Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding
FINANCIAL STATEMENTS AS OF MARCH 31, 2018 (unaudited(
CONTENTS
SECTION B - DIRECTOR'S REPORT
SECTION C - FINANCIAL STATEMENTS Free translation of the Hebrew Language – Hebrew Wording Binding
El Al Israel Airlines Ltd.
Board of Directors Report of the State of the Corporation’s Affairs
For the three month period ended on March 13, 2018
A. Explanations of the Board of Directors as to the State of the Corporation’s Business:
A1. General and key data
We are pleased to submit the Board of Directors Report of the State of the Corporation’s Affairs for the three-month period ended on March 31, 2018.
The Company serves as the leading air carrier of the State of Israel in most of the international routes operating to and from Israel. The Company’s main operations involve the transport of passengers and cargo, including baggage and mail, (primarily) on regular flights between Israel and foreign countries.
In addition, the Company is engaged in providing transport and maintenance services at its hub airport, in the sale of duty-free products, and through affiliates in related activities, which primarily involve the production and supply of food for airlines and the management of a number of travel agencies overseas. For information regarding the Group’s sectors of activity, see note 8 of the Company’s financial statements.
The business environment in which the Company operates is the international and civil aviation and tourism industry to and from Israel, which is characterized by seasonality and fierce competition, intensifying during periods of excess capacity and high sensitivity to the economic, political and security situation in Israel and globally.
Main data for the three-month period ended on March 31 (USD millions):
January - March 2018 2017 Change Operating income 464 418 11% Operating expenses (433) (377) 15% Gross profit 31 41 (25%) EBITDA (14) 10 Loss before income tax (57) (39) )47%( Loss for the period (44) (30) )47%(
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A2. Review of the developments in the business environment and operational metrics
A2.1 Review of the business environment in which the Company operates
For the three-month period ended on March 31:
Traffic at Ben Gurion Airport:
The following charts describe traffic developments at Ben Gurion Airport, both passengers and cargo, divided by inbound and outbound tourisms, and with respect to cargo, divided by imports and exports. In the first quarter of 2018, the trend of significant growth in passenger traffic at Ben Gurion Airport continued, as reflected in both incoming tourism and outbound residents, alongside an increase in the import and export of air freight.
Cargo and passenger traffic at Ben Gurion Airport:21
2018 2017 Change Thousands Thousands %
Incoming tourism 842 655 187 29% Outgoing tourism 1,429 1,152 277 24% Cargo imports – tones 49.1 46.5 2.7 6% Cargo exports – tones 39.1 38.0 1.1 3%
Incoming tourism to Israel and outbound residents (in thousands):
2,000
1,429 1,600 1,152 1,008 895 1,200 800 842 655 400 532 547 0
Incoming tourists Departing Israelis
*Source: the Central Bureau of Statistics
1 Source: Central Bureau of Statistics 2 Import/export data do not include cargo in transit
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Import and export of air freight to and from Israel (thousands of tons):3
75
46.5 49.1 40.8 50 37.5
37.3 37.2 38.0 39.1 25
0
Export Import
Jet fuel:
In the reported quarter, the trend of increase in jet fuel prices continued, as shown by the following graph. Regarding the development of jet fuel prices after the financial position statement date, see Part D. below.
Development of average jet fuel and crude oil market prices:4
$/Barrel cent/gallon 80.0 500.0
67.2 450.0 70.0 400.0 60.0 55.1 54.6 350.0 50.0 300.0
40.0 35.2 250.0
200.0 30.0 190.9 150.0 20.0 163.3 151.5 100.0 10.0 99.8 50.0 $/Barrel cent/gallon - 0.0
3 Source: The Airport Authority 4 Source: Bloomberg
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Exchange rates:
The graph below presents the development in the NIS-USD exchange rate over the last two years, with the average rates in each quarter. During the reported quarter the NIS continued to appreciate vis-à-vis the dollar, resulting in higher Company expenses (in dollar terms).
In addition, as of March 31, 2018, the exchange rate was NIS 3.51/USD compared to NIS 3.47/USD at December 31, 2017, that is, the NIS depreciated by 1.4% against the dollar (as at March 31, 2017, the exchange rate was NIS 3.63 compared to NIS 3.85 at December 31, 2016 – the NIS rose by 3.6%). These rates have an impact on the Company's NIS-denominated balance sheet items.
