as through a nostro account. It should be noted that in accordance with the Articles of Association of the Company, a holding of 5 percent or more of the issued share capitaal of the Company is subject to the approval of the State inn its capacity as a holder of the Special State Share2. As of the date of the Report, the State approval for Altshuler Shaham Grroup's holdings of the Company's shares as aforesaid has nott yet been received.
4. Dividend Distribution
For details regarding the dividend paayment made on August 26, 2015 and the dividend the Company is expected to pay on April 13, 2016, see Notes 18C and 25A to the Financial Statements. For further details regarding the Dividend Policy, see Note 18C to the Financial Statements.
5. Financial Information on the Company's Operating Segmments
For details regarding new financial reporting standards and interpretations published under International Financial Reporting Standards (IFRS), see Note 2D to the Financial Statements. For details regarding the Company's operating segments, see Note 21 to the Financial Statements.
5.1. Nature of the Adjustments
The adjustments between the total results of the reported segments and the overall result presented in the Financial Statementss of the Company mainly includee expenses that are not attributed to segments in accordance with the Results Report reviewed by the Chief Operating Decision Maker (CODM), as provided in Note 21B to the Financial Stattements.
2 For details regarding the Special State Share and the rights attached thereto, see Section 9..11.9 below. A‐10 Free Translation of the Hebrew Language Financial Report ‐ Hebrew Wording Binding
5.2. Explanation for the Developments in the Operating Segments
For an explanation of the developments in the business results of the Company during the Reporting Year in relation to the corresponding period of the previous year, see Section A3 of the Board Report.
6. General Environment and Impact of External Factors on the Company
6.1. International Aviation Traffic
The international aviation market is affected by the security and political situation as well as by special events, such as the outbreak of epidemics and natural disasters in general, and in specific areas in particular, as well as by the economic situation in Israel and abroad.
The year 2015 has been one of the most profitable years for the international aviation industry. According to IATA forecast, airlines are expected to show profits of USD 33 billion in respect of 2015, as the decline in oil prices, the economic recovery and a high growth rate of passenger traffic are the main factors behind the optimistic forecast.
According to IATA data, the total passenger traffic in 2015 (international and domestic flights together) increased by 6.5% compared to 2014, the average capacity has increased by 5.6% compared to 2014, and the average occupancy rate reached a record of 80.3%. Growth rate of international traffic (alone) was identical to the growth rate of passenger traffic and reached the same rate of 6.5%. Traffic growth (international and domestic flights together) was led by emerging markets in the Middle East (10%) and in Asia (8.6%).
Overall cargo traffic (international and domestic flights together) recorded an increase of 2.2% in 2015 compared to 2014, following a growth of 5% in cargo traffic in 2014, compared to 2013.
6.2. Israel Aviation Traffic
The Company estimates that the impact of Operation Protective Edge, which took place in July-August 2014, continued in the first half of 2015 and as a result, in this period a decreased was recorded in incoming tourism traffic compared to the corresponding period in 2014. Since July 2015 a recovery has been observed in passenger traffic to Israel, but this trend of improvement ceased in October 2015, and the Company considers it to be the result of the security events that took place in Israel at the end of 2015.
According to data provided by the Central Bureau of Statistics, a total of about 2.5 million tourist entries to Israel by air were recorded in 2015 (excluding day visits), thus reflecting a decrease of approximately 1% compared to 2014. On the other hand, an increase of approximately 15% was recorded in the traffic of Israelis departing by air, compared to 2014, and in total, about 5.4 million departures of Israelis abroad by air were reported.
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According to data provided by the Israeli Airports Authority ("IAA"), international passenger traffic in Ben Gurion Airport increased in 2015 by approximately 15.6 million passengers, indicating a growth of approximately 10% compared to 2014.
6.3. Fluctuations in Jet Fuel Prices
Aircraft jet fuel is a very substantial component of the Company's expenses. Jet fuel prices are characterized by high and sharp fluctuations. The following data refer to the weighted average of jet fuel market prices (before marketing margins and other fees) in the markets where the Company purchases fuel, as quoted by Platts3. During 2015, jet fuel prices dropped ("markets basket" - the weighted price in accordance with markets in which the Company purchases jet fuel) by approximately 43% on average, compared to 2014 prices. For further details, see Sections 9.5.1 and 9.18.6 below. For further details regarding the financial impact of jet fuel price, including as a result of hedging activities, see Sections A3 and B1(3) of the Board Report and Note 19E to the Financial Statements.
6.4. Foreign Currency Fluctuations
The Group's results are affected by fluctuations in several currencies in relation to the Dollar. Fluctuations in the Dollar exchange rate in relation to other currencies may lead to an improvement or to the erosion of the Group's profitability. As of December 31, 2015, there was a 0.3% depreciation of the NIS/USD exchange rate, compared to December 31, 2014. As of December 31, 2015, there was an 11.6% appreciation of the Dollar/euro exchange rate, compared to December 31, 2014. For details regarding the impact of the fluctuations on foreign exchange rates, including as a result of hedging activities, see Sections B1(5) of the Board Report and Note 19F to the Financial Statements
6.5. Interest Rate Fluctuations
For the purpose of financing aircraft acquisitions, the Company took a significant volume of loans bearing variable interest based on the Libor interest. A change in the Libor interest rates may affect the Company's financing expenses. In 2015, a decrease of approximately 37% has occurred in the average 3-month Libor rate, compared to its average rate in 2014. For details regarding the Company's loans, see Note 14 to the Financial Statements.
3 To the best knowledge of the Company, Platts is a company of McGraw-Hill Group, which has been providing information on the energy sector for many years. Said company provides updated information and analysis, inter alia, with respect to prices and international events in the fuel, petrochemical, natural gas and electric and nuclear power markets. A‐12
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Chapter 3:
Description of the Corporation's Business by Operating Segments
The following is a description of the business of the Group with respect to each area of its operations separately, except in matters related to all areas of the Group's operations, described together in Section 9 below.
7. Passenger Aircraft Operating Segment
7.1. General Information about the Operating Segment
The main operations of the Company in this segment are passenger transportation on both scheduled and charter flights. In addition, the Company transports cargo in the belly of passenger aircraft, as an activity related to passenger transport operations. The services in this segment include additional related services, such as sales of duty-free items to passengers on the aircraft. Therefore, in describing the segment, the Company focused on passenger transportation. Certain issues relating to cargo transport in the belly of passenger aircraft are similar to the service of cargo transport on the Company's cargo aircraft, as described in Section 8 below.
Trends, events and developments in the macroeconomic environment of the Group, which have or are expected to have material impact on the business results or the development in the area of operations, are described below with respect to the following areas:
7.1.1. Structure of the Operating Segment and Changes Occurring therein
As stated above, the main area of operations of the Company is air transport on passenger aircraft on scheduled flights to and from Israel.
In the past, the aviation policy has been regulated by the decision of the Ministerial Committee for Social and Economic Affairs, shortly before the publication of the 2003 Prospectus (Decision SE/14 dated May 19, 2003), with regard to the appointment of the Company as "Designated Carrier". Thereafter, several government decisions were made, determining the aviation policy of the State of Israel with respect to the Company's operations and the State's participation in security expenses incurred by Israeli airlines. For details regarding regulatory arrangements applicable to the aviation operations, including traffic rights granted to the Company, see Section 9.11 below.
7.1.2. Legislation Restrictions, Standardization and Special Constraints applicable to the Operating Segment
The segment of passenger and cargo transport on passenger aircraft is characterized by international and local regulatory restrictions in various jurisdictions, provided for in international treaties and agreements and in local legislation. For details regarding international arrangements, see Section 9.11 below.
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Additionally, these international and local arrangements provide for conditions and arrangements relating to air carrier's operation and liability for damages and for flight delays and cancellations.
The Company is obligated to act upon local legislation and relevant government decisions relating to the Company's areas of operations (including aviation security services), as adopted from time to time and as set out in Section 9.11.12 below.
7.1.3. Changes in the Volume and Profitability of Operations in the Segment
(A) International Developments
According to IATA estimate, passenger traffic (international and domestic flights together) in 2015 increased by approximately 6.5% compared to 2014. This rate is the highest since 2010 and higher than the average growth rate in the last decade, which stood at 5.5%. International traffic (excluding domestic traffic) also increased in 2015 by approximately 6.5% and seat availability on international flights increased by approximately 5.9%, lower than the growth rate of passenger traffic, therefore an increase was recorded in occupancy on international passenger flights – 79.7% in 2015 compared to 79.2% in 2014.
In December 2015, IATA updated its profit forecast for 2015 upwards. According to the new estimate, airlines are expected to present in 2015 net profits of approximately USD 33 billion (compared to USD 29.3 billion, according to IATA forecast of June 2015). This trend is expected to continue also in 2016 and profits of airline companies are expected to reach approximately 36.3 billion. The decline in oil prices, financial improvement in some key markets (including the fast recovery of the Eurozone), an expected growth in passenger traffic and high occupancy rates are the main reasons for the increase in the forecast with regard to airline companies' profitability.
International Traffic4 by Region 2015 compared to 2014
Region Passengers RPK ASK PLF (Annual change) (Annual change) Africa 3.0% 1.5% 68.5% Asia 8.2% 6.4% 78.2% Europe 5.0% 3.8% 82.6% South America 9.3% 9.2% 80.1% Middle East 10.5% 13.2% 76.4% North America 3.2% 3.1% 81.8% Total 6.5% 5.9% 79.7%
4 The data contained in the table only refer to international flights traffic, excluding domestic flights. A‐14
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As reflected by the above table, a passenger traffic increase was reported in all regions, as the highest growth rate, which stood at approximately 10.5%, was recorded among Middle East airlines. The share of these companies in international passenger traffic amounted to approximately 14.2%, compared to 13.4%, which was North American airlines' share thereof.
Data contained in the following table refer to airlines' overall operations on international and domestic flights together.
Region Profit Performance 2016 2015 forecast for assessment versus versus 2016 for 2015 2014 2015 2014 (in USD (in USD (in USD (in USD (in USD billions) billions) billions) billions) billions) North America 19.2 19.4 11.2 -0.2 8.2 Europe 8.5 6.9 2.9 1.6 4.0 Asia 6.6 5.8 2.1 0.8 3.7 Middle East 1.7 1.4 0.9 0.3 0.5 South America 0.4 -0.3 0.2 0.7 -0.5 Africa -0.1 -0.3 0.0 0.2 -0.3 Total 36.3 33.0 17.3 3.4 15.7
As indicated by the above table, the expected profit, based on IATA forecast, which is attributable to North American airlines in the years 2015-2016, exceeds 50% of the total expected profit of all airlines in these years, inter alia as a result of the robust US economy and the strengthening of the Dollar, the low oil prices and structural changes among airlines in the region, which contributed to airlines' increased efficiency of the airlines.
The following are the main points of IATA forecast for 2016:
Revenue – airline companies' revenue is expected to rise in 2016 by approximately 0.9% and the total revenue is expected to amount to USD 717 billion. Said increase in airline companies' revenue arises from the expected growth in revenue from passengers, from approximately USD 525 billion in 2015 to approximately USD 533 billion in 2016.
Passengers – passenger traffic is expected to rise in 2016 by approximately 6.9% compared to a growth of approximately 6.5% in 2015, and in total, passenger traffic is expected to increase to approximately USD 3.8 billion on about 54,000 routes. Seat capacity is expected to rise in 2016 by 7.1%, slightly higher than the expected growth in passenger traffic.
Oil price – oil prices declined significantly in 2015 as the average (at an annual level) price (Brent) per barrel stood at about USD 54. This trend of decline is expected to continue also in 2016, as the average (at an annual level) barrel price (Brent) per barrel is expected to stand at about USD 51. The oil price drop contributes to the increase in the airlines' profit, but its impact is mitigated in many markets worldwide due to the strengthening of the Dollar.
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Returns – the rate of return per passenger in 2016 is expected to decline by approximately 5%, compared to a decline of approximately 11.7% in the return per passenger in 2015, and the rate of return per ton freight is expected to drop by approximately 5.5% in 2016, compared to a drop of approximately 11.7% in return per ton fright in 2015. About half of the drop in the return in 2015 can be attributed to the impact of the Dollar strengthening on non- Dollar revenues.
GDP – global growth rate is expected to improve in 2016 and stand at approximately 2.7%, compared to a growth of approximately 2.5% in 2015.
Occupancy rates – occupancy rate in 2016 is expected to stand at 80.4%, a slight increase compared to the expected occupancy rate in 2015, was 80.3%. Such high occupancy rates indicate an increased efficiency of airlines.
International Operations and Profitability of the Aviation Industry in the Field of Passenger and Cargo Aircraft of all Airline Companies5
Year Output6 Financial Results 7 (in USD billions) Operational10 RPK8 RPK RTK9 RTK Income (in USD Annual (in USD Annual Net Profit (in USD billions) Change billions) Change billions) 2015 6.5% 33 201411 6,190 6.0% 786 5.9% 749.9 17.3 2013 5,793 5.4% 738 4.7% 707.9 10.6
(A) Developments in the Israeli Market
International passenger traffic to and from Ben Gurion Airport during 2015 amounted, according to IAA data, to approximately 15.6 million passengers, thus reflecting an increase of approximately 9.9% (compared to 2014).
5 Including airlines that are not IATA members. 6 Financial results: international and domestic flights, scheduled and charter flights, and operations other than passenger transport. 7 Output data included in the table refer to regular international operations of all airlines on international and domestic flights together. 8 Including revenues from cargo aircraft. 9 Revenue Ton Kilometer – weight in tons of paying passengers and cargo, multiplied by the distance flown. 10 Revenue Passenger Kilometer - number of paying passengers multiplied by the distance flown. 11 Data source: RPK and net profit data – IATA Annual Report of December 2015; RTK and operational revenues – World Air Traffic Statistics edition 58. IATA data, estimates, assessments and forecasts referring to 2015 are preliminary. Final data for 2015 are expected to be published in June 2016 in the framework of World Air Traffic Statistics. A‐16
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Passenger Traffic to and from Israel (to and from Ben Gurion Airport) 12
Year Passenger Traffic at Ben Gurion Airport Flight Legs (in millions) Annual Change 2015 15.6 9.9% 2014 14.2 6.1% 2013 13.4 8.6% 2012 12.4 1% 2011 12.2 6.5%
The following table reflects the trends of incoming tourism traffic to Israel and residents departing by air in recent years13
Year Incoming Tourists Departing Residents (holding foreign passports; excluding day visitors) In thousands of Rate of change In thousands of Rate of change passengers passengers 2015 2,509 -0.7% 5,449 15.2% 2014 2,528 -2.0% 4,732 10.7% 2013 2,580 4.0% 4,276 10.8% 2012 2,482 1.8% 3,860 0.1% 2011 2,438 5.4% 3,857 7.5%
The Company's forecasts and estimates as well as IATA estimates regarding the volume of passenger traffic to and from Israel, and the assessments for 2015 in the various parameters specified above, including in relation to GDP, passengers, cargo, oil price, revenue, returns and occupancy rates are forward-looking information as defined in the Securities Law. Such information relies, inter alia, on IATA estimates, in view of the trends of change that exist in the Aviation and Tourism Industry in recent years and the expected developments therein, as well as in light of the economic, security and geopolitical condition worldwide and in Israel. Therefore, these data might be substantially different from the forecasts provided above, if IATA estimates or the Company's estimates do not materialize as a result of a number of factors, including change in the economic, security and geopolitical condition, both in Israel and worldwide.
12 Data source: IAA (including non-paying passengers). In addition to the traffic at Ben Gurion Airport, tourists arrive to Israel via Eilat Airport on scheduled and charter flights in a negligible volume compared to the traffic at Ben Gurion Airport. The term "Leg" means flight leg from one destination to the other. 13 Data from the Central Bureau of Statistics. A‐17
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7.1.4. Developments in the Operating Segment's Market or Changes in the Characteristics of the Customers thereof
In recent years, a considerable deterioration has occurred in the competition existing in the area of Transportation by Passenger Aircraft between scheduled international airlines, including airlines operating low cost flights and charter international airlines.
Airline companies compete in various segments, the main of which are prices, flight frequency and flight schedule, operational accuracy, type of equipment, aircraft configuration and passenger service. Price competition is particularly manifested by supply of discounted rates to passengers. Competition exists both with respect to scheduled direct flights between different destinations (including extensive activity of foreign airlines in Israel through their base airport to a third destinations – "Sixth Freedom" flights) and with respect to charter flights to the same destinations. Additionally, in the last years, airline companies started operating as "Low Cost"14 airlines, which usually offer competitive prices. For details, see Section 7.1.10(D) below.
The growth in the number of foreign airlines operating in Ben Gurion Airport, in the number of scheduled flights and in foreign airlines' seat capacity, caused further aggravation of the level of competition on routes to Israel. For more details, see Sections 7.1.10 and 9.11.7.2 below.
7.1.5. Technological Changes which have a Material Impact on the Operating Segment
During the first quarter of 2015, the CRM System for managing business customers for the Business Division of Israel Branch. The CRM System has so far treated customers of the Frequent Flyer Club, casual customers, agencies and cargo customers, and now also business customers joined the system. Said system is a new business website designed for business customers, which provides a profile of the business customer and automatic processes for the management of agreements, tariffs and rating levels for companies in favor of enhancing sales abilities.
Starting from July 2015, the Company enables its passengers to purchase Economy Class Plus seats and preferred seats, select the seating and prepay for excess baggage, in the course of the flight ticket purchase process or at the reservation management stage on the Company's website, This project constitutes another stage of enhancing the customer's experience when purchasing flight related products on the website.
Upgrading the Mobile App – the mobile application of the Company was upgraded as part of a comprehensive program for creating added value for the Company's customers throughout the "customer's journey" in the e-commerce environment. Such upgrade allows for a more extensive use of the capabilities of the devices as well as further improvements including a better visibility, new contents and an application registration
14 "Low Cost" companies are airlines with a lower expenses structure, arising mainly from direct online marketing rather than distribution systems and travel agents, use of secondary airports, minimum in-flight service features and short-distance flight activity, without cooperation agreements with other airlines and high utilization of aircraft. A‐18
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mechanism for the purpose of introducing personal contents and receiving push notifications. In addition, the Up application was upgraded to enable the use of a notifications mechanism.
The Company continues, on a regular basis, to maintain information security against cyber-attacks carried out by hackers from all over the world. The Company took various actions to prevent damage to its website and information systems, including reinforcing access filters to and from the Company and intensive monitoring of network traffic. Furthermore, preparations were made in order to provide a quick response to unusual events and the readiness of external internet providers was checked. It shall be further noted that the Company takes regular actions to improve the ability to cope and neutralize future cyber-attacks, if any. This contributes to identifying and preventing all sorts of attacks.
7.1.6. Critical Success Factors in the Operating Segment and Changes Occurring therein
In the field of Cargo and Passenger Transport on Passenger Aircraft, several factors that affect the competitive status in the segment can be pointed out: the economic and security situation in Israel, which affects passenger traffic to and from Israel; the quality of the product, including the Frequent Flyer Club, the branding of the Company in the public's eyes, with a focus on security, safety, quality and service; the ability to offer flights to popular destinations at a competitive price, and development of network paths independently and in cooperation with other airlines; the ability to offer flights at the frequency and capacity required; distribution layout; risk management through the application of appropriate risk hedging policy.
7.1.7. Changes in the Layout of Suppliers and Raw Materials for the Segment
Fuel – the principal raw material used by airline companies is jet fuel, which constitutes one of the main expenditure components of any airline. For details regarding fuel, see Section 9.5.1 below.
Aircraft – due to the fact that the Company's aircraft fleet was manufactured entirely by Boeing, the Company has dependency on this manufacturer in all matters pertaining to the ongoing maintenance of its aircrafts, spare parts supply, repairs and engineering consulting.
7.1.8. Maim Entry and Exit Barriers of the Operating Segment and Changes Occurring thereto
In the past, one of the most significant entry barriers in the field of scheduled international flights was the need to obtain authorization to perform scheduled flights from one country to other countries and be appointed as "Designated Carrier", as well as to obtain approval for the number of flights and the capacity thereof. Due to the liberalized aviation policy in recent years, which was mainly expressed in the Open Sky policy, nowadays this entry barrier is quite insignificant.
Moreover, each flight requires a window of time for takeoffs and landings (Slot) at the airports to which and from which it operates. A‐19
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Another significant entry barrier is the relatively large initial investment required to establish and operate an airline company, as well as to purchase or lease aircraft.
Furthermore, international aviation agreements and the regulation in various destinations may include requirements in relation to identity or nationality as a condition for actual ownership or control over an air carrier. Such requirements may constitute an entry barrier for the grant of authorization to operate flights. For further details, see Section 9.11 below.
With regard to the operation of passenger aircraft in international charter flights, the Company estimates that there are no significant entry barriers in view of the liberal policy prevailing with respect to the grant of authorization in the charter flight segment, to both Israeli and foreign charter companies.
The restrictions applicable to the Company by the holder of the Special State Share with respect to reducing the Company's aircraft fleet constitute an exit barrier. For details, see Section 9.11.9 below.
7.1.9. Substitutes for the Segment's Services and Changes Occurring Therein
The substitutes for transportation by passenger aircraft are transportation by other means (land and marine means as well as cargo aircraft regarding cargo carried in the belly of passenger aircraft). It shall be noted that there is no significant substitutes in Israel for passenger transportation by air. The Company estimates that the main considerations in choosing a flight over marine and/or land transportation are: the purpose of the trip, the passenger's schedule, as well as the distance and the nature of the route.
7.1.10. Structure of Competition in the Operating Segment and Changes Occurring Therein; Developments in the Operating Segment's Markets
(A) General – Competition in the Segment
Severe competition exists in the segment of transport by passenger aircraft between tens of scheduled international airlines, including low-cost airlines as well as charter airlines. Airline companies compete in various segments, the main of which are: prices, flight frequency and schedule, operational accuracy, type of equipment, aircraft configuration, passenger service, frequent flyer benefits, commissions and special incentives to travel agents, and supply of computerized booking and distribution systems for travel agents.
The competition is not only with the principal air carrier in the country located at the other end of the route and with charter airlines operating on the same route, but also with other airlines, including such that do not operate flights to Israel (offline airlines), due to the range of possibilities allowing the passenger to create his own flight schedule consisting of several airlines, and as a result of the strengthening of alliances between the airlines (Star, Sky Team, One World).
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In addition, most of the scheduled airlines operating flights to and from Israel also carry passengers on Sixth Freedom flights, thus causing an increase in the operations of foreign airlines in Israel. Due to the fact that the flight from the base airport (Europe) to the final destination takes place regardless of the flight from Israel to Europe, thus allowing the foreign company to lower the overall price for a flight from Israel to the final destination (via Europe), without impairing the level of the price of a flight from Europe to the final destination. In fact, at times, foreign companies offer the flight ticket from Israel to the final destination (e.g. the U.S) at a lower price in relation to the price they offer for the flight from the interim destination (e.g. Europe) to the final destination. On the other hand, currently the Company does not benefit from a similar possibility to carry passengers between different countries via Israel, mainly due to the present geopolitical condition.
Apart from the foregoing, certain regulatory changes may affect the structure of competition in the segment. For details, see Section 9.11 below.
(B) Open Sky Policy
The liberalization policy of aviation agreements, which has been implemented in the State of Israel in recent years, allows a substantial share of the increase in flight availability and seat capacity offered. This policy, as expressed in an ongoing process of updating aviation agreements by means of increasing the frequencies cap and the number of airlines allowed to operate scheduled flights, causes an increase in the number of flights and as a result, a decrease in flight prices and growth in passenger traffic to and from Israel.
In addition to the execution of the Open Sky Agreement with the European Union on June 2013, whereby most of the restrictions on the number of each party's carriers entitled to operate scheduled flights between Israel and the European Union (as derived from bilateral aviation agreements preceding it) have been removed, in the last few years aviation agreements between Israel and a number of countries with a significant volume of traffic between these counters and Israel, such as Russia, Ukraine, Canada and China.
For details regarding the Open Sky Agreement with the EU, see this Section in the Company's 2013 Periodic Report.
The following is a description of major material changes that occurred in 2015:
Canada – In January 2015, Israel and Canada executed the first official aviation agreement allowing to significantly increase the frequency of flights between the two countries, and enabling other airlines to operate scheduled flights on that route. According to the new agreement, each party may appoint additional scheduled airlines and operate up to 12 weekly scheduled passenger or cargo flights. So far, aviation relations between Israel and Canada have been conducted without aviation agreements, but rather by means of a protocol individually regulating the operation of
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scheduled flights between the countries, and enabled the Company and Air Canada alone to operate scheduled flights.
Georgia – In January 2016, the Company was appointed as Designated Carrier to the destinations Tbilisi and Batumi, based on the bilateral aviation agreement between Israel and Georgia. The appointment of the Company as the third Designated Carrier on routes between Israel and Tbilisi and Batumi (alongside Arkia and Israir) has been made possible following the aviation agreement executed between Israel and Georgia three years ago, which allows additional airlines to operate scheduled flights between the countries. Pursuant to the agreement, each country is entitled to appoint three scheduled airlines and operate up to ten weekly flights between the countries.
In 2015, many airline companies expanded their operations on routes to Israel by adding destinations and/or increasing frequencies and/or capacity. Airlines which significantly expanded their operations in 2015 are:
Turkish Airlines continued to gradually expand its operations at Ben Gurion Airport, with more flight frequencies on route to Istanbul, thus, commencing October 2015, it operates 9 daily flights on this route and its passenger traffic increased by 19%. It shall be noted that Turkish Airlines became the largest foreign airline operating in Israel, and most Israeli passengers flying with Turkish Airlines are Sixth Freedom passengers.
Lufthansa added 3 weekly flights on route Frankfurt – Tel Aviv, and thus the number of weekly flights operated by Lufthansa to and from Israel amounted in 2015 reached 28 (Frankfurt – 20, Munich – 8). In total, Lufthansa recorded a growth of approximately 14% in its passenger traffic. Alitalia increased in March 2015 its weekly flights on route Tel Aviv – Rome from 26 to 29. In total, Alitalia recorded a growth of approximately 18% in its passenger traffic, compared to 2014.
Brussels Airlines increased in April-October 2015 the number of its weekly flights from 11 to 14, and its passenger traffic increased by approximately 40%.
Iberia Airlines - in 2015 Iberia operated an average of 13 weekly frequencies on route Tel Aviv – Madrid (compared to an average of 12 frequencies in 2014) and started flying a wide-body aircraft in some of its flights on this route. In total, Alitalia recorded a growth of approximately 31% in its passenger traffic.
British Airways gradually increased the number of frequencies on route Tel Aviv – London, with an increase to 20 weekly flights starting from March 2015. In total, British Airways recorded a growth of approximately 29% in its passenger traffic.
Ethiopian Airlines gradually added weekly flights on route Addis Ababa – Tel Aviv, and commencing August 2015 it operates 14 weekly flights on this route, which is the total quota permitted to it under an agreement executed between the two countries in
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2014. In total, the annual passenger traffic of Ethiopian Airlines in 2015 increased by approximately 30%.
Aegean Airlines, which replaced Cyprus Airways on route Tel Aviv – Larnaca, started in January 2015 to operate 3 weekly flights on this route and in March 2015 increased the number of weekly flights to 7. On average, during 2015, Aegean Airlines operated 6 weekly flights on this route. In addition, Aegean Airlines increased the number of weekly flights on route Tel Aviv – Athens from an average of 6 to 8 weekly flights in 2015. In total, Aegean Airlines' passenger traffic on scheduled flights increased by approximately 98%. Further to this activity, Aegean Airlines also operates charter flights from Tel Aviv to other destinations in Greece.
Ukraine Air International - starting from May 2015, Ukraine Air operates one weekly flight on route Tel Aviv - Lvov and one weekly flight on route Tel Aviv – Kharkov (2 weekly flights to Kharkov on the summer months of June to September 2015), in addition to flights operated by Ukraine Air from Israel to the destinations of Kiev, Odessa and Dnipropetrovsk. Thus, the average number of weekly flights operated by Ukrainian Air to and from Israel amounted in 2015 to 27. In total Ukrainian Air recorded an increase of approximately 30% in its passenger traffic.
Aeroflot increased in November the number of daily flights it operates on route Tel Aviv – Moscow, from 2 to 4, in view of the cessation of operations of the Russian airline Transaero, which also operated on this route. In total, Aeroflot's passenger traffic increased by approximately 30% compared to 2014.
Air Europe started operating in March 2015 three scheduled weekly flights on route Tel Aviv – Madrid, in addition to the charter flights it operates on route Tel Aviv – Barcelona, and in the summer months - also to other vacation resorts in Spain.
The capacity increase allows airlines operating an international HUB at their base airports to increase the number of passengers using indirect flights between Israel and a large number of destinations, while exploiting their route networks (Sixth Freedom traffic) as well as route networks of their partners in global aviation alliances and code-share agreements.
Passenger traffic in Ben Gurion Airport in 201515 was distributed as follows: the Company (including flights marketed by Sun D'Or) – 32.5% compared to 33.3% in 2015; other scheduled airlines – 57.1% compared to 55.7% in 2014; charter airlines (excluding Sun D'Or) – 10.4% compared to 11% in 2014.
Further growth in foreign airlines' operations on routes to and from Israel is expected in 2016 as well, both by means of increase of capacity and/or frequencies and by expansion of destinations by existing airlines, as well as by the entry of new airlines, and also as a result of operating scheduled flights to new destinations by the other Israeli airlines.
15 The information on foreign airlines' operations is based on IAA data. A‐23
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It shall be noted that Hainan Airlines is expected to operate three weekly flights on route Beijing – Tel Aviv, starting from April 2016.
The Company examines from time to time the possibility of increasing flight frequencies and/or capacity to existing destinations and the possibility of operating flights to new destinations, in accordance with market demands and including by means of code-share agreements and other agreements with other airlines.
(C) Charter Airlines
In total, 2015 recorded an increase of approximately 5.2% in charter flights traffic to and from Israel compared to 2014. Charter airlines' (Israeli and foreign) share of the total passenger traffic in Ben Gurion Airport in 2015 was approximately 12%, compared to approximately 12.6% in 2014, as set forth in the following table:
Year Charter Airlines Share out of Total Passenger Traffic in Ben Gurion Airport 2015 12% 2014 12.6% 2013 14% 2012 14% 2011 15%
(D) Low Cost Airlines
Low Cost airlines are companies maintaining low cost structure, among others, by providing a basic level of service and by using alternative and less popular airports, and accordingly, they usually offer very competitive prices. These airlines managed to considerably grow in the U.S, Canada and Europe, and recently also in Asia.
In 2015, Low Cost airlines continued the trend of expanding their operations on routes to Israel, both by opening new routes and by increasing frequencies and/or capacity. The following are some prominent examples:
EasyJet continued to expand its operations in Israel and started during the year to operate also flights from Paris and Amsterdam. In total, EasyJet operated 41 weekly flights to Israel from 10 different destinations: Luton (11 flights), London Gatwick (3), Manchester (2), Basel (4), Geneva (5), Rome (2), Milano (3), Berlin (4), Paris (3) and Amsterdam (4). In total, EasyJet's passenger traffic increased by approximately 21%. It should be noted that in February 2016, EasyJet cancelled its flights on route Tel Aviv – Rome, due to the closing of EasyJet's base airport in Rome.
The Turkish airline Pegasus expanded its operations and from 2015 Spring/Summer Season schedule added frequencies on route Tel Aviv – Istanbul and operated 4
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weekly flights on route Tel Aviv – Antalya. In 2015 Pegasus operated an average of 25 weekly flights on these routes compared to an average of 18 flights in 2014. In total Pegasus recorded a growth of approximately 33% in passenger traffic on its scheduled flights.
Transavia, an airline owned by Air France – KLM Group, expanded its operations during 2015 on routes to Israel and increased the number of weekly flights on route Tel Aviv – Paris from 3 to 5 and on route Tel Aviv - Lyon from 1 to 2. In addition, Transavia started operating 3 weekly scheduled flights on route Tel Aviv – Amsterdam. In total Transavia recorded a growth of approximately 273% in its passenger traffic.
During 2015, a number of new low-cost airlines started operating on routes to Israel, as hereinafter provided:
Germania Airlines has been active in Israel since March 2015 as a scheduled airline, operating direct flights to Baden (a seasonal route operated from March to October) and Hamburg. Additionally, starting from November 2015, Germania Airlines operates 2 weekly flights on route Tel Aviv – Dusseldorf.
Monarch Airlines started in December 2015 to operate 3 weekly flights on route Tel Avi – Luton as well as one weekly flight on route Ovda – Luton.
Ryanair - starting from November 2015 Ryanair operates 2 weekly flights from Ovda to each of the flowing destinations: Budapest, Krakow and Kovno, and in total operates 6 weekly flights on these routes.
During 2015, several new low-cost airlines ceased operating on routes to Israel, as hereinafter provided:
Niki, which operated flights on route Tel Aviv – Vienna, Air Mediterranee, which operated flights on route Tel Aviv – Paris, and Meridiana Fly, which operated scheduled flights on route Tel Aviv – Milan and charter flights to a number of additional destinations in Italy. In addition, German Wings, a subsidiary of Lufthansa, ceased its fights on route Tel Aviv – Koln in September 2015. It should be noted that German Wings is expected to cease its flight on route Berlin – Tel Aviv in March 2016.
In total in 2015, foreign low-cost airlines increased their passenger traffic on routes to and from Israel by 16% and carried approximately 13% of the passenger traffic in Ben Gurion Airport.
The "UP" Aviation Brand
As a response to the increased competition on the part of low cost airlines, the Company operates, starting from 2014 Spring/Summer Season schedule, the "UP"
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aviation brand, under which discounted flights are operated in the form of low cost flights to five destinations in Europe – Berlin, Budapest, Kiev, Prague and Larnaca.
The "UP" brand offers passengers two types of tickets: UP Basic ticket – a basic ticket which, upon additional payment, provides services such as baggage, seating and refreshments at the customer's choice; since changes in the tickets involve costs and in case of cancellation thereof, no refund will be issued. UP Smart ticket – contains a variety of services such as baggage delivery, seating in Economy Class Plus, Preferred Seats, hospitality in the King David Lounge at Ben Gurion Airport, check-in at the Airport and flexible ticketing. Frequent Flyer Club members can also accumulate points on UP flights, in a lesser amount compared to regular flights.
Until February 2015, the Company operated the "UP" flights from Terminal 3, and commencing March 2015, it operates the "Up" flights from terminal 1.
7.2. Services in the Operating Segment
(A) General
The main services the Company provides in this segment are flying passengers and cargo to various destinations by means of passenger aircraft. As of the Latest Date Prior to the Approval of the Report, the Company operates flights on passenger aircraft to approximately 34 direct destinations in about 25 countries in Europe, North America, the Middle East, Central Asia and other destinations. In 2015 the Company operated an average of approximately 268 weekly flights to each destination. In addition to flights operated by the Company, the Company is engaged in marketing flights in the framework of agreements with other airline companies (Interline Agreements), allowing passengers of scheduled flights, subject to certain restrictions, to use flight tickets issued by one airline, for flights of another airline. The airline actually carrying the passenger submits an invoice for payment to the Company that issued the flight ticket. The parties settle between themselves on a monthly basis, usually through IATA Clearing House.
Furthermore, the scheduled airline companies operate code-share flights, thus allowing the air carrier to market flights of another air carrier as if they were its own, so that a passenger books a flight through one carrier notwithstanding the fact that he travels with another air carrier. Code sharing provides participating air carriers with an option to increase flight frequencies offered to their customers, access to other destinations and marketing advantages, such as enhancing the attractiveness of joining the Company's Frequent Flyer Club. In recent years, the Company is also engaged in code share operations.
The Company operates, in its scheduled passenger flights, up to five travel classes, distinguished from each other by the type of seat, the space between seats, food and beverage menu and manner of serving, supply of comfort and leisure products as well as number of flight attendants in proportion to the number of passengers. Said travel classes consist of: First Class, Enhanced Business Class – Platinum, Business Class,
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Economy Class Plus and Economy Class. Scheduled flights offer a set of in-flight voice programs, movies, both broadcast and print magazines and a sales service of duty-free items.
As stated above, starting from 2014 Spring/Summer Season schedule, the Company operates discounted low-cost flights under the "UP" aviation brand. These flights offer two travel classes: Economy Class and Economy Class Plus. For further details, see Section 7.1.10 above.
In addition to scheduled flights, the Company is engaged, through Sun D'Or, in the marketing of charter flights by leasing aircraft capacity to charter flight organizers at pre-agreed prices, sale of seat packages to agents and sales to the public. Charter flights operate under a service profile adapted to charter flight operations. Not all flights offer all travel classes.
The Company's flights are supported by ground services system, in charge of the process of boarding passengers and their luggage, embarking them at the destination airport and unloading the luggage as well as handling the cargo. Said ground services are available in Ben Gurion Airport and in each one of the destinations where the Company's aircraft land. Simultaneously, the Company operates, under the guidance of government security officials, ground security system in all overseas airports where aircraft of Israeli airlines land, and an aerial security system that operates during passenger flights operated by Israeli airlines (the Ben Gurion Airport Ground Security System is operated by the IAA).
(B) Data on the Company's Group of Destinations
The following are data on the Company's market share, segmented into groups of major destinations, out of all passenger traffic to or from Ben Gurion Airport to those destinations:
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To/from BGN Total Passenger Traffic in BGN Company's estimate of its Airport Airport, segmented into destination market share (in %)17 groups by direct flights (in thousands of flight lags) 16 Change 2015 2014 2013 2015 2014 2013 in % in 2015 North America 3.5 1,655 1,599 1,623 35.6 36.5 37 Europe 9.8 10,476 9,543 8,980 38.6 38.9 38 Far East & 1.0 502 497 492 47.5 51.7 51.3 Central Asia18 Others19 16.1 3,012 2,594 2,325 11.3 9.9 7.9 Total 9.9 15,645 14,234 13,420 32.5 33.3 32.5
(C) Routes to North America (to the United States and Canada)
At the height of the 2015 summer season, the Company operated about 34 flights a week to North America, and about 35 flights a week in the winter season (mainly to New York).
In June 2015, the Company launched a new route to Boston, with 3 weekly direct flights using a 767-300 Boeing aircraft with 218 seats, of which 22 are Business Class bed- seats and 28 are Economy Plus seats. During the flight, passenger can enjoy an in-flight entertainment streaming system, allowing to watch a variety of contents in maximum comfort, directly through their personal devices.
16 CAAI data refer to the airlines operating the flights rather than their destinations. Therefore, these data represent the Company's estimate, based on analysis of the CAAI data. These data are segmented by direct flight destination regardless of the passenger's actual destination, as far as Sixth Freedoms flights operated by foreign airlines are concerned. 17 These data are segmented by passenger final destination (including final destination of Sixth Freedom flights). The Company's estimate as to the passenger's final destination is based on data from global distribution systems. The Company cannot asses the accuracy of the data obtained from said distribution systems, which refer to paying passengers only. It should be noted that the CAAI publishes data referring to non-paying passengers, segmented by the airlines operating the flights (rather than by destination). Thus, Sixth Freedom flights operated by European airlines between Israel and the U.S. via a European airport will be attributed to the country of origin of the European airline. After processing of the CAAI data and breaking down the flights by the airlines' country of origin, while ignoring Sixth Freedom flights, the Company recorded the following market share: in the North America route: 48.6% in 2015 compared to 47.3% in 2014; the Europe route – 33.2% in 2015 compared to 34.1% in 2014; the Far East and Central Asia routes – 89.4% in 2015 compared to 90.3% in 2014; other destinations – 11.8% in 2015 compared to 10.6% in 2014. 18 The Company cannot assess the accuracy of its market share estimates, which include Sixth Freedom flights in the Far East and Central Asia market, Africa and other destinations (such as Turkey, Greece and Cyprus), due to the inaccuracy of information held by the Company in respect to the number of passengers traveling in these markets with other airlines. Without derogating from the foregoing, it should be noted that the Company updated assumptions relating to market share and as a result, data relating to market share in 2013-2014, published in the same sections in the Company's 2014 Periodic Report, as follows: 2013 – 51.3% in lieu of 57.4%, 2014 – 51.7% in lieu of 57.7%. 19 Others: passengers travelling to destinations ibn the region (Cyprus, Egypt, Greece, Jordan, Malta and Turkey) and Africa. A‐28
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Competition on direct routes to North America exists between United Airlines, Delta Airlines, Air Canada and US Airways, which recently merged with American Airlines, It shall be noted that US Airways, which operated 7 weekly flights on route Tel Aviv – Philadelphia, stopped its flights to Israel in January 2016. Following the cessation of US Airways' flights as aforesaid, Delta Airlines announced its intention to operate 4 additional weekly flights on route Tel Aviv – New York starting from the end of May 2016, thus increasing the number of weekly flights operated by Delta Airlines on this route to 11. Furthermore, United Airlines announced its intention to operate 3 weekly flights on route Tel Aviv – San Francisco, starting from the end of March 2016, in addition to flights operated by United Airlines on route Tel Aviv – New York.
Moreover, the intensive operations of European airlines taking traffic on routes to the U.S. and Canada via their base airports (Sixth Freedom) continues. In total, an increase of approximately 3.5% in the volume of passenger traffic on direct routes to North America was recorded in 2015, compared to 2014.
The Company's passenger traffic on its direct flights to North America (the U.S. and Canada) increased by approximately 6.2% compared to 2014.
In the North American route, all airlines (Israelis and Americans) have complete freedom with respect to airfare, number of frequencies, type of aircraft, aircraft configuration, etc. The Company has rights for passenger cargo and mail transport to and from New York and other destinations in the United States, some of which in the framework of a Code Share Agreement with Jet Blue airline, which entered into force in November 2015, allowing the Company to offer its passengers a large number of major destinations in North America, further to the Company's network of direct destinations. Until then, the Company had a code-share agreement with American Airlines, which was modified following American Airlines merger with US Airways, currently applicable only to flights via joint destinations in Europe (destinations to which both the Company and American Airlines fly).
(D) Routes to Europe
As of the Date of the Report, the Company operates scheduled flights to 23 destinations in Europe, mainly to London, Paris, Moscow, Frankfurt, Rome, Milano, Madrid and Zurich. The Company generally competes, on routes between Israel and Europe, with airlines of the destination country as well as with other scheduled airlines carrying Sixth Freedom traffic via their base airport, to other countries, with foreign and Israeli charter airlines operating charter flights to various destinations in Europe, and with companies operating scheduled low-cost flights. In 2015, the liberalization trend of the aviation industry in Israel continued along with the implementation of the Open Sky Agreement with the European Union and the expanding the operations of many other airlines on the routes between Europe and Israel, as specified in Section 7.1.10 above.
An increase of approximately 10% in total passenger traffic to Europe was recorded in 2015, as foreign scheduled airlines, including low-cost airlines, increased their
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passenger traffic by approximately 13% and charter airlines operating on these routes recorded an increase of approximately 5%. The Company increased its passenger traffic on these routes by approximately 7%.
On routes to West European countries an increase of approximately 9% was observed in scheduled airlines' passenger traffic, whereas a decline of approximately 4% was observed in charter flights passenger traffic on these routes. The most outstanding increases were recorded on routes to the following countries: England (11%), France (4%), Germany (10%), the Netherlands (12%), Spain (12%), Italy (6%) and Belgium (18%). It shall be noted that a considerable increase occurred in these countries, both with respect to the operations of the "traditional" scheduled airlines (Legacy Airlines) and in the operations of low-cost airlines as described in Section 7.1.10 above.
On routes to Western and Eastern Europe countries an increase of approximately 12% was observed in scheduled airlines passenger traffic and an increase of approximately 15% was observed in charter airlines' passenger traffic. The most outstanding increases were recorded on routes to the following countries: Bulgaria (18%), Czech Republic (20%), Romania (30%), Hungary (11%) and Ukraine (30%). These countries, similar to the West European countries, reported a significant increase in low-cost airlines operations. In line with the said trend, also the Company increased its activity in this network of routes to the following destinations: Prague, Berlin, Budapest and Kiev, to which the Company operates low-cost flights under the "UP" brand.
It should be noted that in January 2015 the Company ceased its flights to St. Petersburg, in view of a significant decline in the number of passengers on this route.
For further details on the growth in the operations of foreign airlines in Israel, see Section 7.1.10 above.
Aviation agreements executed in recent years as well as the continued implementation of the Open Sky Agreement between Israel and the European Union countries, which was executed in June 2013, are expected to lead to further deterioration in the level of competition on these routes in 2016.
The Company's estimate of the increase in capacity and frequencies among other airlines and the aggravation of competition is forward-looking information, as defined in the Securities Law. This information relies, inter alia, on the Company's estimates in view of the current volume of its operations and the extent of competition in the markets, which may not materialize, in whole or in part, or materialize in a significantly different manner. The actual situation might be different from the above estimates, among other things, due to the degree of opening the market to further competition, regulatory changes, the Company's method of dealing with the competition and the risk factors set out in Section 9.18 below, as well as due to economic, security and geopolitical changes.
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(E) Routes to the Far East and Central Asia
Apart from the Company, which operates on routes to India (Mumbai), Thailand (Bangkok), China (Beijing) and Hong Kong, and Korean Airline which operates flights on route to South Korea (Seoul), scheduled airlines operating in Israel also operate flights to these destinations in the framework of Sixth Freedom traffic.
It shall be noted that starting from April 2016, Hainan Airlines is expected to operate three weekly flights on route Beijing – Tel Aviv.
In total, the number of passengers on direct flights to the above destinations in 2015 remained with no significant change (1%), and its passenger traffic also remained without change.
(F) Other Routes
Other routes operated by the Company in 2015 are Greece, South Africa and Cyprus (Larnaca). In addition, the Company operates, every now and then, one-time charter flights or a short series of charter flights to various destinations.
Regarding regional routes, an increase of approximately 16% was recorded in passenger traffic to Turkey, in light of a considerable growth in the operations of Turkish airlines – Turkish Airlines and Pegasus – which increased their passenger traffic by approximately 19% and 33%, respectively, as specified in section 7.1.10 above. This growth in the traffic to Turkey mainly arise from a growth in Sixth Freedom traffic. A moderate increase of approximately 5% was recorded in traffic to holiday destinations in Turkey (Antalya and Dalaman), compared to the previous year. It shall be clarified that in view of security restrictions imposed on Israeli airline companies, in recent years no flights of Israeli airlines have operated on the routes to Turkey.
In this respect, it should be noted that in December 2013, the aviation authorities of Israel and Turkey executed an agreement that should have enabled Israeli airlines to resume flights to Turkey. Due to limitations set in the agreement by the Turks, the security situation in the country, which worsened following Operation Protective Edge, and the travel warning to Turkey issued by the Israeli Counter-Terrorism Bureau, the preparation required to operate flights to Turkey was halted. Thus, at this stage, it is impossible to resume flights operated by Israeli airlines to Turkey and the inequality between the parties continues in view of the increased operations of Turkish airlines, as specified above.
A growth of approximately 16% was recorded on routes to Greece and the Greek Islands, which offer an alternative for vacation destinations in Turkey, mainly in view of an increase in the operations of Aegean Airlines and a substantial growth in the operations of charter airlines to these destinations.
A considerable growth (31%) was also recorded in passenger traffic to Cyprus, mainly due to an increase in the Company's operations on the Larnaca route under the UP brand
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as well as the operations of the Greek company Aegean Airlines, which replaced Cyprus Airways.
Total passenger traffic on regional routes and on routes to Africa increased in 2015 by approximately 16%, and the number of the Company's passengers on these routes increased by approximately 29%, compared to 2014.
7.3. Segmentation of Revenues and Profitability of Services
A decline of approximately 2.5% in the Company's revenue from the segment was recorded in 2015 compared to its 2014 revenue, as passenger traffic in Ben Gurion Airport throughout 2015 increased by approximately 9.9% compared to 2014.
For details on the segmentation of the Company's revenue and profitability (consolidated) by segments reported by the Company in the field of passenger aircraft, see Note 21 to the Financial Statements.
7.4. New Services
Early Check-in at Home Service – within the framework of the cooperation between the Company and "Premium Check-In", in August 2015 the Company launched a new paid service that enables El Al's passengers to complete their security check and send their luggage from home, 8 to 27 hours before the flight.
737-900 Aircraft – during 2015, the Company continued the process of receiving new Boeing 737-900ER aircraft, following receipt of the fifth of eight aircraft purchased by the Company in March 2015. In February and March 2016 the Company received the three other aircraft of this model. Business Class in these advanced aircraft consists of 16 seats whereas thinner seats manufactured by new technology were installed in Economy Class. Electrical outlets for laptops and USB connections are installed in these aircraft.
Inter-Aircraft Communication System (streaming) – in 2015, the Company continued the installation process of a flight entertainment system containing an inter-aircraft communication system, in some routes (to and from) between Israel to Europe, North America, Far East and South Africa, with the aim of improving in-flight entertainment experience. The system broadcasts in-flight entertainment with AVOD (Audio & Video on Demand) to the passenger's personal device via Dream Stream by El Al App. The service is provided for free and allows the passenger to enjoy a variety of movies, TV shows, songs, games, children contents, information to passengers and more.
For details regarding new areas of operations, see Section 9.15 below (Destinations and Business Strategy).
Code Share Agreement
The Company signed a Code-Share Agreement with Air Serbia, Serbia's national airline. The new agreement enables the Company's passengers to purchase flight ticket to Belgrade
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under the Company's Code and take a connection flight to other destinations in the Balkans. The Company's customers can also benefit from accumulating Frequent Flyers Club points in respect of these flights. The Company is preparing to implement the agreement starting from the 2016 Spring/Summer Season schedule.
7.5. Customers
The Company provides services to both private (households) and business passengers. Most of the Company's flight tickets are sold through travel agents and vacation package dealers as well as by the Company directly to institutions and individuals. For further details, see Section 7.6 below. For details on the Company's Frequent Flyer Club, see Section 7.6.4 below.
In the field of transportation by passenger aircraft, the Company has no customer nor agent by whom revenue or sales turnover amounting to 10% or more of the total revenues of the Group has been generated for the Company. The Company estimates it has no dependence on any single customer or agent.
7.6. Marketing and Distribution
7.6.1. Travel Agents and Travel Packages Dealers
Most travel agents are IATA members, thus they sell flight tickets of the various airlines. Upon the sale, the agent is entitled to receive a commission from the airline company at a rate set by it and in accordance with IATA guidelines20. At times, the agent is entitled to further commissions, inter alia, for the purpose of sales incentive, notwithstanding the discretion of the airline companies.
The vast majority of air fare marketing to passengers is carried out through travel agents and vacation package dealers. In addition, flight tickets are sold through the Company's sales offices and through phone and online direct sales. As of the date of writing this Report, the Company has three sales offices in Israel (Tel Aviv, Jerusalem and Beer-Sheva) and about 29 sales offices in 21 representations abroad.
Furthermore, the Company sells flight tickets through about 58 General Sales Agents (GSA) abroad (including direct and indirect destinations).
Air Tour (Israel) Ltd. (hereinafter: "Airtour"), a company jointly owned by the Company and the travel agents, is another marketing channel of the Group in the Israeli market, acting as the distribution arm with respect to special offers and packages to all agents in Israel. The Company has agreements with Airtour for the distribution of the Company's flight tickets and the provision of various services by Airtour to the Company, including vacation package distribution, ticketing, payment transactions, etc.
20 For details regarding IATA guidelines on this issue, see www.iata.org. A‐33
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Sun D'Or, the Company's subsidiary, also acts as a marketing arm of the Company's products mainly to charter flights and flights to various destinations.
The Company pays travel agents a commission (fixed component) as well as special incentives, particularly according to the volume of airline ticket sales. In principle, remuneration to travel agents in Israel is divided into two: fixed component (fixed rate base commission) and variable commission component, as incentive. In this regard, various methods worldwide are adapted to the market needs. In recent years, a trend of reducing commissions is evolving in the aviation world, up to the point of setting prices without commission, in such a manner that travel agents' base commission shall be cancelled and handling fees collected by the agents will be added.
Commencing July 2013, travel agents' base commission is 5%. In addition, the Company has another incentive mechanism for an additional period, as agreed with each agent. Travel agents' commission overseas varies from one country to another, in line with market conditions.
7.6.2. Computerized Reservation System
The Company's computerized reservation system is Amadeus. The system displays updated schedule of the Company's flights and foreign airlines' flights, allowing users to make reservations and ticketing for flights of such airlines, and includes a security check system (DSC). The computerized system allows a more efficient utilization of loading capacity on the Company's aircraft by calculating weight and balance by means of gathering all data calculation as well as more efficient supervision on customer handling management.
In addition, the Company has agreements with certain international distribution systems, allowing users of such systems direct access to make reservations for the Company's flights.
7.6.3. Marketing and Sales to Passengers
The Company advertises its services to passengers in the Israeli market and in other large markets. In addition, the Company initiates marketing events, sponsorships and cooperations.
In 2015, the trend of growth in direct online marketing of airline tickets continued. This trend aims to reduce marketing and distribution costs incurred by airline companies. The Company continues to adapt its operations to the said trend, with an increase of approximately 18% in online sales through the website (including package sales, sales of associated services and upgrades) in 2015, compared to the corresponding period of the previous year. Such online sales amounted in 2015 to USD 270 million, and the number of tickets sold online increased in 2015 by approximately 37% compared to 2014. The Company estimates that a continued growth of revenues from online flight tickets sales is expected in the coming years, which may amount to approximately USD 400 million. This growth as part of continuous improvement of the Company's website.
The information regarding the Company's estimate for revenue increase resulting from online direct marketing of airline tickets is forward-looking information, as defined in the
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Securities Law, which is based on the Company's estimates in consideration of global trends and developments in the consumption and aviation world. The materialization of the said information, in whole or in part, is uncertain and might be affected by external factors having effect on the competitive environment of the Company and/or by factors that cannot be assessed and are beyond the Company's control, including marketing and sales factors.
The Company makes direct sales to passengers through its Reservation Department and website. In addition, the Company operates a business desk to promote sales to business entities, mainly in Israel.
Sun D'Or, the Company's subsidiary, serves as the marketing arm of the Company's products, mostly with respect to the marketing of charter flights and flights to various destinations, with flights being operated by the Company or by other Israeli airlines (mainly in weekends and holidays).
In order to increase the attractiveness for the Company's passenger flights to passengers interested not only in transportation services to and from Israel, but also in tourism services, the Company markets, directly and through travel agents, diversified ground tourism services (hotels, tours, car rentals) to individual tourists. For this purpose, the Company markets package deals through Airtour. This activity is marketed at the Company's representative offices abroad through Superstar Holidays (England), by means of independent direct marketing or through travel agents.
In March and November 2015, agreements were executed with Taglit Birthright Israel Organization ("Taglit") to transport the participants of the 2015 summer program and the 2015-2016 winter program at an expected volume of about 18,500 passengers. Taglit brings teenagers between 18 and 26 to visit Israel and is considered a leading unique project in the Jewish world that brings young people from about 54 countries to Israel.
7.6.4. Frequent Flyer Club
As part of the marketing efforts and the efforts to increase passengers' loyalty to the Company, the Company offers special benefits to passengers who belong to the Frequent Flyer Club, which is based on a registered database. Passengers are credited with frequent flyer points for their flights on all international flights operated by the Company.
These points provide various benefits to passengers, including discounted or free flight tickets (except for additional cash payment for airport taxes and other surcharges), upgrades to a higher-level of classes and entrance to lounges used by the Company worldwide.
The Company has agreements allowing the accumulation and realization of frequent flyer club point of other airlines and/or the conversion of points/stars from credit cards and other businesses into Frequent Flyer Club points, and it further entered into cooperation agreements allowing the accumulation of club points and/or receipt of other benefits following an acquisition in a variety of businesses (in general, the Company is paid a consideration by the business), as well as into agreements for the use of frequent flyer points
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in different businesses. Payment for purchase of products on the Fly&Buy website as well as in the duty-free and on the Company's airplanes, can be made using the Club points. In addition, agreements were made with non-profit associations and organizations acting out of social, valuable and humanitarian motives in order for the Frequent Flyer Club members to contribute points to such associations and organizations.
Membership in the Frequent Flyer Club is determined by a number of parameters based on the volume of activity of the members: Regular Matmid, Silver, Gold, Platinum and "Top Platinum.
In February 2015 a series of commercial changes in the prices for the accumulation and realization of the points entered into effect, with a particular emphasis on the advantages granted to the Fly Card holders. In addition, technological improvements were carried out in 2015, which included the upgrade of the information system by allowing club members to process actions in their account through the website, the tablet or the smartphone, and a new website has been launched for club members, providing detailed information on the accumulation of points and unique special-offers, and allows to perform actions and obtain information on future flights of the Clun member.
In 2015, the Company continued to operate a program for nurturing, retaining and increasing the number of luxury customers, inter alia, by issuing a "Fly Card" branded credit card, as specified below.
As of December 2015, the number of club members reached about 1.61 million members, of whom about 337,000 are Global Y members (a unique club card issued to Israel's supporters in the Diaspora).
In total, Frequent Flyer Club members' traffic in 2015 constituted approximately 29% of the Company's total passenger traffic, similar to 2014.
For details regarding the accounting treatment of the Frequent Flyer Club liabilities, see Note 13 to the Financial Statements.
The Company intends to separate the Frequent Flyer Club activity and maintain it in the framework of a separate legal entity. To the best knowledge of the Company, such move is not expected to have significant financial impact on the Company.
Branded Credit Card
Within the framework of cooperation agreements executed by the Company with financial institutions, the Company allows for the issue of branded credit cards to the members of the Company's Frequent Flyer Club ("Branded Credit Cards"). Fly Card and Fly Card Premium credit cards were issued to Israeli account holders through the financial institutions listed below: (a) Diners Club Israel Ltd. and Cal - Israel Credit Cards Ltd. ("Diners and Cal"); (b) Poalim Express Ltd. ("Poalim"); and (c) Leumi Card Ltd. and Bank Leumi Ltd. ("Leumi") (hereinafter: the "Agreements" and the "Financial Institutions", respectively).
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The Branded Credit Cards provide their holders with special benefits depending on the type of card and volume of activity, in accordance with commercial terms agreed by the parties. Such benefits include, inter alia, accumulation of frequent flyer points in respect of transactions processed through the Branded Credit Cards.
In addition, the Company has a cooperation agreement with the registered partnership Blue Square-Dor Alon Customer Club ("YOU Club"), whereby holders of Branded Credit Cards issued by Diners and Cal may enjoy additional benefits, including accumulation of frequent flyer points in YOU Club chains. Some of these credit cards even allow the exercise of frequent flyer points in those chains, in pursuance of the terms and conditions agreed between the parties.
In this respect it shall be clarified that the said cooperation agreement with the YOU Club is an agreement with a registered partnership, the partners of which are Alon Energy Israel (1988) Ltd. and Mega Retail Ltd. The Company monitors the developments and the processes related to the Mega Retail's activity within this registered partnership, but the Company estimates that no material impact is expected on the Company's operations as a result of such processes.
According to the agreements described above, El Al is entitled to consideration from the Financial Institutions, also based on the volume of the Branded Credit Card usage. The agreements further regulate the participation in advertising, marketing and sales promotion expenses, as well as customer service to holders of Branded Credit Cards. The Agreements are for an initial term of five years, with an extension option for various additional years, subject to cancellation rights available to the parties.
The Company expects that the implementation of the Branded Credit Cards program will lead to a gradual increase in its revenues and improvement of its cash flow, together with a possible growth of liabilities in respect of accumulation of points based on the development of the pace of accumulation and exercise thereof.
The Company forecasts that in the coming years, 300 thousand credit cards will be issued and that gradual growth will occur in the number of club members to about 1.8 million. As of the Latest Date Prior to the Approval of the Report, about 135 thousand cards have been issued
The information regarding the Company's estimate on the number of credit cards to be issued and the growth in the number of club members is forward-looking information, as defined in the Securities Law, based on the Company's assumptions in consideration of global trends and developments in the consumption and aviation world. The materialization of the said information, in whole or in part, is uncertain and might be affected by external factors having effect on the competitive environment of the Company and/or by factors that cannot be assessed and are beyond the Company's control, including factors in the world of credit card retail and consumption.
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7.7. Reservations Backlog
The Company does not have financial data regarding the volume of future flight reservations. Additionally, some of these reservations can be exercisable by the customer over a long period not exceeding two years. The Company has "prepaid revenues" arising from receipt of advance payment for flights not yet performed as well as in respect of points accumulated by Frequent Flyer Club members as aforesaid.
7.8. Competition
7.8.1. General
(A) The field of transportation by passenger aircraft is characterized by fierce competition between airlines providing transportation services to and from the same or alternative destinations.
(B) The Company serves as the designated air carrier of the State of Israel to most destinations from where scheduled flights are operated to and from Ben Gurion Airport.
(C) The Company estimates that during 2015, the competition on flights to and from Israel was with 110 airline companies, including the Israeli airlines Arkia and Israir (which operate charter and scheduled flights to specific destinations), of which about 60 foreign airlines operated scheduled flights to nearly 70 destinations in approximately 38 countries, and about 50 airlines operated charter flights (of which about 30 have been operating throughout the year whereas the other airlines have been operating individual flights). In addition, competition in the field of cargo transport in the belly of passenger aircraft, which is included in this segment, takes place with airlines engaged in cargo transportation on cargo aircraft and in the belly of passenger aircraft. For more details, see Section 8.7.1 below,
For further details on the structure of competition within the segment, see Section 7.1.10 above.
7.8.2. The Company's Market Share of Service Groups
The Company estimates that its share of the total traffic to and from Ben Gurion Airport in 2015 stood at approximately 32.5%, compared to 33.3% in 2014. The Company's market share of Service Groups is provided in Section 7.2(B) above.
7.8.3. Significant Competitors in the Field of Transportation by Passenger Aircraft
To the best knowledge of the Company, its significant competitors with respect to the Company's destinations in 2015, in terms of market share, in the field of transportation by passenger aircraft were: United Airlines (U.S.), Delta (U.S.), Air Canada (Canada), Lufthansa (Germany), British Airways (Britain), Alitalia (Italy), Air France – KLM (France and the Netherlands), Swiss (Switzerland), Ukraine Air International (Ukraine), Aeroflot (Russia),
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Transaero (Russia), Turkish Airlines (Turkey), Pegasus (Turkey), EasyJet, WizzAir, Air Berlin, Royal Jordanian and Uzbekistan Airways.
For details regarding the aggravation of competition in the segment during 2015, see Section 7.1.10 above.
7.8.4. Main Methods for Coping with Competition
The Company operates in several channels in order to increase its profitability, while preserving and increasing its market share and increasing its seat capacity, inter alia:
(A) Adjusting the schedule, to the extent possible, to traffic seasonality and international events;
(B) Increasing the frequency of flights to popular destinations as well as the number of flight destinations, inter alia, through cooperation with other airlines;
(C) Striving to continuously improve the service to passenger, including the improvement of seat comfort, quality and diversity of inflight food and entertainment, etc., while focusing on Business Class;
(D) Granting benefits to passengers who belong to the Frequent Flyer Club and to business corporations that are members of the Company's Business Desk;
(E) Activity through all relevant marketing channels;
(F) Addressing the passengers by means of advertising campaigns in Israel and worldwide;
(G) Operating the UP-brand flights (for details, see Section 7.1.10 above);
(H) Issuing "Fly Cards" – the Branded Credit Cards (for details, see Section 7.6.4 above).
Among the positive factors affecting or liable to affect the competitive position of the Company, the following factors can be listed: large and diversified flight network; wide deployment of distribution network in Israel and worldwide; existence of an attractive customer club; strong brand in the local market; high level of safety and security; flight schedule stability and operational accuracy; adjustment of services to market needs and a set of cooperation agreements with other airlines.
Among the negative factors affecting or liable to affect the Company's competitive position, the following factors can be listed: geopolitical condition significantly reducing the Company's chances of operating Sixth Freedom flights (indirect flights via Ben Gurion Airport) vis-à-vis the increase of Sixth Freedom flights operated by other airlines; reducing regulatory barriers to operate in the Company's destinations, in particular in light of a liberal aviation policy; the entry of low-cost airlines; cooperations between the foreign airlines in the framework of global aviation alliances (SKY, One World, STAR), regulatory changes and legislation restrictions and constraints applicable to the area of operations; excessive
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production capacity of competitors; the Company's reliance on distribution through agents vis-à-vis the increased trend of direct online marketing; the fact that the Company does not operate passenger flights on Sabbaths and holidays, and possible deterioration of the economic, security and political situation in Israel.
7.9. Seasonality
The Company's operations is seasonal and focuses on peak periods, with high traffic of Israeli passengers abroad mainly in summer and during the Jewish Holidays, and with a high traffic of tourists to Israel in particular in the summer and towards Jewish or Christian holidays, or during vacations in the countries of origin. The peak of the Company's operations is in the third quarter of the year. In the third quarter of 2015, passenger traffic volume was approximately 32% compared to 31% in the third quarter of 2014 (which was affected by Operation Protective Edge), of the total annual traffic.
The table provides contains data on the distribution of the Company's revenues from passenger aircraft, by quarters21:
With respect to the year 2015:
Quarters Annual
(in USD millions) (in USD millions) Year Jan.-Mar. Apr.-Jun. Jul.-Sept. Oct.-Dec. Jan.-Dec. 2015 379 463.2 589.6 433.5 1,865.3 % of the 20.3% 24.8% 31.6% 23.3% 100% operating segment
With respect to the year 2014:
Quarters Annual
(in USD millions) (in USD millions) Year Jan.-Mar. Apr.-Jun. Jul.-Sept. Oct.-Dec. Jan.-Dec. 2013 375.3 528.6 552.9 453.8 1,910.6 % of the 19.6% 27.7% 28.9% 23.8% 100% operating segment
7.10. Production Capacity
Output indices accepted in the aviation world with respect to passenger aircraft are Passenger Load Factor22 and Available Seat Kilometer ("ASK")23. At the height of demand (August), the
21 Dates of Jewish Holidays according to the Gregorian calendar vary from one year to the other, and this may have a comparative impact with respect to operations in corresponding quarters. A‐40
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Company's production capacity almost reaches the full output potentiaal. In August 2015, the Company's ASK was approximately 2,526 million flown seat kilometers and its capacity rate was approximately 89.4%.
The following graph describes ASK monthly average and averagee capacity rate of the Company in the last five years:
In accordance with a Government Resolution of 1982, the Company ceased operations of scheduled passenger flights on the Sabbath and Jewish Holidays, and ass a result, the Company does not fully exploit its production capacity. On June 6, 2006, upon turning into a "Mixed Company", said prohibition was removed. In January 2007, it was agreed between representatives of the Rabbinical Committee for the Sanctity of Shabbat and the Company's representatives, that the Company would keep meeting the status quo prevailing up until then, whereby the Company does not operate passenger flights of El Al on the Sabbath and Jewish Holidays, in accordance with the 1982 Government Resolution. In view of the need, which arisees from time to time, to operate flights on Sabbath, it was concluded that, prior to operating such flights, the Company shall apply to the Chief Rabbii to hear the halachic position (i.e. the position of Jewish Law). Furthermore, the parties formulated understandings for reimbursement of cancellation fees in respect of kosher meals, if, as a result of a breach of this understanding, ultra-orthodox passengers are forced to cancel their flights.
7.11. Airccraft Fleet
7.11.1. As of the Latest Date Prior to the Approval of the Report, the Commpany uses about 43 passenger aircraft, of which 14 aircraft are leased by the Company and 29 aircraft are owned by it.
7.11.2. The Company's entire passenger aircrraft fleet was manufactured by Boeing. Therefore, the Company has dependence on the aircraft manufacturer Boeing as regards the supply of
22 Passenger Load Factor – calculated by passenger – kilometer flown (RPK 0 the number of paying passengers multiplied by the distance flown) as percentage of available seat – kilometer (ASK – number of seats offered for sale multiiplied by the distance flown). 23 Available Seat Kilometer – number of seats offered for sale multiplied by the distance. A‐41 Free Translation of the Hebrew Language Financial Report ‐ Hebrew Wording Binding
fuselage spare parts, in cases of malfunctions and findings in the course of regular maintenance (since Boeing is the aircraft manufacturer) and engineering consultancy.
7.11.3. The Passenger Aircraft Fleet Owned by the Company
The following table sets out passenger aircraft fleet owned by the Company, as of the Latest Date Prior to the Approval of the Report:
Aircraft type Total Average age Average Maximum flight Cargo (in years) number of seats range carriage (nautical mile) 24 capacity 747-400 6 20.5 408 6,400 18.7 737-900ER 8 1.2 172 2,500 2.5 737-700 1 16.5 110 2,500 2 737-800 6 11.9 154 2,400 2 777-200ER25 6 12.8 279 7,300 22.4 767-300ER 2 24.5 216 5,300 8 Total 29 12 240
In November 2015, a Memorandum of Understanding was executed for the sale of two 737-700 Boeing aircraft (EKD and EKE) owned by the Company to Aero Capital Solutions Inc., for a total amount of approximately USD 16 million for both aircraft, most of which (except for an insignificant amount of advance payments) will be paid on the aircraft delivery date. In December 2015, the agreement for the sale of the EKD aircraft, which was delivered in January 2016, was executed, and the consideration therefor has been paid. The second aircraft (EKE), is planned to be delivered in April 2016. For further details, see Note 9F to the Financial Statements.
For details regarding the Company's Aircraft Acquisition Program of wide-body aircraft, see Section 9.12 below and Note 9D to the Financial Statements.
7.11.4. The Company's Leased Passenger Aircraft Fleet
The following table sets out the passenger aircraft fleet leased by the Company, as of the Latest Date Prior to the Approval of the Report:
24 The range is determined for an aircraft full of passengers, and without cargo. 25 Some of the 737-800, 777-200ER and 737-99 aircraft were acquired be means of EXIM / EXIM Guarantee, therefore the legal framework provides that in the first stage, the aircraft have been leased by the Company, with an option to purchase them at the end of the period in return for one dollar. A‐42
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Total Average Lease termination Average Additional details Aircraft age date number type of seats 737-800 9 12.4 EKO – November 2020* 172 * EKO – the Company has EKP – October 2016 an exit option in November 2017 and November 2018. EKI – October 2018
EKS – August 2016 EKF – October 2016 EKT – November 2018 EKM – May 2018 EKR – May 2018 EKU – March 2019 767-300ER 5 18.8 EAR – March 2019* 217 * EAR – the Company has EAL – November 2017 an exit option starting from January 2017, with a 12- EAM – December 2019** month advance notice. EAK – December 2020*** ** EAM - the Company has EAN – March 2020**** an exit option starting from January 2017, with a 12- month advance notice. ** EAK - the Company has an exit option starting from January 2017, with a 12- month advance notice. ** EAN – an early exit option on the date of the third "heavy" check (September 2018). Total 1314 14.6 188
Lease fees in respect of the Company's aircraft in this segment amounted in 2015 to approximately USD 64.2 million, compared to approximately USD 64.6 million in 2014 and approximately USD 71 million in 2013. The above lease expenses include also payments made by the Company in respect of "wet leases" as provided below.
In the course of 2015, the company entered into the following lease agreements:
In April 2015 the Company approved the extension of lease agreements executed with a foreign company for three 767-300 passenger aircraft. The agreement relating to the aircraft marked EAK was extended for an additional period of about 61 months, commencing on November 21, 2015, with an option for the Company to terminate the lease starting from January 1, 2017, by twelve months prior notice. The agreement relating to the aircraft marked EAR was extended for an additional period of about 29 months, commencing on November 5, 2016, with an option for the Company to terminate the lease starting from January 1, 2017, by twelve months prior notice. In addition, the agreement relating to the aircraft marked EAM was extended for an additional period of about 21 months, commencing on December 30, 2017, with an option for the Company to terminate the lease starting from January 1, 2017, by twelve months prior notice.
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In June 2015 the Company approved the extension of the lease agreement executed with a foreign company for a 737-800 aircraft marked EKO, for an additional period of about 60 months, commencing on November 9, 2015, and ending at the earliest of: November 9, 2020 or when both engines of the aircraft are left with a balance of 30 cycles before repair. The Company has an option to terminate the lease during the term thereof, subject to twelve months prior notice.
In August 2015 the Company executed an agreement with a foreign company for dry lease of a 767-300ER Boeing aircraft marked EAN. The lease agreement provides that the term of the lease shall end at 5the end of the fourth "heavy" check, which is expected to take place on March 2020. The Company has an early exit option on the date of the third "heavy" check of the aircraft, subject to an exit fee. The aircraft was received by the Company on October 9, 2015.
In addition to the aircraft leases listed above, the Company entered, from time to time, into agreements for "wet lease" (i.e. lease of aircraft with crew) of passenger aircraft, as set forth below:
During June to August 2015, the Company leased from two foreign companies 737-800 and 767-300 Boeing aircraft for reinforces purposes to meet its flight schedule.
During December 2015 to March 2016 the Company gradually leased, from two foreign companies, five Boeing aircraft, as follows: 767-300ER Boeing, 777-200ER Boeing, 757- 200 Boeing, 777-200 Boeing and 737-800 Boeing, due to difficulties in staffing flights.
For details regarding difficulties in staffing flights and the legal proceeding on the matter, see Sections 9.4.6 and 9.4.1 below; for details regarding a Motion to Approve a Class Action filed against the company, see Note 16B(14) to the Financial Statements.
In the course of 2015, the Company entered into engine maintenance and repair agreements as set forth below:
In April and December 2015 the Company entered into agreements with CFM International S.A. and Israel Aviation Industry Ltd., respectively, for maintenance and repair of engines for the 737 Boeing aircraft leased by the Company. The agreements are for a period of about five years, and the value of each of these transactions shall be determined in accordance with the mix of engines to be sent for repair. Additionally, in October 2015, the Company entered in to a maintenance and repair agreement with United Technologies Corporation (a Pratt & Whitney division) with respect to engines for 767 Boeing aircraft leased by the Company for a five-year period.
In the course of 2015, the Company upgraded its aircraft fleet, as provided below:
The 777 Fleet Upgrade – in the first half of 2015, a process for upgrading the First and Business Class seats on the Company's Boeing 777 aircraft fleet used for long haul destinations such as Los Angeles, Hong Kong, New York Paris and London. Starting from
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2015 Spring/Summer Season schedule, passengers of the luxury classes on the Company's 777 aircraft enjoy upgraded bed-seats in the Business Class as well as a luxurious redesigned First Class with 6 seats. In addition, the Company launched the Economy Plus Class on the 777 aircraft fleet.
The 767 Fleet Upgrade – the Company completed the process of upgrading the Business Class seats and made them into bed-seats in five Boeing 767 aircraft. The Company is expected to complete the same Business Class upgrade in two other 767 Boeing aircraft by May 2016.
8. Cargo Aircraft Segment
8.1. General Information about the Operating Segment
The following describes trends, events and development within the macroeconomic environment of the Company which have, or expected to have, material impact on the business results or the development in the entire Company, or in the segment of cargo aircraft operations, with respect to the following matters:
8.1.1. Structure of the Operating Segment and Changes Occurring therein
Four types of competitors operate in the market of cargo aviation transportation: companies carrying cargo on cargo aircraft only; companies carrying cargo in the belly of passenger aircraft only; companies, like El Al, that carry cargo both by cargo aircraft and in the belly of passenger aircraft, as well as courier companies which, in addition to their courier services, carry other cargo on their aircraft.
In the last few years, a steady increase is seen in the volume of passenger aircraft on international routes worldwide, which increases competition.
In addition, the growing trend of shifting cargo transport to marine traffic has continues over the last year.
The Company estimates that its share of cargo transport in the years 2015, 2014 and 2012 is estimated at approximately 33.2%, 34.2% and 35.2%, respectively, out of all cargo transported by air to and from Israel (including cargo carried in passenger aircraft belly; excluding Sixth Freedom and including mail operations).
8.1.2. Restrictions, Legislation, Standardization and Special Constraints Applicable to the Operating Segment
Regulatory restrictions applicable to cargo transport by cargo aircraft are similar to those applicable to passenger transport by passenger aircraft.
Regulatory arrangements have also been made in the cargo segment, with respect to many operational aspects, such as: permitted flight capacity, air carrier liability for damages, standards of flight safety, security and noise. For details, see Section 9.11 below. However,
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the policy of aviation authorities around the world regarding the provision of permits in connection with cargo aircraft tends to be more lenient than in the segment of passenger aircraft.
8.1.3. Changes in the Volume and Profitability of Operations in the Segment
(A) The volume of international cargo transportation According to IATA estimates, a growth of approximately 2.5% was recorded in 2015 in the volume of global cargo transportation (international only) by aircraft (including in passenger aircraft belly). In 2014, an increase of 5.3% was recorded (international only).
In December 2015, IATA published its estimates, according to which, by 2019 an average annual growth (2015-2019) of approximately 4.3% is expected in global cargo transportation (international only) by aircraft (including in passenger aircraft belly)26. .% 3 ץIATA estimated that 2016will result in a growth of 6
The following table describes the development in the volume of air transport operations (international only) of cargo and mail for 2013 and 2014, based on data provided by IATA27:
Year Output RTK28 (in millions) RTK annual change (%) 2015 N/A N/A 2014 179,176 6.4 2013 168,469 1.6
(B) The volume of cargo transportation by aircraft to and from Israel The following are data on cargo traffic entering and exiting Ben Gurion Airport in the last five years (data include cargo carried by cargo aircraft and in passenger aircraft belly)29:
26 IATA forecasts until 2019 refer to growth in the weight of cargo flown in tons, multiplied by the distance flown – Revenue Ton Kilometer (RTK) 27 Data for 2015 have not yet been published. 28 Revenue Ton Kilometer - the weight, in tons, of paid cargo on cargo aircraft, multiplied by distance flown. 29 Source: CAAI and the Company's estimate, which includes deduction of El Al's Sixth Freedom operations via BGA and addition of El Al's mail operations. A‐46
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Cargo Traffic at Ben Gurion Airport (in thousands of tons) for the year ending December 31 2015 Change 2014 Change 2013 Change 2012 Change 2011 from from from from 2014 2013 2012 2011 Export 134 (6%) 143 3% 139 (5%) 147 (5%) 155 Import 154 8.5% 142 4% 136 1% 134 (4%) 139 Total 288 1% 285 3.5% 275 (2%) 281 (4%) 294 During 2015, an increase of approximately 1.2%30 was recorded in cargo traffic at Ben Gurion Airport, constituting about 3,500 tons, compared to 2014.
In addition to CAL Cargo Airlines Ltd. ("CAL"), the Israeli cargo company, cargo capacity of foreign airlines included cargo capacity of passenger flights and cargo flights operated by nine airlines: Fedex (USA), NMG and Turkish Airlines (Turkey), EAT and TNT (Belgium), Korean Air (Korea) Royal Jordanian (Jordan), Lufthansa (Germany) and Silk Way (Azerbaijan). Additionally, non-scheduled cargo flights were operated through foreign airlines, on an ad hoc basis.
About 55.9% of the total cargo traffic at Ben Gurion Airport was carried on cargo aircraft whereas the remaining traffic (44.1%) was carried in passenger aircraft belly (mainly wide-body aircraft). These data do not include cargo carried by the Company via Ben Gurion Airport under Sixth Freedom, which in 2015 totaled 0.5 thousands of tons, an insignificant volume in 201431 and 0.5 thousands of tons in 2013.
8.1.4. Developments in the Operating Segment Markets or Changes in the Characteristics of its Customers
The Israeli market in the segment of cargo transportation on cargo aircraft is characterized by high seasonal fluctuation, due to the relatively high weight of agricultural export (substantially carried out in wintertime) out of total export. For details about the Company's customers in the segment of transportation by cargo aircraft, see Section 8.5 below.
8.1.5. Technological Changes which have a Material Impact on the Operating Segment
In 2015, no technological changes were made, which have a material impact on the operating segment.
8.1.6. Critical Success Factors in the Operating Segment and Changes Occurring therein
In the segment of cargo transportation by cargo aircraft, several factors having impact on the competitive status in the segment can be counted: the ability to offer cargo transport to popular destinations at competitive prices; independent development of route network,
30 Without deducting the Company's Sixth Freedom operations via BGA, traffic increase in 2015 was approximately 1.4%. 31 Data contains cargo carried on cargo aircraft as well as cargo carried in passenger aircraft belly. A‐47
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including the option to operate Sixth and Fifth Freedom flights as activity supporting cargo transportation to and from Israel; cooperation with other airlines; cargo transportation at the required frequency and quality, while meeting schedules; risk management and hedging.
8.1.7. Changes in the Network of Suppliers and Raw Materials for the Operating Segment
The main raw material used by airline companies is jet fuel, thus constituting one of the major expenditure components of an airline company. For further details regarding fuel, see Section 9.5.1 below. In addition, the Company has dependence on Boeing, as specified in Section 7.1.7 above.
8.1.8. Main Entry and Exit Barriers of the Operating Segment and Changes Occurring therein
Regulatory entry barriers (the need for a designated air carrier and permissions for flight frequency, capacity, etc.) with respect to scheduled cargo aircraft flights are essentially similar to the regulatory entry barriers with respect to scheduled passenger aircraft flights, as set forth in Section 7.1.8 above.
The Company estimates that in the segment of cargo flights, some of the countries have a more liberal policy on giving permissions. Therefore, the Company estimates that in the segment of cargo flights, this entry barrier may be less significant in some countries.
Another entry barrier in this segment is the relatively large initial investment required for establishing and operating an airline company, including aircraft acquisition and leasing, as well as other ongoing significant investments.
Restrictions on the holder of the Special State Share with respect to reducing the Company's cargo aircraft fleet constitute an exit barrier unique to the Company. For details, see Section 9.11.9 below.
8.1.9. Substitutes for the Segment's Services and Changes Occurring Therein
The main substitute for air transport by cargo aircraft is cargo transport in the belly of passenger aircraft, marine transport, or a combination of marine transport to a nearby destination port, from where the cargo is conveyed by means of land transport. In 2015, no material changes have occurred with respect to the substitutes for transportation by cargo aircraft. It shall be noted that marine transportation constitutes a significant substitutes for air cargo transportation.
8.1.10. Structure of Competition in the Operating Segment and Changes Occurring Therein
In the last few years, a change has occurred in the structure of the segment in the Israeli market due to increase in supply to customers following the entry of other airlines operating designated cargo aircraft. Furthermore, the expansion of scheduled flights to and from Israel on passenger aircraft capable of carrying cargo in their bellies, is liable to increase competition in the field of cargo operations. Nevertheless, part of the growth in passenger aircraft arises from the operations of low-cost airlines operating flights from destinations in
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Europe to Israel on narrow-body aircraft which in most cases do not carry cargo. For further details, see Section 8.7 below.
8.2. Services in the Operating Segment
In this segment, the Company offers cargo transport services by a cargo aircraft from Israel to overseas destinations and from overseas destinations to Israel; cargo transport from one foreign country to another foreign company (Fifth Freedom), for example – from Liege to New York; or cargo transport under Six Freedom (indirect flights via interim destinations in the airline's parent country), for example – from Asia to Europe or the U.S. with a stopover in Israel. The Company carried cargo by air under Sixth Freedom (2012-2015) at negligible volume, The Company distinguishes between three major destination groups: (1) North America; (2) Europe; (3) the Far East and Central Asia.
During the Reporting Year, the Company offered, in this segment, cargo transport services to one destination in Europe on scheduled flights, nine destinations in Europe on charter flights, one destination in the Far East on charter flights and one destination in North America. On top of that, the Company offers cargo transport services to many other destinations on the Company's passenger aircraft or through cooperation with other airlines as well as by means of marine transportation from the airport.
Cargo Traffic on the Company's Cargo Aircraft, by regions (in tons) for the year ending December 31:
2015 2014 2013 2012 2011 Between Israel and Europe 33,389 32,071 32,749 32,533 33,675 Between Israel and the U.S. 7,126 6,305 5,120 6,203 7,821 Between Israel and the Far 71 79 32 122 1,279 East and Central Asia Total 40,586 38,455 37,901 38,858 42,775 These data do not include air cargo carried by the Company other than via Ben Gurion Airport under Fifth Freedom and air cargo carried by the Company via Ben Gurion Airport under Sixth Freedom. In the years 2015, 2014, 2013 and 2012, the Company carried Fifth Freedom cargo by the cargo plane in a volume of 5 thousands of tons, 2 thousands of tons, 3 thousands of tons and 4 thousands of tons, respectively. The Company carried Sixth Freedom cargo by the cargo plane at negligible volume. The major target markets for cargo transport services are importers, industrial factories and the agricultural sector.
For the purpose of cargo distribution from the Company's cargo hubs, the Company operates a truck transportation system in Europe, through subcontractors.
In June 2015, the Company's Audit Committee and Board of Directors approved the exercise of the Company's option to extend the framework agreement it has entered into with Maman - Cargo Terminals & Handling Ltd. (hereinafter: "Maman" and the "Framework Agreement", respectively) on February 3, 2010 for another period, from April 1, 2015, to June 30, 2018
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under the terms of the Framework Agreement (hereinafter: the "Extension Period"). Pursuant to the Framework Agreement, at the end of each year during the Extension Period, the Company may choose whether to terminate the agreement or extend it in accordance with the terms of the Framework Agreement for another year, up to the end of the Extension Period. The Framework Agreement provides the terms and conditions as regards the terminal services provided to the Company by Maman, which include, inter alia, cargo handling and storage. It shall be noted that until the end of the first year of the Extension Period, i.e. April 1, 2015, no notice was given by the Company regarding the extension of the Framework Agreement for another Extension Period year, and since that date, the parties operate in accordance with the Framework Agreement and at the same time negotiate the terms of its extension.
In April 2015, the Company entered into an SPA Agreement with CARGOLUX, for the carriage of cargo that can only be carried on cargo aircraft. The agreement will enable expansion of the network of routes to destinations in the Far East, North and South America.
8.3. Segmentation of Revenues and Profitability of Services
In 2015, a decrease of approximately 2.1% occurred in the Company's revenues from the segment compared to the 2014 revenues, with a growth rate in the segment of cargo at Ben Gurion Airport of approximately 1.2% in 2015, compared to 2014. For details regarding data on the segmentation of the Company's revenues and profitability (consolidated) by the Company's reported operating segments in the field of transport by cargo aircraft, see Note 21 to the Financial Statements.
8.4. New Services
In July 2015 the Company launched the "El Al 2 DOOR" service, which allows transportation of shipments from Ben Gurion Airport to the customer's door as well as related services, inter alia, handling the paperwork and releasing the shipment from customs. The aforesaid service is available for shipments weighing from 45 kg to 7 tons and shipments of excessive weight that can only be carried by a dedicated cargo aircraft.
The Company examines from time to time the possibility of operating flights to new destinations and adding frequencies to existing destinations, in accordance with the requirements of the law.
8.5. Customers, Marketing and Distribution
The majority of the Company's sales in the segment of transport by aircraft carrying cargo are made to cargo agents (approximately 89% in 2015). The remaining sales are made directly to the end customers which are not cargo agents.
In the segment of cargo transport by aircraft carrying cargo, the Company does not have customers the revenue from which is 10% or more of the Company's total revenues.
In addition, the Israeli cargo consolidation company ("ACI"), some of the shares of which are held by the Company, is engaged in consolidation of air cargo at Ben Gurion Airport and
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transfer thereof abroad, mainly through the Company. ACI, like other companies operating in this segment, consolidates cargo of individual dispatchers into one shipment, and in its capacity of dispatcher, it sends it for delivery to the Company.
8.6. Backlog
As a rule, carrying cargo by cargo aircraft is done shortly after processing a service order. Therefore, in 2015, the Company did not have any significant backlog.
8.7. Competition
8.7.1. The Conditions of Competition in the Operating Segment
(A) The segment of transportation by cargo aircraft is characterized by fierce competition between airlines providing transportation services between the sale destinations or alternative ones. Airline companies compete in various segments, the main of which are: transportation price, level of service, schedule and frequency of flights.
(B) In the operating segment in Israel, the Company competes with CAL and foreign airlines operating cargo aircraft. As of the Date of the Report, CAL operates flights to various destinations in the U.S. and Europe.
(C) In 2015, the Company competed with nine foreign airlines (in addition to CAL) operating cargo aircraft on flights to and from Israel, in carrying cargo on cargo aircraft to and from Israel.
(D) The Company competes with most scheduled airlines operating passenger aircraft and carrying cargo in their belly. In 2015, the Company's share of cargo carried in passenger aircraft belly was 44.6% compared to 23.4% of cargo carried by cargo aircraft.
(E) In the last few years, the CAAI tends to approve applications of foreign scheduled airlines to increase their flight frequencies to Israel. As a result, a considerable growth occurred in the capacity of carrying cargo in the belly of passenger aircraft of such foreign airlines. Said growth also aggravates the competition in the segment of cargo transportation.
8.7.2. Significant Competitors in the Segment of Transportation by Cargo Aircraft
To the best knowledge of the Company, its significant competitor in terms of market share, in the segment of transportation by cargo aircraft is CAL.
8.7.3. Principal Methods for Coping with Competition
The Company operates in several channels to increase its profitability, while retaining and increasing its market share as well as increasing the volume of cargo it transports, inter alia:
(A) Adjusting the schedule, to the extent possible, to traffic seasonality, and maintaining schedule stability.
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(B) Increasing frequency of flights to popular destinations and the number of destinations through cooperation with other airlines.
(C) Competitive price quotes.
(D) Increasing the frequency of the Company’s cargo flights between two foreign countries.
Among the positive factors affecting or liable to affect the competitive position of the Company, the following factors can be listed: the operation of a dedicated 747-400 Boeing cargo aircraft; a strong brand in the local market; high level of service; high level of security and safety; a wide range of direct flight destinations; schedule stability and operational accuracy.
Among the negative factors affecting or liable to affect the competitive position of the Company, the following factors can be listed: Israeli authorization for additional competitors or destinations. Regulatory changes limiting the possibility for entering into cooperation agreements with other airlines or preventing the exercise of traffic rights; the entry of new foreign competitors; increasing flight capacity of foreign airlines (including under Sixth and Fifth Freedom); security restrictions and requirements; deterioration of the economic, security and political situation in Israel.
8.8. Seasonality
This segment is characterized by a seasonal fluctuation due to the relatively high weight of agricultural export out of total export using cargo aircraft. The following are data on the segmentation of the Company's revenues from the cargo aircraft, by quarters:
With respect to the year 2015:
Quarters Annual
(in USD millions) (in USD millions) Year Jan.-Mar. Apr.-Jun. Jul.-Sept. Oct.-Dec. Jan.-Dec. 2015 19.5 19.7 15 17.2 71.4 % of the 27.3% 27.6% 21% 24.1% 100% operating segment
With respect to the year 2014:
Quarters Annual
(in USD millions) (in USD millions) Year Jan.-Mar. Apr.-Jun. Jul.-Sept. Oct.-Dec. Jan.-Dec. 2014 18.6 17.0 16.5 17.8 69.9 % of the 26.6% 24.3% 23.6% 25.5% 100% operating segment
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8.9. Production Capacity
Output indices accepted in air cargo transportation by cargo aircraft are capacity rate (Load Factor)32 and Available Seat Kilometer ("ASK")33. It shall be noted that the capacity rate indicator is calculated only according to cargo weight, regardless of cargo volume.
100 85% .L.F ממוצע Average חודשי - Monthlyבמיליונים ATK 90 80% 80 (in millions) 75% 70 74.7% 70% 60 72.6% 72.5% 50 68.3% 65% 40 60% 30 55% 20 22 25 10 19 20 50% 0 45% 2012 2013 2014 2015
The following graph describes the average capacity rate and available ton-kilometer of the Company in 2015, per quarter on average:
.L.F ממוצע Average חודשי - Monthlyבמיליונים ATK 40 85% (in millions) 35 76.3% 80% 30 67.3% 66.2% 75% 25 70% 27 62.9% 26 20 25 65% 21 15 60% 10 55% 5 50% 0 45% Q1-2015 Q2-2015 Q3-2015 Q4-2015
8.10. Aircraft Fleet
In June 2015, the Company signed an extension to the lease agreement of the 474-400F (ELF) cargo aircraft with Bank of America Leasing Ireland Co. Limited for another period of 72 months, starting from August 1, 2013, with the Company having an option to terminate the lease after 48 months.
Additionally, during February to June 2015 and January to March 2016, the Company leased cargo aircraft in "wet lease" (lease of aircraft with crew). This lease is expected to continue also during July to September 2016.
The Company's aircraft lease expenses in this segment totaled approximately USD 18.4 million in 2015, approximately USD 8.7 million in 2014 and approximately USD 10 million
32 Calculated by passenger – kilometer flown (RPK - the number of paying passengers multiplied by the distance flown) as percentage of available seat – kilometer (ASK – number of seats offered for sale multiplied by the distance flown). 33 The capacity available for cargo transportation, multiplied by the distance flown (Available Ton Kilometer). A‐53
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in 2013. It should be noted that such lease expenses also include payments made by the Company in respect of "wet leases" as described above.
8.11. Raw Materials and Suppliers
The Company's principal raw material is fuel. For further details, see Section 9.5.1 below. In the segment of cargo aircraft, the Company uses, in its various stations around the world, suppliers engaged in unloading and loading aircraft, storing cargo in warehouses, supplying airborne equipment and consumables for current use as well as in cargo land transport from the customer to the airport and vice versa. The rate of expenditure for entering into agreements with such suppliers in 2015 was approximately 16% of the segment's expenses. In 2015, the Company had no dependence on a single supplier.
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9. Details About the Two Operating Segments
9.1. Fixed Assets and Facilities
9.1.1. Real Estate (A) The Company owns an area of approximately 1,560 sq.m. in El Al House, located at Ben Yehuda Street in Tel Aviv, which, until May 2013, served as the offices of the Israeli branch and was leased to others (for details, see Section (F) below). In addition, the Company owns offices in Spain (Madrid) and Argentina (Buenos-Aires) on a total area of approximately 269 sq.m. (B) The annual cost of leasing the areas in Israel is approximately USD 8,200 thousands for a built area of approximately 88,000 sq.m (of which, about 80,000 sq.m. in El Al Campus). The following table sets out real estate properties the Company leases in Israel: Property Parties to the Consideration Term of Contract and Extension Agreement Option El Al Campus at BGN Airport Authorization agreement Approx. USD 4.5 million The agreement is valid until Dec. 31, on a built area of approx. between the IAA for the land and 2010, with an extension option for another 80,000 sqm on a land of (Authorizer) and El Al buildings component in period of 25 years. The Company approx. 290 dunam. (Authorisee). 2015. announced its wish to exercise said option See subsection (C) below. and is in process of negotiations with the IAA regarding the extension of the agreement for another period. Customer service warehouse at Authorization agreement Yearly usage fees of The validity of the agreement was BGN Airport on a built area of between the IAA approx. NIS 2.5 million. extended until December 31, 2016. approx. 2,600 sqm plus (Authorizer) and El Al approx. 1,750 sqm operational (Authorisee). space.
Areas in Terminal 3 at BGN Airport: A. Area for King David Authorization agreement Yearly usage fees of The agreement is valid until December 31, Lounge and other areas. between the IAA approx. NIS 18 million. 2014, and negotiations are held for See subsection (D) below. (Authorizer) and El Al extending it. (Authorisee). B. Operational areas in Authorization agreement Approx. NIS 7.8 million. The agreement is valid until November 1, Terminal 3. between the IAA 2014 and negotiations are held for (Authorizer) and El Al extending it. (Authorisee). C. Areas in Terminal 1 at Authorization agreement Total annual cost of The agreements are for different periods. BGN Airport totaling between the IAA approx. USD 20 approx. 140 sqm. (Authorizer) and El Al thousands. (Authorisee). Areas at BGN Airport for the Agreement between the Yearly usage fees of The agreement is valid until December 31, Company's cargo transport El Al and Maman - approx. NIS 0.3 million 2015 and negotiations are held for operations; these areas include Cargo Terminals and under in Israeli Shekel extending it. space of approx. 445 sqm in Handling Ltd. contract. Maman Building. El Al branches around Israel Various owners vis-à-vis Total annual cost of The agreements are for different periods. on areas totaling approx. 1,500 the Company. approx. NIS 2.1 million. sqm (excluding parking areas).
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(C) Land Use Rights of the Land at Ben Gurion Airport (BGN Airport)
Ben Gurion Airport (BGN Airport) serves as the Company's base airport and its principal operations base. The Company's head office is located at BGN Airport and so are its aircraft hangers, aircraft parking spaces, workshops, warehouses and the other offices of the Company and its facilities. Most offices, aircraft hangers and the rest of the buildings used at BGN Airport were built by the Company on a land regarding which the Company is a long-term Authorisee.
By virtue of the agreement with the IAA of June 1992, as amended in February 1995, the Company has a right of use (authorization) on a land of approximately 290 dunam at Ben Gurion Airport, up until December 31, 2010. Said period can be extended for another period of up to a total of 25 years, in accordance with the terms of the contract or under different terms as agreed with the IAA. This option exercise will require, as it seems, payment of purchase tax. The Company is in negotiations with the IAA regarding the said extension. The Parties operate in accordance with the terminated agreement.
Pursuant to the above agreement, the IAA allows the Company to use the property and access roads thereto, and further allows the Company to operate airline services in and/or through the property. According to the Agreement, the IAA has the right to demand that the Company vacates an area and/or building required to it for the airport's operation, safety, development or security.
In 2005, the Company paid authorization fees for the above right of use in the amount of USD 960 thousands and from 2005 and thereafter, said authorization fees increased by 7.4% per year until the end of the contract term, provided the maximum annual payment does not exceed USD 4 million. Pursuant to the amendment of the agreement dated October 19, 2004, in addition to the payment for the land, the Company pays to the IAA yearly usage fees for certain buildings and facilities, for which the depreciation period has ended. The payment rate increases gradually (in accordance with and subject to the quantity and type of buildings terminating the depreciation period each year, according to a depreciation period of 40 years after the building's construction). The expenditure in 2015 was approximately USD 4.5 dollars.
(D) Terminal 3
The Company has entered into authorization agreements with the IAA, which provide authorization to operate the King David Lounge as well as operational areas in Terminal 3. The agreements are in effect until November 1, 2014 and negotiations are conducted to extend them.
In the framework of the operation of Terminal 3, the construction of an aircraft maintenance center in proximity to Terminal 3 was considered. For this purpose and as part of the preparations for the transfer to Terminal 3, in April 2000 a Principles Agreement was signed between the Company and the IAA for the construction of a
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maintenance center, hanger and auxiliary buildings in proximity to Terminal 3. The IAA Board of Directors approved the agreement, but it was conditioned on the execution of a detailed agreement between the parties and approval thereof by the Company's Board of Directors. The Company received a letter from the IAA, whereby the IAA would not be able to meet the Agreement and allow the Company to build a hanger for large aircraft in the location agreed upon. In light of this letter, the parties are in negotiations for finding an acceptable solution.
(E) Real Estate Lease in the World
The following table sets out real estate properties the Company leases around the world (without security areas) as of December 31, 2015:
Category Cost in USD Area in sq. m. thousands
Far East 460 930
Europe 2,990 4,940
North America and South 2,300 3,390 Africa
Total rent worldwide 5,750 9,260
(F) El Al House in Tel Aviv
The Company moved its offices from El Al House in Tel Aviv to Terminal Park in Or Yehuda, starting from May 2013. The sales shop has been removed to a commercial area in a building for preservation in Rothschild Boulevard 27 in Tel Aviv, commencing February 2013. The area of the offices and the commercial space in El Al House were leased for a period of 5 years, with two option periods.
9.1.2. Accessories, Spare Parts and Engines for Replacement
The Company keeps accessories, spare parts and engines for replacement in its warehouses, at a reduced cost of approximately USD 105.3 million as of December 31, 2015. In the past few years, the Company began purchasing external logistic support services from designated suppliers abroad, as supplement for spare parts purchased by the Company. For further details on fixed assets, see Note 9 to the Financial Statements.
In this respect it should be noted that he Company operates to apply and implement a system that gathers the information, planning, control, operation and monitoring of the aircraft maintenance operations in Israel and art the Company's stations abroad. The preparation of the system (including interfaces and data conversion) is expected to continue until the end of 2016, then the system will be launched. The use of the system is expected to lead to improvements in the following areas: enhanced reliability surveillance of systems and A‐57
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devices, improvement in the planning of maintenance works, improvement in the logistic management and in the quality and availability of operational and administrative information.
9.2. Insurance
The insurance coverage of the Company substantially refers to two aspects: insurance of the Company's property of all types and legal liability insurance for bodily injury and property damage.
The Company's airline liability insurance, including insurance coverage for third party damages caused by acts of terror and wars, is limited to a cap of USD 1,500 million per occurrence. The Company estimates that the coverages specified above are sufficient for providing appropriate insurance coverage for its operations.
Both hull insurance for aircraft owned by or serving the Company against all risks (Hull All Risk Insurance) and insurance against loss or damage of aircraft which the Company agreed to be responsible for insurance thereof, are based on an "agreed value" of each aircraft and includes self-coverage levels acceptable in the aviation industry.
Aircraft hull insurance against war and similar risks covers, inter alia, acts of war, hostilities, civil war, strikes, riots, malicious damage, abduction and boycott.
In addition, the Company is covered with various insurances, which, as estimated by the Company, are sufficient for providing appropriate insurance coverage for the principal risks to which the Company and its employees are exposed. Such insurances include insurance policies covering employers' liability, buildings insurance against fire, earthquakes and so forth, health and personal accident insurance and more. The insurance policies are renewed annually.
For details of joint insurance agreements entered into with the Controlling Shareholders – Knafaim, see Note 24C (1) to the Financial Statements.
The Company's overall cost in 2015 in respect of the insurance premiums set out above was approximately USD 6.7 million.
9.3. Intangible Assets
The Company holds the title to the "El Al" trademark in Israel. This trademark is the anchor brand of the Company, both in its name and designed logo as well as in the trademarks "El Al Economy Plus" and "Economy Class Plus". Trademark registration in Israel is valid for limited periods prescribed by law, and is renewable at the end of each period. Additionally, the Company is the holder of the title to the "El Al" trademark (name and designed logo) in the United States and in other countries around the globe. The Company estimates that the "El Al" trademark has an economic life span of many years, in view of its being part of the Company's name, the many years of using this trademark and its dominant market status. It should be noted that the Company is in the advanced process of registering the "UP" and "Fly Car" trademarks.
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Various domain names have been registered in the name of the Company, in Israel and abroad, with varied validity periods, in accordance with registration rules of each country, and an extension option.
9.4. Human Capital
9.4.1. Organizational Structure
The ongoing management of the Company is in the hands of the CEO, who, for the purpose of fulfilling his role, is assisted by the management team at the Company's headquarters, and it consists of the Chief Finance Officer, Chief Maintenance and Engineering Officer, Chief Trade and Aviation Relations Officer, Chief Human Resources and Administration Officer, Chief Customers and Service Officer, Chief Operations Officers, Chief Computing Officer, Legal Counsel and the Company's Auditor. For details regarding the terms of employment of the Company's CEO, see Notes 24E and 25B to the Financial Statements.
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9.4.2. Employees
On December 31, 2015, 6,109 workers were employed by the Company, of whom 3,779 are permanent employees (of whom 309 work at the Company's representations abroad (including 24 Israeli stations) and 2,330 temporary employees (of whom 92 are abroad)34. The following table sets out the numbers of permanent and temporary employees as of December 31, 2015, and December 31, 2014:
Type of Employee December 31, 2015 December 31, 2014
Permanent Employees 3,779 3,788
Temporary Employees 2,330 2,135
Total Employees 6,109 5,923
The sharp seasonality of the industry requires allocation of manpower according to demand, by means of a variable number of temporary employees. The Company's security apparatus includes, among others, state employees whose salary is partially paid by the Company (based on allocation of security expenses between the Company and the State – for details, see Section 9.11.12 below).
The following table sets out the distribution of the Com0pany's permanent employees in Israel and abroad, by area of occupation, as of December 31, 2015 and December 31, 2014:
Position December 31, 2015 December 31, 2014 Senior employees 45 44 Marketing, Sales and cargo 427 426 Pilots 550 551 Stewards 372 378 Ground, security, control, operations and 701 657 service staff Maintenance, repairs, engineering and review 1,086 1,114 Auxiliary service 598 618 Total Permanent Employees35 3,779 3,788
34 Segmentation of temporary employees by activity was: flight attendants (1,043), Ground and Service Staff (693), maintenance and engineering (276), marketing, sales and cargo (34), overseas (92), the remaining temporary employees (192) are engaged in other activities. 35 Including permanent employees of Generation A and Generation B (Next Generation). A‐60
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9.4.3. Material Dependence on a Specific Employee
The Company has no dependence on a specific employee and/or office holder.
9.4.4. Training and Guidance
The Company's Training Center is authorized as a "Training Establishment" pursuant to the Aviation Regulations (Training Establishments), 5739-1979. The Training Center qualifies workers and conducts trainings for most professions required by the Company: pilots, aircraft technicians, flight attendants, traffic officers, ground attendants, booking and ticketing staff, marketing and sales managers, medium-level management, etc. In addition, the Company conducts courses and trainings for travel agents and cargo agents in Israel and abroad.
In 2015, the Company invested approximately USD 13.4 million in training and guidance of employees36.
9.4.5. Exemption from the Application of the Budget Foundations Law
The Company has an exemption from the application of the Budget Foundations Law, since 2005.
9.4.6. Special Collective Agreements
In addition to labor legislation and extension orders, the terms of employment of the Company's employees working in Israel, except for senior employees and other workers employed under personal agreements, are regulated in special collective agreements executed from time to time between the Company and the New Histadrut Labor Federation (above and below: the "Histadrut") and in procedures published from time to time by the management.
9.4.6.1. The following is a concise description of the main collective agreements applicable to the Company and its employees:
(A) Special Collective Agreement for the Company's Permanent Employees
All permanent employees of the Company in Israel, including aircrews, are subject to a special collective agreements. The agreement does not apply to senior employees (senior officers and others) who have personal employment agreements, nor does it apply to temporary employees who have their own special collective agreement. The agreement governs all the terms of employment of the permanent employees and determines, inter alia, work procedures, basic rights and obligations, productivity incentives, appointments and placement of workers abroad, internal tenders, insurance, pension arrangements, dismissal procedures, handling of disciplinary violations, rights to free or discounted airline tickets and a dispute resolution mechanism.
36 Such cost includes direct training budget, payments for simulator training, including auxiliary expenses, as well as employee wages during their training days. A‐61
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The agreement forbids strikes and job actions, unless the strikes are announced by the Histadrut subject to the Settlement of Labor Disputes Law, 5717-1957 and the Histadrut's Constitution, including a secret vote of all the workers. Pursuant to the agreement, all the permanent employees of the Company are rated by a factory workers' salary rating which have no connection to the national ratings. There are several ratings: a rating for ground workers, a rating for "senior" aircrew personnel and a separate rating for "new" aircrew personnel with lower salaries, a rating for "senior" flight attendant personnel and a separate rating for "new" flight attendant personnel with lower salaries.
On June 22, 2015, the Company and the New Histadrut Labor Federation, the Professional Union Division - Transport Workers Union, and the Employee Representation of all El Al employees, entered into a special collective agreement which constitutes an interim agreement (hereinafter: the "Interim Agreement"), under which the parties established understandings related to the labor relations within the Company. The Interim Agreement was approved by the Board of Directors of the Company on June 24, 2015. From the date of execution of the Interim Agreement until October 31, 2015, negotiations were conducted between the parties with respect to each one of the professional sectors of the Company, with the aim to execute a new special collective agreement for the years 2015-2018 (the "2015 Agreement"); however, due to the fact that no further agreements were reached, on November 1, 2015 the Interim Agreement became, and was defined as, the 2015 Agreement. It should be noted that with respect to the Pilot Sector, by August 31, 2015 the parties have not reached any agreement, thus arbitration proceedings were conducted, chaired by Judge (Retired) Steve Adler, who delivered his decision as regards a number of issues raised before him, which concern the Pilot Sector. The Interim Agreement contains, inter alia, the following issues: a. Salary increase of 3%, starting from September 2015, to all employees governed by the said agreement, of which a salary increase of 2% applies retroactively for a period commencing January 1, 2015 and ending on the aforesaid date. b. Right to contingent salary increases of 0.5% to 1%, subject to the Company's profits and to terms provided for in the Interim Agreement. c. One-time signature grant of USD 3 million that was distributed to all the Company's employees to whom the said agreement applies. d. Termination of employment of 50 permanent employees – 35 employees terminated their employment by December 31, 2015 and 15 other employees will terminate their employment during the period of the 2015 Agreement. e. Obligations of the Employee Representation and the Histadrut to maintain complete industrial peace regarding the issues regulated in the Interim Agreement. For further details, see Notes 15J and 15K to the Financial Statements
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(B) Special Collective Agreement regarding Temporary Employees' Employment ("Temporaries Agreement")
The terms of employment of the temporary employees are regulated in a special collective agreement, which was extended on May 20, 2004 until December 31, 2008. The agreement provides for the maximum employment duration of temporary employees, depending on the type of work and the department in which the worker is employed. The agreement provides for all the terms of employment of temporary employees, including wages, pension contributions, contributions to a comprehensive pension scheme, sick pay insurance, entitlement to airline tickets, etc. The validity of the agreement was extended in the special collective agreement from November 2, 2008 to December 31, 2012. In December 31, 2013 the agreement was extended for another year and from this date on, the agreement is for an unlimited period, and each party may notify the cancellation thereof by 60 days' notice.
In February 2011, a special collective agreement was executed with respect to temporary flight attendants and temporary workers in the administrative sector. Pursuant to the agreement, an employee pool was created, containing up to 150 workers of each sector, who will continue to be employed as temporary employees for a total period of up to ten years. The term of employment of these workers are the same as those of permanent Next Generation employees, except with respect to training fund. These workers are subject to disciplinary proceeding applicable to Next Generation employees. Incompatibility dismissal of such employees will be carried out by a parity committee, by agreement or arbitration award. On December 31, 2015, the Company and the Histadrut signed a Letter of Extension to this collective agreement, whereby the term of employment of the temporary employees to whom said Letter of Extension applies will be extended for another period until June 30, 2016. The parties conduct negotiations to extend the term of employment of these temporary employees for an additional period of three years.
(C) Special Collective Agreement (Ground Workers – "Permanent Middle Generation")
The agreement was executed on May 20, 2004 and applies to employees who started working prior to January 1, 1999. The agreement was intended to apply to them different terms than those stipulated in the First Generation agreement and those stipulated in the Next Generation agreement. The agreement was extended under the 2015 Agreement and shall be in effect until August 31, 2018.
(D) Special Collective Agreement (Flight Attendant Personnel – "Permanent Middle Generation")
The agreement was executed on May 20, 2004 and applies to flight attendant personnel who started working prior to September 1, 1996 and flight attendant personal who started working between January 1, 1996 and December 31. The agreement was intended to apply to them different terms than those stipulated in the First Generation agreement and those stipulated in the Next Generation agreement.
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The agreement was extended under the 2015 Agreement and shall be in effect until August 31, 2018.
(E) Special Collective Agreement (collaterals)
The agreement was executed on May 20, 2004 and obligates the Company to maintain a balance between all employees whose employment is governed under special collective agreements (First Generation, Middle Generation, Next Generation), to avoid preferring one sector over the other, and addresses the issue of future salary increases to different sectors. The agreement determines, inter alia, that on certain dates, the number of permanent employees working in certain sectors will not be less than the number prescribed in the agreement. The agreement was extended under the 2015 Agreement and shall be in effect until August 31, 2018.
(F) Generation A Employees Special Collective Agreement for Depositing Severance Pay Monies in a Fund in the Employee's Name
The agreement was executed on December 22, 2011, in view of the Legislative Arrangement which entered into force on January 1, 2011 and which does no longer allows to deposit severance pay in a Central Compensation Fund. Pursuant to the agreement, severance pay of a First Generation employee, which was deposited in a central fund until December 31, 2010, will be deposited, starting from January 1, 2011, into the compensation component of a provident fund in the employee's name.
9.4.6.2. The following are details regarding legal proceedings in the field of labor relations:
In December 2015, the Company filed a party's motion in a collective dispute against the representatives of the Company's pilots in the Employee Representation, the Histadrut and the Employee Representation, claiming that the Company's pilots illegally conduct strikes and job actions. In January 2016, the Court issued its decision in the temporary relief motion, ruling that the Company failed to prove that job actions are occurring, therefore the Company's motion for temporary relief was denied. In view of the understandings reached between the Company and the Pilots Representation, the Company decided not to file a motion to appeal the Regional Court's ruling. Throughout January to March 2016, negotiations for updating provisions in the collective agreement referring to the Pilot Sector were held between the Company and the pilots' representatives. As of the Date of the Report, said negotiations have not materialized in a binding agreement and during this period, job actions and disruptions continued to affect the Company's flights. During the job actions and in order to deal with the disruptions, the Company had to lease aircraft under "wet lease" as described in Section 7.11 and 8.10 above. On March 4, 2016, the parties reached an understanding whereby accelerated negotiations will be conducted for a short period of time and the representatives of the Pilot Sector shall request the pilots to refrain as much as possible from splitting flights. The operative meaning of this understanding is that the disruptions to the Company's flights will cease.
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In light of the understandings reached as aforesaid between the Pilots' representatives and the Company's management, on March 8, 2016 the Company filed a motion to dismiss the legal proceeding described above, and on March 9, 2016 a judgment was given, whereby the proceeding was dismissed. It shall be noted that in January 2015, the Company filed a party's motion in a collective dispute and a motion for temporary and provisional relief against the Histadrut and Employee's Representation, claiming that the Company's pilots illegally conduct strikes and job actions. On February 21, 2015 the Regional Court issued a decision in the motion for temporary injunction, ruling that the action taken by the Company's pilots was organized and coordinated, thus constituting an illegal strike. By doing so, the Court granted the Company's motion and issued temporary injunctions. The Histadrut and the Employee Representatives filed a motion to appeal to the National Court, but the motion was rejected.
In March 2015 the Histadrut filed a party's motion in a collective dispute and a motion for temporary relief against the Company, claiming that the Company is not entitled to send the Company's pilots for training that include a stay of more than 9 days outside the base. The Court decided to consolidate the hearing on the motion for temporary relief and the main motion. On March 22, 2015 the motion was dismissed, after the Court accepted the Histadrut's motion to dismiss.
In accordance with the decision of the International Civil Aviation Organization ("ICAO"), in November 13, 2014, the ICAO Decision on the amendment of the Chicago Convention, following which pilots above 65 years of age will no longer be allowed to fly aircraft for commercial flight purposes. Following the ICAO Decision, on August 13, 2014 the CAAI resolved that Israel shall be bound by the new international standard immediately upon becoming effective; that once the ICAO Decision becomes effective, all personal exemptions granted by the CAAI Director to the Company's pilots will be cancelled (said exemptions enabled them to fly beyond the age of 65, despite the provisions of the Aviation Regulations, as co-pilots); and that the CAAI Director would not grant further exemptions from the provisions of the Aviation Regulations to pilots reaching the age of 65. Following said resolution, Israel Air Line Pilots Association (hereinafter: the "Pilot Association") filed a petition to the Court of Administrative Affairs of the Central District against the CAAI resolution. On November 13, 2014, the Court dismissed the petition to the extent it concerns the CAAI resolution whereby the new international standard is also binding upon Israel from its entry into force, but accepted the petition with respect to the CAAI resolution to cancel the personal exemptions granted as aforesaid and the declaration to refrain from granting exemptions. Several appeals were filed to the Supreme Court regarding the CAAI resolution. An agreement between the CAAI and the Pilot Association, which was given the force of a Supreme Court judgment on April 15, 2015, de facto approved the CAAI's position (which is based on the ICAO Decision) – that pilots should not be allowed to fly after the age of 65. Notwithstanding the foregoing, the judgment establishes a special arrangement for pilots who held an existing exemption as well as pilots who have reached 65 three months after the District Court issued its judgment, while emphasizing that the special arrangement "grants no exemption to airlines with respect to assigning these pilots to commercial flights". In addition,
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it was determined that any other application for exemption shall be heard in accordance with the Aviation Law.
Furthermore, the Histadrut filed a party's motion for relief, as part of a collective dispute, according to which the Company shall act in order that the CAAI return the employment permits to pilots above 65, and avoid changing the terms of their employment. In addition, the Court was requested to determine that the Grounding Chapter contained in the Collective Agreement applies to pilots above 65 years, and who are unable to serve as pilots following the entry into force of the international standard.
In July 2015 the Regional Labor Court in Tel Aviv issued a judgment on a party's motion in a collective dispute, which was brought by the New Histadrut Labor Federation, El Al Workers' Committee and others against the Company, alleging that the Grounding Chapter of the collective agreement should be applied to the Company's pilots who have crossed the age of 65 (following the resolution of the ICAO and the CAAI whereby pilots over 65 can no longer serve as active pilots in airlines). The hearing in this case was consolidated with the party's motion filed by the company against the Pilots' job actions that took place in November 2014 on these grounds.
The Labor Court accepted the Company's position, whereby this is not a case of "grounding" nor "temporary grounding" under the collective agreement, due to the fact that "grounding" is an intentional state of mind where a pilot loses his qualification and license, as opposed to a condition where the Company cannot employ a senior pilot as pilot, since the countries above which and to which the Company flies do not agree that the pilot would fly above them and to them. The Court ruled that this is not the "grounding" of a pilot but a "market failure" condition the Company encountered without any guilt on its part.
The Court further ruled, with respect to wages, that the Company's demand to allow pilots over 65 to earn the same wages as these pilots earned from working as pilots in the air, while working in "ground" roles is not reasonable, because this would be deemed discrimination against other senior employees in the same roles. On July 25, the Histadrut filed an appeal which is currently awaiting judgment.
9.4.7. Employee Pension Liabilities
For further details regarding the pension agreement, directors' insurance agreement, severance pay deficit and deficit cover as well as details of the Company's obligation for employee benefits, see Note 15 to the Financial Statements.
9.4.8. Legislative Amendments in the Field of Labor Relations
In January 2015, the Minimum Wage Law was amended in a manner providing for a gradual increase of the minimum wage in the economy, commencing April 1, 2015 (first minimum wage increase) and ending on January 1, 2017, when the minimum wage in the economy is NIS 5000.