Development of the NIS-USD average exchange rate:
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A2.2 The Company’s operating metrics and market shares
For the three month period ending on March 31:
2018 2017 Change
Passenger segment (scheduled and chartered) (paying customers) – in thousands 1,163 1,134 2.5% RPK (scheduled flights) – in millions 4,806 4,651 3.3% ASK (scheduled flights) – in millions 5,735 5,560 3.1% Passenger occupancy (load factor) (scheduled flights) - % 83.8% 83.6% 0.2% The Company's market share (scheduled and chartered) - % 27.9% 32.8% (14.7%) Flown cargo – in tones, thousands 23.3 22.2 5.0% Revenue tons kilometers (RTK) – in millions 131.9 117.4 12.4% Weighted flying hours (including leased equipment) – in thousands * 40.3 39.2 2.7% Average revenue per RPK – in cents ** 7.9 7.6 4.3% Aircraft in operation - end of the period – number of units 45 43 2 Average age of owned aircraft fleet at the end of the period – in years 12.7 12.8 -0.1
* Weighted flight hours in terms of Boeing 767 ** Passenger and related revenue in regular flights net of exchange rate fluctuations
Legend: Passenger segment - the one-way flight voucher. RPK - revenue passenger kilometer - the number of paid passengers multiplied by the airborne distance. ASK - available seat kilometer - the number of seats offered for sale multiplied by the airborne distance. RTK - revenue ton kilometer - which weights in tons the aircraft cargo for payment multiplied by airborne distance. Passenger load factor (passenger occupancy) - passenger-KM traveled, expressed as a percentage of the available seats-km. Weighted flight hours - the weighted value of the airplanes: Boeing 767 = 1.00; Boeing 747 = 2.00; Boeing 777 = 1.6; Boeing 737 = 0.6. These weighting values were determined based on the estimated total expenditure of each aircraft type and are consistently used to calculate the weighted time of flight as an indicator of the volume of aviation activity.
The data points to an increase in the passenger-KM (RPK) flown by the Company and in the available Seat- Kilometer (ASK); the occupancy rate rose 0.2% while the average revenue per RPK rose 4.3% year-over- year. On the other hand, the Company's market share recorded a steep decline, due to the sharp increase in passenger traffic in Ben Gurion Airport, which was not accompanied by a corresponding increase in the number of seats offered by the Company, on account of its limited production capacity.
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Operating metrics (in million)
8,000 100% 7,000 5,560 5,735 6,000 5,159 5,488 4,806 90% 5,000 4,425 4,651 4,100 4,000 3,000 83.6% 83.8% 80% 2,000 80.6% 79.5% 1,000 0 70%
RPK ASK LOAD FACTOR
Traffic at Ben Gurion Airport and the market share of El Al and Sun Dor 5
7.0 40% 35.4% 36.0% 6.0 32.8%
27.9% 30% 5.0 4.2 4.0 3.5 3.0 20% 3.0 2.8
2.0 10%
1.0
0.0 0%
5 Source: The Airport Authority
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A3. Analysis of the Company's business results
Presented below are the Company's statements of income including as a percentage from turnover and the rates of change year over year. Also presented are the explanations and the main trends affecting the Company's results in the reported quarter compared to the first quarter of 2017.