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In February 2016, the Control of Financial Services (Provident Funds) (12th Amendment) Law, 5775-2015 (hereinafter: "Amendment 12") entered into force. Amendment 12 determines that it is impossible to correlate the deposit rate with a certain type of fund as used to be prior to the approval of Amendment 12. In view of Amendment 12, in February 2016 a general collective agreement was executed between the Coordinating Bureau of Economic Organizations and the New Histadrut Labor Federation with respect to increasing the pension insurance contributions in Israel (the "Agreement"). It should be noted that the Ministry of Finance announced that Amendment 12 will be modified in accordance with the Agreement, retroactively. Pursuant to the Agreement, pension contributions for the employees will gradually increase in two increments – in July 2016 and January 2017. It was agreed that the parties will contact the Minister of Economy in a request to apply the provisions of the Agreement to all employees in the country.
In February 2016 an amendment to the Annual Vacation Law, 5711-1951 was approved. According to said amendment, employees with a seniority of up to 4 years will be entitled to two additional vacation days to be granted in two increments – one vacation day commencing July 1, 2016 and the other vacation day commencing January 1, 2017.
9.4.9. Entitlement to Air Tickets
In accordance with IATA Regulations, the Company's employees, including retired employees, are entitled to receive, for themselves and for their family members, air tickets service – vacation (free or at discount), mostly on an available seat basis. This right is anchored in the employment agreement (and with respect to senior executives (except for directors) – their personal employment agreements), personal retirement agreements, the Company's procedures and professional guidelines of Human Resources Division. The maximum amount of free or discount air tickets is limited by the provisions contained in the employment agreements, personal or retirement agreements and the Company's procedures.
9.4.10. Consensual Early Retirement Plan for Employees
For details regarding consensual early retirement plans for employees, see Note 15K to the Financial Statements.
9.4.11. Local Employees at the Company's Overseas Representative Offices
Most of the Company's employees overseas, except for Israelis positioned overseas, are employed under collective labor agreements between the Company and the professional union in that country, or labor agreements with the employee representation, whereas a small number of these employees are employed under agreements between the employers' organization (the foreign airlines) and the umbrella union of airlines' employees, or under other agreements. The terms of employment of the Company's employees in certain countries are not regulated in a collective agreement, but rather determined by the Company on terms customary in the aviation industry or the national airlines of those countries. In some of El Al's overseas stations, employees are employed under personal agreements or through a contractor.
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In some of the overseas stations, the law or the agreement imposes a severance pay obligation whereas other stations are subject to national or other pension insurance obligation.
9.4.12. Israeli Employees Stationed Overseas
The Company employs abroad, inter alia, Israeli resident permanent employees who are sent to fill managerial positions abroad (hereinafter "Posted Employees"). As of December 31, 2015, 24 employees out of the overall number of the Company's overseas employees (309) were Posted Employees.
Similarly to State emissaries abroad, the salary of Posted Employees during their stay abroad (hereinafter "Overseas Salaries") is different from their Israeli salary, taking into account the standard of living and taxation abroad, as well as the fact that their salary is subject to income tax and social tax, both abroad and in Israel. The Overseas Salaries, including participation in vehicle maintenance, is payable to the Posted Employee on a "net salary" basis (taxes, including social tax and the grossing-up abroad, are paid by the Company).
Should the Overseas Salary, or payments exceeding the tax-exempt ceiling, be subject to tax in Israel, then the Company shall bear the Israeli tax. In addition to the Overseas Salary, the Company pays the rent of Posted Employees as well as the tuition of their children. These payments (up to a certain ceiling) are tax exempt in Israel, but are taxable under the laws of the various states. The Israeli salary of a Posted Employee (a salary determined by rank and status as if he was employed in Israel) serves as the effective salary for the Company's provisions for compensation, benefits (or pension and managers' insurance) and training fund, as provided for in the Posting Letter.
9.4.13. Welfare Services and Payments
In addition to wages, some of the Company's permanent employees receive welfare services and payments, which include, among other things: subsidized employee meals and related tax gross up, employee medical tests, contribution to employees' health and welfare insurance and tooth insurance, clothing, uniform and partial participation in high school education. Some of these benefits are provided to temporary workers as well.
Employees may, under certain terms, obtain all-purpose loan guarantees. These loans are provided for a period of up to 60 months by the Company and Yahav Bank, under terms approved by the Ministry of Finance.
9.4.14. Restrictions on Aircraft Wet Lease
Pursuant to a letter of December '99 from the Company's CEO to the Chairman of the Professional Union Division of the Histadrut, the Company shall limit itself for a future lease of up to four airplanes from Israeli airline companies, so that flight hours performed by Israeli airlines for the Company do not exceed 10% of the Company's overall flight hours (including wet lease flight hours performed by the Israeli airlines and excluding aircraft leased from foreign airlines), provided they are performed on specific aircraft models on routes to and from Israel to destinations within a flight range of up to 2,400 nautical miles. It was further A‐68
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determined that the Company shall continue to plan the employment of its aircrews in a volume of 83 flight hours per month on an annual average, as it used to do until then (currently, the planning volume is 85 flight hours per month) and in the event of a significant change in external circumstances that would lead to changing this policy, the Company's CEO shall discuss the matter with the Chairman of the Professional Union Division of the Histadrut, before reaching a decision on the matter.
Additionally, in July 2001, a letter on the subject of cargo aircraft leasing policy was sent by the Company's CEO to the Chairman of the Professional Union Division of the Histadrut, stating that, in case of limited availability of aircrew or aircraft, the Company will be leasing cargo aircraft in accordance with the terms set out in the said letter.
It should be noted that the Labor Court has recognized the authority of the Company to make such leases in order to provide response to its commercial needs, in consultation with the Employee Representation, and the Employee Representation's position whereby the Company should be obligated to negotiate the leases, in and of themselves.
For details regarding "wet lease" transactions carried out by the Company in 2015, see Sections 7.11.4 and 8.10 above.
9.4.15. Officers and Senior Management Staff
Board of Directors
Chairman of the Board
Mr. Amikam Cohen serves as the Chairman of the Board of Directors of the Company, commencing January 1, 2009. For details regarding the employment agreement of the Chairman of the Company's Board of Directors, including changes in his terms of employment as approved at the General Meeting of the Company dated January 8, 2014, see Note 24D to the Financial Statements of the Company.
Directors
As of the date of publication of the Report, 10 members serve on the Board of Directors of the Company. The Company's Board members are not employees of the Company.
On November 29, 2015 an Annual Shareholders Meeting of the Company was held, at which the following resolutions has been adopted: to approve the re-appointment of directors serving on the Company's Board (except for external directors): Messrs. Amikam Cohen, Tamar Moses Borovitz, Yehuda (Yudi) Levy, Pinchas Ginsburg, Shlomo Hanael, Sofia Kimerling and Ruth Dahan (Portnoy), until the end of the next Annual Meeting, and to approve to appointment the first-time appointment of Mr. Eli Defes to serve as director of the Company, until the end of the next Annual Meeting.
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Senior Management
On March 20, 2014, Mr., David Maimon began his term of office as the Company's CEO. Mr. David Maimon served as vice president of the Company since 2005, as starting from 2011 he served as Vice President Commercial & Industry Affairs.
For details regarding the employment agreement of the Company's CEO, see Notes 24E and 25B to the Financial Statements.
For details regarding the Senior Management of the Company, see Regulation 26A of Chapter D of the Company's Periodic Report – "Additional Details of the Corporation".
On December 31, 2015, the organizational structure of the Company has changed upon the merger of the Sales Division and the Commercial & Industry Affairs Division, and on February 28, 2015, Mr. Offer Gat ceased serving as Vice President Global Sales of the Company.
On June 1, 2015, Captain Tal Backer began serving as Vice President Operations of the Company.
On January 1, 2016, Attorney Omer Shalev ceased serving as Legal Counsel and Company Secretary and from that date the position of Legal Counsel and Company Secretary was split, thus Attorney Omer Shalev serves as the Company's Legal Counsel through an external law firm, and Attorney Ayelet Oren was appointed Company Secretary.
In addition to the CEO, other senior employees are employed under personal employment agreements. The salary of senior employees under such agreements is updated in a manner that the overall salary is linked to the Consumer Price Index and is adjusted each year in January, less cost of living allowances (COLA) that have already been paid.
The Company used to approve one month's salary for each year of employment in addition to severance pay for senior employees, and a provision was recorded in the Financial Statements in respect thereof.
Internal Programs
For details of the Internal Enforcement Program in the field of securities and corporate law and the Enforcement Program in the field of antitrust, see Section C.7 of the Board Report.
Remuneration Policy for Senior Officers
On January 8, 2014, the Shareholders Meeting of the Company approved, by a special majority, a remuneration policy for senior officers, in accordance with Amendment 20 of the Companies Law. For details, see Section C.6 of the Board Report.
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9.5. Raw Materials and Suppliers
9.5.1. Fuel
(A) The main raw material used by the Company consists of aircraft jet fuel. Jet fuel is one of the Company's major expenditure components, as with any airline. In 2015, the Company's jet fuel expenses amounted to approximately 30.2% of the operating expenses of the Company, compared to approximately 39% in 2014.
(B) Jet fuel prices materially affect the Company's profitability. The Company estimates that, in terms of operations as of the date of the Report, each increase of 1 cent in the price of one gallon of jet fuel for a year increases the Company's expenses for jet fuel by approximately USD 2.5 million.
(C) Since 2001, the Company takes action to hedge part of the estimated jet fuel consumption. The Board for Directors determines the Company's policy on jet fuel prices hedging, the term of the hedge and the hedge rate out of the total jet fuel consumption for the same period, and a special Market Risk Management Committee of the Company's Board examines, on a regular basis, the hedging transactions carried out by the Company's Management. The Company requests proposals from several financial institutions and fuel companies with which the Company enters into framework arrangements, conducts commercial negotiations and carries out hedging transactions. Account settlement between the parties is made once per period, in such a manner that, if the average market price in that period is higher than the hedged price, the Company receives reimbursement of the price difference during that period, multiplied by the relevant quantity for that period, whereas if the monthly average market price is lower than the hedged price, the Company pays the difference multiplied by the relevant quantity for that period. In 2015, the Company paid (a cash flow amount of) approximately NIS 91 million in respect of hedging transactions.
(D) In 2015, the average price of jet fuel was lower by about 43% before hedging activity, compared to its price in 2014. The impact of this price decrease on the financial results of the Company is material. For details, see Section A3 of the Board Report.
(E) The Company purchases fuel in Israel and abroad. In 2015, the Company purchased fuel in Israel from three suppliers chosen in a tender process, as approximately 70% of its fuel purchases in Israel were made from one of these suppliers (the Paz Fuel Company).
With respect to fuel purchase in Israel in 2016-2017, it should be noted that in October 2015, the Company issued a Request for Proposals (EFP) to fuel supply companies and refueling services companies, for jet fuel supply and refueling services in Israel. Following negotiations held with the companies, in December 2015 the Company's Board of Directors approved the agreements with the fuel supply companies "Paz", "Sonol" and "Delek", for supply of 60%, 30% and 10% of the Company's annual fuel consumption for 2016-2017, respectively. In addition, the Company decided to enter into agreements with refueling companies (franchisers of the IAA) "Paz Aviation
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Services" and "Mercury", under which each of these companies shall supply 50% of the fueling services provided to the Company at Ben Gurion International Airport in 2016. The aggregate annual amount of the agreements (for jet fuel supply and fueling services in Israel) is estimated at approximately USD 186 million (jet fuel prices as of September 2015).
(F) Outside Israel, the Company purchases fuel from a number of suppliers, including fuel companies supplying jet fuel at a significant number of airports. The contracts are for periods of two years, except in cases where it is impossible to enter into one year contracts. Most contracts are executed with the suppliers after winning the tender and following commercial negotiations conducted by the Company with the suppliers, except for stations where there is only one supplier.
(G) In February 2015, the Company issued a Request for Proposals ("RFP") to fuel supply companies abroad, commencing on July 2015 for a two-year period. Following the issue of said RFP, the Company entered into agreements for the purchase of jet fuel at most airports abroad, effective until June 30, 2017.
(H) The Company examines from time to time the advisability of importing jet fuel independently, compared to purchase from local suppliers, and performs such actions in accordance with market conditions. In 2015, there was no import of jet fuel.
(I) In 2015, the Company purchased from one supplier (the Paz Fuel Company) about 35% of its total fuel purchases that year (in Israel and abroad). The Company works with four other suppliers, from each of which it has purchased more than 5% of its total fuel purchases that year. The Company believes that the volume of purchases from the main supplier in Israel may result in dependency on said supplier for as long as there are no appropriate and immediate alternatives for jet fuel supply at Ben Gurion Airport.
(J) In 2003, the Company started operating under the policy of maintaining an inventory of jet fuel purchased from suppliers in Israel. As of December 31, 2015, the Company maintained an inventory of jet fuel purchased from suppliers in Israel and abroad, in a total amount of USD 4.5 million.
(K) In addition to the fuel suppliers, the Company receives refueling services in Israel from other suppliers.
9.5.2. Aircraft
(A) All aircraft operated by the Company are manufactured by Boeing, The Company has a material dependence on Boeing, as specified in Section 7.1.7 above. Nevertheless, the Company estimates that the probability of termination of engineering support is low.
(B) For details regarding aircraft and engines purchase and sale agreements, see Notes 9D and F to the Financial Statements.
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9.6. Working Capital
9.6.1. Inventory
The Company has a raw materials inventory, which includes an inventory of jet fuel consumption, duty free products sold on its flights as well as consumable inventory (chemicals, food and provisions) used by passengers on its flights. The following is a calculation of average inventory days:
2015 2014
Jet fuel inventory 4 4
Inventory of food and provisions 51 45 to passengers
Policy on Duty-Free Products Inventory
The Company purchases about 80% of the duty-free products from DFASS, and the remaining are Israeli products purchased directly from local suppliers (about 20%).
Alcoholic beverages and cigarettes are supplied directly to the duty-free warehouse, on a quarterly basis, whereas the remaining products are supplied to El Al stations abroad, and transported by the Company to Israel on availability basis.
The Company is entitled to return any product (other than food, tobacco or branded products), provided the products remain in their original packaging. The Company is responsible for delivering the products, delivery and insurance costs included, to the place of delivery thereof (cigarettes and alcoholic beverages from the duty-free warehouse, the other products to the Company's station overseas).
Storage of Goods in the Customer Service Warehouse
All purchased products are stored in the Duty-Free Warehouse (a separate unit in the Customer Service Warehouse, with a limited accessibility). Products requiring designated storage conditions (such as chocolate) are stored at refrigerated conditions. The value of the inventory in the warehouse, at any given moment, is about one-and-a-half-million-dollar in average. For details regarding the volume of inventory, see Note 7 to the Financial Statements.
9.6.2. Policy on Cancellation of Reservations
Generally, the Company's policy maintains that a customer is entitled to cancel the reservation, without charge, until the airline ticket is issued ("ticketing"). The customer may also cancel certain tickets even after "ticketing", at times without payment of cancellation fees and at other times with payment, depending on the terms of the ticket. However, some airline tickets can never be cancelled by the customer after "ticketing". In general, the higher the
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airfare level is, the lower the tendency to allow cancellation or change thereof without or with higher cancellation fees.
The foregoing shall apply so long as the law does not determine otherwise. In this regard it shall be clarified that the Consumer Protection Law, 5741-1981 and the Consumer Protection Regulations (Cancellation of Transaction), 5770-2010, provide for special provisions relating to the option to cancel the transaction, which, on the date on which they apply, allow cancellation subject to cancellation fees at a rate of 5% of the value of the transaction, or NIS 100, whichever is lower (for details regarding a legal proceeding conducted in connection with cancellation fees, see Note 16B (2) to the Financial Statements).
9.6.3. Policy on Liability for Services
The Company's liability for damages (bodily injury and property damage) incurred in the course of international air transportation was determined by international treaties adopted by the Air Transport Law, 5740-1980 and orders issued thereunder. Additionally, the Company operates in accordance with IATA Guidelines on various issues related to liability for passengers and baggage. The Company's liability in respect of rejection of passengers due to over-booking is provided in the Aviation Services Law (Compensation and Assistance due to Flight Cancellation or change of Conditions), 5772-2012, which imposes on the Company the obligation to provide passengers whose flight has been delayed or canceled with a variety of remedies, depending on the duration of the delay or the circumstances of the cancellation, such as: assistance (food, beverages, lodging), reimbursement of proceeds or an alternative flight and even financial compensation. In all matters pertaining to the rejection of passengers from flights and delays in flights from member states of the EU, Regulation 261/2004 of the European Parliament applies. In addition, and with respect to rejection of passengers from flights and delays in flights from the U.S., Enhancing Airline Passenger Protections; Final Rule, 2011 applies. For details regarding legislative amendments in this field in Israel, see Section 9.11.2(I) below.
9.6.4. Credit Policy
(A) Credit to customers: travel agents or baggage authorized by IATA enjoy special payment arrangements in accordance with IATA Regulations (an agent not authorized by IATA is committed to provide a guarantee or cash payment). The Company provides agents in Israel with credit for periods ranging on average between 15 and 90 days. As a rule, direct sales of air transportation to customers are made in cash, except for credit sales to government offices and certain commercial customers.
(B) Credit from suppliers: the Company receives credit form its suppliers in Israel and abroad, for periods ranging between 30 and 90 days, in accordance with the type of supplier and the agreement entered into therewith (except for fuel suppliers).
(C) The following table presents average volume of credit and average credit periods with respect to the Company's customers and suppliers in each of the years 2015 and 2014:
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2015 2014 Average volume Average Days Average volume Average Days of credit To Pay of credit To Pay (in USD millions) (in USD millions) Customers 147 26 154 27 Suppliers 147 45 150 39
(D) It shall be noted that the difference between customers' credit policy and suppliers' credit policy arises, inter alia, from the fact that suppliers' credit policy is determined by the Company, among other things, in consideration of market conditions, liquidity and the customary policy in the field. On the other hand, customers' credit policy is determined, in most cases, by the customary practice of the aviation industry and in accordance with guidelines and work procedures acceptable to IATA and to the travel and baggage agents.
9.6.5. Working Capital Deficit
As of December 31, 2015, the Group has a working capital deficit of approximately USD 449 million compared to approximately USD 519 million at the end of the previous year. As at the end of 2015, the current ratio of the Company was approximately 47%, compared to approximately 36% at the end of the previous year.
For details of the factors causing the decrease in working capital deficit, see Section A7 of the Board Report.
9.7. Investments
For details regarding all companies held by the Group, see Notes 8B and 22 to the Financial Statements.
9.7.1. Summary Description of the Business of Principal Subsidiaries
(A) Sun D'Or International Airlines Ltd. ("Sun D'Or")
The charter operations of the Group is carried out through Sun D'Or (a company fully owned by El Al). Sun D'Or operates as a tourist organizer for wholesalers and individuals and markets charter and scheduled flights, both by means of leasing full aircraft capacity to third parties, or aircraft parts' capacity to a number of partners for pre-negotiated prices, or by direct sales. Starting from 2011, Sun D'Or operates as a tourist organizer, while maintaining the "Sun D'Or" brand for scheduled and charter flights marketed by Sun D'Or and operated by it (on weekdays) or by other airlines (on weekend and holiday flights).
During 2015, Sun D'Or marketed scheduled flights to new destinations (Napoli and Nice) and significantly expanded operations to existing destinations such as Lisbon.
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Additionally, Sun D'Or marketed flights to new charter destinations such as Ibiza and Karpathos, as well as flights to exotic destinations in Africa – Seychelles, Kilimanjaro and Zanzibar. In total, in 2015, Sun D'Or marketed 1,141 flights to about 50 destinations in Europe and Africa, compared to 856 flights in 2014, indicating an increase of approximately 33%.
Starting from April 2016, some of Sun D'Or's flights will take off from Terminal 1. Passengers who purchased flight tickets to the relevant flights prior to January 18, 2016 will be refunded in respect of airport tax differences, where the total refund amount is insignificant.
Sun D'Or's revenues in 2015 totaled nearly USD 57,486 thousands, compared to approximately USD 46,076 thousands in 2014 and 52,149 thousands in 2013. As of December 31, 2015, Sun D'Or employed 27 workers.
In response to the immediate report issued by IDB Development Company Ltd. ("IDB") in connection with an amendment to a creditors' arrangement of IDB Holdings Company Ltd., which addressed, among other things, negotiations to examine a merger between Israir Airlines & Tourism Ltd. ("Israir") and Sun D'Or, which, as provided in IDB's report, should they materialize into a binding agreement, there is a possibility that after the merger, IDB would indirectly hold 25% to 30% of Israir shares (the "Transaction") - on March 14, 2016 the Company issued an immediate report (reference no. 2016-01-005463), stating, in reference to IDB's report, that said negotiations have not yet materialized into a binding agreement and that the terms of the transactions, if materialized, are subject, inter alia, to the completion of non-binding due diligence and to negotiations between the parties, and that there is no certainty that a binding agreement will be executed by the parties and/or that the transactions will be completed. The Company estimates that the transaction, if and to the extent executed, is not expected to materially affect the financial results of the Company.
On February 16, 2016, investigators on behalf of the ISA arrived at Sun D'Or's offices, collected documents and asked a number of managers to accompany them for investigation. In addition, investigators on behalf of the Antitrust Authority arrived at the Company's offices to collect documents. At this stage, the Company has no information as to the circumstances under investigation.
(B) Tamam – Aircraft Food Industries (Ben Gurion Airport) Ltd. ("Tamam")
Tamam (a company fully owned by El Al) is mainly engaged in the production and supply of kosher ready meals to airline companies. Recently, Tamam expanded its non- aviation operations and it provides, inter alia, catering services to restaurants. Tamam's place of business is in Israel and its offices are located in Ben Gurion Airport. The Company is the principal customer of Tamam. In 2015, nearly 81% of its sales were to the Company and the rest to other airlines and customers. Tamam revenues in 2015 were approximately USD 31.2 million compared to USD 32.3 million in 2014 and USD 30.4 million in 2013. As of December 31, 2015, Tamam employed 391 workers.
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In January 2016, the IAA issued a re-tender for obtaining up to three permissions for production, transportation, reloading, loading and delivery of food and related products to the aircraft, after its June 2015 tender was cancelled. Within the framework of this tender, franchisees will be requested to build and operate a facility for supplying aircraft with food over a period of 25 years (including the construction period). The parameter by which franchisees are to compete is the amount of the permission fee payable by the franchisee to the IAA. Following said tender, the Company estimates that Tamam would be required to relocate its premises from its present location in 2020. Tamam and the Company are currently examining the profitability of participating in the aforesaid tender.
(C) Katit Ltd. ("Katit")
Katit (a company fully owned by El Al) is mainly engaged in the production and supply of meals to the Company's employees. Katit's place of business is in Israel and its offices are located at Ben Gurion Airport. Katit revenues in 2015 were approximately USD 4,179 thousands compared to USD 4,348 thousands in 2014 and USD 4,065 thousands in 2013. As of December 31, 2015, Katit employed 106 workers.
(D) Borenstein Caterers Inc. (USA) ("Borenstein")
The main business of Borenstein, a company (fully owned by El Al) registered in the U.S. and operates at the New York JFK airport, is the production and supply of kosher ready meals to airlines and other institutions. The Company is the principal customer of Borenstein. Borenstein revenues in 2015 were approximately USD 15,324 thousands compared to USD 14,006 thousands in 2014 and USD 12,754 thousands in 2013. As of December 31, 2015, Borenstein employed 100 workers.
(E) Superstar Holidays Limited (England) ("Superstar")
Superstar (a company fully owned by El Al) is a tourist wholesaler that markets tourist package deals to travel agents and passengers, and sells airline tickets at discounted prices for flights on the Company's routes. Superstar operates in several other countries apart from Britain. Superstar revenues in 2015 were approximately USD 9,920 thousands compared to USD 15,482 thousands in 2014 and USD 16,924 thousands in 2013. As of December 31, 2015, Superstar employed 10 workers.
9.7.2. The following is a summary description of the business of the major investee companies which are not subsidiaries
(A) Cargo Consolidation: Air Consolidators Israel Ltd. ("ACI")
The main business of ACI (a company whose class B shares are fully held by the Company, thus granting it the right to appoint half of the directors as well as vote and participate at general meetings) is air cargo consolidation at Ben Gurion Airport to allow reduction in air cargo rates. Cargo transportation is carried out through the Company, at special rates, as well as through foreign airlines. The shares do not confer
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upon the Company rights to receive profits by way of dividend distribution or other benefit distributable by ACI, except for profits and dividends from capital revenues.
In 2015, the Company paid ACI fees amounting to USD 625 thousands. To the best knowledge of the Company, ACI revenues in 2015 were approximately USD 27,328 thousands compared to USD 30,734 thousands in 2014 and USD 31,098 thousands in 2013. As of December 31, 2015, ACI employed 20 workers.
(B) Marketing of flights: Tour Air (Israel) Ltd. ("Airtour" or "Tour Air")
Currently Airtour (a company under 50% ownership of El Al) is mainly engaged in marketing the Company's flights and special offers to all the destinations to which it operates. Airtour shares owned by the Company grant it the right to participate and vote at shareholders meetings and appoint half of the directors, but they do not confer upon the Company the right to receive dividends or profits.
The Company pays Airtour handling fees for certain services provided to the Company by Airtour such as ticketing services, and also participates in some of Airtour's operating expenses. Airtour revenues in 2015 were approximately USD 4,478 thousands compared to USD 3,979 thousands in 2014. As of December 31, 2015, ACI employed 65 workers.
(C) Touring and Hotels: Holiday Lines Ltd. ("Holiday Lines")
Holiday Lines (a company under 20% ownership of El Al37) is engaged in marketing and sale of tourist services, inter alia, as wholesaler and organizer of charter flights to and from Israel. The Company carries out its marketing operations through travel agents and by the distribution of seats and tourist packages to the end user.
(D) Maman - Cargo Terminals and Handling Ltd. - ("Maman")
Maman is a public company whose shares are listed on the Tel Aviv Stock Exchange. The Company owns approximately 15% of Maman share capital as well as options at a rate of 10%, exercisable into Maman shares. The main activity of Maman is management and operation of cargo terminal authorized to handle all import and export cargo at Ben Gurion International Airport, pursuant to the authorization of granted by the IAA. Additionally, Maman operates in the field of logistics services and in real estate leasing, and provides aviation services. Maman operations is carried out in Israel, the Check Republic and India.
For details regarding the framework agreement between the Company and Maman, see Section 8.2 above.
To the best knowledge of the Company, Maman revenues in 2015 were approximately USD 181,851 thousands compared to USD 189,225 thousands in 2014 and USD
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127,213 thousands in 2013. To the best knowledge of the Company, as of December 31, 2015 Maman employed 2,440 workers.
9.8. Financing
9.8.1. Non Designated Loans
As of the Date of the Report, the Company has non-designated loans totaling about USD 4,032 thousands, of which short-term loans stood at approximately USD 3,766 thousands and long-term loans stood at approximately USD 266 thousands. Interest rates for these loan range between 3.4% and 4.5%.
9.8.2. Terms and Restrictions for Obtaining Credit
(A) Loan to Collateral Ratio
For details, see Note 14D to the Financial Statements.
(B) Restrictions on Transfer of Control
For details, see Note 14E (3) to the Financial Statements.
(C) Calling for Immediate Repayment by the Bank
For details see Note 14E to the Financial Statements.
9.8.3. Credit Facilities
As of the Date of the Report, the Company has credit facilities of approximately USD 19,300 thousands.
9.8.4. Guarantees against Collaterals
The total amount of the guarantees provided by the Company to secure its obligations to third parties, as of the Date of the Report, is not material.
9.8.5. Designated Loans
The Company has loans for the purchase of aircraft and engines. For details regarding such loans, see Note 14 to the Financial Statements. For details regarding pledges and collaterals, see Notes 9C and 14D to the Financial Statements.
9.8.6. Financing the Company's Investment Plans
The Company examines, from time to time, the possibility of raising additional external resources to finance other investment plans of the Company, if decided to implement them.
For details regarding the Company's plans to finance the wide-body aircraft acquisition program, see Section 9.12 below.
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9.9. Taxation
9.9.1. Tax Laws Applicable to the Corporation
For details, see Note 17C to the Financial Statements.
9.9.2. Status of Tax Assessments of the Corporation
For details, see Note 17D to the Financial Statements.
9.9.3. Tax Laws Applicable to Material Related Companies Incorporated Overseas
The Company's subsidiaries incorporated overseas are governed by the tax laws of the states of incorporation.
9.9.4. Reasons for a Material Difference between Effective Tax Rate ad Statutory Tax Rate
For details, see Note 17B to the Financial Statements.
9.9.5. Accumulated Losses for Tax Purposes
For details, see Note 17A to the Financial Statements.
9.10. Environment and Corporate Responsibility
9.10.1. Material Consequences Arising from Provisions relating to Environment
Many countries, including Israel, have adopted the accepted international standards on aircraft noise and determined additional rules for protecting the environment. Some airports around the world are subject to many restrictions on the times of aircraft takeoffs and landings. Airlines' schedule, similar to that of the Company, is set in set in accordance with these restrictions.
The Company attaches great importance to the environmental issue and contributes resources and time for taking care of this issue (inter alia, through the Company's Safety and Quality Division which is responsible for such activities).
The Company implements internal operations to raise awareness to the environment, thus each of the Company's regions was assigned a person responsible for protecting the environment, preventing pollution and conserving resources.
With respect to reducing the amount of waste – paper, cardboard and other recyclable materials from the Company's flights and offices are taken for recycling.
In addition, ongoing activities are conducted on the issue of environmental protection, including inter alia, visits to maintenance and operational areas and taking care of issues requiring modifications in coordination with the IAA; ongoing coordination with the IAA regarding oil removal at Terminal 3 and improving technological systems in order to control and monitor findings related to the field of environmental protection.
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9.10.2. Restrictions on the Operation of Aircraft at Airports and at Ben Gurion Airport
For details regarding restrictions on the operation of aircraft at airports where the Company operates and Ben Gurion Airport, see the same section in the Company's 2014 Periodic Report.
9.10.3. Wastewaters Treatment
The wastewaters of the Company are treated in a modern central facility within the Ben Gurion Airport area, authorized by the Ministry of Environment and operated by the IAA. Similarly, the Company operates, commencing on June 2009, a facility at a cost of USD 600,000. The Company's facility, which was built on the Company's land, is used as emergency reservoir in case of any defect in the quality of the Company's wastewaters. In return for the use of the central facility, the Company pays the IAA usage fees for a period of 22 years (as of 2013). As of 2013, usage fees amounted to USD 150,000 per year. Simultaneously, toxic wastewater created by the Company, are directed to an environmental services company in Ramat Hovav.
9.10.4. Fuel Tanks
Following soil pollution surveys conducted by the Company in 2011, in which pollution points were identified in various areas in the Company's premises, in the second quarter of 2012 the Company performed, on its own initiative, additional tests in order to examine the findings of the pollution surveys. The Company hired the services of an environmental consulting company, which examines the findings of the survey and offers the Company appropriate measures for land treatment. Accordingly, the Company decided to act for the restoration of polluted soil, notwithstanding the fact that the Company did not cause the pollution. The Company reported the findings of the survey to the Ministry of Environment and held a tour with the representatives of the Environmental Protection Ministry. The Company submitted an application to the Environmental Protection Ministry to perform an in- site treatment, but at this stage the Environmental Protection Ministry resolved that an historic comprehensive survey of the site should be conducted and only after such survey, a decision will be made as to the appropriate treatment of pollution points to be found.
9.10.5. Material Environmental Costs and Investments in the Reporting Year and as Expected thereafter
The Company carries out many activities and invests financial means in improving environmental elements, including the construction of a wastewater facility to gather the Company's wastewater in the event of deviation from the quality of wastewater (according to the agreement with the IAA), performance of fat separators in the Company's premises and performance of local separation between the drainage systems and sewage systems.
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2014 2015 2016 (forecast) Costs Approx. USD 150 Approx. USD 150 USD 150 thousand per thousand per year thousand per year year Investments Approx. USD 100 Approx. USD 95 USD 120 thousand per thousand per year thousand per year year Total Approx. USD 250 Approx. USD 245 USD 270 thousand per thousand per year thousand per year year
The information regarding expected environmental costs and investments is forward- looking information, as defined in the Securities Law. The information is based on current requirements of Environmental Laws and current market prices of products and services that the Company has to purchase in the framework of environmental investments. Therefore, actual costs and investments may be materially different than the estimates set out above, due to many factors, including legislative amendments, requirements of authorities and changes in the cost of products and services the Company would be required to procure in the framework of the environmental investments.
9.10.6. Restrictions on the Level of Air Pollution Caused by Engines (Emission)
Following increased global awareness to the process of global warming up, governments are willing to monitor and limit the level of air pollution caused by engines. In the coming years, laws on the subject are expected to be enacted in various countries worldwide.
In January 1, 2012, the European Union (EU) Regulation on monitoring, reporting and verification of gas emissions (ETS - Emissions Trading Scheme) on incoming and outgoing flights from the EU countries (hereinafter: the "ETS Plan") has entered into force, as a result of the inclusion of the aviation industry under the emission policy applicable in other industries, as determined by the EU Decision dated June 26, 2008. According to said EU Decision, the Netherlands was appointed as the body supervising the Company's operations. The duty to report, the reporting procedures and the manner of reporting have been fully regulated and in addition, binding instructions were published. The supervising body audited the report and declared in writing that the Company has successfully passed the audit.
During 2012 the objection on the part of some countries outside the European Union to the implementation of the ETS Plan and future payments in respect of deviation from approved exempt allocations, has increased. The United States even based its objection on a law prohibiting American Airlines from participating in the ETS Plan. In order to prevent unilateral implementation of the ETS Plan with respect to air carriers landing at and taking off from European Union airports, the ICAO proposed a global outline that was due to be voted on by the ICAO management in September 2013. As a gesture of goodwill, the European Union countries agreed to "stop the clock" with respect to compliance with quotas set by the European Union, until receipt of information regarding the ICAO outline and then decide whether to continue with the first outline or join the ICAO outline. This decision did not exempt carriers operating within Europe, from gathering information and submitting reports
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relating to flights from destinations within the European Union nor from payment for excessive amount of emissions on flights between destinations in Europe.
Further to the ICAO Decision, the European Union decided to freeze the implementation of the ETS Plan with respect to flights entering the European Union and flights departing from the European Union, until the end of 2016. According to said decision, until the end of 2016 airlines are not required to report to the European Union or pay for quotas in respect of flights between member states of the European Union and non-member states of the European Union. The implementation of said Regulation shall only apply to flights carried out between member states of the European Union (destinations inside Europe). The relevant agreement between all member states is expected to start being implemented in 2020. It should be noted that should the European Union cancels the freeze of the RTS Plan's implementation as aforesaid, then the Company is expected to suffer only an insignificant annual expense.
Out of wish to reduce greenhouse gas emissions, winglets improving aircraft aerodynamics are installed in some aircraft, thus reducing fuel consumption, aircraft engines are washed to strengthen their efficiency and aircraft fuselages are being externally washed to reduce air resistance. In addition, the Company acts to reduce unnecessary aircraft weight in order to minimize the quantity of consumed fuel.
The extent of the impact of the entry into force of instructions provided by the authorities (including the EU and ICAO), including the EU resolution on the cancellation of the ETS Plan's implementation, legislation or results of legal proceedings, on the amount of annual expense expected to be borne by the Company, may constitute forward-looking information, as defined in the Securities Law, based on the Company's assumptions and estimates. Therefore, the actual results of the entry into force of a legislative amendment, imposition of financial charges or legal proceedings as mentioned above, or the extent of the impact thereof on the Company's operations may be significantly different then the results estimated or implied by such information.
9.10.7. Corporate Liability
9.10.7.1. General
The Company considers itself committed to the community and the environment within which it operates, and attaches great importance to participation in promoting and fostering them. As "National Carrier", the Company places the security and safety of its passengers on top of its priorities and maintains extensive activities to ensure their security and safety. Similarly, the Company considers its employees as the source of its power and acts to provide an attentive, considerate, safe and fair working environment, as a result of understanding the linkage between a quality business-strategic management and the commitment to act and promote corporate responsibility.
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In 2015 the Company continued its work within the various fields of corporate responsibility and continued to implement the subject of corporate responsibility among employees and managers by a variety of measures and activities. The Company is expected to publish the Corporate Responsibility Report for the years 2014-2015 during 2016.
9.10.7.2. The Company is a member of Maale – an umbrella organization of businesses committed to manage corporate responsibility, acting to assimilate social, environmental and valued-ethical considerations in the ongoing conduct of corporations, and to promote development and implementation of corporate responsibility strategies as a business approach.
In 2015, Maale assigned a Platinum rating to the Company.
Furthermore, a volunteering activity related to Israel propaganda abroad is carried out by air crew members, pilots and flight attendants during their stay abroad, in the framework of the "Ambassadors" project, which is successfully held in cooperation with the Ministry of Foreign Affairs, the Jewish Agency and the "Stand With Us" organization.
9.10.7.3. Ethical Code
In 2015, the Company continued to implement the Ethical Code, in conjunction with employees and officers of the Company and its subsidiaries, and with the assistance of an external consulting company specializing in the subject.
The Code contains values, norms of conduct, enforcement and implementation policy and communication channels for reporting violations of the Code and the ethical rules designed to guide the operations of the Company and all officers thereof throughout the course of their work and to dictate standards for their operations.
9.10.7.4. Involvement and Support of the Community
The Company attaches great importance to its responsibility to the community, due to a genuine and unique link to the State of Israel. The Company formed a Community Responsibility Policy, in the framework of which it conducts contribution activities for the community and volunteering activities of employees, while establishing a long-term cooperation with community partners. The target population supported by the Company in this framework includes: IDF soldiers, students in need who are active within the community, sick or disabled children or children with special needs as well as families in need.
In 2015, the Company contributed in the framework of its activity both cash and cash equivalent. For details, see Section C1 of the Board Report.
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9.11. Restriction and Supervision of the Business of the Corporation
9.11.1. General
Most aspects pertaining to the Company's operations as an air carrier are subject to a set of regulatory arrangements, Israeli and International, relating, inter alia, to traffic rights, capacity and flight safety standards, security and noise, and are contingent upon obtaining Commercial Operator Certificate and Air Operator Certificate.
In addition to the operation certificates, the Company's operations are conditioned upon being an Israeli air carrier (substantial ownership and effective control in the hands of the State or its citizens), and upon foreign countries permits to use traffic rights granted to the Company as a Designated Air Carrier. For details regarding aviation agreements and the CAAI Policy, see Sections 9.11.6 – 9.11.8 below. Further, additional restrictions apply to the operation of the Company by virtue of the Special State Share. For details, see Section 9.11.9 below.
9.11.2. Regulatory Arrangements
The main principles of regulatory arrangements, both Israeli and international, relating to the operation of the Company as an air carrier are set forth below:
(For security arrangements, see Section 9.11.12 below; for details regarding operation in times of emergency, see Section 9.11.13 below).
A. Aviation Law, 5771-2011 (hereinafter: the "Aviation Law")
The law regulates the operations of all entities engaged in the civil aviation sector – personal licensing of flight employees (air crew, air traffic controllers, repair station employees trainers and instructors) as well as licensing of organizations (aircraft manufacturers, airline companies, repair stations, flight instruction schools, institutes for authorizations of repair station technician, etc.). The Aviation Law encompasses many aviation-related issues, including issues addressing aviation professions and the duties thereof, aircraft, air traffic control area, control authorities, investigation of a security incident, and in addition, said law provides for provisions concerning penal and financial sanctions due to a breach of the law.
In February 2015 the Aviation Regulations (Repair Stations), 5773-2013 (hereinafter: the "Repair Station Regulations") entered into force. As required by the provisions of the Repair stations Regulations, the Company completed the process of "recertification" of its repair station, which included writing new guidelines and making adjustments to adapt to the Repair Stations Regulations. Following successful completion of the recertification process, in February 1, 2015 the Company received from the CAAI a new Repair Station Certificate. At the same time, on February 1, 2015, the Company received from the CAAI a new Air Operator Certificate, following effective completion of the "recertification" process of the Company's Air Operator Certificate, as required under the Amendment to the Aviation Regulations (Aircraft Operation and Aviation Regulations), 5741-1981.
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The "recertification" process included the replacement of existing literature with literature written pursuant to the new regulations, designated trainings for aircrews, maintenance employees and flight operators concerning such new literature and amended regulations, tests ensuring the Company's compliance with all the provisions of the Aviation Law and the relevant Aviation Regulations, "demonstration of escape" in each of the Company's aircraft fleets, a change in the organizational structure as well as "evaluation flights" by the CAAI of the Company's aircraft.
It shall be noted that on January 29, 2015, the CAAI published its proposal to adopt the U.S. regulations on aircrew fatigue management, which address fatigue management of pilots and flight attendants. According to the CAAI proposal, the adoption of the U.S. regulations in Israel will only be made with respect to "Chapter 13 Operators" (El-Al, IsraAir, Arkia and C.A.L). Upon the application of the U.S. regulations in Israel, the Flights Regulations (Restrictions on Flight Time in Aviation Services), 5731-1971, shall cease to apply to El-Al, except for provisions concerning the entitlement of pilots to a 30- day vacation per year, of which at least 10 days are consecutive. The new regulations will enter into force after two years from the date of its publication. The Company formulated its response to said proposal and will deliver it to the CAAI.
B. Aviation Services Licensing Law, 5723-1963 (hereinafter: the "Licensing Law") and the Licensing Regulations
This law regulates licensing principles applicable to the various aviation fields and by virtue of which El-Al received a commercial operation certificate. Regulations issued under the Licensing Law, regulate, inter alia, excessive registration, Aircraft Operation Certificate and certificates for aircraft lease and charter flight operation.
C. Air Transport Law, 5740-1980
This law and the orders and notices issued thereunder, adopt several international conventions setting different rules on international air transport, mainly regarding the liability of air carriers for damages (bodily injuries and property damages), incurred during international air transportation, and the compensation imposed on air carriers due to such liability. The law applied the convention of unification of certain rules dealing with international air transportation (hereinafter: the "Warsaw Convention"), including amendments thereof. In May 1999, a convention was formulated in Montreal, setting rules for international carriage by air (hereinafter: the "Montreal Convention"), the purpose of which was to formulate, update and modernize the set of rules existing by virtue of the Warsaw Convention, inter alia, to extend the limits of liability for damages caused to the body or property of any passenger, to add jurisdiction authorizations and impose insurance obligation on air carriers. The Montreal Convention became effective in Israel in March 20, 2011.
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D. Airports Authority Law. 5737-1977
This law and the regulations and rules in effect thereunder, regulate, inter alia, the following issues: aviation fees, transport of import consignments, entry into restricted areas, authorization fees, and loading and unloading of aircraft.
E. Civil Aviation Authority Law, 5765-2005
This law provides for the functions of the Civil Aviation Authority which, among others, are: to determine and ensure compliance with domestic and international aviation arrangements pursuant to the aviation laws; to grant licenses, permits and approvals within the field of civil aviation, pursuant to the aviation laws; to supervise the civil aviation sector including, inter alia, maintaining proper safety level of flights on aircraft operated by Israeli airlines and aircraft within the airspace of the State of Israel.
F. Restrictive Trade Practices Law, 5748-1988 (the "Antitrust Law")
In January 1, 2009, Amendment No. 10 to the Antitrust Law entered into force; the Amendment reduced the application of the statutory exemption contained in the Antitrust Law until the end of 2008, for arrangements between air carriers in connection with international transportation. As an accompanying step to reducing the scope of the statutory exemption, the Trade Practices Rules (Block Exemption for Arrangements between Air Carriers), 5769-2008 were enacted by the Antitrust General Director (hereinafter: the "General Director" and the "Air Carrier Block Exemption", respectively), which exempt various types of arrangements between air carriers from the need for a prior individual authorization in order to prevent a comprehensive and undesirable application of the Restrictive Arrangements Chapter on thousands of arrangements that form the basis for aviation activity to and from Israel and do not jeopardize competition.
The Air Carrier Block Exemption addresses a wide range of arrangements, and exempts from the requirement of separate approval for various commercial and operational arrangements, such as Interline Passenger and cargo Agreements that do not ensure a minimum amount of seats or cargo capacity, and frequent flyer agreements.
On December 11, 2012, the Restrictive Arrangements Rules (Block Exemption for Arrangements Between Air Carriers Concerning Marketing Flight Capacity to Destinations Covered by Open Sky Arrangements), 5772-2012 were published, providing an exemption from obtaining a prior individual authorization for a flight capacity marketing arrangements (including Code Share agreements) upon compliance with the following rules: (a) the arrangement addresses airlines to which the Open Sky Agreement applies; (b) the arrangement does not limit competition in a substantial part of the market it affects, or may affect competition in a substantial part of such market, but it cannot cause significant damage to competition in such market; (c) the arrangement is not in reducing does not aim to reduce competition nor prevent it, and it does not contain
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restrictions that are not necessary for the implementation thereof; (d) the parties to the arrangement notified the Antitrust General Director thereof.
On November 28, 2013, the Antitrust Authority published the Antitrust Rules (Block Exemption for Arrangements between Air Carriers) (No. 2), 5773-2013 (the "New Block Exemption"), which renews and amends the Air Carrier Block Exemption published in August 2008. The New Block Exemption, same as the former block exemption, deals with the exclusion of types of arrangements between air carriers from the application of the Restrictive Arrangements Chapter of the Antitrust Law. The new Block Exemption upholds the legal arrangements provided for in the former block exemption, except for matters pertaining to lease arrangements between air carriers. As for these arrangements, the New Block Exemption sets out different requirements for the application thereof, while distinguishing between dry lease and wet lease, between aircraft lease for cargo transportation and other types of lease, and between leases among Israeli carriers on the one hand, and leases between an Israeli carrier and a foreign carrier on the other hand.
BSP Exemption
In November 7, 2013 the Antitrust General Director published his decision on the grant of an exemption from court approval for a restrictive agreement the parties to which are the International Air Transportation Association (IATA) and airline companies, and the subject of which is the BSP Plan (Billing and Settlement Plan), pursuant to Section 14 of the Antitrust Law (the "Exemption"). The arrangement deals with the installation and use of a central computerized billing system that manages the billing and payment process between IATA certified travel agents and airline companies that joined the arrangement by means of the BSP Plan. The exemption shall be in effect until November 7, 2018 and is contingent upon various conditions. The conditions so determined address the following issues: IATA's obligation to connect all interested travel agents to the BSP system and act in a non-discriminatory manner, restrictions on the transfer of information, the ability to remove a travel agent from the Plan and the ability of travel agents to refrain from paying amounts in dispute, etc. In addition, it was determined that, should an airline be suspended from the BSP arrangement due to financial difficulties, travel agents must not be allowed to offset any disputable amount attributed to such airline and at the same agents must not be obligated to pay amounts they owe that airline by means of the BSP Plan.
Decisions and Proceedings related to Monopoly
On October 27, 2005, the Company received the notice of the Antitrust General Director regarding his declaration of the Company as a monopoly in the transportation of time sensitive and price sensitive passengers in civil aviation markets to the following destinations: Johannesburg, Hong Kong, Bangkok and Bombay.
On September 9, 2012, the Company received the notice of the Antitrust General Director, whereby it was declared a monopoly in the provision of services of aviation security services overseas according to professional guidelines provided to airline companies in accordance with the provisions of the Regulation of Security in Public Bodies Law 5758-
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1998 and the Flight Law (Security in Civil Aviation), 5737-1977, with respect to passengers and cargo on passenger flights. On June 16, 2015 the appeal filed by the Company to the Restrictive Practices Court with respect to the aforesaid decision of the Antitrust General Director was rejected, thus the General Director's announcement remains in effect.
G. Legislative Provisions applicable to the Company as a "Mixed Company"
For details regarding Legislative Provisions applicable to the Company as a "Mixed Company", see this section in the Company's Periodic Report for 2013.
H. Aviation Services Law (Compensations and Assistance due to Flight Cancellation or Change of Conditions), 5772-2012
The Aviation Services of (Compensations and Assistance due to Flight Cancellation or Change of Conditions), 5772-2012 adopts, while making certain adjustments and changes, the principles of EU Regulation 261/2004, which set out conditions for removing passengers from flights as well as for flights delays and cancellations. Said law applies to all outgoing flights from Israel (scheduled and charter flights) as well as incoming flights to Israel, in the event the passengers of such flights did not receive the remedies requested in accordance with the laws of the country of origin. Pursuant to the said law, in cases such as flight cancellation, delay, refusal to admit a passenger to a flight and downgrade of the seating class, subject to meeting the preliminary conditions and circumstances determined by the law, a passenger shall be entitled to benefits such as free assistance, reimbursement of expenses, alternative flight tickets and even a financial compensation.
I. Equal Rights for the Handicapped
The Third Chapter of the Equal Rights for the Handicapped Regulations (Access to Public Transportation Services), 5763-2003, sets forth provisions in connection with the obligation to arrange equipment for the handicapped in air transportation, which impose various obligations on air carriers as a condition for aircraft operation.
9.11.3. Business Licenses, Building Permits and the Employment Permits
Some of the Company's activities are subject to obtaining licenses pursuant to the Business Licensing Law, 5728-1968, or permits from various regulatory agencies. Since the beginning of 2003, the Company has submitted business license applications for activities requiring license. In the process of obtaining such licenses, the Company acts to arrange permits for all the buildings within its premises, including old ones, for which the Company does not have building permits since the time it was a government company. The Company works in coordination with the representatives of the Ministry of Interior and employs expert consultants to assist in the process. In the framework of this activity, the Company acts according to a proper Master Plan for the purpose of completing the process of obtaining building permits and adjusting them to currently existing buildings as well as for obtaining business management licenses for the Company. During recent years (since 2008), five
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building permits have been obtained for various building complexes that include most of the buildings that do not have permits. In addition, a building permit application was made for land that mostly includes buildings built before 1965, the essence of which is to obtain building permits for minor variances detected by comparing a Detailed Site Measuring with building permits obtained before 1965 aerial photographs taken before in the same year. The application shall be submitted to the approval of the IAA as a preliminary approval prior to a hearing by the Regional Committee
For the purpose of its operations, the Company is required to obtain 33 business licenses. As of March 2016, the Company holds 18 permanent business licenses, 9 temporary licenses and 6 applications for renewal of licenses in approval stages
As regards the subsidiary Katit – Katit has five business licenses and license for alcoholic beverages, which are renewed in accordance with the requirements of the Committee and the authorities.
As regards the subsidiary Tamam - Tamam has a business license, effective until June 2016.
It should be noted that operations without a building permit and/or business license may force the Company to cease its operations in buildings for which the required permits were not obtained, and this may harm the Company's revenues. Furthermore, operations without a building permit and/or business license may result in criminal proceedings under the Building and Planning Law, 5725-1965 and the Business Licensing Law, 5728-1968, against the Company and its executives.
Failure to obtain licenses and permits or failure to comply with the terms set out therein and the consequences resulting therefrom, constitute forward-looking information as defined in the Securities Law, which contains estimates or forecasts of the Company as of the Report Date. Therefore, the actual results of a failure to obtain business licenses and building permits or failure to obtain appropriate permits for the Company's operations, may be materially different than the results estimated or implied by such information as a consequence of a large number of factors, inter alia, actions taken by competent authorities in connection with licenses, changes in legal or operational provisions and results of legal proceedings.
9.11.4. Commercial Operation Certificate
The Company was granted new Commercial Operation Certificate (No. 1/88) which was issued in January 22, 2014 (in lieu of the previous one dated August 2, 1988) by the Minister of Transportation under the Licensing Law; the Certificate contains general provisions concerning the operation of aircraft, including the obligation to operate flights under a certificate, the duty to comply with the provisions of the law and maintain the security of the State and the safety of fight. The Certificate is valid for as long as it is not cancelled or suspended by the Minister of Transportation or the CAAI.
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The Certificate provides that the licensee shall be an "Israeli Operator" as defined in the Aviation Services Licensing Law, 5723-1963, and sets out obligations regarding the duty to submit reports and information to the CAAI.
The licensee is entitled to offer and perform the services specified in the annex to the Certificate, which mostly consists of passenger transportation and cargo transportation on scheduled flights between Israel and destinations in foreign countries and in-between such destinations. It shall be noted that some of these destinations are not offered by the Company due to lack of economic feasibility (and accordingly, the Minister of Transportation is entitled to cancel such appointment); passenger transportation between Ben Gurion Airport and Eilat on feeder flights; passenger transportation on domestic flights on the route between Ben Gurion Airport and Eilat; cargo transportation by all-cargo flights on scheduled international flights and international charter flights; passenger transportation and cargo transportation on international charter flights.
9.11.5. Air Operator Certificate
The Company has an Air Operator Certificate (No. 1/88) (hereinafter: the "Certificate") issued from time to time by the CAAI.
The Certificate provides that, inter alia, the operator (El Al) has the right to perform operational commercial operation, as defined in the Operation Specifications that form part of the Certificate, in accordance with the operator's Operation Manual and the Aviation Regulations as specified in the Certificate. By virtue of the Certificate, the Company is entitled to operate as "Designated Air Carrier" of large aircraft [pursuant to Chapter 13 of the Air Navigation Regulations (Operation of Aircraft and Rules of Flight)] and international flights to the geographic areas defined in the Operation Specifications.
Aircraft listed in the Operation Specifications are either registered in Israel under foreign ownership approved by the CAAI or under the full ownership of the licensee, as well as aircraft available to the licensee with the approval of the CAAI and the Minister of Transportation and Road Safety. The operator is subject to the obligation to report any change in the list of aircraft included in the Operation Specifications, such as sale, purchase, lease to another operator and /or lease from any Israeli or foreign operator. Said report will be submitted to the CAAI.
9.11.6. International Regulatory Arrangements
The universal rule governing civil aviation provides that every state is sovereign of its airspace and therefore every commercial flight to or from any state requires a permit from that state. The permit may be granted in the framework of a bilateral agreement (as customary for scheduled flights) or an "Open Sky" agreement or with respect to ad-hoc flight/s.
The International Civil Aviation industry operates under a set of regulatory arrangements relating to most operational aspects of an airline company, in particular the subject of traffic rights, permitted capacity, air carrier's liability for damages (bodily injury and property
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damage), standards of flight safety, security and noise. This set of arrangements consists of international conventions, laws, regulations and administrative guidelines, as well as bilateral and multilateral agreements.
The current basis of international regulatory arrangements relating to International Civil Aviation is the Chicago Convention of 1944.
Following the Chicago Convention, the international Civil Aviation Organization (ICAO), an agency of the United Nations, was established. In the framework of the ICAO and under its sponsorship, recommended standards and procedures in various areas of aviation operations were determined. Rights to transport passengers and cargo between countries in return for payment and related issues are regulated in air transport agreements or aviation (bilateral) agreements based on reciprocity and on giving fair and equal opportunity to airlines of both countries.
9.11.7. Aviation Agreements and Principles of Civil Aviation in Israel
9.11.7.1. Aviation Agreements – General
Most air traffic rights under which the State of Israel allows the Company to carry passengers and cargo on international routes are regulated in aviation agreements between Israel and foreign countries, and the rest of such rights are regulated (in the absence of aviation agreements) in agreements between aviation authorities or commercial agreements between the Company and an air carrier of the other state, which require the approval of the authorities of both states. The main components of aviation agreements include, inter alia, the granted air traffic rights, the determination of a designated carrier and the permitted capacity .
Most aviation agreements to which Israel is a party may be terminated or cancelled by giving one-year prior notice. In general, following such a notice, negotiations take place between both states for the purpose of establishing an interim arrangement or new rules prior to the expiration of the agreement.
As stated above, in June 10, 2013 an Open Sky Agreement was executed in Luxemburg between Israel and the EU. Said agreement allows all airlines in the EU to operate direct flights to Israel from everywhere in the EU, and allows Israeli airlines to operate flights to all airports within the EU. Upon entry into force, the agreement replaced all bilateral agreements between Israel and the EU States and removed most restrictions on the number of carriers, frequencies, capacity and types of aircraft allowed to operate between Israel and the EU States.
Additionally, new aviation agreements were executed in 2015 between Israel and several other countries, allowing other designated carriers to enter existing and new destinations and allowing to increase the number of frequencies permitted for airlines from both parties. For further details see Section 7.1.10 above .
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9.11.7.2. Designated Carrier
In the past, each government granted to another government, under an aviation agreement, the right to designate one or more air carriers on its behalf ("Designated Carrier"). In recent years, a change has occurred in the Company's status after the grant of a Designated Carrier license to other Israeli carriers, with respect to several flight destinations, some of which in lieu of the Company, as well as due to the execution of the Open Sky Agreement with the EU, which in practice, obviates the need to appoint a Designated Carrier to destinations included in this Agreement.
9.11.7.3. Ownership and Control of an Air Carrier
There is no standard international arrangement as to the percentage of actual ownership and control over an air carrier, which should be held by the State or its citizens. Bilateral aviation agreements to which Israel is a party contain a provision whereby, each contracting state reserves itself the right to suspend or cancel the permit granted by it to an airline of the other state, if the "substantial ownership and effective control" are not held by the contracting state or its citizens. The agreements do not include definitions of this term. The agreements do not provide definition to this term.
In the past, the practice in the countries of the Western World has been to accept the appointment of an airline company as a designated air carrier as if such appointment contains a statement that the requirement of substantial ownership and effective control has actually been met, and if found that said requirement ceased to be met, the relevant state shall be required to remedy the situation.
The Open Sky Agreement with the EU updated the provisions addressing ownership and control in a manner allowing airlines owned and controlled by any of the EU States to operate flights from any destination in the EU to Israel.
Capacity
Most aviation agreements to which Israel is a party have included restrictions of maximum capacity or maximum frequency that any airline is allowed to offer on the agreed routes in order to ensure equal opportunities to all air carriers of the two states that have entered into an aviation agreement. As mentioned above, the Open Sky Agreement executed by Israel and the EU States gradually cancels previous restrictions that applied with respect to the number of air carriers, capacity and types of aircraft.
9.11.7.4. Flight Fares
IATA, the International Air Transport Association, publishes airfare of flights on international routes are published by. These fares enable passengers to buy a flight ticket with one airline, and use it to fly with another, or use it for other flights with other airlines (in the framework of Interline Agreements). In addition to the fares
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published by IATA, which are supervised by the aviation authorities, the Company is entitled to set special fares unilaterally.
As a rule, the Israeli Ministry of Transportation does not interfere in setting the fares unilaterally published by the Company, provided the level of such fares is not higher than IATA fares. IATA examines the Company's fares and accordingly, publishes Flex Fares used as Interline Fares.
Notwithstanding the Flex Fares published by IATA, most airline tickets and cargo capacity are sold at special rates as published by the airlines under different terms in accordance with the various fares. The Company acts in accordance with practices customary in the industry, while adapting its policy to market conditions. A substantial portion of the Company's income is derived from sales under such conditions.
In recent years, a larger variety of prices have been published. All travel classes for flights has several types of booking classes (or fare types) with a different demand for each and different terms for different seasons of the year. Additionally, the price offered to the public includes supplements charged by air carriers, including supplement security fee, and airport taxes.