For the three-month period ended on March 31:
2018 2017 Change USD % of USD % of USD thousands turnover thousands turnover thousands %
Operating income 463,774 100% 417,691 100% 46,083 11.0% Operating expenses (433,236) (93.4%) (376,808) (90.2%) (56,428) 15.0% Gross profit 30,538 6.6% 40,883 9.8% (10,345) (25.3%) Selling expenses (50,587) (10.9%) (46,427) (11.1%) (4,160) 9.0% Administrative and general expenses (33,563) (7.2%) (28,511) (6.8%) (5,052) 17.7% Other expenses, net 995 0.2% 0 0.0% 995 Loss from ordinary activities (52,617) (11.3%) (34,055) (8.2%) (18,562) 54.5% Financing expenses, net (4,016) (4,976) 960 Company’s share of the profits of associated companies, and revaluation of options in respect thereof (257) 262 (519) Loss before income tax (56,890) (38,769) (18,121) Tax benefit 12,918 8,808 4,110 Loss for the period (43,972) (29,961) (14,011)
Operating income - operating income in the reported period grew by 11.0%, up USD 46.1 million compared to the first quarter of 2017, while revenue from passenger flights rose by 10.2%, up USD 37.4 million. The increase in revenue from passengers is attributable to a higher return on passenger-kilometers and the rise in the volume of passenger-KM (RPK) flown by the Company, as detailed above. It is noted that passenger traffic in Ben-Gurion Airport rose by 19%, both due to the early advent of the Passover Holidays in 2018, so that part of the Passover-related passenger traffic took place in the first quarter, while in 2017 all Passover-related passenger traffic was recorded in the second quarter. Revenue from cargo rose 19.7% (USD 7.0 million), mainly due to an increase in the amount of ton- kilometers (RTK), which was slightly offset by a decrease in the rate of return per ton-kilometer. In addition, cargo revenue was favorably affected by the change in the presentation of revenue from cargo flown by other airline (USD 1.3 million), as detailed in note 6(a) of the condensed interim financial statements.
Operating expenses - operating expenses in the reported period rose by USD 56.4 million, up 15.0% compared to the first quarter of 2017. The rise in operating expenses was attributable to several factors, including higher jet fuel expenses as detailed below, the growth in the Company's operations – following the increase in both available seat-kilometers (ASK) and passenger segments flown by the Company (with the contribution of the new Boeing 787 aircraft), higher payroll expenses, mainly due to the shekel's appreciation vis-à-vis the dollar and the rise in minimum wages, the Company's declining market share in Ben Gurion Airport which led to lower discounts on services acquired by the Company from the Airport Authority.
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Jet fuel expenses:
The Company's jet fuel expenses in the first quarter of 2018 rose by USD 22.6 million (25.0%) compared to the same period of 2017, mainly due to the rise in jet fuel prices, which was partially offset by the change in the results of jet fuel hedge transactions and the increase in flight hours.
The table below presents the effect of jet fuel expenses on the Company’s results in the first quarter, including the impact of hedge transactions (in USD millions):
2018 2017 Difference
Jet fuel expenses for the period (before the effect of hedging) 117.4 91.5 25.9
Impact of jet fuel hedging on the income statement )4.3( )1.0( )3.3(
Total jet fuel expenses (including the impact of hedging) 113.1 90.5 22.6
For additional details jet fuel hedging, see section b(3) below. For additional details on the impact of derivatives on the financial statements, see note 4 of the condensed financial statements.
Selling expenses - selling expenses rose by USD 4.2 million, mainly attributable to the growth in the Company's distribution expenses, as a result of an increase in sales, and an increase in advertising expenses.
Administrative and general expenses – administrative and general expenses rose by USD 5.1 million compared to the first quarter of 2017. The growth is attributable to a provision for legal claims and maintenance of information systems.
Financing expenses - net financing expenses amounted to USD 4.0 million compared to USD 5.0 million in the first quarter of 2017. The decrease in financing expenses stems from the contraction in the Company's outstanding loans during the quarter as compared to the corresponding period in 2017 and a decline in exchange rate differences due to changes in the Company's NIS-denominated balance sheet items.
Tax benefit – the tax benefit in the reported quarter amounted to USD 12.9 million compared to USD 8.8 million in the first quarter of 2017, on account of the growth in pre-tax loss.
Loss for the period – in view of the aforesaid, the pre-tax loss in the reported period amounted to USD 56.9 million (with a post-tax loss of USD 44.0 million, representing 9.5% of the turnover), compared to a pre-tax loss of USD 38.8 million in the first quarter of 2017 (with a post-tax loss of USD 30.0 million, representing 7.2% of the turnover).
A4. Sector reporting
Regarding the analysis of income and expenses by operating segments, see note 8 of the condensed financial statements.
A5. Seasonality
The Group's activity is impacted by seasonality and intensifies during peak periods. A massive traffic of Israeli tourists traveling overseas is recorded in the summer months and the holiday seasons, while the biggest traffic of tourists to Israel is seen in the summer months and ahead of Jewish or Christian holidays or vacations in their countries of origin.
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A6. Cash flows
Cash flows for the three-month period ended on March 31, 2018 compared to the same period of 2017 are:
Jan-March 2018 2017 Change USD thousands USD thousands
Cash flow provided by operating activities, net 14,017 76,943 (62,926) Cash flows used in investment activities, net (183,741) (69,745) (113,996) Cash flows provided by financing activities, net 106,909 13,465 93,444 Effect of exchange rate fluctuations on cash balances held in foreign currency (846) 1,632 (2,478) Increase (decrease) in cash and cash equivalents (63,661) 22,295 (85,956)
Cash flow from operating activities
In the first quarter of 2018, the Company had a positive cash flow from operating activities of USD 14.0 million compared to a positive cash flow from operating activities of USD 76.9 million in the first quarter of 2017. The USD 62.9 million decrease in cash flows is mainly attributable to the USD 28.6 million growth in pre-tax loss (net of the effects of depreciation and non-cash flow expenses), a settlement with the assessment officer in respect of deductions, as detailed in note 6(f) of the condensed financial statements, in the sum of NIS 75 million (USD 21.8 million), and changes in asset and liability items.
Development in the cash flow from operating activities for the three-month period ended on March 31 in the years 2015-2018 (USD millions):
90 76.9 80 71.6 70 59.2 60
50
40
30
20 14.0
10
0
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Cash flows for investment activities
In the first quarter of 2018, the Company invested USD 183.7 million, net, in investment activities. Investments in fixed assets and intangible assets amounted to USD 162.5 million (mainly due to the receipt of the Boeing 787 aircraft and advance payments for aircrafts not yet received). The Company also invested a total of USD 23.4 million in deposits. On the other hand, the Company had cash flows from the sale of fixed assets in the amount of USD 2.2 million.
In the first quarter of 2017, the Company invested USD 69.7 million, net, in investment activities. The investment in fixed assets and intangible assets amounted to USD 76.1 million (mainly advance payments for 787 aircrafts and their engines and acquisition of spare parts and appliances). On the other hand, the Company received proceeds in the amount of USD 6.3 million from the release of short-term deposits.
Cash flows from financing activities:
In the first quarter of 2018, the Company had a net cash flow of USD 106.9 million from financing activities that included loans in the amount of USD 172.0 million (see note 5 of the condensed financial statements), which were taken to finance the first Company-owned aircraft, which arrived in March. On the other hand, the Company repaid loans in the amount of USD 56.5 million, of which USD 30.0 million to repay the loan taken to finance advance payments for said aircraft. Additionally, during the reported quarter there was a USD 7.0 million decrease in short-term credit.
In the first quarter of 2017, the Company had a net cash flow of USD 13.5 million from financing activities, which included loans in the total amount of USD 33.5 million and an increase in short-term credit in the sum of USD 5.9 million. On the other hand, the Company repaid loans in the amount of USD 25.9 million.
A7. The financial position, cash balances and working capital of the Company
31.3.2018 31.12.2017 31.3.2018 31.12.2017 USD thousands USD thousands
Current assets 528,279 518,426 Current liabilities 953,173 956,358 Non-current Non-current assets 1,455,592 1,332,982 liabilities 757,371 616,860 Capital 273,327 278,190 Total 1,983,871 1,851,408 Total 1,983,871 1,851,408
Below are the main changes in the Company's assets, liabilities and equity as of March 31, 2018 compared to December 31, 2017:
Current assets: The Company’s current assets as of March 31, 2018 totaled USD 528.3 million, which is USD 9.9 million above their balance at December 31, 2017. This was mainly due to a seasonal increase in trade receivables and prepaid expenses, which were partially offset by a decrease in cash balances (see above) and short-term deposits.