Charter flight fares are set in a different manner from scheduled flight fares. Every Organizer is committed to pay the air carrier for the capacity (number of seats) leased by it, as the Organizer sets the price per seat with respect to the seats purchased by the Organizer - generally, a price per package deal, which includes flight and ground arrangements. An organizer requesting authorization for a flight or a series of charter flights, must indicate the fare offered to the public and obtain authorization for such flights and fares from the aviation authorities of the relevant country.
9.11.8. Israel's International Civil Aviation Policy
In the course of the last years, the "Open Sky" policy of increased liberalization in the aviation industry has been implemented in Israel, aiming to encourage and increase tourist traffic to Israel by intensifying the competition between the airlines.
For further details regarding the Open Sky policy, see Section 7.1.10 above.
9.11.9. The Special State Share
9.11.9.1. Shortly before the publication of the 2003 Prospectus, the Company allocated to the state a "Special State Share". The rights granted to the holder of the Special State Share are set forth in the Company's Articles of Association, which further detail the State's essential interests in the Company that must be protected by means of the Special State Share. Such essential matters are hereinafter provided:
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Maintaining the existence of the Company as an Israeli company so that the Israeli law, including legislation that allows acquisition of equipment for security purposes, would continue to apply to the Company and the conditions required to retain its operator certificate and flying rights would be met by it.
Maintaining the possibility to ensure that the Company's operational capacity and its ability to carry passenger and cargo do not fall below the capacity provided for in the Company's Articles of Association, in oreder to allow the State an effective use of essential assets, in emergency or for security purposes as determined from time to time by the authorized parties, all as specified in the Company's Articles of Association.
Preventing parties hostile to the State of Israel or parties who might cause damage to the vital interests of the State or to the State's foreign or security affairs or Israel air relations with foreign countries, or parties who are and/or might be in a material conflict of interest that could damage any of the matters set out above – from becoming interested parties of the Company, or otherwise from having a certain impact on the management thereof.
Fulfilling instructions and security arrangements that apply or will apply, by virtue of government resolutions or under any law, with respect to the security of flights, passengers, baggage, cargo and ,ail, in Israel and overseas, including with respect to the Company's operations abroad and the cooperation required from local authorities abroad in the areas mentioned above; in the area of security clearances of employees and service providers of the Company; and in the area of classified information security and security knowledge protection.
9.11.9.2. The holder of the Special State Share is the State of Israel by a Minister or Ministers, and in order to maintain these vital interests, certain provisions relating to the Special State Share were established in the following matters:
Provisions for preserving the Company's nature as an Israeli company, including restrictions relating to citizenship, residency and security clearance of the Company's officers;
Provisions for compliance with security provisions and arrangements;
Provisions relating to rights in security information and classified information of the Company;
Provisions relating to the Company's discussions on security matters;
Provisions for reviewing the Company's documents and information;
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Provisions for maintaining minimum flight capacity – the Company is not allowed to enter into certain transactions related to the Company's aircraft without the consent of the holder of the Special State Share, if, as a result of such transactions, the Company's flight capacity falls below the threshold stipulated in the Special State Share;
Acquiring influence or status in the Company requires the consent of the State – pursuant to the Company's Articles of Association, transactions in the Company's shares, at certain rates, shall not confer any rights arising from holding and/or acquisition of the Company's shares, against the Company, without the prior written consent of the holder of the State Special Share (the State by the Ministers designated for this purpose by the Government). The Articles of Association provides detailed procedures regarding the manner of submitting the application to approve the holding of the Company's shares, should such approval be required;
Provisions for obtaining approval to vote at General Meetings – a voting right at the General Meeting requires the approval of the Company. The approval to vote at the General Meeting will not be granted in circumstances where the consent of the holder of the State Special Share is required but has not been provided. The Company's Articles further determine special provisions in cases where there is a reasonable concern that foreign entities' holdings of the Company's shares would violate the Company's traffic rights or its operator certificate.
9.11.9.3. Any change, including amendment or cancellation, in the provisions of the Memorandum and Articled of Association of the Company which relate to the rights granted and/or attached to the Special State Share and to the holder thereof shall be null and void towards the Company, its shareholders and a certain third party, without the written prior consent of the holder of the Special State Share.
9.11.10. Standardization
The maintenance layout of the Company was certified by the Standard Institution of Israel for Quality Standard ISO 9001. In addition, the maintenance layout was certified as a Repair Station by the CAAI, the U.S. Federal Aviation Authority (FAA) and the European Agency for Aviation Safety (EASA) of the EU. It shall be clarified that EASA certificate was issued for the maintenance layout of the Company's airline.
IOSA
El-Al is currently in advanced process of preparation for the IATA safety standards audit, known as IOSA - IATA Operational Safety Audit. The audit integrates the requirements of the International Civil Aviation Organization (ICAO). The IOSA Standard is an international standard in the fields of operations, safety and quality of airlines, as receipt of said Standard
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Mark places the Company among the world's leading airline companies on the subject of aviation safety, and compliance with IOSA audits is a condition for membership in IATA.
The IOSA audit is conducted by the Company every 24 months by an external organization authorized by IATA. In 2014 the Company complied with the IOSA audit and requirements and accordingly, the Company's Safety Standard Certificate has been renewed for two more years.
In 2015, the IOSA audit structure was modified, thus said audit is carried out by qualified safety auditors from within the Company, continuously and periodically over a period of 24 months. As part of the preparation for the implementation of the said modification, the Company has trained a group of IOSA auditors and senior auditors with the required qualification, in order to provide the Company with the response and the ability to conduct an internal audit, which, at the end of the process, will be revirewed by IATA.
An audit is expected to be conducted by an external organization in June 2016, in which the audit plan executed by the Company as aforesaid will be reviewed, along with the Company's safety management and quality assurance and the adaptation thereof to the IOSA standards. The Company's compliance with the audit will ensure the renewal of the IOSA certificate by IATA in October 2016 for two more years. It shall be noted that non-compliance with the IOSA audit may lead to the loss of the Company's status in IATA and as a result, to the imposition of severe operational restrictions on the Company, arising from the cancellation of landing permits at many airports around the world and cancellation of air transit permits with respect to flying over multiple countries.
Furthermore, the Company has a network for "crisis events", structured and trained in accordance with IATA guidelines. The Company carries out, on a periodic basis, "crisis exercises" encompassing the entire Company (the last all-company exercise was carried out in 2014, a senior management crisis exercise was conducted in 2015 and another all-company exercise is expected to take place in 2016) and updates its procedures in line with relevant global developments (brochures, conferences and professional media).
9.11.11. Quality Control
The Company's maintenance operations are reviewed by an Internal Audit and Quality Control Division at the Company's Repair Station. The Repair Station is supervised by the Continued Airworthiness Officer on behalf of the Company, who is responsible for the continued airworthiness of the Company's aircraft and for ensuring that the Repair Station's aircraft checks performed by the Repair Station comply with the maintenance program authorized by the CAAI.
9.11.12. Security Arrangements
The civil aviation industry, particularly on routes to and from Israel, is a target for attacks by various parties, mainly terrorist organizations all over the world. The Company takes special security measures directed by the government body in charge of this issue.
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State Participation in Aviation Security Costs
For details regarding Government Resolutions concerning the percentage of State participation in aviation security costs, see the corresponding section in the Company's Periodic Report for 2013.
In December 18, 2013, the Company received the approval of Government bodies to increase the percentage of State participation in security costs of Israeli airlines, in such a manner that the percentage of State participation will be 97.5%. According to the Government bodies' notice, said approval applies retroactively as of July 16, 2013, the date the State confirmed that the conditions provided in Government Resolution No. 4026 for the implementation of the Open Sky Agreement have been met in a manner that entitles Israeli airlines to increased percentage of participation.
In this regard, it shall be noted that, as of the Date of the Report, the Ministry of Finance has not yet approved the request of El-Al Security Division to increase the 2016 security budget due to the expected expansion in the operations of Israeli airlines, as a result of the Open Sky Agreement with the European Union. So long as the said budget is not fully approved by the relevant regulatory bodies, difficulties may arise in connection with the operations of Israeli airlines, including the Company.
The implementation of the Government Resolution with respect to participation at a rate of 97.5% of the aviation security expenses of Israeli airlines and its possible impact on the Company's operations and financial results, is forward-looking information, as defined in the Securities Law. The manner and extent of the actual implementation of the Government Resolution, receipt of the funding for the security costs at the updated rate and in line with the growth in the operations of Israeli airlines, may actually be carried differently than estimated, inter alia, due to regulatory restrictions, economic limitations, inter alia due to the need to purchase equipment for the launch of additional flight routes, contractual restrictions requiring amendments to bilateral or other aviation agreements, changes in the security, financial and geopolitical situation and its effect on competition, as well as any change in Government Resolutions.
The following table details direct security costs related to the security of the Company's passengers, aircraft and employees, while distinguishing between the share of costs financed by the Company and the share financed by the State:
State financing Share Company financing Share Total (in USD thousands) (in USD thousands) (in USD thousands) 2015 129,216 3,208 132,424 2014 127,470 3,486 130,956 2013 102,898 15,437 118,335
Aircraft Protection Systems
In 2015, the Company installed, as subcontractor of Elbit Systems Electro-Optics Elop Ltd. (hereinafter: "Elop"), a protection system in some of its aircraft, pursuant to an agreement executed on September 30, 2014 between the Company and Elop, whereby the Company will A‐98
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act as subcontractor for the installation of the protection systems in the Company's aircraft and in the aircraft of the other Israeli airlines. The Company is expected to continue the installation process of the protection systems in other aircrafts during 2016-2017. For further details regarding the agreement executed by the Company and Elop as well as the Agreement executed by the Company and the State of Israel with respect to the State's participation in the expenses for the installation of protection systems in the aircrafts, see the same section in the Company's 2014 Periodic Report. Security Services to Israeli Airlines
In addition, the Company provides security services to Israeli airlines in return for reimbursement of the Company's related expenses. Payment in respect of these services was settled by means of a "price list" which was updated in 2015 and applies retroactively from 2013, as well as according to the understanding reached with Ministry of Finance on the issue of security and the Government Resolution No. 4026 regarding the provision of aviation security services by the Company.
9.11.13. Operation in Time of Emergency and for Essential Purposes
Pursuant to the applicable law, in times of emergency, Israeli Airlines, including the Company, can be operated for purposes of defending the State or for public security or for maintaining essential supplies or services. In addition to the foregoing, several arrangements exist between the Company and the State with respect to flights required for the security of the State or in times of emergency, and flights for other special purposes, as well as with respect to the consideration therefor, on a commercial basis.
The Registration of Equipment and its Enlistment to the IDF Law, 5747-1987, confers upon the Minister of Defense, if convinced that the security of the State so requires, the power to announce, by order, the need to recruit equipment (including aircraft). Said law refers to equipment in the Company's possession in times of emergency. The law obliges the State to pay usage fees for recruited equipment and if, during the period of recruitment, the equipment has been damaged – said law obliges the State to also pay compensation for the damage.
The Emergency Labor Service Law, 5727-1967, confers upon the Minister of Labor the power to certify enterprises as "Essential Enterprises" and once an announcement is made - to enlist, by decree, all employees for essential labor services. The Company was certified as an "Essential Enterprise". This certificate is renewed from time to time at the request of the Company. The validity of the current certificate is until the December 31, 2017.
The Commodities and Services Control Law, 5717-1957, confers upon the Minister, being thus authorized by the Government, the power to issue a "Personal Order" or a "General Order" to perform, inter alia, an "Essential Action" for the defense of the State, the security of the public, and for maintaining supplies or ordinary services. An action as mentioned above, includes, among other things, an obligation to operate an enterprise or any supervised service.
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9.12. Material Agreements
As provided in the Company's reports dated September 10, 2015 (reference no. 2015-01- 118524), October 29, 2015 (reference no. 2015-01-144525) and February 22, 2016 (reference no. 2016-01-032578), in the framework of its Wide Body Aircraft Acquisition Program, the Company entered into aircraft purchase and lease agreements as well as engine acquisition agreements and engine maintenance service agreements, all as set forth below:
In October 2015 the Company signed an agreement with Boeing for the acquisition of 4 new 787-9 Dreamliner aircraft and 5 new 787-8 Dreamliner aircraft (hereinafter: the "Acquisition Agreement" and the "Aircraft" or the "Owned Aircraft", respectively). Pursuant to the Acquisition Agreement, the Company was granted terms allowing flexibility with respect to the dates of receipt of the Aircraft, in a manner that enables Boeing to make adjustments according to the Company's requirements as may be from time to time with respect to its aircraft fleet, including conversion rights related to other Boeing aircraft.
Additionally, the Company was granted an option to purchase 7 other 787-10 Boeing aircraft (the "Option Aircraft"), provided their delivery date is no later than December 31, 2023. The Company made non-recourse advances in respect of the Option Aircraft, in an insignificant amount. Furthermore, should the Company resolve to exercise the Option Aircraft with respect to any of the aircraft included in the Option, then, on the date of each option exercise, the Company shall have the right to acquire another option to purchase a 787-10 aircraft, up to a total of 6 additional aircraft (the "Additional Option Aircraft"). The Company shall be required to pay a non-recourse advance shortly before the date of purchase of the said option. The Option Aircraft and the Additional Option Aircraft, if exercised, are expected to be received between 2020 and 2023.
It shall be noted that, pursuant to the Acquisition Agreement, the Company has options to cancel the acquisition of some of the Aircraft, whereas the Option Aircraft and the Additional Option Aircraft have conversion rights into other models of 787 aircraft. Furthermore, the Company has an option for financial backing from Boeing, of up to seven aircraft, on the terms stipulated in the Agreement.
The estimated cost of the acquisition of nine aircraft from Boeing as well as aircraft engines, substitute engines and spare parts (for all 15 aircraft, including the leased ones) amounts to approximately USD 1,250 million (the "Acquisition Cost"). The payment in respect of each aircraft shall be made on the date of delivery thereof to the Company, except for an advance of 30% of the aircraft price, to be paid on an earlier date, in accordance with the terms of the Acquisition Agreement.
In March 2016 the Company issued a Request for Proposals ("RFP") to financing bodies for the funding of the advance payments of three Owned Aircraft expected to be received by the Company in 2018. As of the date of publication of the Report, the Company has not yet received any proposal.
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In addition to the Acquisition Agreement, the Company executed agreements for the lease of 4 new 787-9 Dreamliners and 4 new 787-8 Dreamliners (the "Leased Aircraft") for 12-year periods with extension options, and for the acquisition of an option for the lease of two new 787-10 Dreamliners (with conversion rights) as hereinafter provided:
In October 2015, the Company signed memorandums of understanding with a foreign company for dry lease of a new Boeing 898-9 aircraft as well as for a sale and leaseback with respect to two of the 787-8 Dreamliners that were acquired from Boeing as aforesaid, so that the aircraft purchased by the Company from Boeing would be sold to the leasing company and leased back from it by the Company. The lease is for 12-month periods with extension options, to the extent agreed by the parties, and with respect to some of the aircraft, the Company has an early exit option after 10 years, subject to prior notice and exit fee, in accordance with the terms provided in the Agreement. A Boeing 787-9 is expected to be delivered to the Company in December 2019 and August 2020.
In December 2015 the Company entered into agreements with a foreign company for dry lease of two new Boeing 787-9 aircraft. These aircraft are expected to be delivered to the Company in August and October 2017. The lease is for 12 years, and the Company has an early exit option after 10 years, subject to prior notice and exit fee, in accordance with the terms provided in the Agreement. The Company has an option to extend the lease agreement with respect to each aircraft, for periods of two years each time, up to a total period of six years or until the next C-Check inspection of the aircraft, by 12-month notice prior to the end of the Agreement.
Additionally, the Company signed a memorandum of understanding for an option to lease two new Boeing 787-10 aircraft for a 12-month period (with conversion rights into a Boeing 787- 9), exercisable until November 2016 (with rights to extend the exercise dates). These aircraft are expected to be delivered to the Company throughout 2019.
In February 2015 the Company entered into agreements with a foreign company for dry lease of a new Boeing 787-9 aircraft and two new Boeing 787-8 aircraft.
A Boeing 787-9 aircraft is expected to be delivered to the Company in January 2019 and two Boeing 787-8 aircraft are expected to be delivered to it in September 2019 and November 2010. The term of the lease is for 12 years, and the Company has an option to cancel the agreement with respect to the Boeing 787-8 aircraft after giving prior notice, on the terms provided in the agreement. The Company has options to extend the lease agreement with respect to each aircraft, for periods of three years each time, up to a total period of six years, by 24-month notice prior to the end of the Agreement.
It should be noted that the anticipated annual expenditure on lease fees for the Leased Aircraft as described above is not material in relation to the total annual expenses of the Company.
Upon completion of the lease and the sale and leaseback transactions described above the Company shall own 7 Dreamliner aircraft and lease out 8 Dreamliner aircraft. All 15 aircraft to be purchased and/or leased by the Company are expected to be available to the Company
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between the years 2017 to 2020, and join the Company's wide-body aircraft fleet, as they are expected to replace the Boeing 747-400 and 767-300 fleets.
In February 2016 the Company entered into agreements with the engine manufacturer Rolls- Royce, in connection with engines to be installed in the Owned Aircraft and Leased Aircraft, as set forth below:
Substitute Engines Purchase Agreement and Benefits Agreement related to the purchase of said engines – the agreement includes the purchase of substitute engines and an option to finance one substitute engine on the terms provided in the agreement. The agreement further includes maintenance reliability assurance (warranties) and performances (guaranties), including fuel consumption performances and MTBR guarantees (Mean Time between Removals).
Engine Maintenance Agreement – pursuant to the agreement, both Owned Aircraft and Leased Aircraft will be provided with maintenance services. The Agreement is based on an All-Inclusive basis and includes coverage in respect of planned events, such as renovation of engines, and unplanned events (such as failures and bird strikes). The payment mechanism provided for in the Agreement is based on flight hourly service. The Maintenance Agreement is a long-term contract with a minimum term of 12 years with respect to Owned Aircraft and 10 years with respect to Leased Aircraft.
It should be clarified that the purchase amount of the substitute engines is included in the purchase cost. It should be further clarified that the annual expenses in respect of engine maintenance are current expenses similar to those paid by the Company in respect of existing aircraft engines, which will be replaced with the new Dreamliners, and that the annual engine maintenance expenses under the Engine Maintenance Agreement are not material in relation to the total annual expenses of the Company.
In March 2016 the Company issued a Request for Proposals ("RFP") to financing bodies for the funding of the substitute engines expected to be received by the Company in 2017 and 2018. As of the date of publication of the Report, the Company has not yet received any proposals.
In addition to the agreements into which the Company has entered within the framework of the Aircraft Acquisition Transaction described above, the Company has agreements concerning its employees and their rights (see Section 9.4 above), real estate lease agreements (see Section 9.1.1 above), aircraft lease and financing agreements (see Sections 7.11 and 8.10 above), various agreements with airline companies (see Sections 7.2, 7.4, 9.11.7 above and Section 9.13 below) and insurance agreements (see Section 9.2 above). Additionally, the Company is obligation for indemnification and insurance of the Company's officers. For details see Regulation 29(A) of chapter D (Additional Details of the Corporation's Business) and Note 24 to the Financial Statements.
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9.13. Cooperation Agreements
The Company has entered into agreements with other airlines (Interline Agreements), allowing passengers on scheduled flights, and subject to certain restrictions, to use services of one airline with flight tickets issued by another airline. The Company also has Code Share agreements, enabling an air carrier to market flights of another air carrier as if they were its own.
Additionally, the Company has entered into various operating agreements with different airlines, including, inter alia, technical operating arrangements, lease arrangements, agreements for the maintenance of aircraft and spare parts, mutual assistance in times of emergency, supply of aviation equipment, and more. The Company has also entered into agreements with airline companies relating to lounge hospitality, cooperation in the framework of customer clubs, account settlement in respect of the use of connection flights, matters of booking registration, as well as transportation agreements (passengers or cargo).
9.14. Legal Proceedings
As of December 31, 2015, legal claims totaling approximately USD 648 million were brought against the Company, for which the Company set aside a provision of about USD 10.5 million, based on the opinion of the legal advisors of the Company.
In addition, non-quantified claims were also brought against the Company. The provision in the Financial Statements mentioned above, includes also provisions for non-quantified claims based on the estimates of the Company's Management.
For details of the material claims against the Company or its subsidiaries, see Note 24(D) to the Financial Statements.
9.15. Business Targets and Strategy
As part of exercising the Company's long-term strategy, inter alia, for reducing its aircraft fleet age and coping with competition, the Company has implemented the Wide-Body Aircraft Acquisition Program, and in this context, the Company entered with Boeing and other aircraft leasing companies, into agreements for the purchase and lease of 15 new 787-8 and 787-9 Dreamliners, which are expected to be received by the Company in 2017-2010 and are expected to replace the Company's 747-400 and 767-300 fleets. Within the framework of the purchase agreement executed with Boeing, the Company was granted options to purchase additional aircraft, the exercise thereof will enable the Company to significantly expand the network of routes in the future and consider the replacement of the Boeing 777 aircraft fleet.
For further details regarding the aircraft purchase and lease agreements and other agreements into which the Company entered in the framework of the Acquisition Program, see Section 9.12 above and Note 9D to the Financial Statements.
The implementation of said Wide-Body Aircraft Acquisition Program creates a new infrastructure for the Company's wide-body aircraft fleets, bringing with it the promise of
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renewal and operational enhancement. The implementation of the new Aircraft Acquisition Program is expected to generate significant technological improvements for the Company as well as significant improvement in the product and the service provided by the Company, an increase in the Company's competitive capacity vis-à-vis its competitors and considerable savings of aircraft current operation and maintenance. The savings in variable operating expenses in expected to be reflected, inter alia, in fuel consumption reduction, and the savings in maintenance is expected to be reflected in a reduction in maintenance activities (in accordance with the manufacturer's instructions) and 15%-20% savings in the costs arising therefrom.
To ensure proper integration of the new aircraft, the Company established the "Dreamliner" Administration, which is responsible to manage the project and its various stages, and consists of a representation of all the divisions of the Company. The Administration operates to ensure the integration of the aircraft in compliance with the agreements and within the predefined budget limits.
In 2015 the Company dealt with the various factors that affected the Company's operations, including the geopolitical situation, Operation Protective Edge that took place during summer 2014 and the impact thereof on the aviation industry and the passenger traffic to and from Israel continued in the first half of 2015, security events that occurred towards the end of 2015, changes in jet fuel prices and the increasing competition.
Following is a description of the Company's main activities which commenced in 2015:
A. During 2015, the Company continued to adapt its operations, inter alia, by increasing frequency and capacity and by adjusting the model for commercial operations to the models customary in Europe. In this framework, since 2014 the Company has been operating low-cost flights under the UP brand, as a response to the models customary in Europe in the low-cost area, as described in Section 7.1.10 above. The Company operates flights in this format to five destinations in Europe. Tickets for flights in the framework of this activity include a basic basket of services and an option to add paid services, similar to the form of services provided by other airlines around the world. In addition, the Company operates three weekly direct flights to Boston.
B. During 2015, the Company received another new Boeing 737-900ER, which is the fifth aircraft purchase by the Company as part of the transaction for the acquisition of 8 new aircraft of this model. The aircraft, which joined the Company's narrow-body aircraft fleet in March 2015, operates to short and medium haul destinations. In February and March 2016 the 3 other aircraft of this model were delivered to the Company.
C. Frequent Flyer Club – during 2015 the Company continued to recruit members to the Company's Frequent Flyer club and issue the following branded credit cards to the members thereof - Fly Card and Fly Card Premium, through financial institutions, as described in Section 7.6.4 above. The branded credit cards confer upon the holders thereof unique benefits, depending on the type of card and the volume of transactions made by using it, in accordance with the commercial terms agreed between the parties.
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These benefits include, inter alia, accumulation of frequent flyer points in respect of transactions processed by the branded credit cards.
The Company examines, inter alia in view of the regulatory changes expected in the credit industry in Israel, and for the benefit of the Club members, the possibility of entering the consumer credit industry by means of cooperation with a financial body as well as the possibility of entering the credit market through a partnership with a credit card company. In addition, the Company is in the process of establishing an insurance agency by means of cooperation with one of Israel's leading insurance companies.
D. During 2015, the Company launched "Cockpit", an innovative program for supporting and accelerating startups in the fields of aviation and tourism. The purpose of the program is to expose the Company to new technologies in its areas of operations, integrate innovative solutions in the Company's systems and position El Al as a state-of- the-art company. The program is intended for companies at different stages, starting from the preliminary stage of prototype development and up to companies in growth stages. Startups selected for "Cockpit" shall benefit from a comprehensive program consisting of access to EL Al's systems, for purposes of development and integration (Beta Site), initial financing, professional consultation, product exposure and opening doors to the local and global market. These startups will also benefit from the possibility that the company would be the startup's first significant client. The Company has entered into cooperation agreements with a number of startups and is currently in the stages of establishment and registration of "Cockpit" as a subsidiary of El Al. In October 2015 "Cockpit" won the prestigious APEX (Airline Passenger Experience Association) Award for "Best Achievement in Passenger Experience 2015".
E. Adjustment of production means to the environment of demand and to the profitability of the routes, by adapting a more efficient capacity and configuration, aiming to achieve optimization of the network of routes.
F. Continued improvement of customer service, while providing an appropriate response to different populations and offering various services to customers (including Economy Plus Class, which was expanded to the 747, 777 and 767 aircraft fleets, and a possibility to purchase preferred seats), as well as a significant product upgrade, with an emphasis on the luxury classes and on improving its suitability to the needs of the business customer and taking customer conservation actions, both upon booking seats and during the flight.
G. Continued cost savings and efficiency trend - the Company implements an internal organizational program, which includes identification of financial savings resources within the various areas of the Company's operations and a follow up of the actual implementation of savings so identified, increase of income and the continuing of the Company's general efficiency process, in particular in the areas of logistics and procurement, sales costs, efficiency of operation of air and ground crews and maintenance management. The Company continues to examine the business structure appropriate for different operations in order to achieve process efficiency and value A‐105
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overflow for the Company, inter alia, by the possibility to act as a separate legal entity in independent and unique areas of operations, such as the Frequent Flyer Club and the cargo operations.
H. Examination of the option to develop additional income sources to supplement the flight activity, inter alia, in the fields of tourism, kosher catering operations in Israel and abroad through cooperation with an international body, establishing a cargo company and selling maintenance services to third parties. It should be noted that, in the field of tourism, various possibilities for development and entrepreneurship through cooperation with entities in the aviation and tourism industries are examined, inter alia, by means of establishing an independent wholesale tourism company, merger with a tourism company or acquisition of an existing tourism company/ tourism wholesale company. The focus on this area will enable to provide the customer with the missing link in the chain of value, while supplementing aviation-related tourism products. For details regarding negotiations to examine the possibility of a merger between Israir Airlines & Tourism Ltd. ("Israir") and Sun D'Or, see Section 9.7.2(A) above.
I. Continued implementation of technological systems, including technological systems in the field of commerce; improvement of the Company's website and increase of the direct sale and the Company's additional sales channels, as well as the establishment of a designated website for the Up brand operations. In 2015 the Company continued the installation of an in-flight communications system (streaming) in the Company's aircrafts. The system includes an in-flight entertainment service, and in 2016 the Company is expected to install the service in additional aircraft.
J. Continued comprehensive treatment in the field of security and environment, including hazards such as air pollution and noise, in the framework of which the Company received several standard marks, thus placing itself under continued scrutiny.
K. Investment in the field of corporate responsibility and community relations as well as continued extensive cooperation with various entities by contributing to the community and to the environment as well as continued cultivation of the human resource and excellence within the Company.
L. Continued implementation of the internal enforcement program in the field of securities and corporate law as well as an internal enforcement program in the field of antitrust, both aiming to ensure compliance with and enforcement of law-abiding norms, rules of ethics and other rules of conduct within the Company, its officers and employees, and to ensure compliance of the Company and its individuals with these rules.
M. Continued investment in human resources, inter alia, through the expansion of training activities to all the Company's employees and formation of training courses in the field of management, designed for the Company's mid-level executives. The Company also continued the implementation of employees' remuneration and incentives, and in this regard, it shall be noted that in 2015 the Company continued to develop results-based
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measuring and incentive programs, and currently 25% of the Company's employees are affected by such measuring and incentive programs.
The manner of implementation of the business strategy presented above and the results expected from the implementation thereof, are forward-looking information, as defined in the Securities Law, based on the Company's assumptions, estimates and predictions regarding its business operations environment, which may change, all or part thereof, from time to time, and thus affect the possibility of its implementation. Therefore, the actual results, in whole or in part, may not materialize, or only partially materialized or be materially different from the results estimated, derived or implied from such information, inter alia, for the reasons detailed below, given that as of the Report Date, there is no certainty as to the form of such actions or the ability to execute them, inter alia, due to the need for various regulatory approvals.
The implementation of the strategy may be affected by changes in the geopolitical, economic and security situation in the area, which may have impact both on the ability to operate flights to certain destinations and on jet fuel prices, which constitutes a major component of the Company's expenses. Further, the implementation of the strategy may be contingent upon the existence of appropriate financial resources for the realization of decisions on development and equipment. In addition, regulatory provisions, maintaining working relationships within the Company, aggravation of competition and changes in the network of routes and in the aircraft fleet, may affect the ability to execute the strategy.
9.16. Expected Development in the Coming Year
As a member of the global aviation industry, the Company faces exogenous financial factors which include, inter alia, the slowdown in the pace of global growth, crisis in the Euro Bloc, jet fuel prices, currency and/or interest rates as well as the geopolitical situation in the area.
In 2016 the Company is expected to continue to deal with an increase in the supply of flights offered by existing airlines and the entering of new airlines, as well as with a growth in low cost operations on routes to and from Israel.
The Company will continue to examine on a regular basis the adaptation of its operations to the trends and developments evolving in the business-economic environment of the company and in the global aviation industry. Such trends and changes require a thorough and continuous examination of the Company's operations, including the composition and profitability of the Company's network of routes with respect to passengers and cargo, and the adaptation of flight schedules and fares in accordance with the market and competition situation.
Additionally, the Company intends to continue to examine to develop additional income sources, including income sources to supplement the Company's flight operations as described in Section 9.15 above, among others, by entering the field of consumer credit in favor of the Club members by means of cooperation with a financial body, entering the credit market
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through a partnership with a credit card company and establishing an insurance agency by means of cooperation with one of Israel's leading insurance companies
Implementation of the Company's objectives shall be done by paying attention, inter alia, to the method of implementing the Company's Wide-Body Acquisition Program and coping ability, its preparation for the intensifying competition and the strive towards improving the business results in 2016, that, by improving the income mix, improving the return, implementing organizational efficiency procedures and cutting costs.
The information regarding expected development in the coming year, is a forward-looking information, as defined in the Securities Law. Such information is based, inter alia, on the Company's estimates, forecasts or intentions as of the Report Date. Therefore, developments during the coming year, all or part thereof, may be materially different from the developments estimated, derived or implied from this knowledge, as a result of numerous factors, including factors set out in Section 9.15 above and Risk Factors set forth in Section 9.18 below.
9.17. Financial Information on Segmental Reporting
For details regarding Segmental Reporting, see Note 21 to the Financial Statements.
9.18. Discussion on Risk Factors
Like other airline companies, the Company's operations is affected by external and internal factors liable to cause material changes (positive or negative) to its profitability. Risk factors may be divided into macro risks, segmental risks and risks that are unique to the Company. The main risk factors are set forth below:
Macro risks
9.18.1. Political or Security Events or Terror Activities
Political or security events or terror attacks in the world or in the area have an immediate impact, to the worst, on the demand for passenger and cargo transport, thus affecting jet fuel prices and the Company's economic situation and volume of operations. The risk is that the Company's revenues will be adversely affected as a result of security and geopolitical events, in Israel or in the country of destination.
9.18.2. Exposure to Currency Risks
The majority of the Company's income and expenses is in foreign currency or linked thereto (mainly US Dollars). The Company is exposed to the increase in the shekel value against the US Dollar in connection with current salary expenses and other liabilities denominated in NIS in the Company's balance sheet, mainly in respect of termination of employer-employee relationship and a provision for vacation. The appreciation of the NIS against the US Dollar increases the Company's current expenses and further increases, in US Dollar terms (with no
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impact on the cash flow), in the Company's liabilities due to termination of employer- employee relationship.
In addition to the foregoing, an internal natural hedge exists for other foreign currencies (Sterling, Euro, Rand, etc.), performed by means of comparing payments and receipts in each currency. In years in which the amount of receipts is not significantly different from the amount of payments denominated in European currencies, the mixture constitutes an internal hedge against exposure of such currencies, whereas in years in which there is a significant difference between the payments and the receipts, which creates an exposure for the Company with respect to these currencies (mainly vis-à-vis the Euro), the Company examines the need for investing in financial derivatives in order to reduce the exposure thus created.
For details about actions carried out by the Company to hedge the exposure to currency risks, see section B1 (5) of the Board Report and Note 19F to the Financial Statements.
9.18.3. Changes in the Economic Condition
The aviation and tourism industries are sensitive to changes in the economic activity that affect the demand for passenger and cargo transport. The structure of expenses in the aviation industry, which includes a high component of fixed costs, makes it difficult to implement the process of adjusting the Company's supply to the changes in the short-term demand. During periods of slowdown in the economic activity, for various reasons, the demand for air transport is reduced, excess capacity is created, and employees and flight equipment are not fully exploited. As a result, the Company's economic condition may deteriorate, as reflected in the Company's business results.
9.18.4. Outbreak of Epidemics and Natural Disasters
External factors, such as natural hazards, fire and earthquakes, epidemics etc., may cause harm to the continuity of the Company's operations. Furthermore, the outbreak of epidemics and natural disasters have an adverse effect on passenger traffic to the disasters areas and therefore may have a negative impact on the Company's business results.
9.18.5. Exposure to Changing Interest Rates
The Company finances most of its investments by means of long-term credit provided by banking institutions. The Company's loans and most of its deposits are in US Dollars. Some of the Company's loans bear variable interest and therefore, changes in interest rates may have an impact on the Company's financing expenses and cash flow. In order to reduce the exposure to said risk factor, part of the loans taken by the Company are fixed-interest loans. For details regarding the actions taken by the Company to protect itself from the exposure to variable interest rates, see section B1 (4) of the Board Report. For further details, see Note 19G to the Financial Statements.
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Sectoral Risks
9.18.6. Jet Fuel Price
Jet fuel is a significant component in the operating expenses of an air carrier. Jet fuel prices are subject to sharp fluctuations. The Company's profitability may be materially affected due to a change or substantial fluctuations in jet fuel prices. The Company takes actions to hedge part of the forecasted jet fuel consumption. This policy may change, depending on the circumstances. The Company has cash flow exposure due to the requirement to provide pledged deposits. As a result of the large share of jet fuel in the operating expenses of the Company, any increase in jet fuel prices adversely affects the Company's operating expenses and its business results (for details, see Section 9.5.1 above). For details regarding the hedging policy and the actions taken by the Company to protect against changes in jet fuel prices, see Section B1 (3) of the Board Report and Note 19H to the Financial Statements.
9.18.7. Changes in Competition
The aviation sector is characterized by a high level of competition, which intensifies in times of excess capacity. The entry of other airline companies into the market, including the entry of additional scheduled foreign carriers into the Israeli market or the capacity growth of existing foreign carriers, the entrance of additional Israeli carriers into the market as well as the appointment of other Israeli carriers as designated air carriers (in the field of passengers and cargo), the entry of additional charter airlines and low-cost airlines into the market and the provision of operation certificates to additional Israeli airlines in the field of passengers and cargo, lead to aggravation of competition in the aviation industry in Israel, thus creating excess capacity and decrease in the price level of passenger and cargo transportation, and may reduce the Company's share of operations in the industry and adversely affect the Company's business results. This trend of increased competition has intensified in recent years, upon the entry of new airlines and the increase in capacity and frequency of airlines operating in the Israeli market (for details see Section 7.1.10 above), as well as an increase in the market share of low-cost airlines, which had an adverse impact on the old airlines with a higher production cost structure. Special emphasize should be given to the increase in the activity of foreign airlines that are members of the three largest airline alliances in the world, which operate in the Israeli market with operational and commercial cooperation, based on non-Israeli regulation (including competition laws applicable in Europe) which allows them to enter into code share agreements, mergers and acquisitions and significant commercial joint ventures. In addition, changes in international agreements, including the aviation agreement between Israel and the EU (the Open Sky Agreement), might affect the Company's operations.
9.18.8. Impact of Seasonality
The Company's operations is seasonal in nature and focuses on peak periods (see Section 7.9 above). Tourist traffic, mainly in summer seasons and towards the holidays (Jewish and Christian) is higher than the annual average. Additionally, the cargo transport segment is also characterized by seasonal fluctuations (for details see Section 8.8 above). Since the
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component of capital and fixed costs is significant in relation to the total costs of the Company, any disruption to the operations during high season (e.g. due to political and security events) or the inability to obtain alternative aircraft, even in a relatively short term, may have a material adverse effect on the financial results of that year.
9.18.9. Government Resolutions regarding Aviation and Certification of the Company as an Air Carrier
A. A change in the Government policy regarding the appointment to appoint the Company as a designated carrier with respect to all or part of the routes on which the Company currently serves as a designated carrier, may affect the financial results of the Company. Additionally, the Company's operations is contingent upon obtaining a certificate from the regulator in the aviation field (e.g. Air Operation Certificate and Repair Station Certificate), whose terms are determined in accordance with the provisions of the law and regulations and supervised by the CAAI and therefore, may affect the position of the Company and its ability to carry out its assignments and even adversely affect its financial results.
B. The Company's air carrier operating certificates and the traffic rights granted to it are contingent on having the substantial ownership and effective control held in the hands of Israelis. Failure to comply with the provisions relating to the identity of the Company's shareholders may damage the operating certificates of the Company and the traffic rights granted to it by the State.
9.18.10. Operations in a Sector with a High Fixed Costs Structure
The Company operates in the aviation field where the structure of fixed costs is relatively high and the profitability margins are relatively low. Therefore, even moderate changes in the level of income or expenses may directly affect the existence of profit or loss.
9.18.11. Effect of Noise and Environment Limitations on the Operation of Flights
Any change in the restrictions on operating hours at Ben Gurion Airport or other airports to or from which the Company operates, and any additional restriction or prohibition on the operation of aircraft due to pollution, noise or other causes, may have a material impact on the manner of operation of the Company and accordingly, on its financial results.
9.18.12. Harm to Flight Safety or Security
9.18.13.1 In order to ensure flight security, the Company maintains security arrangements in accordance with the instructions of the competent government authority. In order to ensure flight safety, the Company complies with guidelines and instructions of the relevant authorities, including manufacturer's instructions and the CAAI guidelines. Damage to the Company's flights and/or customers and/or facilities and/or employees, as a result of a flight security event or flight safety failure, may have a significant adverse effect on the Company's activity, inter alia, due to
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damage to reputation, loss of income and customers and the Company's exposure to legal claims.
9.18.13.2 The Company conducts an external review of its set of operational procedure in accordance with the IATA Operational Safety Audit (IOSA) program, which operates under IATA guidelines and instructions. A change was made in the IOSA audit structure, thus said audit is carried out by qualified safety auditors from within the Company, continuously and periodically over a period of 24 months. In June 2016, an audit is expected to be conducted by an external organization, in which the audit plan executed by the Company as aforesaid will be reviewed, along with the Company's safety management and quality assurance and the adaptation thereof to the IOSA standards. The Company's compliance with the audit will ensure the renewal of the IOSA certificate by IATA in October 2016 for two more years. It shall be noted that non-compliance with the IOSA audit may lead to the loss of the Company's status in IATA and as a result, to the imposition of severe operational restrictions on the Company, arising from the cancellation of landing permits at many airports around the world and cancellation of air transit permits with respect to flying over multiple countries.
9.18.13. Regulation of Aviation
The Company's operations and its ability to expand the scope and layout of operations, depend, inter alia, on different regulatory approvals granted by authorities in Israel and worldwide. Lack of appropriate certification and failure to comply with international and local standards may incur an increase in the Company's expenses, competitive disadvantage vis-a- vis the Company's competitors and damage to the continuity of its operations.
During the Reporting Year, regulation amendments proposals were made with respect to the Aviation Regulation, the enactment of which has not yet been completed. For details on Aviation Regulation, see Section 9.11.2 above.
Risks Unique to the Company
9.18.14. Costs of Maintaining Flight Security
The fact that the Company is obligated to maintain security arrangements set by a government authority and bear security expenses it cannot control, the majority of which does not apply to foreign airlines competing with the Company, damages its profitability, competitiveness and routes network development. In 2013, an updated Government Regulation was adopted, whereby the State funds the majority (97.5 %) of Israeli airlines' security expenses. Changes in the percentage of State participation in the Company's security expenses, non-compliance with said Government Resolution in full, changes in the scope of safety measures the Company will use (due to security events or attempted terrorist attacks) as well as in the event the Company is forced to cease or limit its flights to a certain destination or is unable to expand its operations to additional destinations for security reasons, may have a material effect on the financial results of the Company.
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9.18.15. Restrictions on Obtaining Credit
The Company is under obligations to some of the long-term credit providers, to maintain an appropriate collateral ratio between the unpaid credit balance and the collateral pledged to the bank. Additionally, loan agreements for loans taken by the Company provides the bank with the right to call for immediate repayment of the balance of the loans provided by that bank if, in the opinion of the bank, based on reasonable criteria, an adverse change in the financial condition of the Company, its operations or business has occurred in a manner that endangers or may endanger the ability to repay the credit to the bank. A decrease in the market value of the collateral and/or call for immediate repayment of the Company's loans provided by banking institutions, may adversely affect the financial results of the Company. Furthermore, "single borrower" and "group of borrowers" restrictions may apply to the Company with respect to the transfer of control and change of ownership, taking into consideration the amount of credit and the identity of the controlling shareholder of the Company.
9.18.16. Antitrust
In light of the Israeli Antitrust Laws, including the need for a prior approval of the Antitrust General Director for certain agreements, the competitiveness of Israeli carriers, the Company included, may be harmed, and it may have an adverse effect on the financial results of the Company due to regulatory restrictions on of international agreements within the areas of the Company's operations or the non-approval of such agreements (existing or new) by the Antitrust Authority. The differences between the antitrust laws applicable in Israel and the antitrust laws applicable worldwide may affect the competitiveness capacity of Israeli airlines, particularly in view of mergers, acquisitions and airline alliances which are common in the global aviation industry.
For further details regarding the impact of Antitrust Laws on the Company's operations, including details on monopoly, see Section 9.11.2 above.
9.18.17. Municipal Status of Ben Gurion Airport
From time to time, the possibility to include Ben Gurion Airport in the jurisdiction of the municipality of Lod is examined. In the event the transfer of Ben Gurion Airport to the jurisdiction of a certain local authority is realized, the Company's expenses may increase (due to property tax payments which so far have not been paid), thus adversely affecting its financial results.
9.18.18. Labor Relations
Any cessation of operations due to work slowdowns or a strikes by an air carrier causes an irreversible loss of income and damage to customer trust. The state of the industry and the intensified competition within the industry require continuous efforts to make the Company more efficient and improve the service provided to customers. The foregoing is contingent upon the stability of labor relations within the Company, the identification of employees with
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the Company and the willingness to cooperate and reach an understanding with the Company's management.
It is quite possible that efficiency processes consisting of organizational changes, decrease in the number of employees (with emphasis on permanent employees) and decrease in salary costs, may shake up, even for a short while, the delicate balance of labor relations within the Company. This may cause damage in the immediate term as well as in the longer term to the reputation of the Company, and may have a material adverse effect on the business results for that year and the following year. Furthermore, difficulties may occur in exploiting business opportunities and in dealing with changes arising from restrictions in employment agreements.
9.18.19. Legal Proceedings
The Company is a party to legal proceedings, including actions which the court has been requested to recognize as class actions in Israel, as a result of which the Company may incur considerable amounts of money that cannot always be estimated, and in respect of which no provision has been made in the Company's Financial Statements on a regular basis. The outcome of these proceedings may have a material impact on the Company.
9.18.20. Restrictions due to Certain Provisions in the Special State Share
Restrictions related to maintaining minimum flight capacity, and the State's ability to demand an increase of the minimum flight capacity that the Company must maintain, reduce operational flexibility and impose heavy duties (competence assurance). In such circumstances, the indemnification does not cover all the Company's expenses. In addition, the Government Companies Law provides the power to impose on the Company provisions designed to protect the State's essential interests that concern the Company, by means of orders under Chapter H2 of the Government Companies Law, which may the Company's business discretion and, as a result, may harm its financial results.
9.18.21. The Company's aircraft fleet consists entirely of aircraft manufactured by "Boeing". Cessation of Boeing operations will cause temporary operational difficulties. The Company is materially dependent Boeing, both with respect to spare parts and engineering support.
9.18.22. Dependence on Routine Activity at the Base Airport (Ben Gurion International Airport)
Most of the Company's activities are carried out at its base airport, Ben Gurion International Airport. Therefore, any interruption or disruption of the routine activity at Ben Gurion Airport and/or changes in the policy for grant of takeoff and landing permits (sluts) at major airports where the Company operates, may have a material adverse effect on the Company's operations. For details regarding the decision of the Minister of Transport and Road Safety dated January 21, 2014, see Section 9.10.2 of the Company's 2014 Periodic Report.
Another significant change in the operating hours may materially affect the operational ability of the Company and its financial results.
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9.18.23. Flights on the Sabbath and Jewish Holidays
The Company continues to operate according to the policy determined by Government Resolution of 1982 and does not carry out flights on the Sabbath and Jewish Holydays. For details regarding the understanding reached between the Company and the representatives of the Rabbinical Committee for the Sanctity of Shabbat, see Section 10.7 above. Failure to comply with the understandings reached with respect to flights on the Sabbath and Jewish Holydays, or a change in the Company's policy on this subject, may result in a conflict with this sector of customers, which is liable to affect the Company's results due to a consumer boycott.
9.18.24. Information Systems and Information Security
The current operation of the Company, its business operations and the service provided by it are based on information and database systems. Some of the Company's information systems have reached the end of their life cycle and are not included for replacement purposes in the Company's work plan. The Company completed the establishment of a computer backup facility in the event of total failure of main computer room. In addition, the Company is equipped with a comprehensive program on information security as a response the increased risk of cyber-attacks. Until the completion of the preparation in the fields listed above, there is risk for malfunctions and disruptions in the operation of the Company's information systems, which may result in essential systems shutdown or inability to provide sufficient support for certain time periods.
The following table presents a segmentation of the risk factors described above, by nature (macro risks, segmental risks and risks unique to the Company), which were classified based on the estimates of the Company's management according to the scope of their impact on the Company's business as a whole – large, medium or small effect. The Company's estimate of the risk rating was determined while taking into consideration the probability of the occurrence of the event and the amount of damage that might be caused to the Company upon occurrence of the event.
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Degree of the Risk Factors Impact on the Group Large Medium impact Small impact impact Macro Risks
Political and security events or terror activities √
Exposure to currency risks √ Changes in the financial condition √ Forces of nature and epidemic outbreak √ Exposure to variable interest rates √ Segmental Risks Jet fuel prices √ Changes in competition √ Impact of seasonality √ Government Resolutions on aviation and the √ Company's certification as an air carrier Operations in a segment with a high fixed cost √ structure Noise and environmental restrictions √ Harm to flight security or flight safety √ Aviation Regulation √ Risks Unique to the Company Flight safety costs √ Restrictions on obtaining credit √ Antitrust √ Municipal status of Ben Gurion Airport √ Labor relations √ Legal proceedings √ Restrictions arising from the provisions of the √ Special State Share Dependence on aircraft manufacturer √ Dependence on regular activity at the base √ airport (Ben Gurion Airport) Flights on the Sabbath and Jewish Holydays √ Information and database systems √
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El Al Israel Airlines Limited.
Report of the Board of Directors on the State of the Corporation's Affairs For the Year Ending December 31 2015
a. Explanations of the Board of Directors for the State of the Corporation's Affairs a1. General and Key Data
We hereby present the Report of the Board of Directors on the State of the Corporation's Affairs for the period ending December 31 2015.
The Company serves as the designated air carrier of the State of Israel on most international routes that operate to and from Israel. Most of its activity is in the in the transport of passengers and cargo, including luggage and mail, on scheduled flights (mostly) and charter flights between Israel and foreign countries.
In addition, the Company is engaged providing luggage handling and maintenance services at its home airport, sale of duty-free products and – through investees – in related activities, mainly production and supply of airline meals and management of several travel agencies abroad. For information on the Group’s operating segments, see Note 21 to the Company’s Financial Statements.
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.
Key data (in millions of dollars):
2015 2014 Change Operating revenues 2,054 2,081 (1%) Operating expenses (1,593) (1,803) (12%) Gross profit 461 279 66% EBITDA 331 129 156% Profit (loss) before taxes on income 145 (38) Income (loss) for the year 107 (28)
B-1 a2. Review of Developments in Business Environment and Operational Indices
a2.1 Review of Business Environment in which the Company is Active
The following charts describe the development of traffic at BGN, both passengers and of cargo, divided by incoming and outgoing tourism, and in the field of cargo, divided into imports and exports. In the passenger flight market, we can see the continued increase in traffic from BGN, comprised of a significant increase in outgoing resident traffic, offset by a slight drop in the field of incoming tourism. In the cargo field, we can see that 2015 saw an increase in the scope of imports, which is contrasted with a decrease in exports from Israel.
Passenger and cargo traffic in BGN:
2015 2014 Change Thousands Thousands % Incoming tourists * 2,509 2,528 (19) (1%) Departing Israelis * 5,449 4,732 717 15% Cargo import - tons ** 154.1 141.5 12.6 9% Cargo export - tons ** 134.2 143.4 (9.1) (6%) * Source: Central Bureau of Statistics. ** Does not include cargo in transit.
Incoming Tourist & Departing Israeli Traffic (In Thousands)
7,000 5,449 6,000 4,732 4,276 5,000 3,860 4,000 3,000 2,000 2,482 2,580 2,528 2,509 1,000 0
Incoming tourists Departing Israelis
* Source: Central Bureau of Statistics.
B-2 Imports & Exports of Cargo by Air to and from Israel (in Thousands of Tons)
200 180 147.1 154.1 139.5 143.4 160 140 141.5 134.4 136.0 134.2 120 100 80 60 40
Export Import
* Source: the Israeli Airports Authority
An additional material change that occurred in the Company’s business environment was the significant drop in jet fuel prices, as described below, as a result of the drop in crude oil prices, which had a positive impact on the business environment in which the company is active, expressed in reduced operating costs.
Development of average jet fuel and crude oil prices on the market:
$/Barrel cent/gallon 500.0 120.0 111.7 108.7 450.0
99.5 400.0 100.0 350.0
80.0 300.0 304.6 292.9 53.6 250.0 60.0 268.9 200.0
40.0 150.0 $/Barrel cent/gallon 154.0 100.0 20.0 50.0
- 0.0
B-3
a2.2 Company Operating Indices and Market Shares
Select Operating Indices
2015 2014 Change
Scheduled and charter passenger segments (paying passengers) – in thousands 4,942 4,595 7.6% RPK (scheduled) – in millions 19,735 18,984 4.0% ASK (scheduled) – in millions 23,882 23,021 3.7% Load factor (scheduled) – in percentages 82.6% 82.5% 0.2%
The data indicates an increase in the Company’s seat capacity (ASK) and a significant increase in the Company’s passenger segments and in RPK, which means an increase in the number of Company passengers. The load factor remained similar to last year. The following is a graphic presentation of the development in operating indices over a number of years.
30,000 100%
25,000 23,021 23,882 20,905 21,828 19,735 20,000 18,984 90% 17,246 18,086 15,000
10,000 82.5% 82.9% 82.5% 82.6% 80% 5,000
0 70%
RPK ASK LOAD FACTOR
Additional Data 2015 2014 Change
Total market share (scheduled and charter) – in percentages 32.5% 33.3% (2.1%) Ton of cargo flown – in thousands 91.9 91.1 0.9% RTK – in millions 488.7 484.6 0.9% Weighted flight hours (including leased equipment) – in thousands * 167.5 159.2 5.2% Number of aircraft operating at the end of the period – in units 41 40 1 Average age of owned aircraft fleet at the end of the period – in years 13.1 12.7 0.4
* Weighted flight hours in Boeing 767 terms.
B-4 The above data indicates a slight drop in the Company’s market share, in a market that has grown significantly as a result of the major increase in traffic to BGN. Note that the decrease in the Company's market share came in spite of the increase in its seat capacity as detailed above, due to the intensification of competition expressed in an increase in activity by foreign airlines as well as the entrance of new airlines into the Israeli market, including low cost airlines, which increased their market share. The following is passenger traffic through Ben Gurion Airport and the Company’s market share.
total traffic (mill. - per passeng. Leg) El Al & Sun D'or share in total traffic (%)
25.0
40%
20.0 33.6% 32.5% 33.3% 32.5%
15.6 30% 14.2 15.0 13.4 12.4
20% 10.0
10% 5.0
0.0 0%
* Source: the Israeli Airports Authority
Glossary: Passenger leg – Flight coupon in one direction. RPK – Revenue Passenger Kilometer – number of paying passengers multiplied by distance flown. ASK – Available Seat Kilometer – number of seats offered for sale multiplied by distance flown. RTK – Revenue Ton Kilometer – weight of paid flown cargo in tons multiplied by distance flown. Passenger Load Factor (occupancy) – flown passenger-km is expressed as a percentage of available seat- km. Weighted flight hours – weighted value of the planes: Boeing 767 = 1.0; Boeing 747 = 2.0; Boeing 777 = 1.6; Boeing 737 = 0.6. These weighted values were determined based on an estimate of the total expenses of each type of aircraft, and are used consistently to calculate weighted flight hours as an indicator of the volume of aviation activity.
B-5 a3. Analysis of the Company’s Operating Results
The following are the Company’s statements of operations, including the removal from circulation sector and the yearly rate relative to last year. Also presented are the explanations and key trends that influenced the Company’s results in 2015 relative to last year.
For the Year Ending December 31
2015 2014 Change Thousands % of Thousands % of Thousands of Dollars Turnover of Dollars Turnover of Dollars %
Operating revenues 2,054,041 100% 2,081,303 100% (27, 262) (1.3%)
Operating expenses (1,592,844) (77.5%) (1,802,661) (86.6%) 209,817 11.6% Gross profit 461,197 22.5% 278,642 13.4% 182,555 65.5% Selling expenses (194,911) (9.5%) (202,140) (9.7%) 7,229 3.6% General and administrative expenses (93,237) (4.5%) (100,811) (4.8%) 7,574 7.5% Other income (expenses), net (3,282) (0.2%) 11,525 0.6% (14,807) Profit (loss) from regular activities 169,767 8.3% )12,784( (0.6%) 182,551 Financing expenses (26,820) (27,471) 651 Financing income 821 912 (91) The Company's share of the profits of subsidiaries, net of tax 823 1,056 (233) Profit (loss) before taxes on income 144,591 7.0% )38,287( (1.8%) 182,878 Tax benefit (taxes on income) (38,057) 10,227 (48,284) Profit (loss) for the year 106,534 5.2% )28,060( (1.3%) 134,594
Operating revenues – operating revenues decreased by 1.3% in 2015 relative to 2014. This decrease is largely attributed to a drop in revenues from Company passenger flights, and some of it from its cargo flight revenues, as detailed below. In the field of passenger plane flights, the change in revenues derived from a number of trends that had significant impact in opposing directions.
The revenues were positively impacted by an increase in the number of Company passengers relative to last year, attributed to a 10% increase in passenger traffic through BGN in 2015, among other things due to the negative impact of Operation Protective Edge on passenger traffic in 2014.
On the other hand, the Company’s revenues were negatively impacted as a result of a drop in flight prices in the reported period, mainly due to increased competition and the impact of the drop in oil prices.
The Company’s revenues were also negatively influenced by the erosion of the exchange rates of the various currencies in which some of the Company’s sales transactions are conducted (primarily the euro) relative to the USD. Note that the influence in question was positively expressed in the Company’s revenues denoted in these currencies.
In the field of cargo, the drop in Company revenues attributed both to the drop in shipping prices and the impact of exchange rates.
B-6 Operating costs -
Breakdown of Operating Expenses in 2015
Meals Depreciation 3% Jet fuel 8% lease expenses 30% 5% Airport fees & service 12%
Other expenses 3% Air crew expenses Maintenance of 4% aircraft 7% Wages and social benefits Air navigation & 22% communication 6%
Operating costs dropped by 11.6% in 2015 relative to 2014.
Jet fuel:
The drop in the Company’s operating costs largely derive from the sharp drop in the Company’s jet fuel expenses, which dropped by 32% relative to the corresponding expense last year (including hedging influence) as a result of a sharp drop in jet fuel prices, which was partially offset by an increase in the amount of jet fuel consumed due to the increase in the scope of the Company’s activity. Note that the impact of the drop in jet fuel prices on the market depends on hedging agreements made by the Company.
The following table concentrates the influence of the jet fuel hedging activity on profit/loss in 2015 compared to the corresponding year (in millions of dollars):
2015 2014 Difference
Loss due to the payment of )65.5( )17.5( )48.0( transactions that have been recognized as hedging for accounting purposes.
Loss due to the revaluation of )5.8( )25.2( 19.4 transactions that have not been recognized as hedging for accounting purposes.
Total influence of hedging agreements )71.3( )42.7( )28.6( on profit and loss
B-7 For further information on jet fuel price hedging see b.1.(3) below. For further details on the impact of derivatives on the Financial Statements, see Note 19e to the Financial Statements.
Beyond the influence of jet fuel as noted above, the key trends in the Company’s operating results are as follows:
A 12% decrease in the Company’s air navigation expenses, despite the increase in scope of activity, largely attributed to the positive impact of the erosion of various currencies, mainly the euro, relative to the dollar.
A 15% increase in depreciation expenses, largely deriving from an increase in the Company’s flight equipment, as well as a change in estimate for the plan for removing wide bodied Company aircrafts from the 747 and 767 fleets from service, as a derivative of the equipping plan described in Note 9d to the Company’s Financial Statements.
Salary Expenses
All of the Company’ salary expenses in 2015, decreased relative to the previous year last year as a result of the strengthening of the USD relative to the NIS, including positive influences on hedging exposure. The decrease in salary expenses was partially offset by the increase in expenses as a result of the increase in personnel due to the increase in activity, and as a result of the implementation of the salary agreement signed in June 2015, which led to a $9 million increase in the Company salary expenses (of these, $3 million due to a one-time signing bonus paid in June 2015). In addition, the Company’ salary expenses increased due to recognition of a bonus to be distributed to employees and executives to the sum of $9 million for 2015 results, in addition to an added salary, of 1%, stipulated on profits in accordance with the special collective agreement (see Note 15j to the Financial Statements), to be paid starting 2016.
Note that as the increase in personnel is largely attributed to the increase in the Company’s activity, the influence of the quantitative increase on salary expenses attributed to the Company’ operating expenses was more significant compared to the exchange rate influence described above, and these increased relative to expenses in 2014. The salary expenses attributed to the sales expenses and administrative and general expenses were influenced more than the change in exchange rates, and therefore decreased.
Sales expenses – sales expenses underwent a 3.6% decrease compared to 2014, mainly as a result of decrease in distribution expenses and a decrease in salary expenses due to the strengthening of the USD, as explained above, offset in part by an increase in advertising costs.
General and administrative expenses – general and administrative expenses decreased by 7.5% relative to 2014, mainly as a result of the decrease in salary expenses due to the strengthening of the USD.
Other income and expenses – over the course of 2015 the Company listed other net expenses to the amount of $3.3 million, mainly early retirement plan expenses, offset by capital gains from the sale of a 737-700 aircraft. On the other hand, in 2014, the Company listed other net income to the amount of $11.5 million, mainly as a result of recording capital gains from the sale and re-lease of two engines, and the cancellation of a provision to certain lawsuits.
Financing expenses – net financing expenses in 2015 amounted to $26.0 million compared to $26.6 million in the corresponding period last year.
Profit for the period – the profit before tax in 2015 amounted to $144.6 million ($106.5 million profit after tax), 7.0% of turnover, compared to a $38.3 million loss before tax in 2014 ($28.1 million loss after tax).
B-8 For the Three-Month Period Ending December 31
2015 2014 Change Thousands % of Thousands % of Thousands of Dollars Turnover of Dollars Turnover of Dollars %
Operating revenues 476,290 100% 493,123 100% (16,833 ) (3.4 %) Operating expenses (379,079) (79.6%) (441,053) (89.4%) 61,974 14.1% Gross profit 97,211 20.4% 52,070 10.6% 45,141 86.7% Selling expenses (49,886) (10.5%) (49,268) (10.0%) )618( (1.3%) General and administrative expenses (25,371) (5.3%) (22,882) (4.6%) )2,489( (10.9%) Other income, net 1,663 0.3% 6,192 1.3% (4,529) Profit (loss) from regular activities 23,617 5.0% )13,888( )2.8%) 37,505 Financing expenses (7,591) (6,605) )986( Financing income 116 306 )190( The Company's share of the profits of subsidiaries, net of tax 71 222 (151) Profit (loss) before taxes on income 16,213 3.4% (19,965) (4.0%) 36,178 Taxes on income (tax benefit) (3,984) 5,122 (9,106) Profit (loss) for the period 12,229 2.6% (14,843) (3.0%) 27,072
The key trends that influenced the results the fourth quarter of 2015 compared to the fourth quarter last year are largely similar to the trends explained in the analysis of early results, mainly due to the upheavals occurring in the company’s revenues as a result of increased competition, alongside an increase in the number of passengers, as well as including the decrease in operating expenses, mainly as a result of the drop in jet fuel prices.
a4. Segment Reporting
Regarding the analysis of revenues and expenses by operating segments, see Note 21 to the December 31 2015 Financial Statements. a5. Seasonal Factors The Group's activity is based on seasonal factors and focuses on peak periods. Heavy traffic of Israeli residents traveling abroad occurs primarily during the summer months and during holiday periods, while heavy incoming tourist traffic occurs during the summer months and during Jewish or Christian holidays or vacation time in their countries of origin.
B-9 Revenue breakdown by quarters and percentage of turnover in 2015 (in millions of dollars):
700 647.3 50% 45% 600 510.6 40% 476.3 500 35% 419.8 400 30% 31.5% 25% 300 20% 24.9% 23.2% 200 20.4% 15% 10% 100 5% 0 0% Q1-15 Q2-15 Q3-15 Q4-15 Revenues in millions % of operating revenues
a6. Cash Flow
The movements in cash flows in the year ending December 31 2015 compared to 2014 are:
January – December 2015 2014 Change Thousands of Thousands of Dollars Dollars
Cash Flow from operating Activities 271,41 8 163,443 107,975 Cash flow for investment activities (164,137) (198,606) 34,469 Cash flows from (for) financing activities (50,156) 8,589 (58,745) Influence of changes in exchange rates on cash balances held in foreign currency 862 (4,885) 5,747 Increase in cash and cash equivalents 57,987 (31,459) 89,446
Cash Flow from Operating Activities
In 2015 the Company cash flow from current operations was positive and amounted to $271.4 million, compared to a positive cash flow from current activity of $163.4 million in 2014, with the increase largely deriving from an improvement in the Company’s profits before taxes in the reported year compared to last year, as detailed above. Note also that in 2015, the Company paid a total of $33 million for the expiry of hedging agreements not recognized for accounting purposes the loss for which was largely recognized in 2014, payment that decreased the Company’s cash flow from operating activity in the reported year.
.
B-10 Development of cash flow from current activity in 2012-2015 (millions of dollars):
310 271.4
260
210 184.3 163.4 160
110 78.3
60
10
-40
Cash Flows for Investment Activities
In 2015, the Company made a net investment of $164.1 million in investment activity compared to net investment activity if $198.6 million in 2014. The decrease largely derives from a drop in investment in fixed and intangible assets, which amounted to a total of $136.9 million in 2015 (mainly payments for the purchase of 737-900 aircraft and the purchase of parts and accessories), compared to $177.0 million in 2014.
Cash Flows for Financing Activity
The Company used a net sum of $50.2 million for financing activity in 2015. In this period, the Company repaid loans to the sum of $125.1, comprised of current redemptions and repayment of loans for financing the advance payments for a 737-900 plane received in March 2015, paid $24.7 million in dividends. On the other hand, it received net loans (less recruitment costs) to the sum of $90.3 million, to pay advance payments for the 737-900 aircraft received at the Company over the course of the first quarter of 2016, and a long-term loan upon the receipt of the above 737-900.
The Company received a net cash flow of $8.6 million from financing activity in 2014. The Company received long-term loans (less raising expenses) to the sum of $139.3 million and short-term credit of $12.8 million, while on the other hand it redeemed long-term loans to the sum of $143.5 million.
B-11 a7. The Company’s Financial Status, Cash Balances and Working Capital
December December December December 31 2015 31 2014 31 2015 31 2014 Thousands of Dollars Thousands of Dollars
Current assets 394,281 288,420 Current Liabilities 843,075 807,766 Non-current Non-current assets 1,269,868 1,293,200 liabilities 626,292 662,419 Equity 194,782 111,435
Total 1,664,149 1,581,620 Total 1,664,149 1,581,620
The following are the main changes in the assets, liabilities and equity items as of December 31 2015 compared to December 31 2014: Current assets: The Company’s current assets as of December 31 2015 amounted to a total of $394.3 million, a $105.9 million increase relative to December 31 2014. The increase derived both from an increase in cash balances and short-term deposits due to improvement in Company operating results.
Cash Balances The balances of the Company’s cash and cash equivalents as of December 31 2015 saw a $58.0 million increase, amounting to $112.7 million. In addition, as of this date the Company has designated cash and short-term deposits totaling $76.6 million.
Current liabilities:
The Company’s current liabilities as of December 31 2015 amounted to a total of $843.1 million. The $35.3 million increase relative to December 31 2014 largely derived from an increase in short-term credit, mainly as a result of financing for advance payments for the 373-900 aircraft received by the Company subsequent to the balance sheet date. Repayment of these loans took place (subsequent to the balance sheet date) mainly from long-term loans received when receiving the planes. Furthermore, the increase in current liabilities was influenced by the increase in unearned revenues (non-cash flow liability) and from a decrease in derivative financial instruments (see Note 19 to the Financial Statements).
Working capital: As of December 31 2015, the Company has a working capital deficit of $448.8 million, compared to a deficit of $519.3 million on December 31 2014. Note that a material part of the working capital deficit does not reflect short-term cash flows, as explained below. The Company’s current ratio as of December 31 2015 amounted to 46.8% compared to 35.7% as of December 31 2014. The working capital deficit consists of three material elements included under the Company’s current liabilities items and characterized by current business cycles, however the Company does not require short- term cash resources in order to redeem them: unearned revenues from the sale of flight tickets, unearned revenues from frequent flyer clubs which will be cleared by providing future flight services, , and employee vacation obligations, which are expected to be paid over the course of a number of years, but which are classified as a long-term liability in accordance with accounting rules. These items are influenced, among other things, by the seasonality of the activity and by the timing of the holidays. Another material component
B-12 is short-term loans to finance advance payments for the purchase of new 737-900 aircraft the source of the redemption of which is long-term loans taken when receiving the planes.
Non-current assets:
Non-current assets as of December 31 2015 amounted to $1269.9 million, a $23.3 million decrease relative to their balance on December 31 2014, derived from of an increase in the Company’s assets as a result of the receipt of a 7367-900ER airplane, the fifth of its series, as per Note 9e to the Financial Statements, while on the other hand a decrease due to the Company’s current depreciation expenses, and due to the sale of a 737- 700 aircraft near the end of the reported year.
Non-current liabilities: The Company’s non-current liabilities as of December 31 2015 amounted to a total of $626.3 million, a $36.1 million decrease relative to December 31 2014. The decrease derived from the redemption of loans offset by a loan received in March 2015 to finance a 737-900 aircraft, as noted above (see Note 93 to the Financial Statements), offsetting an increase in deferred taxes as a result of the profit before tax for the period.
Equity Total equity as of December 31 2015 amounted to $194.8 million. The $83.3 million increase relative to equity as of December 31 2014 largely derives from the net profit in the period to the sum of $106.5 offset by dividends to the sum of $24.7 million paid in the reported period.
Equity development as of December 31 (millions of dollars):
250
194.4 200 183.5
150 138.3 111.4
100
50
0
B-13
b. Exposure to Market Risks and their Management
b.1 Qualitative Reporting on Exposure to and Management of Market Risks
b.1. (1) General – Description of Market risks to which the Company is Exposed
The following are details of the market risks to which the Company is exposed:
Exposure to changes in prices of jet fuel – changes in prices of jet fuel, which constitutes a significant element of the Company's operating expenses, have a material effect on the Company's profitability. In the Company's estimation, at its current level of activity, every change of 1 cent US in the price of a gallon of jet fuel during an entire year impacts the Company's fuel expenses by $2.5 million. The Company has taken hedging measures to reduce the exposure, as detailed in b.1.(3) below.
Exposure to changes in interest rates – 59% of the Company's long-term loans are at variable interest. Therefore, an increase in the Libor rate could impact the Company's profitability. At the present level of loans, every 1% increase in the Libor rate for a full year increases the Company's financing expenses by $3.8 million.
Currency exposure – most of the Company's revenues and expenses are in U.S. dollar (the Company’s operating currency), except for several shekel expenses, mainly salary expenses and payments to local suppliers in Israel. Accordingly, a change in the shekel/dollar exchange rate influences the Company's shekel expenses in dollar terms. In the Company's estimation, at present levels of activity, any 1% in appreciation of the exchange rate of the shekel relative to the dollar for an entire year increases the Company's annual expenses by $4.5 million. The Company has adopted hedging measures to reduce the exposure, as provided in Section b.1.(5) below. In addition, the Company has a non-material exposure to the euro and other currencies.
Exposure in long-term loan frameworks – according to the provisions of some 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 Not 14d to the December 31 2015 Financial Statements.
B-14 b.1.(2) Company Market Risk Management Policies, Officials Responsible for their Management and Means of Controlling and Executing Policy
Regarding the Company’s policy in managing market risk, those responsible for managing it, means of supervision and policy realization, see Note 19 to the December 31 2015 Financial Statements.
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 Note 19 to the Financial Statements.
As of December 31 2015, the Company had several agreements designed for hedging jet fuel prices, at a scope estimated at 37% of expected consumption for the next 12 months. In addition, the Company hedged 12% of its expected consumption for the first half of 2017. The net fair value of all jet fuel hedging instruments as of December 31 2015 is a negative sum of $42.2 million, presented in the Financial Statements as part of current liabilities and non-current liabilities, under “derivative financial instruments". For details regarding changes occurring to jet fuel prices subsequent to the balance sheet date, see Section e.2 of the Board of Directors Report.
b.1.(4) Hedging Interest on Loans
As of the report date, 59% of the balance of the loans received by the Company are at variable and non- hedged interest rates and 41% of the balance of the loans are at fixed interest for a period of up to 12 years. Furthermore, there are currently no hedges of the exposure in the Company’s long-term credit portfolio, due to changes in interest rate.
The Company acts in accordance with its policy as described in Note 19 to the Financial Statements.
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 Note 19 to the Financial Statements. Some of these transactions are recognized as hedging agreements for accounting purposes and some are not.
B-15 The Company has entered into several financial transactions designed to protect the Company from drops in NIS/USD exchange rates until March 2016.
The net fair value of these instruments as of December 31 2015 is a positive sum of $1.5 million, presented in the Financial Statements in the framework of current assets under derivative financial instruments.
For details on changes occurring in the NIS-USD exchange rate, see Section e.3 of the Board of Directors Report 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 2015.
The following is a description of the models for examining the fair value sensitivity of the various financial instruments:
1. 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 1,700 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 2015 are forward and/or cylinder transactions according to which the Company fixes the exchange rate to the date on which it is required to perform a currency conversion. The fair value of these transactions is calculated based on mathematical formulas for pricing derivatives in recognized models.
2. Jet fuel hedges – Jet fuel constitutes the most material component of Company expenses
Jet fuel hedge transactions are executed by the Company through 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:
B-16 Crude oil prices are influenced by market expectations and by 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 terrorism, 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, cost of their development is very high and their expansion takes many years (construction of a refinery takes 5-7 years).
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 were given regarding to the fair value of the financial instruments as of December 31 2015.
B-17 Presented below are sensitivity analysis tables for instruments sensitive to changes in market factors:
a) Sensitivity to changes in the NIS/USD exchange rate – in thousands of dollars:
Gain (Loss) from Gain (Loss) from Changes Changes Increase Increase Decrease Decrease of of Fair of of Value 10% 5% 5% 10% 4.292 4.097 3.902 3.707 3.512 NIS/USD NIS/USD NIS/USD NIS/USD NIS/USD
Cash and cash equivalents (4,573) (2,395) 50,299 2,647 5,589 Short term deposits (777) (407) 8,543 450 949 Trade and other receivables (2,674) (1,401) 29,417 1,548 3,269 Long-term investments (64) (33) 702 37 78 Assets due to employee benefits (6,028) (3,157) 66,305 3,490 7,367 Total financial assets (14,115) (7,394) 155,266 8,172 17,252
Short-term borrowings and current maturities 334 175 (3,679) (194) (409) Trade payables 3,278 1,717 (36,056) (1,898) (4,006) Other payables – current 41 22 (455) (24) (51) Provisions 776 407 (8,537) (449) (949) Current employee benefits obligations 7,920 4,149 (87,123) (4,585) (9,680) Loans from banks and others 27 14 (293) (15) (33) Non-current employee benefits obligations 4,874 2,553 (53,612) (2,822) (5,957) Other payables – non-current 403 211 (4,437) (234) (493) Total financial liabilities 17,654 9,247 (194,192) (10,221) (21,577)
Linkage balance sheet exposure as a result of surplus of Financial liabilities on financial assets 3,539 1,854 (38,926) (2,049) (4,325)
B-18 b) Sensitivity of NIS/USD Exchange Rate Hedging
Loss from Changes Profit from Changes Increase Increase Decrease Decrease of of Fair of of 10% 5% Value 5% 10% In the In the In the In the Exchange Exchange Exchange Exchange Rate Rate NIS/USD Rate Rate 4.292 4.097 3.902 3.707 3.512
NIS/USD forward transactions designated for hedging (1,908) (1,000) 616 1,105 2,332
c) Sensitivity to changes in the EUR/USD exchange rate - in thousands of dollars: Gain (Loss) from Gain (Loss) from Changes Changes Increase Increase Decrease Decrease of of Fair of of 10% 5% Value 5% 10% 1.011 0.965 0.919 0.873 0.827 EUR/USD EUR/USD EUR/USD EUR/USD EUR/USD
Cash and cash equivalents (400) (210) 4,401 232 489 Trade and other receivables (1,208) (633) 13,293 700 1,477 Total financial assets (1,609) (843) 17,694 931 1,966
Trade payables 2,050 1,074 (22,546) (1,187) (2,505) Other payables 15 8 (167) (9) (19) Total financial liabilities 2,065 1,082 (22,713) (1,195) (2,524)
Linkage balance sheet exposure as a result of surplus of Financial assets over financial liabilities 456 239 (5,019) (264) (558)
d) Sensitivity to changes in jet fuel prices on inventory (dollar/gallon) – in thousands of dollars:
Profit from Changes Loss from Changes Increase of Increase of Decrease of Decrease of
10% 5% Fair Value 5% 10% 1.054 1.006 0.958 * 0.910 0.862 USD/Gallon USD/Gallon USD/Gallon USD/Gallon USD/Gallon
Total jet fuel hedging transactions 450 225 4,497 (225) (450)
* The price of jet fuel according to a moving weighted average for the three-month period ending December 31 2015.
B-19 e) Sensitivity of jet fuel hedging to changes in jet fuel prices - in thousands of dollars:
According to the model's principles, jet fuel hedges that react in a similar manner to market factors were grouped together, since there was no loss of material information required to understand the Company's exposure to market risks as a result of the grouping. On January 5 2009 jet fuel prices changed by 14%, and therefore the following sensitivity analysis includes a 15% change in jet fuel prices.
Profit from Changes Loss from Changes Increase Increase Increase Decrease Decrease Decrease of of of Fair of of of 15% 10% 5% Value 5% 10% 15% 1.172 1.121 1.070 * 1.019 0.968 0.917 0.866 USD/Gal USD/Gal USD/Gall USD/Gall USD/Gall USD/Gall USD/Gall lon lon on on on on on
Jet fuel hedging transactions are recognized as defensive actions 11,895 8,051 4,089 (42,186) (4,215) (8,551) (13,004)
* The price of jet fuel in the Mediterranean Basin as of December 31 2015, according to which the fair value of the Company's hedge transactions is calculated.
B-20 b.2. Linkage Basis Report The following is the consolidated linkage basis report for December 31 2015:
In or In or Linked In or Linked to Other Non- Linked to In Israeli to the Foreign Monetary the USD Currency EUR Currency Items ~ NIS ~ ~ ~ Total Thousands of Dollars
Current Assets Cash and cash equivalents 53,389 50,299 4,401 4,579 - 112,668 Short term deposits 68,030 8,543 - - - 76,573 Trade and other receivables 107,652 29,417 13,293 11,030 - 161,392 Derivative financial instruments - 1,467 - - - 1,467 Prepaid expenses - - - - 25,686 25,686 Inventory - - - - 16,495 16,495
Non-current assets Long-term investments - 702 - - 19,370 20,072 Fixed assets and intangible assets - - - - 1,171,454 1,171,454 Prepaid expenses - - - - 11,997 11,997 Assets due to employee benefits 40 66,305 - - - 66,345 Total assets 229,111 156,733 17,694 15,609 1,245,002 1,664,149
Current liabilities Short-term borrowings and current maturities )189,547( )3,679( - - - )193,226( Trade payables )67,586( )36,056( )22,546( )7,736( - )133,924( Other payables )67,711( )455( )167( )1,853( - )70,186( Provisions )1,941( )8,537( - - - )10,478( Derivative financial instruments )39,474( - - - - )39,474( Employee benefit obligations )15,656( )87,123( )1,507( )1,405( - )105,691( Unearned revenues - - - - )290,096( )290,096(
Non-Current Liabilities Loans from banks and others )439,037( )293( - - - )439,330( Employee benefit obligations )20,101( )53,612( )664( )7,126( - )81,503( Derivative financial instruments )2,712( - - - - )2,712( Other payables - )4,437( - - - )4,437( Deferred taxes - - - - )56,183( )56,183( Unearned revenues - - - - )42,127( )42,127( Equity - - - - )194,782( )194,782( Total liabilities and equity )843,765( )194,192( )24,884( )18,120( )583,188( )1,664,149(
Surplus of assets over liabilities (surplus of liabilities over assets) )614,654( )37,459( )7,190( )2,511( 661,814 -
B-21 The following is the consolidated linkage basis report for December 31 2014:
In or In or Linked In or Linked to Other Non- Linked to In Israeli to the Foreign Monetary the USD Currency EUR Currency Items ~ NIS ~ ~ ~ Total Thousands of Dollars
Current Assets Cash and cash equivalents 7,225 38,931 5,006 3,519 - 54,681 Short term deposits 37,940 10,248 - - - 48,188 Trade and other receivables 98,640 16,110 12,104 11,649 - *138,503 Prepaid expenses - - - - 26,465 26,465 Inventory - - - - 20,583 20,583
Non-current assets Long-term investments - 1,002 - - 18,313 *19,315 Fixed assets and intangible assets - - - - 1,197,398 1,197,398 Prepaid expenses - - - - 9,335 9,335 Assets due to employee benefits - 67,152 - - - 67,152 Total assets 143,805 133,443 17,110 15,168 1,272,094 1,581,620
Current liabilities Short-term borrowings and current maturities )152,025( )2,623( - - - )154,648( Trade payables )82,688( )33,405( )22,167( )7,640( - )145,900( Other payables )61,405( )990( )132( )1,533( - )64,060( Provisions )1,743( )8,356( - - - )10,099( Derivative financial instruments )62,289( )11,044( - - - )73,333( Employee benefit obligations )3,800( )88,654( )1,557( )1,553( - )95,564( Unearned revenues - - - - )264,162( )264,162(
Non-Current Liabilities Loans from banks and others )498,782( )80( - - - )498,862( Employee benefit obligations )23,729( )48,839( )669( )7,778( - )81,015( Other payables )2,260( )4,437( - - - )6,697( Deferred taxes - - - - )14,704( )14,704( Unearned revenues - - - - )61,141( )61,141( Equity - - - - )111,435( *)111,435( Total liabilities and equity )888,721( )198,428( )24,525( )18,504( )451,442( )1,581,620(
Surplus of assets over liabilities (surplus of liabilities over assets) )744,916( )64,985( )7,415( )3,336( 820,652 -
* Reclassified.
B-22 c. Aspects of Corporate Governance c1. Charitable Contributions and Community Work El Al assigns a great deal of importance to making charitable contributions and assisting the needy and the community. As part of its activities, the Company contributed a total of $750,000 in cash and cash equivalents in 2015.
Over the course of 2015, El Al continued its long-standing tradition of giving back to the community and even expanded the scope of its social activity. As a result of this work, the Company was upgraded to the Platinum category in Ma’aleh ratings for 2015.
The activity continued to focus mainly on the following subjects:
1. El Al employee volunteer activities for various populations, including 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, and expanding volunteer activity within the framework of Nahalat Eran – Aleh Negev.
2. In addition, volunteer activity has continued 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:
By management – within the framework of the Contributions Committee, the Company contributes .א donates sums of money, and in addition contributes assistance in the form of money equivalents, such as dozens of hot meals daily, free flight tickets and transport of special cargo free of charge.
,In addition, El Al has donated to organizations assisting the mentally disabled (AKIM, Etgarim .ב 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 AWIS adopt a Warrior program.
Within the framework of the Globally Club, El Al transfers points for the purchase of flight tickets .ג 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. In 2015, the Company expanded its activity through the CEO Fund for the Community.
By the employees themselves – whether in money or money-equivalents (home electrical .ד appliances, clothing, books, games, etc.) to preschools for special-needs children, at-risk children’s homes and more.
4. The Company is currently completing its corporate responsibility report for 2014/2015, which will be published over the course of 2016.
B-23 c2 Directors with Accounting and Financial Capabilities For information regarding the experience and education of the directors the Board of Directors considered to have possessed accounting and financial in the reported year – see Regulation 26 in part D to this periodic report.
c3. Disclosure about Internal Auditor of Reporting Corporation
1. Information Regarding the Internal Auditor and Compliance with Conditions
1.1. Name of Auditor: Gil Berr.
1.2. Beginning of term in office: June 1 2009.
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 nineteen years’ experience in internal auditing, in financial statements auditing, in risk management and in consulting. Until his appointment Mr. Berr was a partner in Cost Forrer Gabbai & Kasierer (Ernst & 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, at Ben Gurion University and at the Ono Academic College in the field of risk management and internal auditing. In addition, serves as a director at the Internal Auditor’s Association (IIA) and as 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 is in compliance with Section 46(b) of the Companies Law, 199 and Section 8 of the Internal Auditing Law, 1992.
1.4. The Internal Auditor has no holdings in Company securities or holdings in any related body in the reported year.
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.
1.6. 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
B-24 Auditor was tasked with proposing a work plan, to be carried out in accordance with the Company’s auditing plans and to distribute, in writing, reports containing findings, conclusions and recommendations.
3. The Internal Auditor's Supervisor
The Internal Auditor is subordinated at 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. Proposals of VPs and department managers.
4.2.5. Previous audit findings and 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
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 inspections of the Company’s activity abroad.
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.
B-25 7.2. 15,400 audit work hours were invested in the Company and its subsidiaries in Israel and abroad in 2015, as follows:
The scope of employment is determined in accordance with the audit work plan, which is determined in accordance with the scope and complexity of the Company's various activities.
Work hours for the Work hours for the Work hours due to Company's activity in Company's activity investee Total Israel abroad * corporations ** 10,690 3,500 1,210 15,400
* 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. Conducting the Audit
8.1. The Company's Internal Auditor conducts his work in accordance with the Companies Law, 1999, the Internal Audit Law, 1992 and 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.
8.5 Furthermore, during the reported period a discussion was held in the Audit Committee, in the presence of the internal auditor and without the presence of company officers who are not committee members, to check for the presence of flaws in the corporation's business management.
9. Access to Information
The Internal Auditor has unfettered, continuous and direct access to any document or information held by the Company and its subsidiaries, in Israel and abroad, or by any of its employees, as well as access to any ordinary or computerized information listings, to any database and to any automatic data processing system in the Company, including for 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 prepared 36 audit reports in 2015. 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.
B-26 10.3. In 2015, the Audit Committee convened 13 times to discuss the internal audit reports, on the following dates: 11.01.15, 19.02.15, 15.03.15, 19.04.15, 11.05.15, 17.05.15, 22.06.15, 13.07.15, 07.09.15, 19.10.15, 25.10.15, 22.11.15, 23.12.15.
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 (including a bonus according to the Company’s officer remuneration policy) granted members of the senior management group and in accordance with the remuneration policy. Total remuneration for 2015 is 1,492,000 NIS (including a 360,000 NIS bonus).
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.
4c. 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 provided by them.
Auditing and tax services Hours Thousands of dollars 2015 9,564 507
2014 8,723 462
The increase in audit and tax service hours in 2015 relative to 2014 largely derives as a result of an increase in current tax service this year. 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.
5c. Disclosure in the Report of the Board of Directors Regarding the Financial Statements Approval Process The body charged with ultimate control in the Company regarding the approval of the Financial Statements is its Board of Directors.
Within the framework of the Board of Directors, the Company operates several committees, as follows: 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
B-27 Committee, the Executive Committee, the Remuneration Committee, and the Government Affairs and Regulations Committee (on March 15 2016 the Audit and Remuneration Committee were consolidated).
As of the approval of these Financial Statements, the Balance Sheet Committee (Financial Statement Examination Committee) consisted of four members (a majority of whom are independent), as follows: Committee Chair Prof. Yehoshua (Shuki) Shemer, Ms. Ruth Dahan (Portnoy), Mr. Pinchas Ginsburg and Mr. Eyal Chaimovsky. For further information regarding the experience and education of the Board members see Regulation 26 in Part D of this periodic report.
The Balance Sheet Committee meets for extensive and thorough discussion of the draft Financial Statements, in the presence of the auditing accountant. The Chief Executive Officer and the Chief Financial Officer present the members of the committee with extensive details on the Financial Statements, including detailed financial analyses about the Company's performance during the reporting period.
The Balance Sheet Committee studies the material issues in financial reporting and formulates a recommendation for the Company’s Board of Directors pertaining to, among other things, the following issues: (a) estimates and evaluations made pursuant to the Financial Statements; (b) internal controls pertaining to financial reporting; (c) the wholeness and propriety of disclosure in the Financial Statements; (d) the accounting policy adopted and the accounting treatment applied to material Group issues; (e) value estimates, including underlying assumptions and estimates, on which the data in the Financial Statements was based. The Committee also reviews different aspects of control and risk management, both those reflected in the Financial Statements and those impacting the reliability of the Financial Statements.
When complex or material issues are on the agenda, special discussions are held by the Balance Sheet Committee on the issues on the agenda with the participation of the independent auditor.
The Company’s Board of Directors is the organ responsible for discussing and approving the Financial Statements, after the members of the Board receive the draft Financial Statements and the recommendations of the Financial Statements Examination Committee at least two business days prior to the meeting.
Over the course of the Board meeting in which the Financial Statements are discussed and ratified, the Company CFO provides a detailed review of the key points of the Financial Statements and the Company’s accounting policy. The CEO also reviews the Company's current activity and the influence of this activity on the Company’s Financial Statements and emphasizes material issues.
Invited and present at the Board meeting in which the Financial Statements are discussed and ratified are representatives of the Company’s independent auditor, who provide remarks and clarifications to the Financial Statements and who are at the Board member’s disposal to answer questions and provide clarifications regarding the reports prior to their approval. In addition, the Chair of the Financial Statement Examination Committee (Balance Sheet Committee) reviews the key points of the Committee’s recommendations.
The Balance Sheet Committee convened on March 17 2016 to formulate recommendations for the Board of Directors. Taking part in the meeting in question were the Committee members: Professor Yehoshua Shemer (Chair), Ms. Ruth Dahan (Portnoy) and Mr. Eyal Chaimovsky. Also taking part in the meetings in question were the Company CEO, Mr. David Maimon, the CFO, Ms. Dganit Palti, the Company Secretary, Ms. Ayelet Oren, Esq., Omer Shalev, Esq. and representatives of the independent auditor.
The Balance Sheet Committee held a discussion about the Financial Statements presented to it, including directing questions to the members of management present and to the independent auditor. Likewise, the independent auditor is asked to present his comments to the committee members, including accounting policy applied and special events that arose during the review of the Financial Statements.
B-28
The following are details of the processes taken prior to the approval of the December 31 2015 Financial Statements: a) The draft Financial Statements were provided to the members of the Board of Directors to study on March 15 2016. b) Committee members are welcome to contact the Company CFO at any time with any question or clarification they require, prior to the meeting. c) Over the course of the meeting, the CFO reviewed the Company’s financial results and presented comparisons between the reported period and corresponding periods and the work plan. d) Pursuant to its meeting, the Committee studied the estimates and assessments carried out in relation to the Statements for the reported quarter, the wholeness and propriety of disclosure in the Financial Statements for the reported quarter, the accounting policy adopted and accounting treatment implemented regarding the Company's material issues. e) The Committee discussed the effectiveness of internal controls on the matter of financial reporting and disclosure in the Company. The Committee was also presented with the actions taken by the Company to verify that its reports had been prepared in accordance with the law. f) At the conclusion of the discussion, and after it has been clarified that the Financial Statements adequately reflect the state of Company affairs and its operating results, the Committee recommended that the Board of Directors approve the Financial Statements. g) The Committee’s recommendations were provided to the members of the Board of Directors in writing on March 17 2016. The Company’s Board of Directors is of the opinion that in light of the scope and complexity of the recommendations and the time deemed reasonable by the Board of Directors to provide the draft Financial Statements and recommendations as noted above, they were passed on to the directors for study a reasonable amount of time prior to the Board of Directors discussion. h) On March 22 2016 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 2015 Financial Statements, prepared on the basis of IFRS rules, were approved unanimously. Present at the Board of Directors Meeting in which the Financial Statements were approved, were the following Board members: Amikam Cohen (Chairman), Tamar Moses Borowitz (Deputy Chairman), Yehuda (Yudi) Levi (Deputy Chairman), Professor Yehoshua Shemer, Pinchas Ginsburg, Shlomo Hannael, Sofia Kimmerling, Eyal Chaimovsky and Eli Defes. c6. 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.
B-29 On April 8 2014 a special General Meeting of the Company's shareholders approved the terms of service and employment of Mr. David Maimon and the Company CEO.
Regarding a yearly bonus for Company officers in accordance with the remuneration policy note that in February 2016 the Remuneration Committee and Company Board of Directors to extend the “determining period” for payment of the “deferred bonus” for the Company officers (as these terms are defined in Section 7.4.1 of the remuneration policy) by 3 additional years and accordingly the deferred bonus period shall occur in 2016 to 2018. It was also decided to update the profit target noted in Section 7.4.4 of the remuneration policy, so that it would amount to a sum equal or greater than $60 million, with the remaining provisions of the remuneration policy remaining unchanged.
The decision of the Remuneration Committee and the Board of Directors is subject to the approval of the general meeting of the Company's shareholders, which will be summoned by January 2017, in order to renew the remuneration policy, which is in effect until the date in question.
The Company Board of Directors examined the matter and determined that terms of service of Company officers detailed in Regulation 21 of Chapter D of the periodic report are compatible with the Company's remuneration policy. In accordance with the Securities Authority’s clarifications from February 11 2014, in the matter of the examination of the fairness and reasonability of remuneration of interested parties, this examination is acceptable in terms of the examination of remuneration for officers.
For the Company’s remuneration policy see the shareholders’ meeting summoning report published by the Company on December 30 2013 (ref. no. 2013-01-112759). c7. 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 Director’s 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.
B-30 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, Omer Shalev, as the Company’s internal enforcement supervisor (hereinafter: “the Supervisor”).
Over the course of 2015 the Supervisor continued to perform 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, initiated inspections were carried out to examine the implementation of enforcement procedures.
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.
Furthermore, in September 2014, the Company Board of Directors approved an internal enforcement plan in the antitrust field, which includes an outline for the activity of internal enforcement at the Company and key procedures in the Company’s areas of activity. Implementation and adoption of an effective enforcement plan contributes to increasing awareness among workers and executives of the requirements of the Antitrust Law and the enforcement policy of the Restraint of Business Authority and in accordance with the reduction of exposure to claims against the Company, employees and executives, and constitutes a framework for fruitful cooperation between the Antitrust Authority and the Company. In addition, effective implementation of the enforcement plan shall be placed at the disposal of the officers in the event of criminal liability, so long as it has been proven that the violation has been provide without the knowledge of the accused officer and that the Company has taken all reasonable measures to ensure that the Antitrust Law was observed.
The Company Board of Directors approved Omer Shalev, Legal Counsel and responsible for the enforcement plan in the field of securities law and corporate law, as supervisor for internal enforcement in the antitrust field. As part of the assimilation of the enforcement plan in the antitrust field, in 2015 the supervisor provided training to Company workers and executives and initiated audits were performed to examine implementation of enforcement procedures.
B-31 d. Disclosure Provisions with Regard to Financial Reporting by the Corporation
d1. 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 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 2c to the December 31 2015 Financial Statements.
d.2. Disclosure on Value Assessment In accordance with Regulation 8.b.(i) to the Securities Regulations (periodic and Immediate Reports), 1970, the following are details regarding the valuations of the 777, 747 and 737 aircraft fleets prepared by the Company as of March 31 2015.
Recoverable Deprecia Sum – ted Cost Work Carried Assessmen Relevant Work (Fair Value in Use Whichever is in Books Out t Date Regulation Method Value) (Value in Use) Higher
In Millions of Dollars
Examination of March 31 Accounting Discounted 307 532 532 404 777 aircraft fleet 2015 Standard 36, cash flow investment Impairment of (DCF) depreciation (6 Assets. planes)
Examination of March 31 Accounting Discounted 70 411 411 151 747 aircraft fleet 2015 Standard 36, cash flow investment Impairment of (DCF) depreciation (6 Assets. planes)
Examination of March 31 Accounting Discounted 384 427 427 387 737 aircraft fleet 2015 Standard 36, cash flow investment Impairment of (DCF) depreciation (11 Assets. planes)
For the full valuation, see March 31 2015 quarterly report, published May 20 2015 (ref. no. 2015-01- 023328), included in this report by way of referral. Since the publication of the valuation of the comprehensive value of the aircraft fleet attached to the Board of Directors Report for the first quarter of 2015 and until the publication of this report no changes have occurred that may, according to the Company’s
B-32 estimates, alter the conclusion of in the valuation according to which no impairment shall be made in the books of the aircraft covered by the valuation.
d3. Events Subsequent to the Balance Sheet Date 1. Regarding the dividend declaration, see Note 25a to the Financial Statements,
2. On March 22 2016, after the balance sheet date, the Company Board of Directors approved (after receiving the approval of the Company Audit and Remuneration committee) the summoning of a special shareholders’ meeting for April 28 2016, with the following on the agenda: (1) an update to the terms of employment of the Company CEO, as follows: (a) increasing the monthly salary (gross) of the Company CEO to a total of 130,000 (one hundred and thirty thousand) NIS, retroactively starting January 1 2016; and (b) reducing the deferred bonus (as defined in the Company’s remuneration policy) relative to the Company CEO by 45% (forty-five percent) to 30% (thirty percent), similar to the Company’s other officers; (2) approval of a one-time bonus to Mr. Nimrod Borowitz, Head of Business Development, Long-Term Planning and Equipping at the Company, by 160,000 (one hundred and sixty thousand) NIS, a transaction in which a Company controlling shareholder has a personal interest.
The Company shall issue an immediate report on the summoning of a special shareholders’ meeting to approve the above decisions soon after the publication of the Financial Statements, which will provide broader details on the above decisions. d4. The Subjects to which the Company's Independent Auditors Draw Attention in their Opinion on the Financial Statements For detail regarding exposure to the approval of lawsuits as class actions and the Company’s exposure to these class actions see Note 16b to the Financial Statements.
B-33 e. Additional Information
Disclosure regarding Changes in the Economic Environment, the Implications of the Capital Market Crisis, Market Risks and Special Events 1. The international aviation industry is affected by the economic and security situation and by unusual events, such as the outbreak of epidemics and natural disasters in the world in general, and in specific areas in particular, as well as by the economic situation in Israel and around the world.
The following are changes occurring to jet fuel prices and NIS exchange rates from the end of the quarter until immediately prior to the publication of the December 31 2015 Financial Statements:
2. As of the reported date, the market price of jet fuel (before fees and supplier margins) weighted according to the markets in which the Company purchases jet fuel, was 102 cents per gallon, while as of a date immediately prior to the approval of the report this price is 112 cents per gallon, a 9% increase; note that jet fuel expenses constitute nearly 23% of the Company's revenue turnover, and therefore changes in price may have a material impact on its financial results. At the same time, the fair value of jet hedging instruments shall be set in accordance with price changes which occurred since the report date and the completion of accounting for some of the transactions. As of December 31 2015, the Company had agreements for hedging jet fuel prices, at a scope estimated at 37% of expected consumption for the next -12 months. Subsequent to the balance sheet date, the Company performed additional financial transactions to protect it from increased jet fuel prices in accordance with its hedging policy, and as of a date near the publication of this report, it is hedged at a rate of 38% of the expected consumption for the period from April 2016 to March 2017, as well as 30% for the period between April 2017 to December 2017 and 10% for the first quarter of 2018.
3. Immediately prior to the approval of this report, no material change occurred in the exchange rate of the NIS relative to the USD relative to the report date. The Company has hedging agreements on the NIS/USD exchange rate (see b.1.(5) above), the fair value of which may change according to changes in exchange rates. Note that the impact of exchange rates on next quarter's operating results shall be determined based on exchange rates in effect throughout the quarter and at its conclusion (March 31 2016).
Amikam Cohen David Maimon Chairman of the Board of Chief Executive Officer Directors
March 22 2016
B-34 Appendix A to the Report of the Board of Directors on the State of the Corporation's Affairs for the Period Ending December 31 2015
The Company’s Material Loans and Credit Frameworks: – As of December 31 2015
Clearance Board
Scope of Scope of Unpaid Principal Balloon Final Loan Loan Aircraft Loans Principal Balance and Interest Balance Loan Repayment Characteristics Loans (Thousands Securities: Interest Repayment (Thousands Repayment (Thousands Start Date Date of Dollars) (Thousands of Dollars) Frequency of Dollars) of Dollars)
The U.S. capital Fixed – 4 737-900 market with Ex- 737-900 188,894 160,369 2.623% Quarterly 3,935 - 26/11/2013 25/6/2026 aircraft Im's guarantee - 2.45% Foreign banking Libor institution variable + 2 777-200 777-200 278,718 120,915 margin Quarterly 5,065 36,428 23/07/2007 23/07/2019 aircraft – 0.01%- 0.8%-
Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding
El Al Israel Airlines Limited
2015 Consolidated Financial Statements
Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding
El Al Israel Airlines Limited
2015 CONSOLIDATED FINACIAL STATEMENTS
Table of Contents
Page
Independent Auditors’ Report C1 - C2
Financial Statements:
Consolidated Balance Sheets C3 - C4
Consolidated Statements of Operations C5
Consolidated Statement of Comprehensive Earnings C6
Consolidated Statement of Changes in Equity C7 - C9
Consolidated Cash Flow Reports C10 - C11
Notes to the Consolidated Financial Statements C12 - C82
Free Translation of the Hebrew Language Financial 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 2015. These control components have been determined as explained in the following paragraph. The Bank'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 2015.
We have also conducted an audit, in accordance with generally accepted Israeli auditing standards, of the Company’s Consolidated Financial Statements for December 31 2015 and 2014 and for each of the three years of the period ending December 31 2015 and our report, published March 22 2016, includes our unreserved opinion of those Financial Statements, as well as directing attention to exposure of 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 (ISR.) Member of Deloitte Touche Tohmatsu Limited
Tel Aviv, March 22 2016 - C-1 -
Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding
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 2015 and 2014 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 ending December 31 2015. These Financial Statements are the responsibility of the Company’s Board of Directors and management. Our responsibility is to express our opinion on these financial statements based on our audits.
We did not audit the financial statements of consolidated subsidiaries, the assets of which included in the consolidation represent approximately 0.3% and 0.3% of total consolidated assets as of December 31 2015 and 2014, and whose revenues included in consolidation constitute 0.9%, 1.1% and 1.2% of total consolidated revenues for the years ending December 31 2015, 2014 and 2013, respectively. Furthermore, we did not audit the financial statements of an associated company on a book value basis, the investment in which amounted to a total of $13,965,000 and $13,801,000 as of December 31 2015 and 2014, respectively, and the Company's share of its results for the year ending December 31 2015, 2014 and 2013 amounted to a total of $821,000, $874,000 and $207,000, 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 are of the opinion that this audit, and the reports of the other accountants, provide an adequate basis for the provision of our professional 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 2015 and 2014 and the results of their operations, changes to their equity and their cash flows for each of the three years in the period ending December 31 2015, 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 that stated in Note 16b 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 2015, and our March 22 2016 report includes an unreserved opinion regarding the effective existence of those components.
Brightman Almagor Zohar & Co. Certified Public Accountants (ISR.) Member of Deloitte Touche Tohmatsu Limited Tel Aviv, March 22 2016
- C-2 -
Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding
El Al Israel Airlines Ltd. Consolidated Balance Sheets
As of December 31 Note 2 0 1 5 2 0 1 4 Thousands Thousands of Dollars of Dollars Assets
Current Assets Cash and cash equivalents 3 112,668 54,681 Short term deposits 4 76,573 48,188 Trade and other receivables 5 161,392 * 138,503 Derivative financial instruments 19 1,467 - Prepaid expenses 6 25,686 26,465 Inventory 7 16,495 20,583
Total current assets 394,281 288,420
Non-Current Assets Long-term investments 8 20,072 *19,315 Fixed assets and intangible assets 9 1,171,454 1,197,398 Long-term prepaid expenses 6 11,997 9,335 Assets due to employee benefits 15 66,345 67,152
Total non-current assets 1,269,868 1,293,200
Total assets 1,664,149 1,581,620
* Reclassified. See Note 23.
The accompanying notes are an integral part of the financial statements. - C-3 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding
El Al Israel Airlines Ltd. Consolidated Balance Sheets
As of December 31 Note 2 0 1 5 2 0 1 4 Thousands Thousands of Dollars of Dollars
Liabilities and Equity
Current Liabilities Short-term borrowings and current maturities 14 193,226 154,648 Trade payables 11 133,924 145,900 Other payables 12 70,186 64,060 Provisions 16 10,478 10,099 Derivative financial instruments 19 39,474 73,333 Employee benefit obligations 15 105,691 95,564 Unearned revenues 13 290,096 264,162
Total current liabilities 843,075 807,766
Non-Current Liabilities Loans from banks and others 14 439,330 498,862 Employee benefit obligations 15 81,503 81,015 Derivative financial instruments 19 2,712 - Other payables 12 4,437 6,697 Deferred tax liabilities 17 56,183 14,704 Unearned revenues 13 42,127 61,141
Total non-current liabilities 626,292 662,419
Total liabilities 1,469,367 1,470,185
Equity 18 Share capital 155,012 155,012 Premium and capital reserves 240,556 *239,003 Accumulated loss )200,786( )282,580(
Total equity 194,782 111,435
Total liabilities and equity 1,664,149 1,581,620
* Reclassified. See Note 23.
Amikam Cohen – Chairman of the David Maimon – CEO Dganit Palti – CFO Board of Directors
Certification date of Financial Statements: Ben-Gurion Airport, March 22 2016.
The accompanying notes are an integral part of the financial statements. - C-4 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding
El Al Israel Airlines Ltd. Consolidated Statements of Operations
For the Year Ending December 31 Note 2 0 1 5 2 0 1 4 2 0 1 3 Thousands of Thousands of Thousands of Dollars Dollars Dollars
Operating revenues 20a 2,054,041 2,081,303 2,103,020 Operating expenses 20b )1,592,844( *)1,802,661( *)1,737,117(
Gross profit 461,197 278,642 365,903
Selling expenses 20c (194,911) *)202,140( *)203,120( General and administrative expenses 20d (93,237) *)100,811( *)98,506( Other income (expenses), net 20e )3,282( 11,525 )6(
)291,430( )291,426( )301,632(
Profit (loss) from regular activities 169,767 )12,784( 64,271
Financing expenses 20f )26,820( *)27,471( )25,858( Financing income 20g 821 912 *501
Financing income (expenses), net )25,999( )26,559( )25,357(
The Company's share of the profits of subsidiaries, net of tax 823 1,056 298
Profit (loss) before taxes on income 144,591 )38,287( 39,212
Tax benefit (taxes on income) 17 )38,057( 10,227 )12,545(
Net profit (loss) for the year 106,534 )28,060( 26,667
Profit (loss) per 1 NIS NV ordinary share. (In USD):
Basic and diluted profit (loss) per share 0.21 )0.06( 0.05
Weighted average of number of shares (in thousands) used in the calculation of profit (loss) per share Basic and diluted 495,719 495,719 495,719
* Adjustment due to retroactive implementation of changes in accounting policy, see Note 23.
The accompanying notes are an integral part of the financial statements. - C-5 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding
El Al Israel Airlines Ltd. Consolidated Statements of Comprehensive Earnings
For the Year Ending December 31 2 0 1 5 2 0 1 4 2 0 1 3 Thousands of Thousands of Thousands of Dollars Dollars Dollars
Profit (loss) for the year 106,534 )28,060( 26,667
Other comprehensive income:
Sums not classified to gain/loss in the future: Profit (loss) from the re-measurements of a defined benefit plan, net of tax )984( )258( 17,710
Sums classified to gain/loss in the future: Exchange rate differences due to the translation of foreign activity )137( )2,448( 1,704 Profit (loss) in respect of cash flow hedging, net of tax 5,346 )41,298( )926( Loss due to cash flow hedging – time value, net of tax )2,672( - -
Other comprehensive income (loss) for the year 1,553 )44,004( 18,488
Total profit (loss) for the year 108,087 )72,064( 45,155
The accompanying notes are an integral part of the financial statements. - C-6 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding
El Al Israel Airlines Ltd. Consolidated Statements of Changes in Equity
For the Year Ending December 31 2015 Capital Capital Reserve from Capital Reserve due Capital Transactions Capital Capital Reserve in to Reserves in with a Reserve in Reserve in Respect of Translation Respect of Re- Former Respect of Respect of Cash Flow Differences of Measurements Share Controlling Share-Based Cash Flow Hedging – Foreign of a Defined Accumulated Share Capital Premium Share-holder Payment Hedging Time Value Activity Benefit Loss Total Thousands of Thousands of Thousands of Thousands of Thousands of Thousands of Thousands of Thousands of Thousands Thousands of Dollars Dollars Dollars Dollars Dollars Dollars Dollars Dollars of Dollars Dollars
Balance as of January 1 2015 155,012 28,007 237,122 7,547 )33,228( - )846( 401 )282,580( 111,435
Yearly profit ------106,534 106,534 Other comprehensive income (loss) - - - - 5,346 )2,672( )137( )984( - 1,553
Total profit (loss) for the year - - - - 5,346 )2,672( )137( )984( 106,534 108,087
Expiry of stock options - 7,547 - )7,547( ------Dividends paid (see Note 18) ------)24,740( )24,740(
Total equity as of December 31 2015 155,012 35,554 237,122 - )27,882( )2,672( )983( )583( )200,786( 194,782
The accompanying notes are an integral part of the financial statements.
- C-7 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding
El Al Israel Airlines Ltd. Consolidated Statements of Changes in Equity
For the Year Ending December 31 2014 Capital Capital Reserve from Reserve due Capital Transactions Capital Capital to Reserves in with a Reserve in Reserve in Translation Respect of Re- Former Respect of Respect of Differences of Measurements Share Controlling Share-Based Cash Flow Foreign of a Defined Accumulated Share Capital Premium Share-holder Payment Hedging Activity Benefit Loss Total Thousands of Thousands of Thousands of Thousands of Thousands of Thousands of Thousands of Thousands of Thousands Dollars Dollars Dollars Dollars Dollars Dollars Dollars Dollars of Dollars
Balance as of January 1 2014 155,012 28,007 237,122 7,547 8,070 1,602 659 )254,520( 183,499
Loss for the year ------)28,060( )28,060( Other comprehensive loss - - - - )41,298( )2,448( )258( - )44,004(
Total comprehensive loss for the year - - - - )41,298( )2,448( )258( )28,060( )72,064(
Total equity as of December 31 2014 155,012 28,007 237,122 7,547 )33,228( )846( 401 )282,580( 111,435
The accompanying notes are an integral part of the financial statements.
- C-8 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding
El Al Israel Airlines Ltd. Consolidated Statements of Changes in Equity
For the Year Ending December 31 2013 Capital Capital Reserve from Reserve due Capital Transactions Capital Capital to Reserves in with a Reserve in Reserve in Translation Respect of Re- Former Respect of Respect of Differences of Measurements Share Controlling Share-Based Cash Flow Foreign of a Defined Accumulated Share Capital Premium Share-holder Payment Hedging Activity Benefit Loss Total Thousands of Thousands of Thousands of Thousands of Thousands of Thousands of Thousands of Thousands of Thousands Dollars Dollars Dollars Dollars Dollars Dollars Dollars Dollars of Dollars
Balance as of January 1 2013 155,012 28,007 237,122 7,547 8,996 )102( )17,051( )281,187( 138,344
Yearly profit ------26,667 26,667 Other comprehensive income (loss) - - - - )926( 1,704 17,710 - 18,488
Total profit (loss) for the year - - - - )926( 1,704 17,710 26,667 45,155
Total capital as of December 31 2013 155,012 28,007 237,122 7,547 8,070 1,602 659 )254,520( 183,499
The accompanying notes are an integral part of the financial statements.
- C-9 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Consolidated Statement of Cash Flow
For the Year Ending December 31 2 0 1 5 2 0 1 4 2 0 1 3 Thousands of Dollars
Cash Flow from Operating Activities Yearly profit (loss) 106,534 )28,060( 26,667 Adjustments Required for the Presentation of Cash Flow from Operating Activities – Appendix A 164,884 *191,503 *157,588
Cash deriving from operating activities, net 271,418 163,443 184,255
Cash Flows from (for) Investment Activity Acquisition of fixed assets (including general engine overhauls and payment on account of aircraft) )136,239( )173,966( )170,739( Proceeds from the realization of fixed assets 913 8,666 15,833 Investment in intangible assets )672( )3,031( )1,534( Change in deposits )28,139( *)30,275( *2,784
Cash used for investment activities, net )164,137( )198,606( )153,656(
Cash Flows from (for) Financing Activities Payment for loan raising costs )3,876( )9,293( )9,840( Receipt of loans from banking institutions and others 104,547 148,599 154,647 Repayment of loans from banking institutions and others )125,105( )143,513( )131,607( Increase (decrease) in short-term credit, net )982( 12,796 )11,456( Dividends paid )24,740( - -
Cash deriving from (used for) financing activities, net )50,156( 8,589 1,744
Increase (decrease) in cash and cash equivalents 57,125 )26,574( 32,343
Balance of cash and cash equivalents at the beginning of the year 54,681 86,140 52,810
Influence of changes in exchange rates on cash balances held in foreign currency 862 *)4,885( *987
Balance of cash and cash equivalents at the end of the year 112,668 54,681 86,140
* Reclassified. See Note 23.
The accompanying notes are an integral part of the financial statements.
- C-10 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Consolidated Statement of Cash Flow
For the Year Ending December 31 2 0 1 5 2 0 1 4 2 0 1 3 Thousands of Dollars Appendix A -
Income and expenses not involving cash flows: Depreciation and amortization (including disposal of accessories, disused components and consumption of perishable equipment) 161,108 142,158 136,973 Deferred taxes, net 37,721 )10,399( 11,464 Increase (decrease) in liabilities in respect of employee benefits and in provisions 10,442 )17,167( 13,250 Net capital gain from the sale of fixed assets )2,043( )5,457( )3,019( Change in derivatives (not through other comprehensive income): )28,976( 29,150 2,234 Expenses (income) from exchange rate differentials due to cash and cash equivalents )862( *4,885 * )987) Other changes )1,085( *)937( *1,042
Changes in asset and liability items: Decrease (increase) in trade and other receivables )12,436( *8,451 *6,122 Decrease (increase) in prepaid expenses )1,883( 833 2,759 Decrease in inventory 4,088 3,215 1,787 Increase (decrease) in trade and other payables )8,110( *25,351 *)30,842( Increase in unearned revenues 6,920 11,420 16,805
164,884 191,503 157,588
Appendix B - Payment and Receipt of Interest, Taxes and Dividends, Classified Under Cash Flow from Operating Activities1
Interest payments 15,877 16,422 15,359
Interest receipts 176 225 507
Tax payments – advances in respect of extraneous expenses 276 517 445
Dividend receipts 576 184 365
* Reclassified. See Note 23.
The accompanying notes are an integral part of the financial statements.
1 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.
- C-11 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 1 – General
El Al Israel Airlines Ltd. mainly operates in the field of transport of passengers and cargo, including luggage and mail, on scheduled flights (mostly) and charter flights between Israel and foreign countries.
In addition, the Company is engaged providing luggage handling and maintenance services at its home airport, sale of duty-free products and - through investees - in related activities, mainly production and supply of airline meals and management of several travel agencies abroad. For information on the Group’s operating segments, see Note 21.
Passenger traffic through Ben Gurion Airport (BGN) is characterized by a high level of seasonality. Most activity is during summer months, peaking July-September. Winter months (January-March) are characterized by low passenger activity levels.
In the matter of signing an agreement with aircraft manufacturer the Boeing Company (hereinafter: “Boeing”) for the purchase of 787-9 and 787-8 aircraft, as well as signing agreements and memorandums of understanding with aircraft leasing company, according to which the Company would lease additional planes of the same models, see Note 9d.
Note 2 – Basis for the Preparation of the Financial Statements
a. Statement regarding the implementation of International Financial Reporting Standards (IFRS) and Securities Regulations:
The Company's Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations thereof issued by the International Accounting Standards Board (IASB), and in accordance with the Securities Regulations (Yearly Financial Statements), 2010 (hereinafter – “the Securities Regulations”). Regarding the retroactive implementation of accounting policy regarding the classification of certain expenses and revenues in the Statement of Operations, see Note 23.
In accordance with Regulation 4 of the Periodic and Immediate Reports Regulations, the Company did not include separate financial information to these Financial Statements as per Regulation 9c of the Securities Regulations (Periodic and Immediate Reports), 1970, in light of the negligible influence the investees’ financial statements have on the Company’s Consolidated Financial Statements The criteria used by the Company in this decision are the scope of data of the subsidiaries from the company’s total assets, revenues, profits and cash flows from current activities (under 5%).
b. The Company’s Operating Currency and Foreign Currency
The Company's consolidated financial statements and those of each of its subsidiaries are presented in the currency of the primary economic environment in which they operate (hereinafter – “the Operating Currency”), while the Group’s consolidated Financial Statements are presented in dollars – the Company’s functional currency, as this currency is used to denote most of the Company’s revenues and expenses, including the purchase and financing of its aircraft.
Transactions executed in currencies other than said company's functional currency are recorded at the exchange rates effective as of the transaction date. Upon each balance sheet date, monetary items denominated in other currencies are translated using the exchange rate effective as of that date. Exchange rate differences are recognized in the Statement of Operations in the period in which they were generated (except for exchange rate differences for investees – see Note 22b).
- C-12 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 2 – Basis for the Preparation of the Financial Statements (continued)
c. Accounting Considerations and Critical Estimates
(1) General
In applying The Company’s accounting policy, Company management is sometimes required to exercise considerable accounting judgment with regard to estimates and assumptions used in determining the value of assets and liabilities in the Financial Statements. These estimates and related assumptions are based on past experience and other factors deemed relevant. Actual results may differ from these estimates.
(2) Provisions to Legal Proceedings
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, based on the Company management’s best estimate regarding the sum needed to clear the obligation. 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.
For claims quantified and not quantified in monetary sums, pending against the Company as of December 31 2015, see Note 16.
(3) Employee Benefits
The present value of the Company's severance pay liability for some of its Israeli employees, for vacation payment for all Israeli employees as well as for other benefits including pension plans for some local Company employees in the U.S. and UK, is based on large amounts of data determined based on actuarial estimate, using actuary assumptions. Changes in actuarial assumptions may impact the estimated value of the Company's obligation to pay these benefits. Accordingly, the Company reviews the actuary assumptions used in calculating the various obligations. For details of the actuary assumptions and for a sensitivity analysis regarding them, see Note 15.
(4) Useful lifespan and residual values of fixed assets and parts:
Company aircraft (including engines) are amortized throughout their useful lifespan, taking their residual value into account. Flight equipment such as accessories and parts is amortized throughout the lifespan of the relevant fleet of aircraft. As stated in Note 9, the estimate of the useful lifespan of the Company’s planes and engines, as well as their residual values, is determined in accordance with management's plans and estimates regarding the manner of use of the aircraft fleet as well as in accordance with market estimates regarding the sums of sale of equipment upon removal from service, among other things on the basis of aircraft price lists published from time to time.
Actual changes in the balance of useful lifespan and/or the residual value may lead to material changes in the Company’s depreciation rates and depreciation expenses.
(5) Aircraft Impairment Test
As stated in Note 9 below, in estimating value in use, the Company estimates future cash flows expected to derived from extended use of the Company’s aircraft and their realization at the conclusion of the usage period, and deducts them to their current value using a discount rate reflecting the operational risk of the aircraft fleet based on the Company’s weighted discount rate.
- C-13 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 2 – Basis for the Preparation of the Financial Statements (continued)
Regarding the key assumptions used in calculating the cash flow capitalization, see Note 9.(a).(5). Material differences in these estimates, or in part of them, may impact the value of the recoverable sum of these aircraft.