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Current liabilities:
The Company’s current liabilities as of March 31, 2018 amounted to USD 953.2 million, down USD 3.2 million from their balance at December 31, 2017. On the one hand, this change is attributable to a decrease in short-term credit and current maturities, mainly due to the repayment of a loan taken to finance advance payments for new aircrafts, which was replaced with a long-term loan, and a decrease in provisions and employee severance pay liabilities (among others, due to a payment made in respect of a settlement agreement with the assessment officer). On the other hand, there was a seasonal increase in unearned revenue from the sale of airline tickets and related trade payables compared to their balance at December 31, 2017.
Working capital:
As of March 31, 2018, the Company had a working capital deficiency of NIS 424.9 million compared to a deficiency of USD 437.9 million as of December 31, 2017. It is noted that a significant portion of the deficiency in working capital does not reflect short-term cash flows, as explained below. The Company's current ratio as of March 31, 2018 rose to 55.4% from a ratio of 54.2% at December 31, 2017. The working capital deficiency as of March 31, 2018 has material components which are included in the balance of current liabilities and are characterized by business cyclicality; however, the Company does not require cash flows in the short-term to repay them: unearned income from the sale of airline tickets and frequent flyer miles in the amount of USD 411 million, which will be recognized upon the provision of future flight services, and a vacation pay liability in the amount of USD 46 million, which is expected to be paid upon the retirement of employees, but is classified as a short-term liability in accordance with GAAP. Current liabilities also include loans taken to finance advance payments for the Boeing 787 aircraft, which will be repaid with long-term loans upon the receipt of the aircraft. As of March 31, 2018, the amount attributed to the aforesaid loans out of total current liabilities was USD 55 million.
Non-current assets:
Non-current assets as of March 31, 2018 amounted to USD 1,455.6 million, rising by USD 122.6 million from their balance at December 31, 2017, mainly due to the receipt of the Boeing 787-9 aircraft during the report period and advance payments for the purchase of the Boeing 787, less current depreciation.
Non-current liabilities: The Company’s non-current liabilities as of March 31, 2018 amounted to USD 757.4 million, rising by USD 140.5 million above their balance at December 31, 2017, mainly due to a loan taken to finance the Boeing 787-9 aircraft which arrived in March 2018; see note 5(b) of the condensed financial statements.
Shareholders' equity Shareholders' equity of March 31, 2018 amounted to USD 273.3 million. The USD 4.9 million decrease in equity compared to December 31, 2017 was despite the USD 37.5 million growth in equity following the application of IFRS 15 "Revenue from Contracts with Customers" (see note 7(a) of the condensed financial statements) and it is mainly attributable to the loss for the period.
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Development of equity as of March 31 (USD millions):
400
350
300 273.3 246.0 250
200 175.8
150 104.7 100
50
0
Material Company loans and credit lines:
In accordance with the guidelines of the Securities Authority with respect to “reportable credit event,” the Company has determined that the materiality threshold for reporting material loans is 5% of the consolidated balance sheet of the Company and 10% of the outstanding loans of the corporation.
The changes in loans that constitute reportable credit are set forth in Appendix A of the Board of Director’s Report as of March 31, 2018.
For additional details as to Company's loans and its compliance with the financial restrictions and covenants, see note 5 of the condensed financial statements.
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B. Exposure to Market Risks and their Management
B1. Qualitative report of exposure to market risks and their management
B1. (1) General – description of the market risks to which the Company is exposed
Detailed below are the market risks to which the Company is exposed and the management of said risks including the use of hedge transactions. The Company applies the hedge accounting by designates derivatives financial instruments as hedging instruments. With regard to the Company's hedge accounting policy as well as its market risks management policy, the officers responsible for the management thereof, means of supervision and exercise of the Company's policy, see note 18 to the annual financial statements as of December 31, 2017.
Exposure to changes in jet fuel prices Jet fuel prices are a key component of the Company's operating expenses and have an impact on its profitability. The Company is taking measures to reduce its exposure to these changes, as specified below.
As of March 31, 2018, the Company had several jet fuel hedges estimated at 38% of the expected jet fuel consumption in the next 12 months. In addition, the Company hedged 25% of its expected consumption for the second quarter of 2019, 10% for the period July-December 2019 and 5% of its expected consumption for the first quarter of 2020. The net fair value of total jet fuel hedge instruments as of March 31, 2018 was USD 20.4 million.