(6) Frequent Flyer Clubs
In order to calculate the balance of unearned revenues for frequent flyer points accumulated as of the report date and yet unused, the Company relies on the sales prices of the various products these points can be converted to, while taking into account the number of points that need to be converted in order to purchase those products in return for points, and on the Company’s experience regarding the point utilization forecast. Until the third quarter of 2015, value was derived from the sales price of the points to business partners, while making various adjustments. In the opinion of Company management, calculating the value of the point in accordance with the products’ sales prices, in lieu of the sale of the points themselves (while making the above adjustments), constitutes a better and more precise indication of the value of the point.
Changes in management’s estimates regarding the value of a point and the point’s non-exercise rate, may impact the timing of recognition of income from the sale of flight tickets, due to the different separation of the transaction’s components.
d. Newly Published Financial Reporting Standards and Interpretations
(1) First-time implementation of IFRS 9 Financial Instruments:
Regarding the early implementation of the third sage of IRFS 9 “Financial Instruments” on hedge accounting see Note 19b.
(2) IFRS 16 Leases:
The new standard coming into binding effect starting January 1 2019 or subsequently, states that all leases are classified as financial leases (besides an exception regarding leases for a period shorter than one year, an exception not material to the Company). Accordingly, the discounted value of the future leasing fees shall be listed as a “asset usage right” and shall be amortized into gain/loss across the lease period, against listing a financial liability.
In light of this, all of the Company’s aircraft leases currently treated as operational leases (as well as certain leases such as buildings and facilities) leased by the Company shall be recognized upon implementation of the standard as assets and liabilities in the Company’s balance sheet. In this preliminary stage, the Company is examining the impact of the standard on its Financial Statements, an examination that is just in its initial stages, however, in light of the material impact this standard is expected to have on its Financial Statements, the Company saw fit to describe in general terms the main expected influences, as are known from time to time, as follows:
o A significant increase in the scope of the Company’s assets and liabilities as a result of listing all of the Company’s lease agreements against the purchase of usage rights in the assets’ side against a commitment to a leasing fees in the liabilities’ side.
o A decrease in leasing expenses currently included in the operating expenses in the Statement of Operations, against an increase in depreciation and amortization expenses (amortization of usage rights) and financing expenses due to the interest embodied in the commitment to pay leasing fees, these influences will lead to an increase in the Company’s EBITDA.
- C-14 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 2 – Basis for the Preparation of the Financial Statements (continued)
o An increase in cash flow from the Company’s ongoing activity, due to the classification of the principal component of the leasing fees as a cash flow from financing activity, as it is a payment reflecting a repayment of a loan from the lessor.
Early implementation of this standard is possible, on the condition that IFRS 15 Revenues from Contracts with Customers is also implemented. As a rule, the standard shall be implemented retroactively, but entities shall be entitled to select certain adjustments as part of the standard’s transitional orders in the matter of its implementation in previous reported periods.
Regarding leasing fees paid by the Company for its existing leases, see Note 10.
(2) IFRS 15, Revenue from Contracts with Customers
The new standard, which will come into binding effect regarding yearly reporting periods starting January 1 2018 or subsequently, establishes a comprehensive and uniform mechanism that arranges the accounting treatment of revenues deriving from contracts with customers. The standard’s core principle is that recognition of income must reflect the transfer of merchandise or services to customers at a sum representing the economic benefits the entity is expected to receive in return. For this purpose, the standard states that recognition of income shall exist when the entity transfers the goods and/or services listed in the contract to the customer in such a manner that the customer achieves control of these goods or services.
Early adoption of the standard is possible. As a rule, the standard shall be implemented retroactively, however the option is given to select certain adjustments as part of the standard’s transitional orders in the matter of its implementation in previous reported periods.
At this stage, the Company is studying the impact of the standard on the contracts with its customers and on recognition of revenues from them. This examination has yet to be completed.
Note 3 – 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/or lacks defined designation, 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 exceeds three months and is no greater than one year are classified under short term deposits.
Composition: As of December 31 2 0 1 5 2 0 1 4 Thousands of Dollars
Cash and bank balances 80,612 21,778 Cash equivalents 32,056 32,903 Total cash and cash equivalents 112,668 54,681
- C-15 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 4 - Short-Term Deposits
Composition: As of December 31 2 0 1 5 2 0 1 4 Thousands of Dollars
Short term deposits 60,000 - Restricted deposits for jet fuel hedging agreements - 34,611 Deposit made by the Company as collateral for a banking institution. See Note 14d 8,030 5,000 Deposit due to surplus in payables fund (1) 8,361 8,382 Others 182 195 Total short term deposits 76,573 48,188
(1) A NIS deposit deriving from the proceeds of option exercises (Series 1) the Company received as part of the Company’s offering process as described in Note 15.c.(2).
Note 5 – Trade and Other Receivables
a. Accounting policy:
The Company’s customers are reviewed for indications of impairment upon each balance sheet date. Such impairment occurs when there is objective evidence that as a result of one or more event, the chances of collecting on the customer's debt have been negatively impacted. This evidence may include, among other things, significant financial difficulties on behalf of the debtor or meeting current payments.
During impairment the book value of the customers is amortized while using a provision account to doubtful debt. The provision is calculated specifically (the Company does not make a general provision due to materiality). When the Company estimates that these trade receivables are not ultimately collectible, they are written off against the provision account. Changes in the value of the provision account are recognized in the Statement of Operations.
b. Composition: As of December 31 2 0 1 5 2 0 1 4 Thousands of Dollars Customers: Open accounts 104,752 96,597 Credit card companies 28,767 27,660 Airlines (see 1 below) 331 1,974 133,850 126,231 Less provision to doubtful debt (mostly over 90 days) )7,903( )7,511( 125,947 118,720 Other receivables (see e. below) 35,445 19,783 Total trade and other receivables 161,392 138,503
(1) Most accounts between airlines (mainly due to the sale of a flight ticket for one airline and flying the customer on a different one) are settled through the International Air Transport Association (IATA) clearing system. (2) The average credit for Company services provided is 26 days (in 2014: 27 days). (3) The average debt period of trade receivable debts the repayment date of which has passed as of December 31 2015 is 42 days (as of December 31 2014 – 35 days).
- C-16 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 5 – Trade and Other Receivables (continued)
The Group has, in general, several types of trade receivables in Israel and abroad: IATA agents, non- IATA agents and business customers (private customers purchase tickets through payments in cash or credit cards). The credit rating of IATA agents is established in accordance with BSP parameters for passenger agents and CASS for cargo agents abroad. 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. For its business customers the Company holds credit risk insurance.
In establishing the likelihood of the repayment of customer debts, the Company is testing changes in the quality of trade receivable credit from the date said credit was granted until 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.
c. Age of debts deviating from credit days established for which no provision has been included in doubtful debts: As of December 31 2 0 1 5 2 0 1 4 Thousands of Dollars
0-90 Days 2,651 3,447 Over 90 days 986 436 Total 3,637 3,883
d Movement in provision to doubtful debt: As of December 31 2 0 1 5 2 0 1 4 Thousands of Dollars
Balance at the beginning of the year 7,511 5,215 Loss from impairment due to receivables, net 1,361 2,296 Doubtful debt sums erased )969( - Balance at the end of the year 7,903 7,511
e. Other receivables As of December 31 2 0 1 5 2 0 1 4 Thousands of Dollars
Government institutions 10,491 12,290 Deposits at trade payables 3,062 3,013 Receivables due aircraft sale 7,340 - Receivables due to renovation of leased engines 3,108 - Other receivables 11,444 4,480 35,445 19,783
- C-17 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 6 - Prepaid Expenses
Agent commissions referring to revenues not yet recognized (including for flight points) 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 for the sales covered by the commissions.
Composition: As of December 31 2 0 1 5 2 0 1 4 Thousands of Dollars Current: Commissions due to unused flight tickets 14,564 14,775 Frequent flyer point commissions 1,384 963 Aircraft leases 6,268 5,123 Others 3,470 5,604 25,686 26,465
Non-current: Frequent flyer point commissions 1,211 2,057 Aircraft leases 10,786 7,278 11,997 9,335
Note 7 – Inventory
Composition: As of December 31 2 0 1 5 2 0 1 4 Thousands of Dollars
Jet fuel for consumption 4,497 5,778 Materials and foodstuff 6,537 6,358 Chemicals 3,749 3,926 Duty free products 1,712 4,521 16,495 20,583
Note 8 – Long-Term Investments
a. Composition: As of December 31 2 0 1 5 2 0 1 4 Thousands of Dollars
Associated companies (see Section b. below) 17,821 17,123 Investments at fair value (see Section c. below) 1,549 1,190 Long-term deposits 702 1,002 Total 20,072 19,315
- C-18 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 8 – Long-Term Investments (continued)
b. Investments in associates:
An associate is an entity in which the Company has a material influence, but does not control. Material influence is the power to participate in decision making with regard to financial and operational policies of the affiliated company. 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. As a result, the Company has material influence over “Cargo and Handling Terminals Ltd” (Maman), as the Company holds 15% of its stock, but it is entitled to exercise its potential rights options to shares that may lead to holding 25% of Maman’s shares) immediately and realize its material influence.
The Group examines the presence of signs of impairment in these investments, in accordance with the existence of objective evidence of the fact that the future cash flows expected from the investment were negatively impacted and regarding Maman, as its shares are traded on the Tel Aviv Securities Authority, in accordance with changes in the price of its share as well.
Composition of investments handled using the book value method: As of December 31 2 0 1 5 2 0 1 4 Thousands of Dollars
MAMAN due to shares 13,965 13,801 MAMAN due to options 2,925 2,290 Kavei Chufsha Ltd. 914 1,015 Others 17 17 Total 17,821 17,123
c. Investments at fair value:
The investments include (in addition to investment in Sita to the sum of $1.2 million) investment ventures, which operate in conjunction with the Company, and in return the Company holds capital instruments in these ventures (mainly start-up companies). These investments are part of the comprehensive “Cockpit” venture, which is an arm of the Company intended to serve as a hothouse for investment ventures touching upon the field of aviation, both in terms of financial support and in terms of cooperation with the Company in order to promote the venture.
In the reported year, the Company recognized a $300,000 profit due to the revaluation of one of these ventures, which was charged to other revenues in the Statement of Operations, on the basis of a capital offering made by the same venture.
Note 9 – Flight Equipment, Other Fixed Assets and Intangible Property
a. Accounting policy for amortization and examination of impairment of Company aircraft and flight equipment:
(1) General:
The Company’s fixed assets largely consist of the Company's planes and flight equipment (such as parts and accessories, spare engines and so on). In addition to these, the fixed assets include the Company's buildings and facilities, transportation equipment, furniture and computers. Fixed asset items are presented in the balance sheet at cost, net of accumulated amortization.
- C-19 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 9 – Flight Equipment, Other Fixed Assets and Intangible Property (continued)
(2) Amortization of Company Aircraft
The Company’s aircraft are amortized while being separated into two components – the aircraft body (including the engine part that is not potential, as described below), amortized in a straight line over the course of its useful life span while taking into account the expected residual value at the end of the period, as well as the overall component cost for the aircraft engine, called “potential”, which is amortized in accordance with the engine hours carried out in practice regarding the expected engine hours until the next restoration date.
In cases where the Company has entered into engine refurbishment agreements of an insurance nature, the Company records expenses as specified in the insurance agreements, and the cost of general refurbishment is incurred by the insurer. In these cases, the potential component is not amortized, so that the separate component is its expected residual value at the end of the engine's projected period of use. Despite the above, note that when the residual value for these engines is revised downward, the potential value is amortized for the difference over the balance of the engine’ life span.
The annual depreciation rate of each aircraft is decided considering its residual value, as it appears in the prevailing aircraft price list, which estimate the value of an aircraft for the year that 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 year 2015:
Average Yearly Aircraft Fleet Deprecation Rate
737 6.8% 747-400 7.5% 777 5.7% 767 26.5%* * The high depreciation rate for this fleet derives from the fact that these aircraft were purchased toward the end of their useful life span.
The residual value and useful life span are reviewed by Company management on a regular basis. Changes are treated as changes to estimates on a "hence forward" basis.
As of December 31 2015, the balance of years remaining for the Company's aircraft fleet is between three months and 20 years, and the balance of the years remaining for the general engine refurbishments is between four years and 14 months.
- C-20 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 9 – Flight Equipment, Other Fixed Assets and Intangible Property (continued)
In the end of the reported year, and in light of the equipping plans detailed in D below, a change has occurred in the projected retirement dates of the aircraft and engines of the 747 and 767 fleets owned by the Company. As a result of the changed estimate of departure dates as noted above, as well as the revision to the residual values, the Company recognized an additional depreciation expense in the fourth quarter of the year to the sum of $1,659,000. In 2016, the Company’s depreciation expenses are expected to increase by $6,636,000 for these changes.
(3) Accessories and Spare Parts
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.
(4) Establishment and Maintenance Costs for Company Aircraft
The cost of the aircraft includes all of the costs involved in purchasing the plane, including acceptance costs. Subsequently, consecutive costs are charged to the book value of Company planes, in the event that they constitute an asset that will be used by the Company in a number of periods (such as general engine overalls or costs that lead to additions or significant upgrades to the aircraft’s performance or form). Regular maintenance costs including engine refurbishments that are not overalls are charged to the Statement of Operations upon creation.
(5) Impairment Examination of Company Aircraft and Assessment of Recovery Sum
At the end of each reported period, the Company tests whether there are any signs pointing to impairment in the value of the Company’s fleets, which as of these Financial Statements constituted the Company’s cash-generating units (see below). These signs largely consist of a review of the difference between the book value of the aircraft fleet and their price lost prices published every six months, a significant worsening in the contribution of the various aircraft fleets and material changes in the Company’s weighted cost of capital. 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 (aircraft price lists) or its value in use, whichever is higher. In estimating value in use, the Company estimates future cash flows expected to derive from the use of the aircraft (projected contribution) and their realization at the conclusion of the usage period (via the price lists, as noted), and deducts them to their current value using a discount rate reflecting the operational risk of the aircraft fleet based on the Company’s weighted discount rate.
As of March 31 2015, the Company examined the recoverable value of three aircraft fleets in which signs of deterioration were evident: the 777 fleet, the 747 fleet and the 737 fleet.
The following are key assumptions used in calculating value in use:
(1) The expected contribution from the aircraft fleet was based on results listed in practice in Q1 2015 and the estimated results for Q2 (which were not materially different from results in practice) and the budget for the second half of the year (less imputed tax), projected forward unchanged across the economic life span of the entire aircraft fleet, unless expressly noted otherwise.
(2) The useful life of the 777 fleet upon performing the test is 8 years of activity on average, for the 747 fleet - 4 years of activity on average and for the 737 fleet – 17 years of activity on average.
- C-21 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 9 – Flight Equipment, Other Fixed Assets and Intangible Property (continued)
(3) The weighted average capitalization interest after tax of 5.5% is equivalent to the capitalization interest before tax of 23.7% for the 747 fleet, 14% for the 777 fleet and 10.1% for the 737 fleet.
In an examination conducted by the Company on the same date, it found that the recoverable sum for each aircraft fleet surpasses its depreciated cost as of that date.
As of December 31 2015, no additional signs of impairment were detected regarding the state on March 31 2015, and in particular regarding the 737 fleet, it found that the fair value of the fleet aircraft (in accordance with a revised price list published in November 2015) exceeds their book value. Regarding the 747 and 777 fleets, although the price list price was found to be lower than the fleets’ book value, it found that the depreciation expenses the Company recognized since the latest impairment examination exceeds the decrease in fair value of the aircraft in accordance with new price lists published (which also take the planes’ aging into account). In addition, the yearly contribution of the aircraft fleet improved relative to the calculation made on March 31 2015, and furthermore, no material change has occurred in the useful life span and market interest rates regarding that date.
Accordingly, over the course of 2015, no provision to aircraft impairment was recognized.
(6) Change in Composition of Cash-Generating Units
Until the Financial Statements for the third quarter of 2015, Company management believes that recoverable amounts for aircraft should be studied relative to their depreciated cost after grouping aircraft fleets, which in its opinion constituted separate cash-generating units. According to an additional examination conducted on this matter, the positive cash flows deriving from each Company aircraft fleet are not independent of the cash flows of other fleets. This is due to the fact that the Company’s aircraft fleet are largely interchangeable, often flying to the same destinations as planes from different fleets and in any event, they all constitute part of the Company’s route network, which the Company manages as a unified complex. Therefore, starting from the Financial Statements for the first quarter of 2016, the Company shall treat its entire aircraft fleet as a single cash-generating unit in the matter of the impairment test. To be clear, this change in the company’s cash-generating units has no actual influence on the results of the impairment tests conducted in previous periods and in the current reported year.
(7) Acquisition of Other Fixed Assets and Intangible Assets
The balance of the Company’s assets is amortized in a straight line over the course of the expected life span of the various assets, or in the case of leasehold improvements, for its expected life span or that asset's rental period, whichever is shorter.
(8) Regarding critical accounting considerations and key sources for estimating uncertainty used in determining the value of the assets in the Financial Statements, see Note 2.c.(5).
b. Composition: As of December 31 2 0 1 5 2 0 1 4 Thousands Thousands of Dollars of Dollars
Flight equipment – depreciated cost 1,107,477 1,133,888 Other fixed assets and intangible assets – amortized cost 63,977 63,510 1,171,454 1,197,398
- C-22 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 9 – Flight Equipment, Other Fixed Assets and Intangible Property (continued)
c. Flight equipment:
Payments General on Account Engine of Aircraft Passenger Refurbish- Spare and Accessories Aircraft ments Engines Engines and Parts Total Thousands Thousands Thousands Thousands Thousands Thousands of Dollars of Dollars of Dollars of Dollars of Dollars of Dollars Cost: As of January 1 2015 1,623,853 155,761 25,605 77,194 249,159 2,131,572 Classification 30,324 - - )30,324( - - Additions 16,829 7,642 - 53,429 44,428 122,328 Disposals )29,181( )2,129( - - )39,817( )71,127(
As of December 31 2015 1,641,825 161,274 25,605 100,299 253,770 2,182,773
Accumulated depreciation: As of January 1 2015 797,396 26,985 14,408 - 158,895 997,684 Yearly depreciation 90,022 12,146 1,168 - 10,557 113,893 Disposals )23,182( )2,129( - - )10,970( )36,281(
As of December 31 2015 864,236 37,002 15,576 - 158,482 1,075,296
Depreciated Cost: As of December 31 2015 777,589 124,272 10,029 100,299 95,288 1,107,477
Payments General on Account Engine of Aircraft Passenger Refurbish- and Accessories Aircraft ments Engines and Parts Total Thousands Thousands Thousands Thousands Thousands Thousands of Dollars of Dollars of Dollars of Dollars of Dollars of Dollars Cost: As of January 1 2014 1,565,455 145,183 25,605 79,806 244,607 2,060,656 Classification 53,370 - - )53,370( - - Additions 45,026 21,777 - 50,758 40,661 158,222 Disposals )39,998( )11,199( - - )36,109( )87,306(
As of December 31 2014 1,623,853 155,761 25,605 77,194 249,159 2,131,572
Accumulated depreciation: As of January 1 2014 754,881 29,355 13,197 - 162,750 960,183 Yearly depreciation 82,512 6,462 1,211 - 7,394 97,579 Disposals )39,997( )8,832( - - )11,249( )60,078(
As of December 31 2014 797,396 26,985 14,408 - 158,895 997,684
Depreciated Cost: As of December 31 2014 826,457 128,776 11,197 77,194 90,264 1,133,888
- C-23 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 9 – Flight Equipment, Other Fixed Assets and Intangible Property (continued)
In general, the vast majority of the Company’s flight equipment includes engines and associated equipment and excluded parts, pledged in favor of the bodies accompanied by fixed and specific first-degree liens, including potential and associated rights such as leasing and insurance. The Company is precluded from transferring or listing an additional lien on the assets without the advance consent of the accompanying bodies. d. Equipping plan for purchasing and leasing new wide-bodied 787 aircraft:
Aircraft Purchases
On October 29 2015 the Company signed an agreement with Boeing according to which the Company undertook to purchase 4 new 787-9 Dreamliner aircraft and 5 new 787-8 Dreamliner aircraft from Boeing (“the Purchase Agreement” and “the Planes”, respectively). In accordance with the Purchase Agreement, the Company was granted terms offering flexibility in the matter of the dates the planes were received in such a manner so as to allow compatibility with the Company's requirements from time to time, regarding its aircraft fleet, including the right to convert them to aircraft of different Boeing models.
In addition, the Company was granted options to purchase 7 additional 787-10 aircraft (“the Option Aircraft”), so long as their delivery date is no later than December 31 2023. The Company paid non- refundable advance payments for the option planes at a non-material sum. In addition, in a situation in which the Company decides to exercise any of the Option Aircraft, on each exercise date the Company shall have the right to purchase an additional option to purchase a 787-10 aircraft, up to a total of 6 additional planes (“the Additional Option Aircraft”). The Company will pay a non-refundable advance payment near the date the option in question is purchased. The Option Aircraft and the Additional Option Aircraft are expected to be received between 2020 and 2023. Note that according to the purchase agreement, the Company has the option of canceling some of the planes, and the Option Aircraft and the Additional Option Aircraft have conversion rights for planes of other 787 series models.
The estimated cost for the purchase of the nine planes as well as the aircraft engines, the alternate engines and the spare parts (for all 15 aircraft, including the leased aircraft) amounts to $1,250 million US (“the Purchase Cost”). Payment for each aircraft shall take place upon delivery to the Company, with the exception of an advance payment of 30% of the price of the plane, which will be paid on a later date, in accordance with the terms of the Purchase Agreement.
Aircraft Leases
In addition to the purchase agreement, the Company signed agreements to lease three new 787-9 Dreamliner aircraft as well as two more 787-8 aircraft. Additionally, the Company has signed additional memorandums of understanding for the sale and lease back agreement for two of the 787-8 aircraft purchased from Boeing, as noted above, so that the aircraft purchased by the Company from Boeing would be sold to the leasing company and leased back from it by the Company, along with the lease of an additional 787-9. The leases are for periods of 12 years, with some of the agreements have options to extend and/or options for the early conclusion of the lease after 10 years, subject to paying exit fees.
In light of the above, in total 15 Dreamliner wide-bodied aircraft will join the Company, with 7 of them owned by the Company and 8 of them leased by it.
In the matter of the Company’s commitment to pay the minimal leasing fees covered by these leases, see 10d.
- C-24 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 9 – Flight Equipment, Other Fixed Assets and Intangible Property (continued)
d. Equipping plan for purchasing and leasing new wide-bodied 787 aircraft (continued):
General
The 8 787-9 aircraft are intended to replace the 747-400 fleet and are expected to be received by the Company between 2017 and 2019. The seven 787-8 aircraft are intended to replace the 767-300 fleet and are expected to be received by the company between 2019 and 2020. The Option Aircraft and the Additional Option Aircraft, if exercised, are expected to be received between 2020 and 2023.
In February 2016, subsequent to the balance sheet date, the Company signed agreements with engine manufacturer Rolls Royce regarding engines installed in the owed aircraft and in the leased aircraft. The agreements include, among other things, an agreement to purchase four alternate engines. To be clear, the purchase sum for the alternate engines was included in the purchase cost noted above.
e. Receipt of narrow-bodied 737-900ER aircraft:
In March 2015 the Company signed receipt papers for an additional Boeing 737-900ER aircraft (“the Plane”), the fifth of this model purchased by the Company. The aircraft joined the Company’s narrow- bodied aircraft fleet in April 2015 and is operating on short- and medium-range destinations. In order to finance the aircraft purchase, the Company took a loan from a Canadian bank guaranteed by the American Export-Import Bank (“Ex-Im”). The loan, to the sum of $48 million, will be repaid over the course of 12 years from receipt of the plane.
In February and March 2016, subsequent to the balance sheet date, three additional planes of this model were delivered to the Company. To finance their purchase, the Company engaged in loan agreements with three local banks. Each loan is to the sum of $41 million and will be repaid over the course of 12 years.
f. Sale of 737-700 Aircraft and their Removal from Service
In November 2015 a memorandum of understanding was signed for the sale of two Company Boeing 737-700 aircraft to Aero Capital Solutions in return for a total of $16 million for both aircraft, which will mostly be paid (with the exception of non-material advance payments) upon delivery of the aircraft. In December 2015, the agreement was signed for the sale of one of the planes, which was delivered to the buyer in January 2016, and proceeds were received for it (the aircraft was subtracted from the Company’s books on the report date). The second plane will be delivered in April 2016.
- C-25 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 9 – Flight Equipment, Other Fixed Assets and Intangible Property (continued)
g. Other fixed assets and intangible assets:
As of December 31 2015 As of December 31 2014 Accumulated Accumulated Cost Depreciation Balance Cost Depreciation Balance Thousands Thousands of Thousands Thousands Thousands of Thousands of Dollars Dollars of Dollars of Dollars Dollars of Dollars Buildings and installations at BGN 86,310 57,096 29,214 83,832 54,559 29,273 Computers and office furnishings 167,116 155,131 11,985 159,102 148,630 10,472 Ground machinery and equipment 67,439 57,365 10,074 66,132 56,778 9,354 Leasehold improvements of rented offices 25,208 22,016 3,192 25,206 21,843 3,363 Vehicles and garage equipment 6,338 5,255 1,083 6,570 5,509 1,061 Freehold offices 3,150 2,478 672 3,090 2,399 691 Passenger and cargo terminals 11,524 11,524 - 11,524 11,524 - Intangible assets (1) 22,195 14,438 7,757 21,275 11,979 9,296 389,280 325,303 63,977 376,731 313,221 63,510
(1) This balance includes rights to use security equipment and software purchased by the Company including costs involved in their development.
Note 10 - Leases
a. General background and accounting policy:
Upon engaging in a lease, the Company examines in accordance with the terms of the lease whether the lease constitutes a financial or operational lease. Most of the Company’s leases are aircraft leases, which were all recognized as operating leases.
As of December 31 2015, the Company leases 15 aircraft for periods of between 5 and 16 years. The Company pays the lessors a fixed monthly sum to lease the aircraft, plus an additional sum paid for maintenance reserves, deriving from the scope of use of the aircraft, which will be used by the lessor to finance refurbishment of the aircraft.
Lease expenses are recognized in a straight line for the duration of the lease. In lease agreements where no leasing fee, or a reduced or increased leasing fee, is paid at the start of the leasing period, the Company recognizes expenses for the minimal leasing fees on a straight line basis for the duration of the lease.
Leasing expenses stipulated on the scope of use of the leased asset, such as sums that need to be deposited to the maintenance reserves of leased aircraft, are recognized as a current expense in the period in which the expense is created.
Regarding the publication of IFRS 16 on leases, see note 2.d.(2) above.
Regarding leases of 787 aircraft as part of the equipping plan, see Note 9d.
- C-26 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 10 - Leases (continued)
b. Engagements with the Israel Airports Authority (IAA)
The Company has a use-right (permit) to 290 hectares of land at Ben Gurion Airport (hereinafter – “BGN”) until December 31, 2010 with an option to renew it for an additional 25-year period. The Company informed the IAA of 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. Furthermore, the Company has the right to use certain facilities and buildings in the real estate area in question, including use of the BGN warehouse (regarding which the current lease agreement is expected to expire at the end of 2016), and holds the right to us the guest lounge in BGN’s Terminal 3. As noted, most of the rental and authorization agreements have come to a conclusion as of the report, and the Company is negotiating with the Airport Authority to extend them.
c. Payments Recognized as Expenses For the Year Ending December 31 2 0 1 5 2 0 1 4 2 0 1 3 Thousands of Dollars
Aircraft and engine leases 95,630 *83,495 *89,313 Land and structure usage rights 4,463 4,176 3,726 100,093 87,671 93,039
* Restated in order to express the engine leases not through sale and re-lease (SLB).
d. Commitments for Minimal Future Leasing Payments for Non-Revocable Operational Leases
The following are details of sums of payments for minimal future leasing fees for operating leases of aircraft in active Company service, which cannot be canceled. The sums do not include payment for maintenance reserves for operational leases of aircraft and engines, which are stipulated on their scope of use.
As of December 31 2 0 1 5 2 0 1 4 Thousands of Dollars
2015 - 56,354 2016 50,755 47,263 2017 36,308 32,728 2018 27,905 21,064 2019 onward 145,674 136,349 260,642 293,758
* The minimal leasing fees detailed above include lease payments expected for the Company following the extension of the option to use IAA areas as detailed in b. above, despite the fact that the extension agreement has yet to be signed, consistent with the current expenses recognized for his lease on a periodic basis.
In addition, the lease agreements of the 5 Dreamliners described in Note 9d, signed in December 2015 and January 2016, are for a period of 12 years, with the nominal leasing fees amounting to $727 million, and are expected to be paid over the course of 2017-2032.
- C-27 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 11 – Trade Payables
a. Composition: As of December 31 2 0 1 5 2 0 1 4 Thousands of Dollars
Open accounts 131,577 145,152 Airlines 2,347 748 133,924 145,900
b. The average credit period granted as a result of purchasing goods and services is 45 days (2014: 39 days), for which the Group does not pay interest.
Note 12 - Other Accounts Payable
a. Current liabilities: As of December 31 2 0 1 5 2 0 1 4 Thousands of Dollars
Port taxes payable 34,752 33,615 Payables for flight segments in foreign companies that have yet to be realized (1) 11,736 12,823 Interest payable 1,979 1,975 Deposits received for passenger groups 4,575 2,980 Payables due to cargo claims 2,344 1,669 Other accounts payable 14,800 10,998 70,186 64,060
(1) This balance reflects the sales sums of flight tickets sold by the Company, with the flights performed by foreign airlines, so that the sum the company collected from its customers is transferred to these foreign companies.
b. Non-current liabilities: As of December 31 2 0 1 5 2 0 1 4 Thousands of Dollars
Payables due to cargo claims - 2,260 Leasing incentives 4,437 4,437 4,437 6,697
- C-28 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 13 - Unearned Revenues
Flight ticket sales are included as unearned until the flight date, when they are charged to gain/loss. 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 Company 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.
Regarding the frequent flyer programs, the Group has applied IFRIC 13, Customer Loyalty Programs. Accordingly, sales of flight tickets in which the Company grants its customers flight points that can be converted to flights on a later date, are handled as multi-component transactions, while allocating the payment received from the customer for the flight component and the points component, based on the fair value of the flight point estimated by the Company. The proceeds attributed to the club points will be recognized as income when the points are converted into service provided by the Company (for instance, a “bonus” flight ticket”) and when the service is provided by the Company (for instance, the actual flight of the bonus ticket). Until the revenue recognition date, the club point obligation is recognized as unearned revenue.
Revenues from the sale of frequent flyer club points to business partners are largely included under unearned revenues until the points are used by the end customers, and are exercised as flight tickets.
Regarding critical accounting considerations and key sources for uncertainty estimates used in determining the value of the liability in the Financial Statements, see Note 2.c.(6).
a. Current liabilities: As of December 31 2 0 1 5 2 0 1 4 Thousands of Dollars
From the sale of flight tickets 242,917 235,545 For frequent flyer points 47,179 28,617 290,096 264,162
b. Non-current liabilities: As of December 31 2 0 1 5 2 0 1 4 Thousands of Dollars
For frequent flyer points 42,127 61,141
- C-29 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 14 - Loans from Banking Corporations and Others
The loans the Company takes to purchase aircraft are first recognized at the sum raised, after deducting transaction costs and deducting commissions paid, mainly for collateral provided the Company by third parties, such as Ex-Im collateral; see below. Subsequent to initial recognition, loans are measure at amortized cost using the effective interest method.
a. Composition of short-term borrowings and current maturities: As of December 31 2 0 1 5 2 0 1 4 Thousands of Dollars
Current maturities of long-term loans and others 173,975 134,416 Bank overdraft 19,251 20,232 193,226 154,648
Yearly interest (in %) 0.3-5.0 0.2-5.4
b. Composition of long-term loans: As of December 31 2 0 1 5 2 0 1 4 Thousands of Dollars
Loans at variable interest 374,789 414,524 Loans at fixed interest 258,641 239,464 633,430 653,988 Less - current maturities )173,975( )134,416( Less – balance of loan raising costs )20,125( )20,710( 439,330 498,862
Effective yearly interest from banks and others (in %) 1.2-5.7 1.1-6.1
c. Fair value of long term fixed interest loans:
Book Value (1) Fair Value As of December 31 As of December 31 2 0 1 5 2 0 1 4 2 0 1 5 2 0 1 4 Thousands Thousands Thousands Thousands of Dollars of Dollars of Dollars of Dollars
Long term fixed interest loans 258,641 239,464 254,567 236,248
(1) The fair value of the loans is based on calculating the current value of cash flows according to an interest rate of 2.6% as of December 31 2015 (2.7% as of December 31 2014), as used for similar loans with similar characteristics. (Level 2).
- C-30 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 14 - Loans from Banking Corporations and Others (continued)
d. Ratio of loans to securities:
Some of the credit agreements state that the balance of the debt to the bank compared to the market value of the pledged aircraft shall be no less than a ratio of between 65% and 80% (see 1 below). An examination of compliance with this ratio should be conducted once a year (in some agreements – twice a year) based on certain stipulated international professional publications set regarding the planes’ market value. It was also decided 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.
Uncleared Unpaid Balance to Value Balance in Final Loan of Collateral Loan Thousands Repayment Ratio Characteristics of Dollars Aircraft as Collateral Date Requirement
3 777-200 aircraft 3 737-800 aircraft Local banking 1 737-700 aircraft institution (1) 122,500 2 747-400 aircraft (2) July 27 2017 80%
Local banking August 16 institution 16,667 1 747-400 aircraft (3) 2017 65%
(1) A cross-default mechanism exists between the various loans of the same banking institution. (2) With the exception of one 747-400 aircraft, taken as collateral at a ratio of 50%. (3) An $8 million deposit serving as additional collateral for the banking institution.
As of December 31 and near the report publication date, the Company is meeting the required ratio of loans to securities.
e. Additional details:
(1) Debentures issued by a designated company:
Loans to the sum of $160,369,000 take to finance aircraft are debentures issued by SPCs that are not owned by the Company, and are guaranteed by Ex-Im collateral, with the source of the obligation being principal and interest payments paid the designated company by the Company. In the event that the debentures are not redeemed properly by the Company, and the Ex-Im collateral is realized, Ex-Im shall sell the pledged aircraft and redeem the balance of the debentures. Inasmuch as the aircraft realization funds will not suffice to cover the sum of the collateral, the Company will be committee to return the balance of the debt to Ex-Im.
(2) Additional loans:
The Company has additional loans the balance of which in the December 31 2015 balance sheet amounts to $334 million. These loans are not material in and of themselves, with the exception of a loan the balance of which is $121 million, against which the Company pledged two 777-200 aircraft as collateral, which is expected to be redeemed in equal quarterly payments by July 2019.
- C-31 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 14 - Loans from Banking Corporations and Others (continued)
(3) Early repayment
Most existing loans as of December 31 2015 may be repaid early by the Company as is generally accepted. In addition, most of the loan agreements taken by the Company feature a he right on behalf of the bank to immediately redeem the balances of the loans toward the relevant bank in the event of actions such as mergers or 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 loans in the event of other standard occurrences generally accepted in financing transactions.
(4) For details on the financing of 3 new 737-900ER aircraft received subsequent to the balance sheet date as well as in the matter of financing received when accepting the fifth aircraft of this model in March 2015, see Note 9e.
f. Liquidity Risk
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, according to the earliest date by which the Group may be required to receive the asset or repay the liability.
Second Third Fourth Fifth Year First Year Year Year Year Onward Total Thousands Thousands Thousands Thousands Thousands Thousands of Dollars of Dollars of Dollars of Dollars of Dollars of Dollars
As at December 31 2015: Loan principal and interest payments 190,450 167,095 58,418 112,667 154,693 683,323
As at December 31 2014: Loan principal and interest payments 152,307 133,799 157,838 49,355 222,595 715,894
The Company has additional future cash flow obligations deriving from future leasing fees detailed in Note 10d, as well as from the equipping plan in Note 9d above.
Company management estimates that repayment of these loans will be based on the Company’s positive cash flow deriving and expected to derive from its current activity in the current business environment in which it is active. This and more, the plan of equipping modern and efficient wide-bodied aircraft as per Note 9d above, which is expected to bring about significant savings in fuel consumption costs and maintenance expenses, is also expected to bring about a significant contribution to the Company’s ability to meet its obligations, both present and future, deriving from the equipping plan in question.
Furthermore, the Company has balances of cash and cash equivalents and short-term deposits as of December 31 2015 totaling $189 million.
- C-32 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 15 – Employee Benefit Obligations
a. Accounting policy:
(1) Post-Employment Benefits
Post-employment benefits at the include: severance pay liability, pensions for certain local workers employed in the United States and the UK, adjustment pay to senior 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 a 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 high- quality corporate debentures 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 (net after offsetting the yield on plan assets) is included in the Statement of Operations under salary expenses. Actuary profits and losses are charged to other comprehensive earnings upon creation and will not be reclassified to gain or loss on a later date.
The assets of the various plans (such as a central compensation fund) are measured at fair value. Interest income on plan assets is determined on the basis of the discount rate of the appropriate liabilities and is charged to gain/loss as part of the net interest cost. The difference between interest income on plan assets and their yield in practice is charged to other comprehensive earnings and will not be reclassified to gain or loss on a later date.
(2) Other Long-Term Employee Benefits
Other long-term employee benefits are benefits expected to be utilized in a period over 12 months from the end of the period in which the service qualifying for the benefit was rendered.
Other employee liabilities include utilization and redemption of sick and rest days as well as jubilee bonuses. These benefits are recognized and measured in the same manner as post- employment benefits, so long as actuary gains and losses for them are charged to gain/loss upon creation, in lieu of other comprehensive earnings.
(3) Short-Term Employee Benefits
Short-term employee benefits are 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.
Short-term employee benefits include Company liability in respect of current wages and benefits. These benefits are recognized in the statement of operations when generated.
(4) Early Retirement Plan Benefits
Early retirement plan benefits are recognized when the Company has a practical obligation toward employees in issuing benefits, while not against these workers’ material future service. The sum of the liability is determined in accordance with the current value of the cash flows expected due to the liability. When recognizing a liability in the Financial Statements the full expense is also recognized for the plan in the Company’s Statement of Operations.
(5) Regarding critical accounting considerations and key sources for uncertainty estimates used in determining the value of the liability in the Financial Statements, see Note 2.c.(3).
- C-33 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 15 – Employee Benefit Obligations (continued)
a. Composition:
As of December 31 2015 As of December 31 2014 Non- Non- Non- Non- Current Current Current Current Current Current Liabilities Liabilities Assets Liabilities Liabilities Assets Plan Reference Currency Thousands of Dollars
Short term employee benefits: Wages, salaries and social benefits Mainly NIS 58,421 47,861
Post-employment benefits: Bonus due to retirement and severance pay in Israel C NIS 17 65,910 259 65,767 Redemption of sick leave D NIS 38,830 38,989 Pension funds for representation workers: E United States USD 15,382 17,806 UK Pound sterling 6,739 7,338 Retirement benefits F NIS 7,769 8,466 Other Post-Employment Benefits M NIS 6,093 435 6,269 391
Other long term employee benefits: Liabilities due to vacation and rest days * 1i NIS 47,270 47,703 Jubilee bonuses 2i NIS 1,133 947 Other long term benefits NIS 991 941
Termination benefits At-will retirement plans j NIS 4,549 994
Total in the Balance Sheet 105,691 81,503 66,345 95,564 81,015 67,152
* Note that the commitment for vacation and rest is presented in the balance sheet as a current liability, despite the fact that it is expected to be realized after a 12-month period from the report date (and is therefore, defined as a long-term benefit), on the grounds that the Company has no “unconditional right” to defer the clearance of the liability for this period, and therefore according to the accounting rules, the liability is presented on a shot-term basis.
- C-34 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 15 – Employee Benefit Obligations (continued)
c. Severance Benefits for Israeli Workers
(1) The Company’s obligation regarding retirement and severance pay in Israel:
The Company's work agreements, Israeli labor law and the Severance Pay Law, 1963 require that the Company pay compensation to employees upon retirement or dismissal. The retirement age is currently 67.
Arrangement of retirement and severance pay for Company employees:
Beginning September 1992, the social benefits of part of the Company’s employees have been regulated within the context of a designated pension agreement. 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 arrangement, 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. Employees who subsequently received permanent status in the Company were then obligated to join the plan. Note also that workers joining the Company starting September 1992 have signed Section 14 as noted above (whether they are regular employees, part-time or senior executives).
Defined deposit plan:
Accordingly, the current deposits in the pension funds and in policies in insurance companies, exempt the Company from any additional obligations to employees, and regarding senior employees who joined the pension agreement in 1992 – the exemption in question is for periods for which deposits only were made.
Defined benefit plan:
Regarding the period between the start of the employee's work at the Company and the employee joining the pension plan in question, the employees are entitled to severance pay in accordance with their salary upon retiring from the Company, for the number of years in the period in question. Employees who had not joined the pension agreement in 1992 (but worked at the Company at the time) are entitled to severance pay to the level of their salaries upon retirement from the Company for all of their years of seniority at the Company.
(2) Arrangements and Plans for Ensuring the Severance Payments (Plan Assets)
According to the provisions of the collective agreement, since January 1983, the Company makes deposits of 8.33% of the current wages of the employees in a provident fund for severance pay in Israeli banks. The deposit is 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 (for periods prior to the start of the deposits as well) from the money accrued in the provident funds for severance pay, a substantial shortfall was created in these funds, which was filled in by deposits from the Company’s and the State’s option money upon offering the Company, as follows;
Eligible population and arrangement with the State of Israel:
- C-35 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 15 – Employee Benefit Obligations (continued)
In June 2003, as part of the process of privatizing the Company, an agreement was signed between the State, the Company and the employees’ association, in which the State and the Company agreed to act to cover the deficit created until that date (516 million NIS) and which is connected to the eligibility of employees who had been employed by the Company in 1982 and who continued to be employed in June 2003 ("the Eligible Employees"). Under this agreement, the Company opened central compensation funds to which 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”).
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 32.6 million NIS (as of December 31 2015 including interest accrued as of the reporting date), constituting the surplus between the proceeds of the offering raised by the Company to sell the state bonds and the shortfall in the central compensation funds mentioned above, in a separate account included in short-term deposits. On the other hand, the Company recognizes the provision for the obligation to the State of Israel at the same sum, due to the fact that 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.
In the matter of a 125 million NIS suit filed against the Company by the Ministry of Finance in the matter of the reimbursement of excess money sent to the compensation fund, in light of profits the State claims were accumulated from them, see Note 16.b.(17).
Special collective agreement for long-term employees for the deposit of severance pay money in the fund in the employee’s name:
In accordance with the agreement 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, long-term employees who had compensation money deposited for them as of December 31 2010 in the central fund, money shall be deposited for them starting January 1 2011 to the compensation component in the provident fund in the worker’s name.
(3) Senior 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. It is hereby made clear that new officers joining the Company shall not be entitled to such additional compensation. This liability is financed by designated personal funds.
(4) Financing Policy
The Company’s severance pay payments are mainly pad from the plan’s assets, meaning from the central funds and from the employees’ personal funds. The Company’s central funds as well as the employees’ personal funds are managed by leading investment houses.
- C-36 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 15 – Employee Benefit Obligations (continued)
Composition of the Plan's assets:
Fair Value of Plan Assets As of December 31 2 0 1 5 2 0 1 4 Thousands of Dollars Shares 62,040 59,832 Government bonds 30,725 28,354 Corporate bonds 30,491 33,074 Cash, cash equivalents and deposits 17,794 23,601 Other investments 14,360 21,340 Total 155,410 166,201
d. Redemption of Sick Leave
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.
This liability is largely paid from the Company’s current resources.
e. Pension Funds of Some Local Company Employees in the United States and UK
Some of the local employees of the Company in 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 are managed by a designated body and are invested mainly in marketable securities. The Company is obliged to cover any deficit that would be created in the value of the funds’ assets relative to any actuarial obligation, if any
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 it. The U.S. pension fund is also closed to new members, however, regarding existing workers entering into the arrangement, there is still accumulation of rights.
The obligation payments are largely financed by the plan assets, however in light of the current deficit in pension plans, the Company is expected to complete certain funds for the obligations from its own sources as well.
f. Retiree Benefits
Company employees are entitled, after their retirement, to flight tickets in accordance with Company policy, as well as holiday gifts.
g Other Post-Employment Benefits
Other benefits include an adaptation bonus to which some of the Company's senior employees are entitled. In addition, in some Company branches, the Company’s local employees are entitled to severance pay in accordance with local law and in accordance with the Company’s agreements. This and more, the other benefits include the subsidiaries’ severance pay liability.
- C-37 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 15 – Employee Benefit Obligations (continued)
h. Details of Quantitative Influences due to defined benefit plans on the Financial Statements
For the Year Ending December 31 2015 Severance Redemption Other Pay in of Sick Pension Retirement Long-Term Israel Leave Funds Benefits Benefits Total Thousands of Dollars
Sums charged to gain/loss due to defined benefit plans Current cost of service 2,176 1,857 607 116 265 5,021 Interest cost 2,940 1,308 2,702 339 239 7,528 Yield on plan assets according to discount rate )4,918( - )1,791( - )93( )6,802( Real yield transferred from compensation to remuneration 295 - - - - 295 Exchange rate differences 552 )29( )360( )19( 237 381 Other changes in the period )1,522( - - - - )1,522( Total )477( 3,136 1,158 436 648 4,901
For the Year Ending December 31 2014 Severance Redemption Other Pay in of Sick Pension Retirement Long-Term Israel Leave Funds Benefits Benefits Total Thousands of Dollars Sums charged to gain/loss due to defined benefit plans Current cost of service 3,623 2,055 546 117 233 6,574 Interest cost 3,706 1,460 2,807 338 275 8,586 Yield on plan assets according to discount rate )5,563( - )2,010( - )123( )7,696( Real yield transferred from compensation to remuneration 435 - - - - 435 Exchange rate differences 6,917 )4,734( )372( )625( )400( 786 Other changes in the period - - - - 160 160 Total 9,118 )1,219( 971 )170( 145 8,845
- C-38 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 15 – Employee Benefit Obligations (continued)
h. Details of Quantitative Influences due to defined benefit plans on the Financial Statements (continued)
For the Year Ending December 31 2013 Severance Redemption Other Pay in of Sick Pension Retirement Long-Term Israel Leave Funds Benefits Benefits Total Thousands of Dollars Sums charged to gain/loss due to defined benefit plans Current cost of service 3,666 2,200 643 125 236 6,870 Interest cost 4,096 1,394 2,541 344 292 8,667 Yield on plan assets according to discount rate )5,472( - )1,616( - )129( )7,217( Real yield transferred from compensation to remuneration 249 - - - - 249 Exchange rate differences )3,506( 3,202 171 377 223 467 Other changes in the period - - - - 350 350 Total )967( 6,796 1,739 846 972 9,386
Expenses due to defined benefit plans were included in the following items in the Statement of Operations For the Year Ending December 31 2015 2014 2013 Thousands of Dollars Operating expenses 3,936 7,103 7,538 Selling expenses 274 495 527 Administrative and general expenses 691 1,247 1,321 Total 4,901 8,845 9,386
- C-39 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 15 – Employee Benefit Obligations (continued)
h. Details of Quantitative Influences due to defined benefit plans on the Financial Statements (continued)
For the Year Ending December 31 2015 Severance Redemption Other Pay in of Sick Pension Retirement Long-Term Israel Leave Funds Benefits Benefits Total Thousands of Dollars Movement in the current value of the obligation Opening balance – current value of obligation 100,693 38,989 73,988 8,466 9,073 231,209 Current service cost 2,176 1,857 607 116 265 5,021 Interest cost 2,940 1,308 2,702 339 239 7,528 Actuary (gains) losses 1,780 43 )4,027( )676( )429( *)3,309( Benefits paid )13,336( )3,340( )3,056( )457( )295( )20,484( Exchange rate changes )21( )29( )1,030( )19( 229 )870( Other changes in the period )4,715( - - - - )4,715( Closing balance – current value of obligation 89,517 38,828 69,184 7,769 9,082 214,380
Changes in the fair value of plan assets Opening balance – fair value of plan assets 166,201 48,844 3,197 218,242 Yield on plan assets according to discount rate 4,918 1,791 93 6,802 Re-measurements due to the difference between the yield in practice on plan assets and the yield calculated according to the discount rate )1,856( )2,619( )91( )4,566( Deposits by employer ** 3,430 2,773 343 6,546 Benefits paid )13,222( )3,056( )105( )16,383( Real yield transferred from compensation to remuneration )295( - - )295( Exchange rate changes )573( )670( )8( )1,251( Other changes in the period )3,193( - - )3,193( Closing balance – fair value of plan assets 155,410 47,063 3,429 205,902
Average life span of liability (in years) 8 8 14 21
* Most of the sum derives from changes in financial assumptions. ** The Company’s estimates of deposits expected in 2016 amounts to $6.5 million.
- C-40 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 15 – Employee Benefit Obligations (continued)
h. Details of Quantitative Influences due to defined benefit plans on the Financial Statements (continued)
For the Year Ending December 31 2014 Severance Other Pay in Redemption Pension Retirement Long-Term Israel of Sick Leave Funds Benefits Benefits Total Thousands of Dollars Movement in the current value of the obligation Opening balance – current value of obligation 128,301 43,522 63,211 8,324 9,809 253,167 Current service cost 3,623 2,055 546 117 233 6,574 Interest cost 3,706 1,460 2,807 338 275 8,586 Actuary (gains) losses )8,578( )273( 11,635 819 388 *3,991 Benefits paid )12,684( )3,041( )3,025( )507( )1,108( )20,365( Exchange rate changes )13,675( )4,734( )1,186( )625( )684( )20,904( Other changes in the period - - - - 160 160 Closing balance – current value of obligation 100,693 38,989 73,988 8,466 9,073 231,209
Changes in the fair value of plan assets Opening balance – fair value of plan assets 188,879 47,117 3,387 239,383 Yield on plan assets according to discount rate 5,563 2,010 123 7,696 Re-measurements due to the difference between the yield in practice on plan assets and the yield calculated according to the discount rate 2,599 1,087 29 3,715 Deposits by employer 3,043 2,469 193 5,705 Benefits paid )12,856( )3,025( )251( )16,132( Real yield transferred from compensation to remuneration )435( - )435( Exchange rate changes )20,592( )814( )285( )21,691( Other changes in the period - - - - Closing balance – fair value of plan assets 166,201 48,844 3,196 218,241
* Of this sum, $2,305,000 derived from changes in financial assumptions, with the remainder of the sum deriving from experience due to demographic assumptions.
- C-41 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 15 – Employee Benefit Obligations (continued)
h. Details of Quantitative Influences due to defined benefit plans on the Financial Statements (continued)
Actuary Assumptions
The primary actuary assumptions used by the Company in order to assess the obligations and their quantitative impact on gain and loss as detailed above are as follows:
At the end of 2015, the discount rate used to calculate the obligations in Israel is based on the interest vector deriving from high-quality corporate debentures in the Israeli capital market, which ranged from 3.0% in the coming year to 5.3% at the end of the forecast. At the end of 2014, the obligations were calculated on the basis of a uniform discount rate of 3.0% (in the start of 2014 – 3.1%). The discount rate used to calculate the pension obligation in the United States and the UK is based on high-quality corporate debentures in the relevant markets. At the end of 2015, these discount rates increased by 0.5% relative to the discount rates at the end of 2014. The salary increase rate is between 2.2% and 4.4% in the short term, as well as between 1.2% and 3.4% in the long term. This is despite the projected salary increase rate at the end of 2014, which was set at 3.2%. The departure rate was set at a range between 0.5% and 4.1%, depending on the age of the population (with no material change from 2014). The life span on the basis of which the pension obligation in the U.S. and UK was estimated, was determined in accordance with the appropriate mortality tables. A certain drop occurred in projected life spans in 2015 due to a correction to the mortality tables published by the U.S. authorities.
Sensitivity Analyses for Chief Actuary Assumptions
The plans detailed above expose the Company to the risk that the plan assets will not suffice to cover the obligations, this among other things due to possible changes in actuary assumptions. The possible influence of the changes to these assumptions is as follows:
In the event that the discount rate was lower by one percent relative to the discount rate used to calculate the obligation, or in the event that the projected salary increase rate was one percent higher than the rate taken into account when calculating the obligation, the post-employment benefit obligation (with the exception of pensions) would have increased by $6,129,000.
The above 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:
i. Other Long-Term Employee Benefits:
(1) Paid vacation days:
According to the Yearly Vacation Law, 1951 and in accordance with the Company’s work agreements, Company employees are entitled to a number of paid vacation days for each work year. 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. In addition, certain Company employees are entitled to days of rest they accumulate and which can also be accumulated and redeemed upon retirement. The Company’s vacation obligation also includes its obligation for these days.
(2) 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.
- C-42 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 15 – Employee Benefit Obligations (continued)
i. Other Long-Term Employee Benefits: (continued)
(3) Details of quantitative influences due to other long-term employee benefits on the Financial Statements:
For the Year Ending For the Year Ending For the Year Ending December 31 2015 December 31 2014 December 31 2013 Vacation Jubilee Vacation Jubilee Vacation Jubilee and Rest Bonus and Rest Bonus and Rest Bonus Thousands Thousands Thousands Thousands Thousands Thousands of Dollars of Dollars of Dollars of Dollars of Dollars of Dollars
Opening balance 47,703 947 54,896 1,036 50,063 1,283 Sums charged to gain/loss due to defined benefit plan: Current cost of service 26,484 57 25,212 60 26,292 82 Interest cost 1,382 42 2,110 52 2,156 63 Exchange rate differences 1,500 2 )7,240( )121( 2,193 101 Actuary (gains) losses )2,533( 200 488 32 )1,308( )379( Total gain/loss 26,833 301 20,570 23 29,333 )133( Benefits paid )27,266( )115( )27,763( )112( )24,500( )114( Closing balance 47,270 1,133 47,703 947 54,896 1,036
Average life span of liability (in years) 8 19
Vacation and rest expenses were included in the following items in the Statement of Operations For the Year Ending December 31 2015 2014 2013 Thousands Thousands Thousands of Dollars of Dollars of Dollars Operating expenses 21,547 16,518 23,554 Selling expenses 1,503 1,152 1,643 Administrative and general expenses 3,783 2,900 4,136 Total 26,833 20,570 29,333
- C-43 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 15 – Employee Benefit Obligations (continued)
j. Signing of special collective agreement with Company workers over the course of the reported year, to whom the collective agreement applies:
On June 22 2015 the Company and the workers; representative signed a special collective agreement, which formulated understandings regarding work relations at the Company, until a period ending August 31 2018. The key points of the Agreement include:
(1) A one-time 2% salary increase, retroactive for the period starting January 1 2015, until the increase denoted in a. above comes into effect (in practice up to and including August 2015).
(2) A 3% salary increase starting September 2015.
(3) A right to conditional salary increases of 0.5%-1% subject to the Company’s profits and the terms set in the agreement.
(4) Payment of a one-time $3 million signing bonus, paid near the signing of the agreement.
k. Early Retirement Plans
(1) Retirement plan within the framework of the collective agreement signed in 2015:
Within the framework of the special collective agreement in question, it was agreed that the Company may, according to its needs and its discretion, conclude the employment of up to 50 Company employees, who would retire from the Company over the course of the agreement period. The employees whose employment is ended shall receive a bridge pension from the Company from their retirement date until they arrive at the legal retirement age. Furthermore, it was agreed that the first 35 candidates terminated shall leave work no later than December 31 2015 (which is what happened in practice, with a handful of exceptions).
In accordance with IAS 19, the Company recognized an additional expense of $5.3 million over the course of the reported period (under other expenses) for the retirement of the first 35 candidates in question, as well as a result of the retirement of the 15 additional workers, regarding whom the expenses were recognized in accordance with the relative portion of the period that passed from the agreement signing date until the date they will be entitled to these benefits in practice.
(2) Additional early retirement plans:
Between 2000 and 2011, the Company's management adopted resolutions relating to early retirement programs for 703 employees, for which provisions were recorded in the Company's accounts. The following are the balance sheet balances for these plans, including the 2015 plan:
(3) Composition of the balance sheet balance: As of December 31 2 0 1 5 2 0 1 4 Thousands of Dollars
Retirement plan obligation 6,595 3,826 Assets of plan to finance obligation )2,046( )4,820( Total 4,549 )994(
l. Additional information:
For information on current employee benefit obligations given key management personnel, see Note 24f.
- C-44 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 16 - Provisions and Legal Proceedings
In accordance with IAS 37, provisions are included for legal claims and proceedings that are likely to materialize (probability higher than 50%), which Group management believes, based among other things on advice of legal counsel, to be appropriate to the circumstances of the cases.
Therefore, the financial statements include appropriate provisions with regard to lawsuits and proceedings filed against the Company, which management believes would not be rejected or eliminated, despite the fact that it contests these claims.
Regarding critical accounting considerations and key sources for uncertainty estimates used in determining the value of the liability in the Financial Statements, see Note 2.c.(2).
As of December 31 30 2015, legal claims filed against the Company amounted to a total of $648 million, along with claims not quantified in monetary sums. The Company listed a provision totaling $10.5 million in its Financial Statements for these claims. 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.
a. Movement in provisions: The State of Israel due to a Dispute on Surplus Compensation Funds of Other Legal Eligible Proceedings Employees * Total Thousands of Dollars
Balance as of January 1 2014 7,664 9,341 17,005 Additional provisions recognized 311 49 360 Updating existing provisions 915 - 915 Sums used and canceled during the year )6,385( - )6,385( Exchange rate influence )788( )1,008( )1,796(
Balance as of December 31 2014 1,717 8,382 10,099
Additional provisions recognized 939 - 939 Updating existing provisions 47 7 54 Sums used and canceled during the year )573( - )573( Exchange rate influence )13( )28( )41(
Balance as of December 31 2015 2,117 8,361 10,478
* See Note 15.c.(2) on employee benefit obligations.
b. Details of Key Legal Proceedings
Class Actions
(1) In May 2011 the Company’s offices 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) amounted to 12.5 million NIS for the entire Group. On June 2 2015 the Tel Aviv District Court decided to reject the motion. - C-45 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 16 - Provisions and Legal Proceedings (continued)
(2) Regarding the motion to approve a suit as a class action and in the matter of an appeal filed following the ruling of the Haifa District court to reject a motion to approve a class action (“the Ruling”) filed against the Company in May 2011, claiming that the Company is overcharging cancellation fees for off-site transactions at a rate exceeding the maximum rate permitted by the Consumer Protection Law, on August 17 2014 the Supreme Court, sitting as a civil court of appeals, ruled against the appeal filed against the Ruling, thus accepting the Company’s position. The Supreme Court ruled that the Company may collect cancellation fees in accordance with the Consumer Protection Law for each canceled flight ticket, even when a number of tickets were purchased as part of a single reservation. On August 31 2014, the plaintiff filed a motion for an additional hearing by the Supreme Court, and the Company filed its response to the motion. Company management estimates, based on the opinion of Company legal counsel, that it is more likely than not that the suit will be dismissed.