Close to the date of publication of the report, the percentage of hedging for the next 12 months was 45% of the projected consumption.
The table below presents a sensitivity analysis for jet fuel expenses over a period of 12 months (close to the date of publication of the financial statements), in relation to the projected market prices as of March 31, according to the estimated level of activity and the Company's assessments (assuming all other variables, including level of consumption and suppliers' margins remain unchanged) as well as the effect of hedging on expenses:
Changes in the average Hedging as a market price in the percentage of Effect on expenses Effect on expenses next 12 months relative the projected prior to hedging after hedging (USD, to the price close to the expenses for (USD, million) million) date of publication of the next 12 this report months 25% 137 84
10% 55 34 45% -10% -55 -37
25%- -137 -97
For details on changes in jet fuel prices subsequent to the report date, see section E(2) of the board of directors' report below.
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Exposure in respect of long-term loans - in accordance with the provisions of several loan agreements, the Company is required to meet a minimum ratio between the market value of the aircrafts and the balance of the loans that are secured by the same aircrafts. Likewise, the Company is required to fulfill several conditions, in the absence of which it may be required to repay these loans forthwith. The Company’s exposure to market risks in this regard results from changes in the market value of aircrafts globally. For additional details, see note 13c of the financial statements as of December 31, 2017.
Exposure to changes in interest rates - As of the report date, 30% of the outstanding balance of Company loans has a floating interest rate and 70% of outstanding loans bear a fixed interest rate for a period of up to about 11 years.
The Company operates in accordance with the policy detailed in note 18 of the annual financial statements as of December 31, 2017. Given the comfortable environment of long-term interest rates and the small gap between short-term and long-term interest rates, the Company decided, with the approval of the board of directors' risk management committee, to increase the amount of fixed-interest loans. During 2017, the Company entered into an interest rate hedging transaction in the amount of USD 92 million. It is noted that during the reported quarter the Company did not enter into new hedge transactions.
The table below presents a sensitivity analysis for interest expenses over a period of 12 months (close to the date of publication of the financial statements), including the effect of the Company's hedges, as detailed above, regarding interest risk management:
Changes in the average Libor Average of hedging interest rate in the next 12 and/or fixed interest rate Impact on expenses after the months relative to the Libor as a percentage of the effect of hedging (USD, interest rate close to the date estimated exposure for million) publication of this report the next 12 months
50% 2.1
10% 0.4 73% -10% -0.4
-50% -2.1
NIS-USD Exchange Rate Exposure Most of the revenues and expenses of the Company are in US dollars, which is the Company's functional and reporting currency. The Company has NIS-denominated expenses, primarily payroll expenses and payments to local suppliers in Israel. Accordingly, a change in the rate of the shekel against the dollar affects the Company's shekel expenses in dollar terms. The Company has taken hedging measure to reduce its exposure, as specified below. In addition, changes in the NIS-USD exchange rate has an impact on the Company's balance sheet items, mainly due to long-term employee benefits, which could be reflected as an expense or income in the income statement, and an increase or decrease of the dollar-denominated cash flows required to settle the liability. Close to the date of publication of the report, the hedging of NIS-denominated cash flows for the next 12 months is 10% of the projected exposure.
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The table below presents a sensitivity analysis for NIS-denominated expenses over a period of 12 months (close to the date of publication of the financial statements), in relation to the projected market prices as of March 31, according to the estimated level of activity and the Company's assessments (assuming all other variables, including the amount of NIS-denominated expenses remain unchanged) as well as the effect of hedging on expenses:
Change in the average The change (in dollar The change (in dollar Hedging as a exchange rate in the next terms) in NIS- terms) in NIS- percentage of the 12 months relative to the denominated denominated projected exposure exchange rate close to the expenses prior to the expenses after the for the next 12 date of publication of the effect of hedging effect of hedging months report (USD, million) (USD, million)
10% 62- -56 10% -10% 76 68
In addition, any 10% increase or decrease in the exchange rate as of March 31, 2018, would have led to an increase or decrease in NIS-denominated liabilities in the amount of USD 3.8 million.