(3) In February 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. On December 21 2014, after the start of evidence hearings in the suit, the Company filed a motion to strike the representation permission request and to reject the applicant and their representatives, due to the fact that one of the applicant’s representatives (who in light of the above concluded their representation in the proceedings) had formerly represented the Company on matters pertaining to the arguments that came up in the motion. Following the rejection of the above motion by the District Court, the Company and the other defendants filed a motion to appeal before the Supreme Court in March 2016. Company management estimates, based on the opinion of Company legal counsel, that it is more likely than not that the suit will be dismissed.
(4) In April 2014 the Company’s main offices received a motion to approve a claim as a class action, which was filed against it before the Tel Aviv District Court (“the Motion”). The key points of the Motion are that buyers who performed transactions with the Company and purchased flight tickets had not received the information on conditions for altering and canceling flight tickets, as required by law, and that the Company had not met the terms of cancellation and change it presented its customers, but rather operated in accordance with different terms that had not been revealed to them, as claimed by the plaintiff in the motion. The motion notes personal damages estimated at 774 NIS and the collective damage is estimated at 226 million NIS. Company management estimates, based on the opinion of Company legal counsel, that it is more likely than not that the suit will be dismissed.
(5) In September 2014, a class action was filed against the Company at the Tel Aviv District Court. This is a request for a monetary remedy and for an injunction pertaining to a claim regarding double billing for excess luggage in connecting Company flights to Israel from customers who have already paid the airline for excess luggage with which they arrived at the destination from which they flew with the Company to Israel, but did not save the receipt for the payment. Attached to the suit was a motion to recognize it as a class action. The applicants assessed their personal damage at 251 NIS, and set the sum of the suit at 15.6 million NIS, “before receiving details from the defendant”. In November 2015 the court approved this motion to dismiss filed by the plaintiffs.
- C-46 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 16 - Provisions and Legal Proceedings (continued)
(6) In January 2015 the Company’s main offices received a motion to approve a claim as a class action, which was filed before the Central District Court (“the Motion”). The Motion was filed against Arkia Israeli Airlines Ltd., Israir Aviation and Tourism Ltd., the Company and the Airports Authority (“the Respondents”). According to the Motion, the Respondents are in violation of their obligations in accordance with the Disabled Persons’ Equality Law, 1988, to operate a hearing accessory system with an induction coil in each airport passenger terminal to benefit people with hearing disabilities who use hearing aids. The Motion notes a personal sum of 500 NIS and a total sum for the entire Group of 83 million NIS. The Company submitted its response. Company management estimates, based on the opinion of Company legal counsel, that it is more likely than not that the suit will be dismissed.
(7) In January 2015 the Company’s main offices received a motion to approve a claim as a class action, which was filed before the Central District Court (“the Motion”). According to the Motion, its issue us the failure to repay fees and/or port taxes the Company charges its customers upon billing for flight tickets in cases in which the passengers failed to take their flights, in light of the fact that the Company does not give the fees and/or port taxes collected from these customers to third parties. The Motion notes a personal sum of 183 NIS and a total sum for the entire Group of 30 million NIS. The Company submitted its initial response. Company management estimates, based on the opinion of Company legal counsel, that it is more likely than not that the suit will be dismissed.
(8) In February 2015 the Company’s main offices received a motion to approve a claim as a class action, which was filed against it before the Central District Court (“the Motion”). The Motion was filed on behalf of a group of holders of branded credit cards of the Company's frequent flyer club – Fly Card. According to the Motion, contrary to the Company’s publications and presentations, these credit card holders do not receive various benefits promised by the Company in UP flights operated by the Company. The Motion notes a personal sum of 192 NIS and a total sum for the entire Group, estimated by the applicant, of 10 million NIS. The Company submitted its response. Pursuant to the legal proceedings, the court proposed that an attempt be made to reach a settlement, which as of the reported date has yet to be completed. Company management estimates, based on the opinion of Company legal counsel, that it is more likely than not that the suit will be dismissed. This is in spite of argument regarding non-material sums for which the settlement is studied.
(9) In April 2015 the Company’s main offices received a motion to approve a claim as a class action, which was filed against it before the Tel Aviv District Court (“the Motion”). The Motion was filed on behalf of members of the Company's frequent flyer club ("the Group” and “the Club”). According to the key points of the claims in the Motion, the Company unilaterally altered the terms of a number of characteristics of the Club program, all of which constitute a significant worsening of the terms of the Club and a material negative economic impact on the value of the points accumulated by the group. The Motion noted a personal sum of 7,300 NIS and a total sum for the entire Group, estimated by the applicant, of 1.3 billion NIS. The Company submitted its response. Company management estimates, based on the opinion of Company legal counsel, that it is more likely than not that the suit will be dismissed.
(10) In June 2015 the Company’s main offices received a motion to approve a claim as a class action, which was filed against it before the Tel Aviv District Court (“the Motion”). According to the motion, it was filed on behalf of any person who examined the possibility of purchasing reduced- cost flights on the Company’s website in accordance with the Company’s publications, but there were no such flights present (“the Group”). The Motion notes a personal sum of 400 NIS and a total sum for the entire Group, estimated by the applicant, of 40 million NIS. In January 2016, subsequent to the balance sheet date, the court approved the parties joint request to dismiss.
- C-47 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 16 - Provisions and Legal Proceedings (continued)
(11) In June 2015 the Company’s main offices received a motion to approve a claim as a class action, which was filed before the Tel Aviv District Court against the Company and against Israir Aviation and Tourism Ltd., Israir Charter (1994) Ltd. and Arkia Israeli Airlines Ltd. (“the Motion”). As alleged, the Motion was filed on behalf of all of the airlines’ passengers starting August 16 2012 the flight takeoff time of whom had been delayed for over two hours and/or whose flight have been canceled and the takeoff date of their alternate flight has been postponed for over two hours from the original takeoff time and who were not provided with assistance in accordance with the Aviation Services Law, 2012 (“the Group”). The Motion notes a personal sum of 50 NIS, with the sum for the entire Group estimated by the applicants at 47 million NIS, of which 32.5 million NIS is attributed to the Company. The Company has fled its response. Company management estimates, based on the opinion of Company legal counsel, that it is more likely than not that the suit will be dismissed.
(12) In August 2015 the Company’s main offices received a motion to approve a claim as a class action, which was filed before the Central District Court (“the Motion”). The Motion was filed on behalf of all passengers belonging to the Company’s “frequent flyer” club (“the Club”) who has purchased vouchers from the Company for the purchase of duty-free products in return for the Club points they have accumulated, in the seven years prior to the approval of the Motion, inasmuch as it is sustained. According to the Motion, the vouchers’ purchasing condition according to which there are “No refunds for partial voucher redemptions” constitute a harmful condition in a uniform contract. The remedies requested in the motion are, among other things, to compel the Company, from now on, to provide change in cash or credit vouchers or credit in Club points for partial use of the voucher as well as suitable monetary reimbursement to all customers who did not receive change for such partial usage. Note that the direct financial damage has been estimated by the applicant at 4 million NIS. The Company is studying the motion and will file its response as needed. Company management estimates, based on the opinion of Company legal counsel, that it is more likely than not that the suit will be dismissed.
(13) In January 2016, subsequent to the balance sheet date, the Company’s main offices received a motion to approve a claim as a class action (“the Motion”), which was filed before the Central District Court. According to the Motion, the applicant purchased return flight tickets at full price to Budapest, with her seat on these flights being in seats characterized by smaller space than usual for passenger legs with no option of tilting the seats back. The applicant claims that full price should not be charged for these seats and the applicant clams that her personal damage amounts to 500 NIS, and that the motion was filed on behalf of all customers flying over the past seven years on Company flights featuring a row of seats that cannot be tilted back, and paid a regular price, as well as those who flew until the cessation of the fault covered by the motion (“the Group”), and the applicant claims that the Group’s total damages amount to 15 million NIS. The Company is studying the motion and will file its response as needed.
(14) In February 2016, subsequent to the balance sheet date, the Company’s main offices received a motion to approve a claim as a class action (“the Motion”), which was filed before the Center District Court. According to the motion, the applicant purchased a flight ticket to the U.S. from the Company, while in practice the flight was carried out by way of a “wet lease” by Spanish airline. The applicant claims that her personal damage amounts to $100 and that the motion is filed on behalf of all Company flight ticket buyers whose flights were carried out by foreign airlines via “wet lease” and were not given advance notice as required by law (“the Group”), and according to the applicant the damage to the Entire group amounts to $328 US for each Group passenger, according to a calculation performed by the applicant between the price of the Company’s flight tickets and the price of flight tickets in foreign companies, as claimed by the applicant. The Company is studying the Motion and will file a response as needed.
- C-48 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 16 - Provisions and Legal Proceedings (continued)
Details of other key legal proceedings:
(15) 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 amounted to 120 million NIS. The motion included 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. On July 8 2014, the Tel Aviv-Jaffa District Court rejected motion to approve the derivative claim. An appeal was filed before the Supreme Court on September 5 2014. On December 3 2015, the appellant withdrew the appeal, thus ending the suit.
(16) In February 2013 the Company received a statement of claim to the sum of 56 million NIS 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 listed a provision for this claim according to management’s estimates and based on the advice of legal counsel.
(17) In August 2014 the Company's offices received a suit filed against it by the State of Israel – Ministry of Finance before the Central District Court, to the sum of 58 million NIS. The suit deals with the Company’s demand for the return of money provided as proceeds from Company securities to cover a deficit in the compensation fund of the Company’s employees as part of the privatization of the Company in 2003. Note that the deficit was covered in full in 2007 and a surplus remained in the compensation fund, as described in the Company’s Financial Statements (see Note 15.c.(2)). It was also claimed that the Company received additional compensation by virtue of issuing options to Company employees, which was supposed to have been transferred to the compensation fund in question. Furthermore, the suit includes remedy for accounts regarding the compensation fund and the claimed deficit. The Company submitted a statement of defense on November 30 2014, and the state issued a letter of response on December 28 2014. Regarding a provision made regarding the surplus in the compensation fund see Note 15.c.(2) above. Company management estimates, based on the opinion of the Company’s legal counsel, and in light of the fact that the surplus created in the compensation fund (32.6 million NIS) was deposited in a separate account, no additional provision was listed in the Financial Statements.
In March 2015, the Ministry of Finance filed an additional claim against the Company before the Central District Court in Lod to the sum of 77 million NIS, regarding profit as a result of the investment of money in the compensation fund, plus surpluses deriving from accounting regulation (at a non-quantified sum).
- C-49 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 16 - Provisions and Legal Proceedings (continued)
In its suit, the Ministry of Finance claimed that some of the surplus in the compensation fund was created subsequent to the date on which the State was supposed to complete the balance of the deficit in the compensation fund, and as a result the completion sum required from the Sate to cover the deficit was supposed to be significantly lower than the sum paid in practice, and therefore a claim was filed for the repayment of these sums. In March 2016, subsequent to the balance sheet date, the Ministry of Finance filed a revised statement of claim against the Company before the Lod Central Distinct Court to the sum of 125 million NIS. The revised statement of claim argued that the over-deposit was a result of profits from investments in the compensation fund, and not (as claimed in the second suit from March 2015) from over-deposit as a result of changes in accounting regulations. Note that an entity by the name of “the El Al Workers’ Action Committee”, which represents El Al employees constituting eligible employees in accordance with the compensation agreement, asked to join the Ministry’s suit as a defendant, and within this framework it sees as though the Action Committee is claiming entitlement to all of the money in the compensation fund. The Company submitted its objection to the addition of the Action Committee in question, and the State also filed its objection to it joining the suit. The Court has yet to rule on this matter. The Company is studying the revised statement of claim and will file a response as needed.
(18) In November 2015 the Company’s main offices received a suit filed against it at the Center District Court to the sum of $20 million US (“the Suit”). According to the Suit, most of the claims deal with the breach of contract, damages and unlawful gain within the framework of a joint venture in the field of credit cards in the United States between the Company’s frequent flyer club and Heritage Affinity Services Ltd., a company registered in the State of New York, with a fully owned subsidiary incorporated in Israel. The Company has submitted a statement of defense to the sum of $1.9 million in addition to temporary motions to deposit collateral and forfeiture. Company management estimates, based on the opinion of Company legal counsel, that it is more likely than not that the suit will be dismissed.
Additional legal claims totaling $2 million exist against the Company, for which the Company has made provisions in its Financial Statements on the basis of management’s estimates based on the advice of its legal counsel.
- C-50 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 17 – Taxes on Income
Deferred taxes are recognized 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 rate expected upon their realization, in accordance with tax laws effectively enacted as of December 31 2015, meaning 26.5%. (Regarding the update to tax rates subsequent to the balance sheet date, see c. below).
In calculating deferred taxes, taxes which would apply in case of realization of investments in investees are not accounted for, as these temporary differences are under the Company’s control and are not expected to reverse in the foreseeable future.
a. Deferred tax balances:
The composition of deferred tax (liabilities) assets are as follows:
Charged to Gain/Loss Trans- ferred from Charged to Other Other Balance as Balance as Compre- Compre- of of January Directly to hensive hensive December 1 2015 Gain/Loss Earnings Earnings 31 2015 Thousands Thousands Thousands Thousands Thousands of Dollars of Dollars of Dollars of Dollars of Dollars Timing differences: Fixed assets )212,888( 7,039 - - )205,849( Derivative financial instruments 19,433 )15,357( 7,639 )931( 10,784 Provisions, doubtful debts and employee benefit obligations 20,200 )520( - 322 20,002
Total )173,255( )8,838( 7,639 )609( )175,063(
Unused tax losses and benefits: Losses for tax purposes: **155,402 )36,522( - - 118,880
Total )17,853( )45,360( 7,639 )609( )56,183(
* The balance of the Company’ losses carried over for tax purposes as of the end of 2015 is $448 million. For this sum as a whole, the Company recognized a tax asset in its Financial Statements (2014: $586 million). ** The balance of the tax asset for the losses carried over for the end of 2014 included a balance of $3,149,000 for advance payments for surpluses paid in the past and reclassified in these Financial Statements to payables. Therefore, the opening balance for 2015 for the tax asset for carried over losses does not include this balance.
- C-51 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 17 – Taxes on Income (continued)
Charged to Gain/Loss Transfer- red from Charged to Other Other Balance as Balance as Compre- Compre- of of January Directly to hensive hensive December 1 2014 Gain/Loss Earnings Earnings 31 2014 Thousands Thousands Thousands Thousands Thousands of Dollars of Dollars of Dollars of Dollars of Dollars Timing differences: Fixed assets )222,460( 9,572 - - )212,888( Derivative financial instruments )3,152( 15,393 )7,804( 14,996 19,433 Provisions, doubtful debts and employee benefit obligations 23,631 )3,416( - )15( 20,200
Total )201,981( 21,549 )7,804( 14,981 )173,255(
Unused tax losses and benefits: Tax losses 161,897 )3,346( - - 158,551
Total )40,084( 18,203 )7,804( 14,981 )14,704(
b. Effective tax: For the Year Ending December 31 2 0 1 5 2 0 1 4 2 0 1 3 Thousands of Dollars Profit (loss) before taxes on income and before profits of associated companies according to Statement of Operations 143,768 )39,343( 38,914 Statutory tax rate 26.5% 26.5% 25% Tax expenses (revenues) according to statutory tax rate 38,099 )10,426( 9,729
Tax surcharge due to: Non-deductible expenses 149 199 400 Adjustments due to changes in tax rates - - 2,416 Other differences )191( - -
Total taxes on income (tax benefit) presented in Statement of Operations 38,057 )10,227( 12,545
c. Tax Laws Applicable to the Company
(1) 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.
(2) 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 these asset items, at an early rate of 30% and for engines, to depreciate at a yearly rate of 40%.
- C-52 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 17 – Taxes on Income (continued)
(3) In early January 2016, subsequent to the balance sheet date, the Income Tax Order Amendment Law was published, stating that the corporate tax rate would be reduced to 25% (instead of 26.5%) starting 2016.
In accordance with IAS 12 Taxes on Income, the deferred tax balances as of December 31 2015 do not take the law in question into account, as their legislation was completed subsequent to the balance sheet date.
As a result, in the first quarter of 2016, the Company is expected to recognize a decrease in the Company's (net) tax liability to the sum of $3,180,000. In addition, the deferred tax asset attributed to the Company's capital reserves is expected to decrease by $635,000 (against a loss recognized in the Report on Comprehensive Earnings and in the Company’s equity), and therefore the company shall recognize a tax revenue of $3,815,000.
d. Final assessments:
The Company has received tax assessments considered final up to and including the 2002 tax year and in addition, Company has tax assessments considered final up to and including the 2011 tax year. Chief subsidiaries have received tax assessments considered final for up to and including tax year 2011
Note 18 – Equity and Surpluses
a. The Company's share capital: Authorized Issued and Paid-Up Ordinary Ordinary Special Share Shares Special Share Shares 1 NIS NV 1 NIS NV 1 NIS NV 1 NIS NV NIS NIS NIS NIS Balance: As of December 31 2015 1 1,000,000,000 1 495,719,135
As of December 31 2014 1 1,000,000,000 1 495,719,135
b. The Special State Share and the rights associated with it:
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.
- C-53 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 18 – Equity and Surpluses (continued)
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 flight 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 these Consolidated 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.
b. Dividends:
Pursuant to the Company’s dividend distribution 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.
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 projected 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.
(1) On August 5 2015, the Company announced the distribution of dividends totaling 0.19 NIS (5 cents) per share for each 1 NIS NV regular share. The total sum of the dividends amounted to 94.2 million NIS ($24.7 million), and was paid on August 26 2015.
(2) In the matter of dividends declared subsequent to the balance sheet date, see Note 25a.
Note 19 – Derivative Financial Instruments and Hedging Accounting
a. Managing Financial Risks and their Origins
The Company uses a range of derivative financial instruments to manage exposure to changes in price of jet fuel, which has a direct impact on the Company’s operating expenses, as well as exposure to exchange rates, largely deriving from the Company’s mostly NIS salary expenses. The Company also has certain exposure, limited in scope, to other currencies, mainly due to the surplus of receipts over payments in these currencies. In addition, the Company also bears interest risk deriving from loans taken at variable interest.
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 development (this committee reports to management at least once per month). 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.
- C-54 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 19 – Derivative Financial Instruments and Hedging Accounting (continued)
As of December 31 2015, most of the Company’s derivative financial instruments are intended as hedging items in cash flow hedging accounts. 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 compatibility of this strategy with the Company’s hedging policy.
b. First-time implementation of IFRS 9 (2013) Financial Instruments:
Starting January 1 2015, the Company has International Financial Reporting Standard 9 (2013). Except for a few exceptions (which are not relevant to the Company, the standard has been implemented on a prospective basis. The standard establishes new hedging instructions to be detailed below and give the option to select them or alternately, those existing as per IAS 39. The Company chose to implement the new hedging directives starting from the reported period.
As part of the new standard, the three types of hedge accounting remained in effect: cash flow, fair value and net investment in foreign activity hedging. At the same time, material changes were made regarding the types of transactions fit for hedge accounting, particularly expanding the fit risks for hedge accounting of non-financial items. In this regard, the standard expands the hedging fitness of specific risks (or a risk element) inside non-financial items, assuming that they can be identified separately and measured reliably. In this context, regarding new transactions, the Company may hedge the changes to jet fuel prices only for a specific risk of changing the raw material (crude oil) price in lieu of hedging the full change in the cost of jet fuel (including changes in the margins of marketing elements or transport costs) as carried out in accordance with IAS 39.
Additionally, some of the hedging effectiveness tests were replaced by a more general test based on “economic relationships”. The retroactive assessment of hedging effectiveness is no longer required. The Company examined and found that the existing hedging instruments as of the first-time implementation are fit for hedging also under the new hedging instructions, and therefore treatment of these instruments continues in accordance with the original zoning.
The standard also stated that when option hedging is performed by the use of their internal value only then the time component for these options will also be charged to other comprehensive earnings (presented in the report on changes in equity under separate capital reserves) and will be classified to gain/loss upon the occurrence of the hedged transaction or, under certain circumstances, earlier. Over the course of 2015, the Company recognized a negative sum of $3,635,000 (before tax) in other comprehensive income for the time value of options designed (in their internal value only) as hedging instruments in the cash flow hedging.
c. Accounting Policy
Following that stated in b. above, changes in the value of derivative financial instruments intended to hedge cash flows are first recognized in the Report on Comprehensive Earnings (and in Company equity) and are then charged to the Statement of Operations, with the projected hedged transaction listed in the Statement of Operations (for instance, the purchase of jet fuel). In particular, 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, while forward contracts for the protection of the NIS/USD exchange rate are charged to salary expenses, constituting the projected hedged transaction for this matter. In the matter of retroactive accounting policy changes in this regard see Note 23.
Over the course of the reported period and in the comparison periods, the Company also held derivative financial instruments (for these exposures) that were not recognized as hedging instruments for accounting purposes. These derivatives were recognized in the Financial Statements at fair value, in such a manner that the differences in fair value in each reporting period were charged immediately to the Statement of Operations, in the same gain/loss items as were charged the profits and losses of the derivative instruments designated as hedging instruments (operation and salary). - C-55 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 19 – Derivative Financial Instruments and Hedging Accounting (continued)
d. Composition of Derivatives in the Balance Sheet
For the Year Ending December 31 2015 Contrac- tual Payment Non- (Receipt) Nominal Current Current Current Date Sum Assets Liabilities Liabilities Total Thousands of Dollars Derivative financial instruments, intended as hedging items: Jet fuel hedging transactions 1/16-6/17 91,606 - )39,474( )2,712( )42,186( NIS-USD exchange rate hedging transactions 2/16-3/16 21,008 616 - - 616 616 )39,474( )2,712( )41,570( Derivative financial instruments measured at fair value via gain/loss: USD-EUR exchange rate hedging transactions 1/16-12/16 72,000 851 - - 851
Total assets (liabilities) due to derivative financial instruments: 1,467 )39,474( )2,712( )40,719(
For the Year Ending December 31 2014 Contrac- tual Payment Non- (Receipt) Nominal Current Current Current Date Sum Assets Liabilities Liabilities Total Thousands of Dollars Derivative financial instruments, intended as hedging items: Jet fuel hedging transactions 1/15-9/15 118,532 - )42,144( - )42,144( NIS-USD exchange rate hedging transactions 1/15-10/15 38,780 - )2,912( - )2,912( Interest rate swap agreements 1/15 111,000 - )216( - )216( - )45,272( - )45,272(
Derivative financial instruments measured at fair value via gain/loss: Jet fuel hedging transactions 1/15-12/15 5,871 - )19,930( - )19,930( NIS-USD exchange rate hedging transactions 1/15-11/15 5,547 - )8,131( - )8,131( - )28,061( - )28,061(
Total liabilities due to derivative financial instruments - )73,333( - )73,333(
- C-56 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 19 – Derivative Financial Instruments and Hedging Accounting (continued)
e. Jet Fuel Derivatives
The Market Risks Management Committee supervises the scope and manner of hedging of future consumption of jet fuel, subject to the policy approved by the Company Board of Directors, as detailed below. The significance of the financial hedging of jet fuel prices is to guarantee the range of jet fuel purchase prices, in order to protect the Company's exposure to changes in global jet fuel prices.
According to Company policy in this regard, jet fuel hedging will be carried out for a period of 12-24 months forward, on a monthly basis and at decreasing rates, as follows:
o For the coming month the Company shall hedge at least 60% and at most 75% of its jet fuel consumption. o These percentages will decrease by 5% each month until the 12th month. o 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). o 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 is 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, with 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.
Jet fuel prices paid by the Company in practice (before influence of hedging) are determined according to its market price, and as a result, the hedging agreements for purchasing jet fuel and setting the prices as noted above, naturally hedge the Company’s exposure to the risk of changes in jet fuel prices. Note that when hedging jet fuel prices, the Company hedges the refining component only from the Company’s engagements in jet fuel purchases, which also include other components such as refining and transportation margins. As the refining component constitutes the most significant and primary component of these engagements (85%-90%), the hedging agreements are expected to be effective. On occasion, the Company chooses to hedge these transactions by hedging the crude oil component only (by engaging in derivatives in which the base asset is crude oil). The crude oil price constitutes the primary component in setting the market price of the jet fuel (80%-85%), with the coefficient between the price of the crude oil and the price of jet fuel examined by the Company from time to time, in order to ensure that hedging the oil component in question constitutes and is expected to constitute effective hedging.
The Risk Management Committee is authorized to exceed the policy detailed above, including in the scope of hedging. As of December 31 2015, no such deviations existed, however, subsequent to the balance sheet date, the Company exceeded the policy, in that the edged jet fuel consumption for 2017 is 30% of the expected jet fuel consumption. As of the report date, the Company had agreements designed for hedging jet fuel prices, at a scope estimated at 37% of expected consumption for 2016.
The following is the impact of the jet fuel derivatives on the Company’s statement of operations, other comprehensive earnings, equity and cash flows. Note that in the presented years, the Company designated some of the jet fuel derivatives in transactions some of which were recognized as hedging agreements, and some were not recognized as such. This leads to a certain difference in the timing of recognition of gain and loss due to the derivatives, as detailed in the table below. Furthermore, the following table also includes a sensitivity analysis that explains the changes to the Company’s results and its equity as a result of changes in the price of jet fuel derivatives (meaning this analysis, which is required in accordance with accounting rules, does not bring into account the impact of the changes in jet fuel prices on the Company’s operating expenses). The fair value of the jet fuel hedging agreements as of the balance sheet date is determined using generally accepted forward price curves (Level 2).
- C-57 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 19 – Derivative Financial Instruments and Hedging Accounting (continued)
For the Year Ending December 31 2015 Increase in Asset/Decrease Impact on Total Influence in Liability Impact on Comprehensive on the (Decrease in Gain/Loss for Income for the Company’s Cash Flow due Asset/Increase the Year Year Equity to Derivatives in Liability) Jet Fuel Derivatives Thousands of Dollars
Balance of jet fuel derivatives as of January 1 2015 )62,074(
Revaluation of transactions intended as hedging instruments for accounting purposes - )65,623( )65,623( - )65,623( Payment of transactions intended as hedging instruments for accounting purposes )65,514( 65,514 - )65,514( 65,514 Revaluation of transactions not intended as hedging instruments for accounting purposes )5,789( - )5,789( - )5,789( Payment of transactions not intended as hedging instruments for accounting purposes - - - )25,786( 25,786 Total movement in jet fuel derivatives )71,303( )109( )71,412( )91,300( 19,888
Balance of jet fuel derivatives as of December 31 2015 )42,186(
Potential impact of a 15% increase/(decrease) in jet fuel prices on the fair value of the derivatives as of the end of the period (in millions of dollars) - 11.9/(13.0) 11.9/(13.0) - (11.9)/13.0
- C-58 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 19 – Derivative Financial Instruments and Hedging Accounting (continued)
For the Year Ending December 31 2014 Increase in Asset/Decrease Impact on Total Influence in Liability Impact on Comprehensive on the (Decrease in Gain/Loss for Income for the Company’s Cash Flow due Asset/Increase the Year Year Equity to Derivatives in Liability) Thousands of Dollars
Balance of jet fuel derivatives as of January 1 2014 8,055
Jet Fuel Derivatives
Revaluation of transactions intended as hedging instruments for accounting purposes - )66,701( )66,701( - )66,701( Payment of transactions intended as hedging instruments for accounting purposes )17,485( 17,485 - )17,485( 17,485 Revaluation of transactions not intended as hedging instruments for accounting purposes )25,179( - )25,179( - )25,179( Payment of transactions not intended as hedging instruments for accounting purposes - - - )4,266( 4,266 Total movement in jet fuel derivatives )42,664( )49,216( )91,880( )21,751( )70,129(
Balance of jet fuel derivatives as of December 31 2014 )62,074(
Potential impact of a 15% increase in jet fuel prices on the fair value of the derivatives as of the end of the period (in millions of dollars) - 11.3 11.3 - )11.3(
- C-59 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 19 – Derivative Financial Instruments and Hedging Accounting (continued)
f. Currency risk:
Most of the Company’s revenues and expenses are in dollars, which constitutes its operating currency. 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.
The Company also has balance sheet exposure to the weakening of the USD vs. the NIS and other currencies, due to the excess of financial liabilities over financial assets (mainly due to employee benefit obligations, see Note 15), denominated in currencies other than the dollar (primarily the NIS).
From time to time, the Company examines the need to invest in derivative financial instruments to reduce its exposure to currency risks.
In accordance with its policy, the Company hedges its expected cash flow exposure at a rate of 75% for the coming 12 months. The extant of the hedging shall be determined by management.
The following is the impact of the NIS/USD exchange rate derivatives on the Company’s statement of operations, other comprehensive earnings, equity and cash flows. Note that in the presented years, the Company designated some of the exchange rate derivatives in transactions, some of which were recognized as hedging agreements and some were not recognized as such. This leads to a certain difference in the timing of recognition of gain and loss due to the derivatives, as detailed in the table below. 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 (Level 2).
Furthermore, the following table also includes a sensitivity analysis that explains the changes to the Company’s results and its equity as a result of changes in the value of derivatives deriving from fluctuations in exchange rates (meaning this analysis, which is required in accordance with accounting rules, does not take into account the impact of the changes in jet exchange rates prices on the Company’s salary expenses). Note, still, that beyond the possible impact detailed below regarding exchange rate derivatives, possible changes in NIS/USD exchange rates may also influence the Company’s balance sheet balances, due to the surplus of liabilities over NIS assets as detailed above. Thus, a 10% drop in the exchange rate would lead to an expense of $4.3 million, due to the revaluation in question of balances in the balance sheet.
- C-60 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 19 – Derivative Financial Instruments and Hedging Accounting (continued)
For the Year Ending December 31 2015 Increase in Asset/Decrease Impact on Total Influence in Liability Impact on Comprehensive on the (Decrease in Gain/Loss for Income for the Company’s Cash Flow due Asset/Increase the Year Year Equity to Derivatives in Liability) Exchange Rate Derivatives Thousands of Dollars
Balance of NIS/USD derivatives as of January 1 2015 )11,043(
Revaluation of transactions intended as hedging instruments for accounting purposes - 2,207 2,207 - 2,207 Payment of transactions intended as hedging instruments for accounting purposes )1,321( 1,321 - )1,321( 1,321 Revaluation of transactions not intended as hedging instruments for accounting purposes 108 - 108 - 108 Payment of transactions not intended as hedging instruments for accounting purposes - - - )8,023( 8,023 Total movement in exchange rate derivatives )1,213( 3,528 2,315 )9,344( 11,659
Balance of NIS/USD derivatives as of December 31 2015 616
Potential impact of a 10% increase/(decrease) in the exchange rate on the fair value of the derivatives as of the end of the period (in millions of dollars) - )2.3(/1.9 )2.3(/1.9 - 2.3/)1.9(
- C-61 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 19 – Derivative Financial Instruments and Hedging Accounting (continued)
For the Year Ending December 31 2014 Increase in Asset/Decrease Impact on Total Influence in Liability Impact on Comprehensive on the (Decrease in Gain/Loss for Income for the Company’s Cash Flow due Asset/Increase the Year Year Equity to Derivatives in Liability) Thousands of Dollars
Balance of NIS/USD derivatives as of January 1 2014 4,834
Exchange Rate Derivatives
Revaluation of transactions intended as hedging instruments for accounting purposes - )5,943( )5,943( - )5,943( Payment of transactions intended as hedging instruments for accounting purposes 1,699 )1,699( - 1,699 )1,699( Revaluation of transactions not intended as hedging instruments for accounting purposes )10,833( - )10,833( - )10,833( Payment of transactions not intended as hedging instruments for accounting purposes - - - )2,598( 2,598 Total movement in exchange rate derivatives )9,134( )7,642( )16,776( )899( )15,877(
Balance of NIS/USD derivatives as of December 31 2014 )11,043(
Potential impact of a 10% increase/(decrease) in the exchange rate on the fair value of the derivatives as of the - )4.3(/3.5 )4.3(/3.5 - 4.3/)3.5( end of the period (in millions of dollars)
- C-62 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 19 – Derivative Financial Instruments and Hedging Accounting (continued)
g. Interest risk:
The Group is exposed to interest risk deriving from loans at variable interest rates. The risk is managed by the Company by maintaining an appropriate ratio between variable interest and fixed interest loans. 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. Over the course of the first quarter of 2015, the company ceased using interest derivatives, and since then the hedging policy has been implemented by creating an appropriate mixture between fixed interest loans and variable interest loans as noted above.
Note 20 - Statement of Operations Details
a. Operating revenues:
See Note 13 on the Company’s accounting policy regarding recognition of income from flying passengers and unearned revenues.
For the Year Ending December 31 2 0 1 5 2 0 1 4 2 0 1 3 Thousands of Dollars
Flying passengers 1,816,406 1,833,339 1,848,750 Less – discounts )4,291( )5,119( )6,867( 1,812,115 1,828,220 1,841,883 Flying cargo and mail (in the holds of passenger planes and in the cargo plane) 169,796 179,409 182,436 1,981,911 2,007,629 2,024,319 Others 72,130 73,674 78,701 Total 2,054,041 2,081,303 2,103,020
b Operating Expenses For the Year Ending December 31 2 0 1 5 2 0 1 4 2 0 1 3 Thousands of Dollars
Fuel 480,715 703,060 690,922 Payroll and benefits 351,397 *348,220 *314,430 Airport fees and services 192,534 *195,261 *184,880 Maintenance of aircraft, flight and ground equipment 115,141 *121,335 *111,504 Air navigation and flight communication 87,957 100,207 96,218 Depreciation 127,739 110,664 104,421 Insurance 5,262 4,402 6,450 Aircraft leasing fees 82,579 73,297 81,268 Meals and supplies 47,888 46,182 45,943 Air crew expenses 57,148 53,737 50,030 Security expenses less State’s participation (see 1 below) 3,208 3,486 15,437 Cost of duty-free products 10,893 10,199 11,066 Other operating costs 30,383 *32,611 *24,548 Total 1,592,844 1,802,661 1,737,117
- C-63 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
* Adjustment due to retroactive implementation of changes in accounting policy, see Note 23. Note 20 - Statement of Operations Details (continued)
(1) Participation in security costs:
The State’s participation in the Company’s security costs was 97.5% in 2015 and 2014. In 2013, the weighted participation rate was 87.0%.
c. Sales expenses: For the Year Ending December 31 2 0 1 5 2 0 1 4 2 0 1 3 Thousands of Dollars
Commissions for agents and credit card companies 107,668 112,963 119,428 Payroll and benefits 44,796 *47,856 *45,969 Advertising and public relations 13,658 11,278 10,968 Other sales expenses 28,789 *30,043 *26,755 Total 194,911 202,140 203,120
* Adjustment due to retroactive implementation of changes in accounting policy, see Note 23.
d. Administrative and general expenses: For the Year Ending December 31 2 0 1 5 2 0 1 4 2 0 1 3 Thousands of Dollars
Payroll and benefits 61,210 *66,389 *65,335 Professional services 6,320 6,654 7,541 Communications 1,419 2,420 2,154 Rental fees and office maintenance 9,759 *9,269 *10,968 Insurance 1,622 1,995 2,059 Others 12,907 *14,084 *10,449 Total 93,237 100,811 98,506
* Adjustment due to retroactive implementation of changes in accounting policy, see Note 23.
e. Other expenses (revenues), net: For the Year Ending December 31 2015 2014 2013 Thousands of Dollars Expenses (revenues) in respect of employee retirement plans, net (See Note 15k) 5,509 )177( 428 Lawsuit expenses 2 173 2,119 Capital gain from the sale of fixed assets (see Note 9f) )2,043( )5,457( )3,019( Cancellation of lawsuit provision - )6,037( - Others )186( )27( 478 Total 3,282 )11,525( 6
- C-64 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 20 - Statement of Operations Details (continued)
f. Financing Expenses
For the Year Ending December 31 2 0 1 5 2 0 1 4 2 0 1 3 Thousands of Dollars
Interest with respect to loans 15,617 15,061 14,186 Expenses due to interest hedging agreements 216 864 720 Expenses due to the revaluation of Maman options, see Note 8b. - - 686 Loan raising commissions and other bank expenses 7,067 6,451 5,116 Exchange rate differences due to balances not in the Group's functional currency 3,920 5,095 5,150 Total 26,820 *27,471 25,858
* Adjustment due to retroactive implementation of changes in accounting policy, see Note 23.
g. Financing income For the Year Ending December 31 2 0 1 5 2 0 1 4 2 0 1 3 Thousands of Dollars
Interest due to short term bank deposits 236 111 331 Exchange rate differences due to balances not in the Group's functional currency 48 108 - Revenues due to the revaluation of Maman options, see Note 8b. 534 687 - Others 3 6 170 Total 821 912 *501
* Adjustment due to retroactive implementation of changes in accounting policy, see Note 23.
Note 21 – Segment-Based Reporting
a. General:
Operational segments are identified based on internal reports, which are reviewed on a regular basis by the chief operational decision maker for the purpose of allocating resources and assessing the performance of the operational segments, as follows (the Company's chief operational decision maker does not receive reports regarding measurement of segment assets and therefore this information is not included in the segment-based reporting):
Segment A – passenger aircraft activity including 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.
Segment B – cargo aircraft activity includes revenues from airborne cargo shipping fees. In this area of activity, the Company offers cargo transportation services using a cargo plane (and occasionally through the use of leased aircraft and their crew – “wet leases”) from Israel to destinations abroad and from destinations abroad to Israel.
The Company’s other activities include revenues from subsidiary Sun D’Or, revenues from maintenance service provided to outside elements as well as a broad variety of other services and revenues such as equipment leasing, frequent flyer membership fees, loading and unloading services and more.
- C-65 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 21 – Segment-Based Reporting (continued)
b. Analysis of revenues and results according to operating segments:
Segment income represents the contribution produced by the sector, as follows: revenues created from operating segments less expenses involved in the operation of passenger aircraft and the cargo airplane, which include, inter alia, fuel expenses (including the impact of hedging, in general), depreciation expenses, airport fees and taxes, variable maintenance costs, air navigation and communication, passenger food and supplies, aircraft leasing fees, discounts given passengers and commissions 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) and other fixed costs.
For the Year Ending December 31 2015 Passenger Cargo Adjustme Aircraft Aircraft Others nts Total Thousands of Dollars Revenues: Revenues from outside customers **/*1,865,271 71,386 45,268 72,116 2,054,041 Inter-segment revenues - - 50,291 )50,291( -
Total segment revenues 1,865,271 71,386 95,559 21,825 2,054,041
Segment results 347,964 )1,832( 47,526 - 393,658 Unassigned expenses )223,891(
Operating profit 169,767 Financing expenses )26,820( Financing income 821 The Company's share of the profits of subsidiaries, net of tax 823
Profit before taxes on income 144,591
* Over the course of the reported year, the Company and the State reached an agreement arranging payment for seats on Company flights. As a result of the agreement in question, the Company recognized a revenue of $11.8 million in the reported year for previous periods.
** Including $94,097,000 in revenues from cargo and mail in the holds of passenger planes.
In 2015 the Company attributed depreciation expenses to the amount of $112,813,000 to the passenger aircraft segment. The cargo plane is leased, and therefore the Company does not recognize depreciation expenses for it,
- C-66 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 21 – Segment-Based Reporting (continued)
For the Year Ending December 31 2014 Passenger Cargo Adjustme Aircraft Aircraft Others nts Total Thousands of Dollars Revenues: Revenues from outside customers *1,910,620 69,932 47,635 53,116 2,081,303 Inter-segment revenues - - 34,529 )34,529( -
Total segment revenues 1,910,620 69,932 82,164 18,587 2,081,303
Segment results 193,261 )742( 40,864 - 233,383 Unassigned expenses )246,167(
Operational loss )12,784( Financing expenses )27,471( Financing income 912 The Company's share of the profits of subsidiaries, net of tax 1,056
Loss before taxes on income )38,287(
* Including $105,280,000 in revenues from cargo and mail in the holds of passenger planes.
In 2014 the Company attributed depreciation expenses to the amount of $98,795,000 to the passenger aircraft segment. The cargo plane is leased, and therefore the Company does not recognize depreciation expenses for it,
For the Year Ending December 31 2013 Passenger Cargo Adjustme Aircraft Aircraft Others nts Total Thousands of Dollars Revenues: Revenues from outside 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 )197,932(
Operating profit 64,271 Financing expenses )25,858( Financing income 501 The Company's share of the profits of subsidiaries, net of tax 298
Profit before taxes on income 39,212
* Including $108,351,000 in revenues from cargo and mail in the holds of passenger planes.
In 2013 the Company attributed depreciation expenses to the amount of $90,849,000 to the passenger aircraft segment. The cargo plane is leased, and therefore the Company does not recognize depreciation expenses for it,
- C-67 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 21 – Segment-Based Reporting (continued)
Presentation by Geographical Segments
East and The Rest North Central of the America Europe Asia World Total Thousands of Dollars 2015:
Revenues: Revenues attributed to regions 693,542 942,390 337,368 31,474 2,004,774 Revenues not attributed to regions 49,267
Total revenues in the consolidated report 2,054,041
2014:
Revenues: Revenues attributed to regions 680,399 973,994 342,539 33,536 2,030,468 Revenues not attributed to regions 50,835
Total revenues in the consolidated report 2,081,303
2013:
Revenues: Revenues attributed to regions 687,020 979,051 339,436 44,983 2,050,490 Revenues not attributed to regions 52,530
Total revenues in the consolidated report 2,103,020
Note 22 - Subsidiaries
a. Details of companies owned by the Company:
(1) Sun D'Or International Airlines Ltd. ("Sun D'Or")
The Group's charter operations are carried out through Sun D’Or (a fully owned El Al subsidiary). Sun D’Or operates as a tourism organizer for wholesalers and individuals and markets charter flights and scheduled flights, both by leasing 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, or direct sale.
Starting 2011, Sun D’Or has 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).
- C-68 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 22 - Subsidiaries (continued)
(2) Tamam Aircraft Food Industries (BGA) 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 in Ben Gurion Airport. The Company is the principal customer of Tamam.
In January 2016, subsequent to the balance sheet date, the IAA published a repeat tender to receive up to 3 permits to manufacture, transport, disassemble and load food and associated products into planes, after its former tender from May 2014 was canceled. Pursuant to this tender, the concessionaires will be required to build and operate a structure for providing food to aircraft for a period of 25 years (including the construction period) with the parameters the concessionaires are competing for being the permit fees the concessionaire will pay the IAA. Following this tender, the Company estimates that Tamam will be forced to move its plant from its current location over the course of 2020. Tamam and the Company are currently examining the feasibility of participating in this tender.
3. Borenstein Caterers Inc. (USA) - (“Borenstein”)
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.
(4) Superstar Holidays Ltd. (England) – (“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. Superstar has operations in several other countries besides the UK.
(5) Katit Ltd. ("Katit")
Katit (a fully-owned El Al subsidiary) operates several restaurants for Company employees at Ben Gurion Airport, commissaries in the Company's office buildings and the King David Lounge at BGA.
b. 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 these companies are presented in USD according to the exchange rates in effect as of the end of the reported period, and revenue and expense items are translated according to the average exchange rates in the reported period. The translation differences are recognized in other comprehensive earnings under “exchange rate differences from the translation of foreign activity”, and will be charged to gain/loss upon realization of the foreign activity for which the translation differences were created.
c. Transactions and Material Engagements with the Subsidiaries
As stated in Note 2a the Company did not include separate financial information in its 2015 and 2014 Financial Statements in accordance with Regulation 9c. of the Securities Regulations (Periodic and Immediate Reports), 1970, due to the negligibility of the added information.
The Company has entered into agreements with its subsidiaries as follows:
- C-69 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 22 - Subsidiaries (continued)
Scope of Activity For the Year Ending December 31 2 0 1 5 2 0 1 4 Company Type of Activity Thousands of Dollars
Leasing of aircraft and providing Sun D’Or associated services. 50,291 36,914
Purchasing food for Company Tamam flights from BGN 24,493 25,984
Purchasing food for Company Borenstein flights from New York 6,953 6,867
Sale of flight tickets and ground Superstar arrangements 7,669 12,354
Purchasing food for employees and food services in the King David Katit Lounge in Terminal 3 3,700 3,812
Note 23 – Adjustment due to Retroactive Implementation of Changes in Accounting Policy and Reclassification
a. Adjustment due to Retroactive Implementation of Changes in Accounting Policy
Starting from 2015 the Company altered its accounting policy regarding classification in the Statement of Operations of the results of foreign currency transactions that hedge the currency exposure embodied in the Company’s salary expenses. In the Financial Statements up to and including the Statements for December 31 2014 and the year ending that date, the Company classified the results of these transactions under financing in the Statement of Operations. In the current Financial Statements, the results of the foreign currency hedging transactions were charged to Statement of Operations items in which the hedged salary expenses are classified. Comparison data for precious periods were classified accordingly. In addition, the Company reclassified certain expenses charged in previous periods in full to administrative and general expenses, and now also split into operating expenses and sales expenses. The Company believes that these classifications better reflects the economic nature of these hedging agreements and these expenses. The following is the influence of the changes on the relevant items for previous periods.
- C-70 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 23 Adjustment due to Retroactive Implementation of Changes in Accounting Policy and Reclassification (continued)
Influence of Retroactive Adjustment of Gain/Loss Items
Retroactive Implemen- Retroactive tation due to Implemen- the Classifi- tation due to Before cation of the Classifi- As Reported Retroactive Exchange cation of in these Implementat Rate Certain Financial ion Transactions Expenses Statements Thousands Thousands Thousands Thousands of Dollars of Dollars of Dollars of Dollars
For the Year Ending December 31 2014:
Operating expenses )1,790,997( )7,325( )4,339( )1,802,661(
Gross profit 290,306 )7,325( )4,339( 278,642
Selling expenses )201,066( )722( )352( )202,140(
Administrative and general expenses )104,415( )1,087( 4,691 )100,811(
Loss from regular activities )3,650( )9,134( - )12,784(
Financing expenses, net )35,693( 9,134 - )26,559(
For the Year Ending December 31 2013:
Operating expenses )1,752,828( 19,733 )4,022( )1,737,117(
Gross profit 350,192 19,733 )4,022( 365,903
Selling expenses )204,714( 1,944 )350( )203,120(
Administrative and general expenses )105,806( 2,928 4,372 )98,506(
Profit from regular activity 39,666 24,605 - 64,271
Financing expenses, net )752( )24,605( - )25,357(
b. Reclassification
The Company performed a number of reclassifications for comparison numbers in the balance sheet (as well as in Appendix A to the Cash Flow Report), in order to present the balances included in it in a clearer and more comprehensive manner, while focusing on the important issues. These reclassifications have no impact on the Company’s equity and/or its working capital (and has no impact on the cash deriving from current activity as well).
- C-71 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 24 - Transactions 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 of the controlled by 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 2015, K'nafaim holds 36.3% of the Company's shares.
The following is a general description of the transactions, their characteristics and their scope:
Included in the framework of operating revenues in 2015 was a revenue of $480,000 from a company controlled by K’nafaim, in 2014 income was included to the amount of $220,000 and in 2013 income was included to the amount of $255,000.
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 $711,000 were included in 2015. Expenses totaling $968,000 were included in 2014 and $1,243,000 were included in 2013.
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 $386,000 were included in 2015. Expenses totaling $546,000 were included in 2014 and $583,000 were included in 2013.
General and administrative expenses include $153,000 in expenses for directors’ insurance in 2015. Expenses totaling $161,000 were included in 2014 and $161,000 were included in 2013.
Regarding the collective insurance agreement, see f. below.
c. Transactions with additional related and interested parties:
(1) Unusual Transactions with Controlling Shareholder
(a) From time to time the Company enters into aviation insurance agreements with insurance companies which include, among other things, "aircraft body all risks" insurance and "liability" insurance. On September 30 2014 and on October 1 2014 the Company's Audit Committee and Board of Directors (respectively) ratified the extension of the Company’s engagement in an agreement with K’nafaim for an additional three-year period, ending November 25 2017, according to which additional air insurance coverage was added to K’nafaim within the framework of the Company’s insurance policies (hereinafter, respectively: “the Joint Transaction” and “the Air Insurance Agreement”), under terms similar to those in the original agreement signed between the parties in July 2006 and extended from time to time.
- C-72 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 24 - Transactions with Related and Interested Parties (continued)
The Audit Committee’s and Board of Directors’ approval of the engagement in the joint transaction was given for a period of up to three years, with the Company reserving the right to cancel the agreement in the event of certain incidents set in the air insurance agreement. In addition, each party shall reserve the right to conclude the agreement for any reason and at its sole discretion, after providing the other party at least 60 days’ notice. The Audit Committee and the Board of Directors approved the extension of the Company’s engagement with K'nafaim in the air insurance agreement, among other things, for the following reasons: in light of K’nafaim’s commitments according to which K’nafaim will compensate the Company for damage that may be caused it as a result of the added insurance, the transaction involves no economic exposure to the Company; K’nafaim’s added insurance is at a non-material scope relative to the scope of Company insurance policies to which it will be attached; the added premium for the K'nafaim aviation insurance, paid be K'nafaim, was priced separately by the insurers and matches the relative value of this added insurance compared to the total value of the insurance to which it is attached; nothing in the added K’nafaim insurance shall cause the Company to be liable for higher premiums, which are not covered in full by K’nafaim. In light of the above arguments, the Audit Committee and the Company's Board of Directors have approved the agreement in question and have determined that there is no material difference between its terms regarding the Company and those regarding K'nafaim, taking into account their relative portions of the shared transaction. Therefore, and in accordance with Regulation 1(4) of the Companies Regulations (Relief in Transactions with Interested Parties), 2000, the Company's entry into the agreement does not required the ratification of the General Meeting with a special majority as per Section 275(a)(3) of the Companies Law, 1999.
(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 from December 30 2008.
(c) Approval of monetary remuneration for Company directors (including directors considered Company controlling shareholders) – on January 8 2014 the general meeting, pursuant to its approval of the Company’s executive remuneration policy, ratified the compensation (including the right to flight tickets for reduced prices) to which the members of the Company’s Board of directors are entitled, including directors constituting Company controlling shareholders and excluding external directors and directors the terms of the remuneration of which was arranged specifically, by three additional years.
(d) Ratification of the revision to the terms of service of Mr. Nimrod Borowitz upon his appointment as Head of Business Development, Long-Term Planning and Equipping at the Company. 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), and has been employed at the Company since March 2009 as the strategic partnerships project and responsible for business development and examining the Company's business collaborations. On September 10 2014 Mr. Borowitz was appointed as Head of Business Development, Long-Term Planning and Equipping and his monthly salary was revised to 35,000 NIS plus benefits according to the eligibility of an executive of his rank at the Company. The revision to the terms of employment was approved by the Audit Committee, the Company’s Board of Directors and by the general meeting from November 12 2014. On March 22 2016, subsequent to the balance sheet date, the Company Board of Directors (after the approval of the Company's Audit and Remuneration Committee), approved the summons of a special shareholders’ meeting for April 28 2016, on the agenda of which, among other things, was the approval of a one-time bonus to Mr. Nimrod Borowitz.
- C-73 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 24 - Transactions with Related and Interested Parties (continued)
(e) Approval of the terms of employment of Mrs. Dalit Moses, wife of Ms. Arnon (Noni) Moses, brother of Ms. Tamar Moses Borowitz, serving as Deputy Chairman of the Company Board of Directors and a Company controlling shareholder, market research and projects manager at the Company’s frequent flyer club. The terms of Mrs. Dalit Moses’ employment were approved by the Audit Committee, the Company’s Board of Directors and by the general meeting, which convened on May 20 2015.
(f) Group directors and executives are insured via director and executive insurance in the framework of insurance coverage prepared by K'nafaim and in accordance with the agreement with K'nafaim. 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 approved by the general meeting of Company shareholders on December 29 2011, in effect until December 28 2014 (hereinafter: “the 2014 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.
On November 12 2014, a special yearly general meeting of Company shareholders approved the Company’s engagement in a new framework agreement with K’nafaim (hereinafter: “the Framework Agreement”) for the joint purchase of an insurance policy for directors and officers at the Company's (including regarding Company controlling shareholders serving as directors and officers), who may serve from time to time, for an additional accumulated period of 3 additional years from December 28 2014, the date of the conclusion of the framework agreement for 2011 to December 27 2017. During the period in question the Company shall be entitled, from time to time, subject to the approval of the Company Audit Committee and Board of Directors, and without requiring additional approvals from the general meeting, join K’nafaim in purchasing an insurance policy for subsidiaries and related companies (hereinafter: “Group Insurance”), for all of the directors and officers serving at the Company, at its subsidiaries at the time (including controlling shareholders).
On June 22 2015 the Company’s Audit Committee and Remuneration Committee and on June 24 2015 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 for an additional period starting June 1 2015 and ending September 30 2016 according to the framework agreement. The liability limit pursuant to the purchased insurance policy matched the terms of the framework agreement in question, amounting to $100 (one hundred) million U.S. as well as an added 20% from the above limit for legal defense expenses in Israel.
In accordance with the terms of the framework agreement, the Company's share of the insurance fees is a sum of $146,000 US a year (and relative to a 16-month period - $194,000), which constitutes 72% of the insurance fees for the group policy (K’nafaim bears the additional 28% of the insurance fees), with a deductible of between $10,000 and $75,000 US (in accordance with the type and nature of the suit).
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.
- C-74 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 24 - Transactions with Related and Interested Parties (continued)
A summary of the arguments presented by the Company’s Audit Committee and Board of Directors to approve the engagement: a) 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; b) 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; c) the terms of the engagement are as set in the Company’s remuneration policy and also match the terms set in the framework agreement in the matter of engagement in director and officer insurance policies approved by the general meeting of the Company’ shareholders on November 12 2014. 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; d) engagements in executive liability insurance agreements are generally accepted engagements with Israeli public companies; e) 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; f) furthermore, engagement in the insurance policy is carried out under improved terms compared to the policy ending in light of the discount the Company earned, and in any event are in accordance with market conditions and will have no material impact on the Company’s profitability, property or liabilities.
(g) On November 12 2014, a special yearly general meeting of Company shareholders approved the re-issue of letters of indemnification to Company directors included among the Company’s controlling shareholders, Ms. Tamar Moses Borowitz, Sofia Kimmerling and Yehuda (Yudi) Levi, for a period of three years starting December 29 2014.
(2) Non-Unusual and Non-Negligible Transactions with Controlling Shareholder
In 2015, the Company Board of Directors approved the Company’s engagements with the Yediot Acharonot Group, as detailed below: (1) an engagement for the purchase of advertising spaces in the various media owned by the Yediot Acharonot Group; (2) 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-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 unusual transactions.
Note that in addition to the engagements in question, the Company has additional engagements with the Yediot Acharonot Group, as detailed blow: an engagement for the transportation of cargo (newspapers) from Ben Gurion Airport to JFK Airport in New York; granting flight ticket benefits to Yediot Acharonot according to a business customer agreement and the purchase of advertising spaces in various media owned by the Yediot Acharonot Group. These engagements were approved by the Board of Directors as “negligible transactions”, after being classified as non- exceptional engagements by the Audit Committee.
- C-75 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 24 - Transactions with Related and Interested Parties (continued)
(3) Negligible Transactions with Controlling Shareholder
On March 18 2014 the Company Board of Directors established 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 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”) (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, a Controlling Shareholder 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 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; (3) the extant of assets the subject of the Interested Party Transaction; (4) the extant of liabilities the subject of the Interested Party Transaction; or – (5) the extant of the expense or yield the subject of the Interested Party Transaction.
In cases in which, at the Company’s discretion, 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 transaction 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.
- C-76 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 24 - Transactions with Related and Interested Parties (continued)
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: Receipt of billboard advertising services; purchase of chemical materials needed for regular maintenance of aircraft accessories; providing ground services; providing various legal services; cooperation in hosting members of the El Al club in the Dan Lounge; receive of IT support and maintenance services; 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.
(4) Transactions with Interested Parties
a. 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 individual 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, direct or indirect, in various transactions carried out by the Company and/or related companies, as detailed below: (a) I. Hillel conducts, from time to time, transactions with the Company and with Sun D’Or for the purchase of flight tickets for Company flights and flights marketed by D’Or as well as leasing charter flights marketed by Sun D’Or. Furthermore, the Company purchased flight tickets from I. Hillel for employees for business travel as well as ground services for workers taking part in trips to Poland initiated by the Company; (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. Ginsburg, who also serves as a director at Airtour. These transactions are essentially for the purchase of light tickets, providing outsourcing services by Airtour in ticketing areas, making reservations and providing ground services; (c) Mr. Ginsburg acts as the general sales agent for Thai Airways (“Thai”) in Israel. Mr. 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 cargo, including code sharing and interline agreements. In addition, the Company purchases, from time to time, flight tickets from Thai for workers for business travel to destinations the Company does not reach. Furthermore, by virtue of Mr. Ginsburg being the general sales agent for Thai in Israel, Mr. Ginsburg was given free flight tickets from the Company in 2015 free of charge, in accordance with a Company procedure based on the reciprocity principle. A report on Mr. Ginsburg’s use of the Company’s tickets is submitted to the Company Audit Committee at the end of each calendar year.
- C-77 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 24 - Transactions with Related and Interested Parties (continued)
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 between the Company and Airtour and between Sun D’Or and Airtour as well as framework agreements between I. Hillel and/or Mr. Ginsburg and the Company and Sun D’Or (all of the transactions in question shall hereby be referred to as “the Engagements”). The basic principles of the transaction procedures and framework agreements are, inter alia, that all of the engagements be carried out at market prices and under market conditions (a supervising party has been appointed); engagements not under market conditions shall require the advance approval of the Audit Committee and Company Board of Directors; at the end of each calendar half, a written report regarding the engagements carried out in the previous half and their conditions is submitted and inasmuch as the Audit Committee determines that a deviation had occurred from market prices and conditions in any of the engagements, is passed on to the Company’s Board of Directors for its decision on the steps required for their approval. As of this report, no deviating transactions have been found.
b. Unusual Transactions with Interested Parties
(1) In June 2014, the Company Audit Committee and Board of Directors approved the exercise of the Company's option to extend the engagement with Maman – with Cargo Terminals and Handling Ltd. (“Maman”) in a framework agreement (“the Framework Agreement”) signed February 3 2010 for an additional period, from April 1 2014 to June 30 2018 according to the terms of the framework agreement (“the Extension Period”). At the end of each year over the course of the extension period, the Company shall be entitled to choose whether to conclude the engagement or extend it according to the term of the framework agreement by an additional year until the end of the extension period. Note that one year from the end of the extension period in question, meaning on April 1 2015, the Company did not give notice on extending the framework agreement by an additional year and from that date the parties are operating in accordance with the framework agreement while at the same time are negotiating regarding the terms of its extension, the Framework Agreement sets terms of engagement regarding the terminal services granted the Company by Maman, which include, among other things, cargo handling, cargo shipping and cargo storage. The engagement with Maman was classified as a transaction in which a Company interested party has a personal interest, as Mr. Amikam Cohen, Chairman of the Board of Directors, and Mr. Yehuda (Yudi) Levi, Deputy Chairman of the Board of Directors, serve as directors at Maman. The Audit Committee determined that the engagement is not an unusual transaction. The Company’s Audit Committee and Board of Directors examined the engagement in question and came to the conclusion that the engagement benefits the Company.
(2) In March 2016, subsequent to the balance sheet date, the Audit Committee and Board of Directors approved the extension of the Company’s engagement with the Mor Medical Information Institute Ltd. (“the Mor Institute”) for 2016-2017 in an agreement to perform fitness tests for Company pilots. The engagement with the Mor Institute was classified as an engagement in which a Company interested party has a personal interest, as Mr. Eli Defes, serving as Company director, is the chairman of the Mor Institute’s Board of Managers. For the sake of prudence and as no suitable alternatives were found (despite the fact that this was a long-term engagement that began before Mr. Defes was appointed to the Company Board of Directors), the Audit and Remuneration Committee ruled that the engagement was an unusual transaction. The Company’s Board of Directors examined the engagement in question and came to the conclusion that the engagement benefits the Company.
- C-78 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 24 - Transactions with Related and Interested Parties (continued)
c. Transactions with other interested parties:
Note that in addition to the Company’s engagements described in this Note above, the Company has additional engagements in which the Company interested parties have a personal interest and which are non-exceptional. The scopes of these engagements are included in the following monetary data:
d. Service agreement with the Chairman of the Company’s Board of Directors:
On January 8, 2014, the general meeting approved the revision to the service agreement between the Company and the Chairman of the Board of Directors, starting January 1 2014. According to this revision, the services provided by the Chairman of the Board of Directors shall be at no less than 40% employment. In return for the services, the Chairman of the Board of Directors shall be entitled to a management fees of 53,000 NIS plus VAT as required by law 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 executive remuneration policy, at a rate that will not exceed 90% of the level of the bonus the CEO is entitled to according to the job percentage (according to the policy the CEO is entitled to a bonus of 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 services agreement.
e. Agreement with the Company CEO:
On January 29 2014 the Company’s Board of Directors approved the appointment of Mr. David Meimon as Company CEO, and he began serving in his position on March 20 2014. Mr. Meimon has served in various positions at the Company since 2005 and his most recent position was as VP of Commerce and Aviation Relations. On April 8 2014 the General Meeting of the Company's shareholders approved the terms of service and employment of Mr. David Meimon and the Company CEO. The employment agreement between the CEO and the Company is for an unlimited period of time in which he will serve as Company CEO as full- time employment. Each party (the CEO or the Company) may terminate the agreement with 6 months’ advance notice.
The CEO shall be entitled to a gross monthly salary of 97,500 NIS (“Comprehensive Salary”). The comprehensive salary is linked to the Consumer Price Index or any other index that replaces it and shall be updated on a yearly basis, in January, according to the increase in CPI in the past year, less price of living 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. The CEO 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 as per the Company’s executive remuneration policy, as it may be from time to time, including provisions regarding the threshold conditions for the receipt of a bonus, deferred long-term remuneration as well as in the matter of the right to reduce the sum of the bonus by the Company Board of Directors. Regarding the deferred bonus rate note that despite that sated in the remuneration policy, the rate of the deferred bonus for the CEO shall be 45% and not 30%.
The CEO is 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. Furthermore, the CEO is 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. The Company provides the CEO with a mobile telephone and the CEO is entitled to reimbursement for maintaining his home telephone. The Company provides the CEO with a Licensing Group 6 vehicle. Expenses involved in maintaining and using the vehicle are borne and paid for by the Company. The Company shall gross up the value of tax applicable for the use of the vehicle. The CEO is entitled to flight tickets for himself and for his family according to Company practice regarding anyone who serves as CEO, this according to existing Company procedures, updated from time to time. - C-79 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 24 - Transactions with Related and Interested Parties (continued)
Upon the CEO’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, the CEO 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 VP 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.
Regarding the Board of Directors’ approval for the summoning of the general meeting on the terms of employment of the Company CEO, see Note 25b.
f. Remuneration of Key Administrative Personnel For the Year Ending December 31 2 0 1 5 2 0 1 4 2 0 1 3 Thousands of Dollars
Short-term benefits 4,016 4,913 5,767 Post-employment benefits 277 806 597 Total 4,293 5,719 6,364
g. Benefits Granted Interested Parties For the Year Ending December 31 2 0 1 5 2 0 1 4 2 0 1 3 Thousands of Dollars
Chairman services and management fees (including bonuses due to options) for interested parties employed at the Company 441 178 336
Number of people to whom the benefit refers 1 1 1
Remuneration for directors not employed by the Company 304 423 439
Number of people to whom the benefit refers 9 10 10
- C-80 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 24 - Transactions with Related and Interested Parties (continued)
h. Balances with Interested and Related Parties As of December 31 2 0 1 5 2 0 1 4 Thousands of Dollars Other interested parties/related parties:
Within the framework of current assets: Customers: Related party – affiliate 4,420 3,954 Related party and interested party 26 1 4,446 3,955
Total highest debit balance during the balance year 7,577 8,319
As of December 31 2 0 1 5 2 0 1 4 Thousands of Dollars Within the framework of current liabilities: Related party and interested party 655 475
Current employee benefits obligations: Related party 909 120
Within the framework of non-current liabilities: Related party 150 307
As of December 31 2 0 1 5 2 0 1 4 Thousands of Dollars Associated companies:
Within the framework of non-current financial assets:
Investment in shares and options 17,821 17,123
- C-81 - Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding El Al Israel Airlines Ltd. Notes to the Consolidated Financial Statements
Note 24 - Transactions with Related and Interested Parties (continued)
i. Transactions with Interested and Related Parties For the Year Ending December 31 2 0 1 5 2 0 1 4 2 0 1 3 Thousands of Dollars Interested parties/related parties:
Revenues from interested and related parties: Flight tickets (1) 44,895 51,738 53,600
Cargo transport (1) 16,142 18,603 20,013
Other revenues 830 871 255
Operating costs: Transactions with controlling party 711 884 1,243
Services from interested party 1,963 1,271 4,377
Sales expenses: Primarily commissions and marketing fees for related parties: 4,068 4,822 5,105
Advertising services from interested party (via third party) 386 546 583
Administrative and general expenses: 2,265 1,655 2,622
(1) To be clear, the sum presented in the table also includes, for the sake of prudence, the comprehensive scopes of turnover for the transactions from which commissions are derived at various rates paid to related parties or the Company, as the case may be.
Note 25 - Events Subsequent to the Balance Sheet Date
a. On March 22 2016, subsequent to the balance sheet date, the Company declared a dividend distribution of 11.7 NIS (about 3 cents) per share for each regular 1 NIS NV share. The total sum pf the dividends amounted to 57.8 million NIS (about $15 million in accordance with the representative rate of exchange of the USD known near the publication of the report). The X date was set for March 31 2016 and the payment date were set for April 13 2016.
b. On March 22 2016, after the balance sheet date, the Company Board of Directors approved (after receiving the approval of the Company Audit and Remuneration committee) the summoning of a special shareholders’ meeting for April 28 2016, with the following on the agenda: (1) an update to the terms of employment of the Company CEO, as follows: (a) increasing the monthly salary (gross) of the Company CEO to a total of 130,000 (one hundred and thirty thousand) NIS, retroactively starting January 1 2016; and (b) reducing the deferred bonus (as defined in the Company’s remuneration policy) relative to the Company CEO by 45% (forty-five percent) to 30% (thirty percent), similar to the Company’s other officers; (2) approval of a one-time bonus to Mr. Nimrod Borowitz, Head of Business Development, Long-Term Planning and Equipment at the Company, by 160,000 (one hundred and sixty thousand) NIS, a transaction in which a Company controlling shareholder has a personal interest.
- C-82 - Free Translation of the Hebrew Language Financial Report ‐ Hebrew Wording Binding
Additional Details of the Corporation
Company name: El Al Israel Airlines Ltd.
Company number: Public Company 520017146
Address: Ben Gurion Airport 7015001
Date of Balance Sheet: December 31, 2015
Date of the Report: March 22, 2016
Period of the Report: 2015
Regulation 10A – Condensed Comprehensive Income Statements, by quarters
The following is the Condensed Profit and Loss Statements for 2015, in USD thousands:
Quarter Quarter Quarter Quarter 10-12/2015 7-9/2015 4-6/2015 1-3/2015 Operating income 476,290 647,300 510,642 419,809 Operating expenses (379,079) (438,480) (407,895) (376,390) Gross profit 97,211 208,820 102,747 52,419 Selling expenses (49,886) (52,885) (48,118) (44,022) General and Administrative expenses (25,371) (22,962) (22,389) (22,515) Other income (expenses), net 1,663 (143) (4,830) 28 Profit (loss) from ordinary activities 23,617 132,830 27,410 (14,090) Financing expenses (7,591) (6,981) (5,551) (7,923) Financing income 116 104 1,785 42 Company's share of the profit of investee 71 508 - 244 companies Profit (loss) before taxes on income 16,213 126,461 23,644 (21,727) Tax benefit (taxes on income) (3,984) (33,467) (6,343) 5,737 Profit (loss) for the period 12,229 92,994 17,301 (15,990) Profit (loss) from re-measurements of (2,205) (2,964) 4,228 (43) defined benefit, net of tax Exchange differences due to translation of (51) 375 (13) (448) foreign activities Profit (loss) due to cash flow hedging, net of (11,592) (10,646) 18,770 9,777 tax Loss due to cash flow hedging – time value, (493) (3,142) - - net of tax Total profit (loss) for the period (2,112) 76,617 40,286 (6,704)
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Regulation 10C – Use of Proceeds from Securities
Since May 2003 (the date of the Company's Issue Prospectus), the Company has not raised funds pursuant to a prospectus. For details regarding surplus of proceeds from exercise of options that have not been deposited into the compensation fund, see Note 15C (2) to the Financial Statements as of December 31, 2015.
Regulation 11 – List of Investments in Subsidiaries and Affiliates
The following is a list of the Company's investments as of the date of the statement of the financial position of each one of its active subsidiaries and affiliates (in USD thousands):
Company Type of Amount of Total par Par Rate at % Value in the Share of Loans to name share shares / value of value of separate net asset investee convertible the issued held financial value as of companies securities shares shares Capital Voting statements 31.12.2015 as of Power if the 31.12.2015 corporation, as defined in Regulation 9C Sun D'Or Ordinary International shares of 5,000 NIS 5 NIS 5 100 100 3 3 - Airlines Ltd. NIS 0.001 ("Sun D'Or") Ordinary shares of 1,000 NIS 0.1 NIS 0.1 100 100 - - - NIS 0.0001 Katit Ltd. Deferred shares of 5,000 NIS 0.5 NIS 0.5 - - - - - NIS 0.0001 Superstar Ordinary Holidays shares of 50,000 £ 50,0000 £ 50,0000 100 100 349 (362) 838 Limited £1 Class A ordinary - NIS 25.2 shares Tour Air Class B (Israel) Ltd. ordinary 50 NIS 10 NIS 5 50 13 13 - ("Airtour") shares1 Class C ordinary - NIS 64.8 shares Tamam – Aircraft Food Ordinary NIS Industries shares of 1,068 NIS 1,068 100 100 1 881 - 1,068 (Ben Gurion NIS 1 Airport) Ltd. Ordinary Borenstein shares USD USD 80,000 100 100 1 5,217 - Caterers Inc. (without 80,000 80,000 par value) Ordinary Holiday shares of 25 NIS 125 NIS 25 20 20 40 914 - Lines Ltd. NIS 1
1 Shares held by the Company grant the Company the right to participate and vote at Airtour's General Meetings at a rate of 50% and appoint half of the members of Airtour's Board, without the right to receive profits. Free Translation of the Hebrew Language Financial Report ‐ Hebrew Wording Binding
Company Type of Amount of Total par Par Rate at % Value in the Share of Loans to name share shares / value of value of separate net asset investee convertible the issued held financial value as of companies securities shares shares Capital Voting statements 31.12.2015 as of Power if the 31.12.2015 corporation, as defined in Regulation 9C Foundation shares of - NIS 1.1 - NIS 0.01 Ordinary shares of - NIS 11 - Air NIS 0.01 Consolidators Class B 50 50 4 4 - Israel Ltd. ordinary 2 55 NIS 11 NIS 5.5 ("ACI") shares of NIS 0.01 Class C ordinary - NIS 10 - shares of NIS 0.01 Maman - Ordinary Cargo shares of NIS NIS Terminals NIS 1 6,176,472 15 15 12,135 16,890 - 41,176,472 6,176,472 and Handling Ltd. 3
Regulation 12 – Changes in Investments in Subsidiaries and Affiliates in the Reporting Year
None.
2 The ordinary shares held by the Company grant the Company the right to participate and vote at ACI's General Meetings and appoint half of the members of Airtour's Board, without the right to receive profits. 3 Starting from January 1, 2012, the Company holds 15% of Maman shares, in addition to options.
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Regulation 13 – Comprehensive Profit (Loss) of Subsidiaries and Affiliates and Profit therefrom as of the date of the Statement of the Financial Position
Company Name Profit Other Total Dividend Dividend Interest Management Management (Loss) for comprehensive comprehensive received received received fees received fee received the year profit (loss) for profit after the after the date the year date of of the the financial financial position position statement In USD In USD In USD In USD In USD In USD thousands thousands thousands thousands thousands thousands Sun D'Or * ------Superstar (236) - (236) - - - - - Borenstein 418 (91) 327 20 - - 201 - Tamam (290) (100) (390) - - - - - Katit ** ------Holiday Lines4 595 - 595 102 - - - - Airtour 622 - 622 - - - - - Air Consolidators 29 - 29 - - - - - Israel Maman 8,852 (941) 7,911 454 - - - - * According to the method of settlement between Sun D'Or and the Company, Sun D'Or ends each period with balanced financial results. ** According to the method of settlement between Katit and the Company, Katit ends each period with balanced financial results. Translation of NIS data was made according to the average exchange rate for 2015.
Regulation 20 – Trading on the Stock Exchange
During the Reporting Period and up until the date of publication of the Report, no securities issued by the corporation have been listed on a stock exchange and no trading halts have occurred.
Regulation 21 – Compensation to Interested Parties and Executive Officers as recognized in the Financial Statements for the Reporting Year
The following are details of the compensation of five executive officers with the highest compensation among the executive officers of the Company and/or subsidiary, whether paid by the Company or by another, as recognized in the Financial Statements for 2015:
4 Data concerning Holiday Lines are for December 31, 2014.
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Compensation for services Details of the compensation recipient (in terms of cost to the Company in NIS) % of Total Scope of holding in Bonus Management Consulting Other (NIS) Name Position Salary* Fee position Company ** fees fees *** capital David CEO Full-time - 1,806,284 3,000,000 8,853 4,815,137 Maimon Omer Full-time VP - 1,319,077 420,000 6,681 1,745,758 Shalev Shalom Full-time VP - 1,302,420 420,000 8,465 1,730,885 Zahavi Tal Full-time VP - 1,442,961 276,500 8,910 1,728,371 Becker Amikam Chairman Part-time Cohen of the - 1,080,000 634,513 9.998 1,724,511 (40%) Board
* Compensation in respect of "salary" in the above table is in terms of cost to the Company and includes salary-related benefits, such as vehicle maintenance, social benefits, actuarial provisions due to termination of employer-employee relations and any income attributed to salary in respect of any benefit component granted to the employee. The salary of the officers is linked to the Consumer Price Index and is updated once a year. The Company provides a vehicle to the officers and bears all expenses involved in the use and maintenance thereof (including grossing up). Furthermore, the officers are entitled to a telephone, mobile phone, reimbursement of board and lodging expenses due to a stay abroad for work purposes, participation in certain expenses, annual vacation, sick leave and convalescence pay, clothing allowance executive insurance / pension fund, training fund as customary. ** The bonus mentioned in the above table will be paid to the officers listed in this Regulation in respect of 2015, in accordance with the remuneration policy of the Company's officers as approved by the General Meeting of the Company's shareholders dated January 8, 2014 (Reference no. 2014-01- 008755) (hereinafter: the "Remuneration Policy"). *** Value of the benefit grossed up in flight tickets.
(1) David Maimon Mr. Maimon serves as the Company's CEO, starting from March 20, 2015. Mr. Maimon has been employed in the Company since July 2005, and prior thereto served as Vice President Customer Service and Vice President Commercial & Industry Affairs (until his appointment as the Company's CEO).
The annual bonus of the Company's CEO was set at a rate of 2% of the annual profit of the Company (before tax) and not more than NIS 3 million (the "Maximum Bonus"). Due to the fact that in 2015, the Company's annual profit before tax stood at approximately NIS 564 million, Mr. Maimon is entitled to the Maximum Bonus, in the amount of USD 3 million.
In the event of termination of the CEO's employment with the Company, due to the termination of his employment agreement for any reason whatsoever (except for dismissal under special circumstances) and his complete resignation from the Company, the CEO shall be entitled, in addition to the pension arrangement, to severance pay of one month per year in respect of the period of his employment with the Company, according to: his last salary as Vice President as of the date of execution of the agreement employment as the Company's CEO in respect of the years in which he served as Vice President; as well as his last salary as
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CEO in respect of the years in which he served as CEO. Apart from the provisions of this paragraph above, the CEO shall not be entitled to a retirement bonus.
On March 22, 2016 the Board of Directors of the Company approved (following approval by the Company's Audit Committee and Remuneration Committee) the convening of a Special Shareholder Meeting on April 28, 2016, the agenda of which include, inter alia, adjustment of the terms of employment of the Company's CEO, as follows: (a) raising the monthly salary (gross) of the Company's CEO to NIS 130,000 (one hundred and thirty thousand shekels), retroactively, starting from January 1, 2016; and (b) reducing the rate of the Deferred Bonus (within the meaning thereof in the Company's Remuneration Policy) with respect to the Company's CEO from 45% (forty five percent) t0 30% (thirty percent), similar to the other officers of the Company.
For further details regarding the terms of employment of Mr. David Maimon as the Company's CEO, which were approved at the Company's General Meeting convened on April 8, 2014, see Supplementary Report to the invitation to the General Meeting of Shareholders of the Company, published by the Company on April 2, 2015 (reference no. 2014-01-036720) and Notes 24E and 25B to the Financial Statements as of December 31, 2015.
(2) Adv. Omer Shalev Adv. Omer Shalev served as Legal Counsel and Company Secretary since November 15, 2016. On January 1, 2016, Adv. Omer Shalev ceased serving as Legal Counsel and Company Secretary and from that date Adv. Shalve serves as Legal Counsel of the Company through an external law firm.
Adv. Shalev is entitled to an annual bonus derived from two components: (a) compliance with the Company's profit target before tax; (b) meeting quantitative and qualitative targets, at the level of the Division for which he is responsible (hereinafter, collectively: the "Targets"). Based on the mechanism provided in the Remuneration Policy for determining the individual cap of the annual bonus for each Vice President of the Company, the maximum bonus of Mr. Shalev for 2015 is NIS 420,000 (the "Maximum Bonus"). The proportionate weight of each of the components set out above is 50% of the Maximum Bonus. Due to the fact that in 2015 Mr. Shalev met all the targets, he is entitled to the Maximum Annual Bonus in the amount of NIS 420,000.
As regards termination of employment, the employment agreement of Adv. Shalev provides that it may be terminated by 3-month prior written notice in the event of resignation and 6- month prior notice in the event of dismissal. Upon termination of employment, Mr. Shalev shall be entitled to additional severance pay at a rate of one month for each year of work.
(3) Shalom Zahavi Mr. Shalom Zahavi serves as Vice President Commercial & Industry Affairs of the Company, starting from July 28, 2014.
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Mr. Zahavi has been employed in the Company since March 2009 and until his appointment as VP Commercial & Industry Affairs, served as the Company's Head of Cargo Division and VP Cargo.
Mr. Zahavi is entitled to an annual bonus derived from two components: (a) compliance with the Company's profit target before tax (the "Profit Target"); (b) meeting quantitative and qualitative targets, at the level of the Division for which he is responsible (hereinafter, collectively: the "Personal Targets"). Based on the mechanism provided in the Remuneration Policy for determining the individual cap of the annual bonus for each Vice President of the Company, the maximum bonus of Mr. Zahavi for 2015 is NIS 420,000 (the "Maximum Bonus"). The proportionate weight of each of the components set out above is 50% of the Maximum Bonus. Mr. Zahavi met the Personal Targets (at a rate exceeding 90%) and the Profit Target has been met. Furthermore, the Company's CEO, in accordance with the authority conferred upon him under the Remuneration Policy, determined that the annual bonus of Mr. Zahavi should be raised to the Maximum Bonus, therefore Mr. Zahavi is entitled to a bonus in the amount of NIS 420,000.
As regards termination of employment, the employment agreement of Mr. Zahavi provides that it may be terminated by 3-month prior written notice in the event of resignation and 6- month prior notice in the event of dismissal.
(4) Tal Becker Captain Tal Becker serves as Vice President Operations of the Company, starting from June 1, 2015. Mr. Becker has been employed in the Company since October 1994 in the framework of an aircrew personnel collective agreement. It shall be noted that during the term of office of Mr. Becker as VP Operations, he belongs to the Company's air crew as the Captain of the 747 fleet, as a minimum requirement for maintaining competence.
As regards termination of employment, the air crew collective agreement that applies to Mr. Becker as aforesaid, provides that the prior notice term is three months.
Mr. Becker is entitled to an annual bonus derived from two components: (a) compliance with the Company's profit target before tax (the "Profit Target"); (b) meeting quantitative and qualitative targets, at the level of the Division for which he is responsible (hereinafter, collectively: the "Personal Targets"). Based on the mechanism provided in the Remuneration Policy for determining the individual cap of the annual bonus for each Vice President of the Company, the maximum bonus of Mr. Becker for 2015 is NIS 276,500 (the "Maximum Bonus"). The proportionate weight of each of the components set out above is 50% of the Maximum Bonus. Mr. Becker met the Personal Targets (at a rate exceeding 90%) and the Profit Target has been met. Furthermore, the Company's CEO, in accordance with the authority conferred upon him under the Remuneration Policy, determined that the annual bonus of Mr. Becker should be raised to the Maximum Bonus, therefore Mr. Becker is entitled to a bonus in the amount of NIS 276,500, which is a proportionate share, given the fact that Mr. Becker commenced his term of office as senior officer in June 2015.
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(5) Amikam Cohen Mr. Amikam Cohen was appointed a director in the Company in December 2008 and commencing February 2009 serves as the Chairman of the Board of Directors of the Company.
The management services provided by Mr. Cohen shall not be less than 40% part-time employment. Mr. Cohen is entitled to benefits from the Company in the form of flight tickets. The term of the engagement under the service agreement executed with Mr. Cohen is until the day he ceases to serve as Chairman of the Company's Board of Directors for any reason whatsoever. Additionally, the service agreement may be cancelled at any time by any of the parties, for any reason whatsoever, by 90 days prior written notice. For further details regarding the terms of engagement with the Chairman of the Board, see Note 24D to the Financial Statements as of December 31, 2015.
The annual bonus to the Chairman of the Board was set at a rate not exceeding 90% of the bonus to which the CEO is entitled as specified above (according to the 40% part time employment). Since the Company's CEO is entitled to a bonus in the amount of NIS 3 million, Mr. Cohen is entitled to an annual bonus totaling NIS 1.08 million.
The total compensation and related expenses granted to directors, which do not deviate from the norm and which were paid to the Company's directors in respect of 2015 (excluding management fees to the Chairman of the Board), including the value of airline tickets used by all eligible directors in the Reporting Year, is approximately NIS 1,356 thousands. For details regarding the approval of the General Meeting for the grant of airline tickets to directors, see Note 24C (1)(c) to the Financial Statements as of December 31, 2015.
It shall be noted that the Board of Directors of the Company examined the compensation paid to the officers as set out in this Regulation, including the annual bonus paid to each of the officers mentioned above, and found that the said compensation complies with the Remuneration Policy.
Regulation 21A – The Control of the Corporation
As of the Report Date, the Controlling Shareholders of the Company, within the meaning thereof in the Securities Law, 5728-1968 (hereinafter: the "Securities Law") are: (A) Knafaim Holdings Ltd. (B) Messrs. David Borovitz and Tamar Mozes Borovitz, who own shares of Knafaim as specified in the following table, and are entitled to appoint the majority of the members of Knafaim Board of Directors, in accordance with Knafaim shareholders agreements. The parties set forth below are also considered as controlling shareholders of Knafaim: Messrs. Israel Borovitz5 (Messrs. David Borovitz, Tamar Mozes Borovitz and Israel Borovitz shall be
5 On January 4, 2015, a Share Sale Agreement was executed between Israel Borovitz (by himself and through a company fully owned by him, Israel Borovitz Holdings Ltd.) and Tamar Mozes Investments Ltd. (a company under full ownership of Tamar Mozes Borovitz), under which, inter alia, Israel Borovitz granted Tamar Mozes Investments Ltd. an option to purchase 792,291 Knafaim shares owned by him, subject to certain conditions
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collectively referred to as the "Individual Members of Borovitz Group"), Sofia Kimerling, Carmel Ilan, Dafna Arnon, and A. L. Aviation Assets Ltd., by virtue of being a party to Knafaim shareholders agreements, as set forth below: Description of Ownership of Knafaim – a controlling shareholder in the Company To the best knowledge of the Company and pursuant to the reports of Knafaim as of March 15, 2016, the holdings of Knafaim shares are as set forth below:
stipulated in the Agreement. In the framework of this Agreement, Mr. Israel Borovitz granted Tamar Mozes Investments Ltd. and Tamar Mozes Borovitz an irrevocable power of attorney to vote in respect of said option shares until the option's expiration date (December 31, 2017 at the latest). Further to the foregoing, Knafaim was informed that as a result of the agreement for the sale of shares in Knafaim and their actual sale, the previous agreement between the relevant shareholders (David Borovitz and Tamar Mozes Borovitz on the one hand, and Israel Borovitz on the other hand) shall expire.
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Number of Knafaim Holding rate Holding rate ordinary shares (without dilution) 6 (fully diluted) 7 Holder's name of NIS 1.00 par value each % Capital % Voting % Capital % Voting (Security no. 543017) David Borovitz8 1,734,836 10.75 10.84 10.49 10.57 Tamar Mozes Borovitz9 3,654,008.30 22.65 22.83 22.09 22.26 Israel Borovitz10 472,285 2.93 2.95 2.86 2.88 Ilan Carmel11 1,120,223.05 6.94 7 6.77 6.83 Arnon Dafna12 858,342.7 5.32 5.36 5.19 5.23 Kimerling Sofia 946,544 5.87 5.91 5.72 5.77 A.L. Aviation Assets Ltd. 13 739,311.9 4.58 4.62 4.47 4.5 The Zabludowicz Trust14 1,734,836 10.75 10.84 10.49 10.57 Arnon Saki 800,000 4.96 4.999 4.84 4.87 Knafaim Holdings Ltd. 128,353 0.8 - 0.78 - Yossi Fuks 2,396 0.01 0.01 0.01 0.01 Public 4,053,056 25.13 25.33 24.5 24.69
6 It should be noted that the difference between the percentage of capital and the percentage of voting rights arises from the existence of 128,353 treasury shares held by Knafaim. 7 The percentage holding of share capital and voting rights (fully diluted) presented in the above table are under the theoretical assumption of allocation of one ordinary share in respect of each warrant granted to officers of Knafaim; However, in practice, and to the extent the warrants are exercised, such share allocation will be made in an amount reflecting the benefit embedded in the warrants (exercise on a "cash-only" basis), in accordance with the terms and conditions of the allocation plan under which they were allocated. 8 The holder notified that he holds the securities through B.M.G. (Borovitz Mozes Group), a company he fully owns, except for one share he directly holds. The holder is the brother of Prof. Israel Borovitz and husband of Mrs. Tamar Borovitz. 9 The holder notified that she holds the securities through Tamar Mozes Investments Ltd., a company she fully owns. The holder is the wife of Mr. David Borovitz and sister-in-law of Prof. Israel Borovitz. In addition, Tamar Mozes Investments Ltd and Tamar Mozes Borovitz received an irrevocable power of attorney from Israel Borovitz to vote in respect of 792,291 shares, for which he granted Tamar Mozes Investments Ltd. a purchase option, until the expiration date thereof (December 31, 2017 at the latest) - for further details, see Footnote 7 above. For the avoidance of doubt, said option shares are not included in the amount of shares owned by the Holder as presented in the above table. 10 The holder notified that she holds the securities both directly and through Israel Borovitz Holdings Ltd., a company he fully owns. The holder is the brother of Mr. David Borovitz and brother in-law of Mrs. Tamar Borovitz. The holder granted Tamar Investment s Ltd (a company fully owned by Tamar Mozes Borovitz) and Tamar Mozes Borovitz an irrevocable power of attorney to vote in respect of 792,291 shares, for which he granted Tamar Mozes Investments Ltd. a purchase option, until the expiration date thereof (December 31, 2017 at the latest) - for further details, see Footnote 7 above. As of the Date of the Report, the remaining option shares amount to 472,283 shares, which are not included in the number of the holder's shares presented above. 11 The holder is the wife of Eran Ilan, a director in Knafaim, and sister of Arnon Dafna. The holder notified that she holds the securities both directly and through Carmel Ilan Holdings in Knafaim Ltd., a company she fully owns. 12 The holder is the sister of Carmel Ilan and sister in-law of Mr. Eran Ilan, a director in Knafaim. The holder notified that she holds the securities both directly and through Dafna Arnon Holdings in Knafaim Ltd., a company she fully owns. 13 The holder notified that it is a private company whose issued capital is held in equal shares by Levyim Assets Ltd., a company under the full control and ownership of Adv. Yehuda (Yudi) Levy, who serves as director of Knafaim and the Company, and by Miella Venture Partners, Inc., a company fully owned by a foreign trust, the beneficiaries of which are the family members of Effi Arazi. 14 The holder notified that the Zabludowicz Trust is a trust registered in Lichtenstein (Trust no. FL-0001.506.639-4), the principal beneficiary of which is Mr. Poju Zabludowicz; the Zabludowicz Trust holds Knafaim shares through Tamares Knafaim Holdings Ltd., a fully owned company of Tamares Israel Investments Ltd., which is a fully owned company (indirectly) of the Zabludowicz Trust.
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The following are the agreements that exist, to the best knowledge of the Company, between the shareholders of Knafaim in connection with the exercise of their rights by virtue of their holdings in Knafaim, as of shortly prior to the publication date of the Report: Knafaim Shareholders Agreement Pursuant to a shareholders agreement dated November 22, 1993 (as amended on May 27, 2004), the parties to which, as of the date of this Report, are: the Individual Members of Borovitz Group, Mrs. Sofia Kimerling (hereinafter in this Regulation: "Kimerling"), the children of Mr. David Borovitz (Messrs. Amir Borovitz, Nimrod Borovitz and Maya Borovitz)15 as well as the daughters of Mr. Igal Arnon (Messrs. Carmel Ilan and Dafna Arnon) (both of them will be collectively referred to below as: the "Individual Members of Arnon"), it was agreed that the parties will exercise their voting rights in Knafaim in order that, at any time, eight directors recommended by the parties, according to a list agreed upon by the parties, are appointed to the Board of Directors of Knafaim, as set forth below16. Furthermore, the agreement contains provisions regarding the right of first refusal and appointment of a chairman of the Board and CEO, as specified below (hereinafter in this Regulation: the "Shareholders Agreement"). Appointment of Directors Said list will be established by the parties to the Shareholders Agreement, as provided below: (1) The Individual Members of Borovitz Group shall be entitled to include six (6) directors in the list; (2) Each one of the Individual Members of Arnon and Kimerling shall be entitled to include one director in the list; (3) In this regard, it was agreed that in the event Kimerling's holdings fall below 5% of the issued and paid-up share capital of Knafaim, the Individual Members of Borovitz Group shall have the right to demand by a written notice to Kimerling, the cancellation of Kimerling's right to serve as director, or to appoint one. In such an event, where a notice has been given by the Individual Members of Borovitz Group, Kimerling shall resign (or the director appointed by Kimerling) and the entitlement to appoint a director in lieu of the director so resigning will be transferred to the Individual Members of Borovitz Group. Should Kimerling resign from the Board of Knafaim as a result of Borovitz's demand, then Kimerling shall not be obligated to exercise her voting rights with respect to the appointment of directors of Knafaim on behalf of the other parties to the Shareholders Agreement, as aforesaid. In addition, should Kimerling resign from the Board of Knafaim as a result of the demand on the part of the Individual Members of Borovitz Group, then the right of first refusal shall not apply to her vis-à-vis the Individual Members of Borovitz Group, as provided below. (4) In the event the holdings of the Individual Members of Arnon (collectively) fall below 5% of Knafaim shares, their entitlement to appoint a director to the Board of Knafaim shall be cancelled and transferred to Borovitz Group.
15 As of the Report Date and to the Company's best knowledge, the Children of Mr. David Borovitz are not shareholders of Knafaim. 16 It shall be noted that according to the Articles of Association of Knafaim, the Board of Knafaim shall include at least 3 directors and no more than 14. As of the date of publication of the Report, 11 directors serve on the Board of Knafaim, including two external directors.
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(5) The parties will vote together against dismissal of a director appointed pursuant to the Shareholder Agreement, unless the party that included the director in the list requested to be dismissed. Should a party that appointed a director who resigned wish to appoint another director in lieu of the resigning director, the parties shall exercise their voting power in order to make such an appointment. Appointment of Chairman and CEO Subject to any law, the parties to the Agreement shall act in such a manner that the person appointed as Chairman of Knafaim Board of Directors and Knafaim CEO will be a person recommended by the Individual Members of Borovitz Group to serve as such. Right of First Refusal The Individual Members or Arnon and/or Kimerling granted Borovitz Group a right of first refusal to purchase from them their shares in Knafaim, if and when the percentage holdings of each one of them falls below 5% of the issued and paid-up share capital of Knafaim. Said right of first refusal shall not apply to transfer or sale of shares by the Individual Members of Arnon and/or Kimberling to an "authorized transferee" who is married to a party to the Agreement and/or his adult children (hereinafter: "Authorized Transferee"), provided that such Authorized Transferee gives his approval to the obligations of the transferee under the Agreement. Agreement between BMG and Tamar Mozes Borovitz To the best knowledge of the Company, according to an agreement executed between BMG and David Borovitz on the one hand, and Tamar Mozes Borovitz on the other hand, the appointment of directors of Knafaim whom Borovitz Mozes are entitled to appoint from time to time (in accordance with said Shareholders Agreement) is made pursuant to an arrangement between them, which also contains provisions on the right of first refusal and tag-along right. Agreement between the Borovitz Family and A. L. Aviation Assets Ltd. To the best knowledge of the Company, a separate agreement was signed between the Individual Members of Borovitz Group and BMG on the one hand, and A. L. Aviation Assets Ltd. on the other hand (hereinafter in this Regulation: "Aviation Assets"), in which the parties undertook to vote at the General Meeting of Knafaim on behalf of Aviation Asset on the appointment/replacement of one director of the Board of Knafaim, as well as of the board of directors of each of the companies under the control of Knafaim, for so long as Aviation Assets holds 4% or more of the issued and voting capital share of Knafaim. Contrariwise, as so long as it has the right to appoint, Aviation Assets undertook to support the election of directors appointed at General Meetings of Knafaim by the Individual Members of Borovitz Group.
Regulation 22 – Controlling Shareholder Transactions
For details, according to the best knowledge of the Company, regarding transactions with controlling shareholders or transactions in which the controlling shareholder has a personal interest in the approval thereof, entered into by the Company in the Reporting Year or until the date of submitting the Report, or which are still in effect on the Report Date, see Note 24 to the Financial Statements of the Company as of December 31, 2015.
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Regulation 24 – Holdings of Interested Parties and Senior Officers
Holdings of interested parties of the Company in shares and other securities of the Company and its affiliates, the operations of which is material to the Company's operations, as of March 15, 2016:
Percentage holding (%) Name of Interested Party Security Amount Capital Voting rights Knafaim Holdings Ltd. 17 Ordinary shares 179,965,964 36.3 36.3
Pinchas Ginsburg18 Ordinary shares 49,486,699 9.98 9.98
Altshuler Shacham Group 19 Ordinary shares 25,355,734 5.11 5.11
Delek / The Phoenix / Excellence Ordinary shares 24,982,201 5.04 5.04 Group20
In addition, the State of Israel owns a Special State Share, in accordance with the Company's May 2003 Prospectus. To the best knowledge of the Company, the State of Israel also owns approximately 1.1% of the share capital of the Company. Holdings of shares and other securities of the Company, a subsidiary or affiliate, by senior officers, as of March 15, 2016: None.
Regulation 24A – Registered Capital, Issued Capital and Convertible Securities of the Corporation as of March 15, 2016
Class of share: ordinary share Registered capital: 1,000,000,001 (including the Special State Share) Issued Capital: 495,719,135 Security number: 1087824 Type of share: Special State Share Registered capita: 1 Issued capita: 1
Convertible Securities: As of March 15, 2016, the Company has no convertible securities.
17 On December 22, 2004, EL Al received an approval from the Holder of the Special State Share, whereby the Holder agrees that Knafaim shall hold more than 40% of the Company's issued share capital and at a rate that gives it control of the Company. 18 On September 3, 2006, Pinchas Ginsburg (who serves as director of the Company) and Y. Hillel and Co. ("Y. Hillel"), a company under his full ownership, received an approval from the Holder of the Special State Share, whereby the holder agrees that the individual family members of Pinchas Ginsburg and Y. Hillel will collectively hold shares of the Company at an overall rate lower than 15% of the issued share capital of the Company. It shall be noted that Pinchas Ginsburg has a personal interest, directly and indirectly, in various transactions performed by the Company and/or its affiliates, as specified in Note 24C (4)(a) to the Financial Statements as of December 31, 2015. 19 As of today, the approval of the holder of the Special State Share for Altshuler Shacham Group's holdings of the Company's shares has not yet been received. 20 On March 10, 2010, Delek Group received the approval of the holder of the Special State Share, whereby the holder agrees that Delek Group will hold, directly and through corporations under its control, shares of the Company at an overall rate of more than 5% (but less than 15%) of the share capital of the Company.
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Regulation 24B – Shareholders Register
Shareholders Register Ordinary Shares – security number 1087824 ID Par value Allocation Name Address From S/N Up to S/N number amount date Ministry of State of Israel ---- 1 Special State Share Finance, Jerusalem Registration Yehuda Halevy 62, From January Held through many split Co. of Bank 513056603 495,706,357 Tel-Aviv 2015 share certificates Hapoalim Ltd. Meir Shfeya 2, Eden Sharabani 324978832 980 Nov-26, 2003 31,999,021 32,000,000 Petach-Tikva David Shimoni 14, David Noiman 008332884 100 Aug-1, 2003 31,998,921 31,999,020 Jerusalem POB 4241 Haifa Nathan Pentzer 8037392 250 Jul-1, 2004 395,717,678 395,717,927 31042 Abraham Barsimantov 123, 7675838 77 Jul-11, 2006 395,717,601 395,717,677 Berkovich Yahud
Yehuda Leib Jul-5, 2006 399,458,971 399,459,020 Barlev Yahuda 064837123 Halevy Barski 6A, 100 May-14, 399,459,021 399,459,070 Tel Aviv 2005 Hageulim 44, Savion Tal 35506499 9,070 Nov-4, 2004 395,708,531 395,717,600 Zichron-Yaakov 555 Lake View Drive, Miami Itzhak Pachter 003730165 1,100 Mar-1, 2005 31,997,821 31,998,920 Beach, Florida 33140 USA 6917 Collins Ave. #1503 Miami Batia Sepin 003730173 Beach 1,100 Mar-1, 2005 31,996,721 31,997,820 Florida 33141 USA
Regulation 25A – Registered Address
Registered address: POB 41, Ben Gurion International Airport 7015001 Email: [email protected] Telephone: +972-3-971-6720 Fax: +972-3-971-7334
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Regulation 26 – The Directors of the Company
Is he an employee Education and Is he a Possession Name Independent / External of the Company, employment in the past family Commencement of Director its subsidiary or 5 years member of Address for date of his accounting ID No. affiliate, or an another service of court service on the and affiliate of an interested Date of Birth Membership on Board Board Details of corporations financial interested party party of the Nationality Committees in which he serves as a expertise thereof director Company Amikam Head Office, Security Committee – No December 30, Academic education: No No Cohen Ben Gurion Chairman; Human 2008 Bachelor's degree in Airport Resources Committee – Industrial and Chairman; Government 005265855 Management Relations and Regulation June 8, 1948 Engineering – Ben Committee – Chairman; Gurion University. Israeli Corporate Governance Last 5 years business Committee – Chairman; experience: Executive Committee CEO of Partner, CEO of Hutchison Water. Director of: Maman- Cargo Terminals & Handling Ltd. Tamar Mozes Raoul Government Relations CEO of Tamar January 6, 2005 Academic education: Yes. Wife of No Borovitz Wallenberg 2, and Regulation Mozes Investments Completed Master Mr. David Ramat Committee, Human Ltd., a company Studies of Business Borovitz, one Hachayal, Tel Resources Committee, under full of the 056400997 Administration – Aviv Market Risk Management ownership of the controlling March 11, 1960 University of Bar Ilan; Committee, Executive Director, which Bachelor's degree in shareholders Israeli Committee holds shares of Political Science – Bar of Knafaim Knafaim and the Ilan University. Company. Last 5 years business experience:
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Is he an employee Education and Is he a Possession Name Independent / External of the Company, employment in the past family Commencement of Director its subsidiary or 5 years member of Address for date of his accounting ID No. affiliate, or an another service of court service on the and affiliate of an interested Date of Birth Membership on Board Board Details of corporations financial interested party party of the Nationality Committees in which he serves as a expertise thereof director Company CEO of Tamar Mozes Investments Ltd. CEO of Mapal Communications Ltd. Director of: Knafaim Holdings Ltd, Sun D'or International Airlines Ltd, Global Wings Leasing Ltd, Chairman of the Board of Dori Media Group Ltd; Mapal Communications Ltd, Tamar Mozes Investments Ltd., Yariv M.B. Assets Ltd, Noa M.B. Communications Ltd, Communica TV Ltd, Dori Media Darset Ltd, Travelist Ltd, Dori Media Paran Ltd, Dori New Media Ltd, Mapal L.D.I Ltd, Mapal - Eden Telenobles Ltd, Mapal Brands – B.M.I Ltd, Noa & Yariv Holdings Ltd, C.T.V. Media Israel Ltd, B.M.I. –
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Is he an employee Education and Is he a Possession Name Independent / External of the Company, employment in the past family Commencement of Director its subsidiary or 5 years member of Address for date of his accounting ID No. affiliate, or an another service of court service on the and affiliate of an interested Date of Birth Membership on Board Board Details of corporations financial interested party party of the Nationality Committees in which he serves as a expertise thereof director Company Brand Management International Ltd. Yehuda Igal Alon 98, Risk Management No January 28, 2008 Academic education: No No (Yudi) Levy Tel Aviv 67891 Committee, Government Bachelor's degree from Relations and Regulation the Faculty of Law of Committee, Security 046201323 the Hebrew University Committee, Human and member of the June 10, 1945 Resources Committee, Israeli Bar Association Israeli Corporate Governance and the Bar Association Committee, Executive of New York. Committee. Last 5 years business experience: Partner- Manager of Goldfarb Seligman & Co, Law Office. Director of: Knafaim Holdings Ltd; Dori Media Group Ltd, Maman-Cargo Terminals & Handling Ltd, Advocate Yudi Levy Company, A. L. Aviation Assets Ltd, Global Wings Leasing Ltd, Levyim Assets Ltd, The Shalem Foundation, Shalem Academic D‐17
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Is he an employee Education and Is he a Possession Name Independent / External of the Company, employment in the past family Commencement of Director its subsidiary or 5 years member of Address for date of his accounting ID No. affiliate, or an another service of court service on the and affiliate of an interested Date of Birth Membership on Board Board Details of corporations financial interested party party of the Nationality Committees in which he serves as a expertise thereof director Company Center. Prof. Joshua HaPrachim External Director No November 19, Academic education: No Yes (Shuki) Blvd. 16, Reut 2008 Internal Medicine Shemer Remuneration Committee Specialist degree and – Chairman, Balance Medical Administration Sheet Committee – Specialist degree from 005360029 Chairman, Audit the Ministry of Health February 7, Committee – Chairman, Last 5 years business 1947 Market Risk Management experience: Chairman Committee, Security Israeli of the Board of Committee, Finance and Directors of Assuta Budget Committee – Medical Centers Ltd. Chairman. and its subsidiaries Director of: Maccabi- Dent Ltd, Maccabi Holdings Ltd, Bait Balev Ltd, Compugen Ltd. and Management Member of Maccabi Health Services. Pinchas Motta Gur 12, Risk Management CEO of Y. Hillel & June 24, 2009 Academic education: No Yes Ginsburg Givat-Shmuel Committee, Finance and Co. Ltd, part of Bachelor's degree in Budget Committee, Pinchas Ginsburg Economics and Balance Sheet Group, an 054189451 Accounting – University Committee, Executive interested party of of Tel Aviv. January 2, 1957 Committee. the Company by Last 5 years business
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Is he an employee Education and Is he a Possession Name Independent / External of the Company, employment in the past family Commencement of Director its subsidiary or 5 years member of Address for date of his accounting ID No. affiliate, or an another service of court service on the and affiliate of an interested Date of Birth Membership on Board Board Details of corporations financial interested party party of the Nationality Committees in which he serves as a expertise thereof director Company Israeli, German virtue of its experience: CEO of Y. holdings Hillel & Co. Ltd. – a travel agency and representative of foreign airlines in Israel, and CEO of West East Airlines Representative Ltd. Director of: Y. Hillel & Co. Ltd, West East Airlines Representative Ltd, Privilege Tourism Ltd. and Tour Air (Israel) Ltd. Shlomo Ayalon House, Government Relations Chairman of the June 24, 2009 Academic education: No No Hanael Aba Hillel Rd. and Regulation Board of Directors Bachelor's degree in 12, Ramat-Gan Committee, Risk of Knafaim Aeronautical Management Committee, Holdings Ltd, the 064516271 Engineering – Technion; Finance and Budget Controlling Master's degree in January 10, Committee, Security Shareholder of the 1950 Business Administration Committee. Company. – University of Tel Israeli Aviv. Last 5 years business experience: CEO of Knafaim Holdings Ltd. Director of: Knafaim
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Is he an employee Education and Is he a Possession Name Independent / External of the Company, employment in the past family Commencement of Director its subsidiary or 5 years member of Address for date of his accounting ID No. affiliate, or an another service of court service on the and affiliate of an interested Date of Birth Membership on Board Board Details of corporations financial interested party party of the Nationality Committees in which he serves as a expertise thereof director Company Holdings Ltd. – Chairman of the Board, Global Wings Leasing Ltd – Chairman of the Board, Maintenance Wings (1005) Ltd. – Chairman of the Board, QAS Israel Ltd. Sofia POB 3050, Corporate Governance No January 19, 2011 Academic education: No No Kimerling Herzeliya 46130 Committee Business Administration degree. 71511174 Last 5 years business May 1, 1951 experience: Entrepreneurship. Israeli Director of: Knafaim Holdings Ltd, Sun D'or International Airlines Ltd, Tamam Aircraft Food Industries Ltd. Ruth Dahan Arlozorov 26, Independent Director No December 31, Academic education: No No (Portnoy) Givatayim 2013 Master's degree in Audit Committee, MBA, with Remuneration Committee, specialization in 024807927 Balance Sheet Financing and February 1, Committee. Finance and Accounting – Hebrew 1970 Budget Committee - University of Jerusalem;
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Is he an employee Education and Is he a Possession Name Independent / External of the Company, employment in the past family Commencement of Director its subsidiary or 5 years member of Address for date of his accounting ID No. affiliate, or an another service of court service on the and affiliate of an interested Date of Birth Membership on Board Board Details of corporations financial interested party party of the Nationality Committees in which he serves as a expertise thereof director Company Israeli Chairman, Market Risk Bachelor's degree in Management Committee. Economics - Hebrew University of Jerusalem. Last 5 years business experience: Founder and Manager of TMF – Tailor Made Finance; Deputy Director at Standard & Poor's Maalot (from 2003 until April 2013). Director of: A. Dori Group Ltd, Assuta Medical Centers Ltd. Eyal Echad Ha'am External Director No February 18, Academic education: No Yes Haimovsky 22, Jerusalem 2015 Master's degree in Audit Committee, Business Administration Balance Sheet 027425800 (MBA) – University of Committee. Remuneration Derby; Bachelor's May 29, 1974 Committee, Finance and degree in Business Israeli Budget Committee, Administration (BBA) – Corporate Governance Champlain College; Committee, Government Construction Relations and Regulation Engineering – The Committee. College of Management. Last 5 years business
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Is he an employee Education and Is he a Possession Name Independent / External of the Company, employment in the past family Commencement of Director its subsidiary or 5 years member of Address for date of his accounting ID No. affiliate, or an another service of court service on the and affiliate of an interested Date of Birth Membership on Board Board Details of corporations financial interested party party of the Nationality Committees in which he serves as a expertise thereof director Company experience: CEO of the Jerusalem Development Authority; Prime Minister's Office Bureau Chief (2012-2014); VP Development & Construction of the Association of Contractors and Builders in Israel (2011- 2012). Eli Defes Hazait 24, No November 29, Academic education: No No Mazkeret Batya 2015 M.A. in Political 052016631 Science - Bar-Ilan University; M.A in July 31, 1953 Political Science and Israeli Sociology – Haifa University; graduate of the Israeli National Defense College. Last 5 years business experience: CEO of Clalit Health Services Group. Director of: Chairman of the Board of Mor Institute; Chairman of
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Is he an employee Education and Is he a Possession Name Independent / External of the Company, employment in the past family Commencement of Director its subsidiary or 5 years member of Address for date of his accounting ID No. affiliate, or an another service of court service on the and affiliate of an interested Date of Birth Membership on Board Board Details of corporations financial interested party party of the Nationality Committees in which he serves as a expertise thereof director Company the Board of MHS – Healthcare Services Ltd.; Chairman of the Board of Clalit – Medical Engineering Ltd.
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Regulation 26A – Senior Officers of the Company
holds a position An interested party of in the the corporation or a Name Date of Company's family member of Education and employment in the ID No. Position commencement subsidiary, another senior office past 5 years of office Date of Birth affiliate or holder or an interested interested party party of the Company David Maimon Chief Executive March 3, 2014 Chairman of the No Academic education: Master's degree in Officer Board of Directors Business Administration – University of of Sun D'or 056491616 Derby, Britain; Bachelor's degree in International Political Science – University of Bar Ilan. July 8, 1960 Airlines Ltd. Last 5 years business experience: VP Commerce and Aviation Relations (until January 2014). Ofer Tsabary VP Computers June 30, 2005 No No Academic education: Bachelor's degree in Computer Science – Tel-Aviv University; 055336168 Bachelor's degree in Mathematics and Computer Science – Tel-Aviv University. July 3, 1958 Last 5 years business experience: VP Computers.
Yehudit Grisaro VP Customer January 1, 2011 No No Academic education: Master's degree in Service Business Administration (EMBA) - Tel-
057895385 Aviv University; Bachelor's degree in Social Science - Tel-Aviv University. September 28, 1962 Last 5 years business experience: Head of El Al Flight Service Division (2009-2010) Shalom Zahavi VP Commerce July 28, 2014 No No Academic education: Bachelor's degree in and Aviation Business Administration and Marketing – Relations 008117434 State University of New York. December 30, 1947 Last 5 years business experience: VP
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holds a position An interested party of in the the corporation or a Name Date of Company's family member of Education and employment in the ID No. Position commencement subsidiary, another senior office past 5 years of office Date of Birth affiliate or holder or an interested interested party party of the Company Cargo (2011-2014). Omer Shalev Legal Counsel and November 15, In addition to his No Academic education: Bachelor's degree in Corporate 2006 appointment as the Law – University of Tel Aviv, a licensed Secretary* Company's Legal attorney. 028913051 Counsel and Internal July 7, 1968 Enforcement Officer, Last 5 years business experience: VP, he serves as Legal Legal Counsel and Corporate Secretary. Counsel and Internal * Adv. Shalev ceased serving as the Enforcement Officer Company's Legal Counsel and Corporate of the Company's Secretary on January 1, 2016. Since then he subsidiaries. serves as the Company's Legal Counsel through an external law firm. Gil Ber Auditor of the June 1, 2009 In addition to his No Academic education: Bachelor's degree in Company appointment as Business Administration and Accounting Internal Auditor of 028913051 – The College of Management; Master's the Company, he degree with honors in Internal Auditing January 10, 1972 serves as Internal Auditor of the and Public Administration – University of Company's Bar Ilan; An Accountant a U.S. Certified subsidiaries. Internal Auditor (CIA) and Certified in Risk and Information Systems Control (CRISC) in the U.S. Last 5 years business experience: Internal Auditor of the Company and the subsidiaries. Prior thereto he was a partner and Head of Business Risks Department of the accounting firm of Kost Forer Gabbay & Kasirer – Ernst & Young Israel (2001-2009). A lecturer at the College of D‐25
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holds a position An interested party of in the the corporation or a Name Date of Company's family member of Education and employment in the ID No. Position commencement subsidiary, another senior office past 5 years of office Date of Birth affiliate or holder or an interested interested party party of the Company Management-Academic Studies, the Ono Academic College and Ben Gurion University. An Audit Committee member at ILAN - the Israeli Foundation for Handicapped Children and director in IIA – The Institute of Internal Auditors. Dganit Palti Chief Finance March 20, 2014 No No Academic education: An accountant. Officer Bachelor's degree in Economics and 0057696551 Accounting – University of Tel Aviv; Master's degree in Business June 11, 1962 Administration – University of Tel-Aviv. Last 5 years business experience: CFO of Granit Hacarmel Investments Ltd. Hanan Matasaro VP Human May 1, 2014 Chairman of the No Academic education: Bachelor's degree in Resources and Board of Katit Ltd. Political Science – University of Bar Ilan; 058493867 Administration (a fully owned Master's degree in Political Science – subsidiary of the University of Haifa. January 1, 1964 Company) Last 5 years business experience: Director of Israel Station of El Al (2009-2014). Yosef Barazani VP Maintenance September 1, No No Academic education: Bachelor's degree in and Engineering 2014 Social Science – the Hebrew University of 057938367 Jerusalem; Graduate studies of Business Administration – Peres Academic Center. January 6, 1963 Last 5 years business experience: VP at Maintenance Wings – Limited Partnership (2010-2014).
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holds a position An interested party of in the the corporation or a Name Date of Company's family member of Education and employment in the ID No. Position commencement subsidiary, another senior office past 5 years of office Date of Birth affiliate or holder or an interested interested party party of the Company Tal Becker VP Operations June 1, 2015 No No Academic education: Bachelor's degree in Mathematics and Computer Science - the 69516995 Hebrew University of Jerusalem. December 5, 1955 Last 5 years business experience: Captain in the 747 fleet. Senior Officers who have Terminated their Office During the Reporting Year Benjamin Livneh – VP Operations Date of commencement of office – May 1, 2010; Date of termination of office – May 30, 2015. Offer Gat – VP Global Sales Date of commencement of office – November 1, 2011; Date of termination of office – February 25, 2015. Mr. Gat ceased serving as VP Global Sales due to the merger of the Sales Division into the Commercial & Industry Affairs Division.
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Regulation 26B – Authorized Signatory of the Corporation
The Company has no independent authorized signatories.
Regulation 27 – The Accountant of the Corporation
The Accounting Firm Brightman, Almagor, Zohar & Co. Address: Azrieli Center 1, Tel Aviv.
Regulation 28 – Changes in the Memorandum or Articles of Association
During the Reporting Year, no changes were made to the Memorandum or Articles of Association of the Company.
Regulation 29(B) – Directors Recommendations and Decisions
For details regarding a dividend payment made on August 26, 2015 and a dividend expected to be paid by the Company on April 13, 2016, see Notes 18C and 25A to the Financial Statements.
Regulation 29(C) – Resolutions at Special General Meetings
At a Special General Meeting of the Shareholders of the Company that was convened on February 18, 2015, it was resolved to approve the appointment of Mr. Eyal Haimovsky as External Director of the Company for a three-year term of office beginning on the date of approval of the Meeting. Mr. Haimovsky has been evaluated by the Company's Board of Directors as having accounting and financial expertise.
At a Special General Meeting of the Shareholders of the Company that was convened on June 14, 2015, it was resolved to approve the appointment of Mrs. Dalit Mozes, spouse of Mr. Arnon (Noni) Mozes, brother of Mr. Tamar Mozes Borovitz, who serves as Deputy to the Chairman of the Board of Directors of the Company and is one of the controlling shareholders of the Company, to the role of Marketing Research and Project Manager in the Company's Frequent Flyer Club, for a three-year period from the date of approval at the Meeting. For further details see the Company's immediate report dated May 20, 2015 (reference no. 2015-01-023463).
Regulation 29A – The Company Resolutions
1. Officer's Liability Insurance
Further to the description in Note 24C to the Financial Statements, on June 18, 2015 the Audit Committee and Remuneration Committee approved, and on June 24, 2015 the Board of Directors approved, to continue the engagement with Menora Mivtachim Insurance Ltd., made through Knafaim, in order to renew the Directors' and Officers' Liability Insurance Policy for another period commencing on June 1, 2015 and ending on September 30, 2016. The main terms of the policy set forth below:
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Free Translation of the Hebrew Language Financial Report ‐ Hebrew Wording Binding
A. The insurance coverage applies to all incumbent directors and officers of the Company and/or its subsidiaries and affiliates. The liability limit of the policy, which is an action- based policy, is USD 100 million per event and in total for the period of the insurance. In addition to the above liability limit, the insureds are entitled to an addition of 20% of the liability limit stated above, for legal defense expenses. The policy covers the liability of the insured for claims brought in Israel as well as outside the borders of the State of Israel and anywhere in the world, including the United States and Canada. B. The Company's deductible in claims against the Company which relate to the purchase or sale of the Company's securities was determined at USD 75,000 per event. The Company's deductible for claims against officers and directors is USD 10,000 per event for claims anywhere in the world except in the United States or Canada (no deductible for the directors and officers themselves). C. The policy is extended to cover claims against the Company (as opposed to claims against its officers) which relate to the purchase and/or sale of the Company's securities listed on the TASE (Entity Coverage). This extension provides for insurance benefit payment procedures, if such benefits are due, and according to which, officers' right to indemnification from the insurers precedes the right of the Company. D. The policy is further extended to cover legal defense expenses incurred in an investigation conducted by a competent authority in connection with the business of the Company. E. The insurance policy does not cover claims against directors or officers relating, inter alia, to the following matters: events providing them with personal gain to which they were not lawfully entitled; body and property damage; pollution (exclusive of defense expenses up to USD 500,000); improper malicious act or fraud or criminal act; claim under the securities laws of the United States and Canada (SEC); future public share offering; war; distribution of profits or benefits to employees, including pension arrangements; breach of professional responsibility; breach of the duty of care committed intentionally or out of indifference to the circumstances and consequences of the breach, as well as in the event where a claim was filed by the Company or by any of its directors or officers. It is clarified that the insurance coverage complies with the terms and conditions of the policy, including the various exceptions provided therein.
2. Officers' Indemnification
For details regarding officers' indemnification, see Note 24C (1) (G) to the Financial Statements.
Date: March 22, 2016
______Amikam Cohen David Maimon Chairman of the Board of Directors Chief Executive Officer
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