C. Disclosure in connection with the Financial Reporting of the Corporation:
C1. Disclosure as to critical accounting estimates The implementation of the accounting principles by the management upon the preparation of the financial statements at times involves estimates, assumptions and forecasts that impact the amounts of assets and liabilities and the business results reported in the financial statements. Some of the assumptions, estimates and forecasts are critical to the financial position or the operating results presented in the Group’s financial statements, due to the materiality of the matter, the complexity of the calculations or the degree of likelihood for the realization of the uncertain matters. For details regarding the material accounting estimates used by the Company, see Note 2c of the Financial Statements as of December 31, 2017.
C2. Matters to which the Company's auditors called attention in their opinion on the Financial Statements For details on motions to certify class actions against the Company and the Company’s exposure to these class actions, please see Note 6 of the condensed financial statements.
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D. Additional information:
Disclosure regarding changes in the economic environment, repercussions of the crisis in the capital markets and market risks and special events
1. The global aviation market is affected by the security and political situation, special events, such as the outbreak of epidemics and natural disasters worldwide in general and in specific areas in particular, and the economic situation in Israel and globally.
Below are changes in the prices of jet fuel, the interest rate and the shekel's exchange rate from the end of the quarter and until close to the publication of the report as of March 31, 2018:
2. As of the reporting 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 198.9 cents per gallon, while as of the date close the approval of this report, the price was 216.1 cents per gallon, up by 9%. It is noted that jet fuel-related expenses constitute approx. 24% of the Company’s turnover, and therefore changes in jet fuel prices may have a material impact on its financial results. The fair value of the jet fuel hedging instruments is determined based on the change in prices since the date of the report and the following the settlement of transactions. As of March 31, 2018, the Company had jet fuel hedges estimated at 52% of the expected jet fuel consumption for the period June-December 2018, 33% of the projected consumption for 2019 and 5% of the projected consumption for the first quarter of 2020.
3. On the date close to the publication of the financial statements, the dollar-NIS exchange rate increased by 1.5% as compared to report's publication date. It is noted that the impact of exchange rates on next quarter's business results will be determined according to the exchange rates in effect during and at the end of the quarter (June 30, 2018).
Eli Defes Gonen Usishkin Chairman of the Board CEO
May 28, 2018
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Appendix A to the Board of Directors' Report on the State of the Company's Affairs for the year ended on March 31, 2018
Changes in the Company's material outstanding loans for the three-month period ended on March 31, 2018
Amortization schedule
Amount of Amount of Date of Loans for Outstanding The lender loans Repayment repayment Outstanding maturity of aircraft balance Date of the (USD, 000) Collateral Interest rate of principal of balloon loan the loans loans (USD, 000) and interest principal (USD, 000) (USD, 000) Floating rate: Foreign 787-9 135,000 135,000 787 aircraft Libor + Quarterly 3,250 - 01/03/2018 01/03/2030 bank margin -
B-1
El Al Israel Airlines Ltd.
Condensed Consolidated Financial Statements As of March 31, 2018
(Unaudited)
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El Al Israel Airlines Ltd.
Condensed Consolidated Financial Statements As of March 31, 2018
(Unaudited)
Table of Contents
Page
Auditors' Report C-2
Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Statements of Financial Position C-3 - C-4
Condensed Consolidated Income Statements C-5
Condensed Consolidated Statements of Comprehensive Income C-6
Condensed Consolidated Statements of Changes to Equity C-7 - C-9
Condensed Consolidated Statements of Cash Flows C-10 - C-11
Notes to the Condensed Consolidated Financial Statements C-12 – C-24
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Auditors' Review Report to the Shareholders of El Al Israel Airlines Ltd.
Introduction We have reviewed the attached financial information of El Al Israel Airlines Ltd. (hereinafter: “the Group"), including the condensed consolidated statement of financial position as of March 31, 2018, as well as the condensed consolidated income statements, comprehensive income, changes to equity and cash flow for the three month periods then ended. The board of directors and management are responsible for the preparation and presentation of financial information for these interim periods, pursuant to International Accounting Standard IAS 34, “Interim Financial Reporting,” and are responsible for the preparation of financial information for these interim periods under Chapter D of the Securities Regulations (Periodic and Immediate Reports), 5730-1970. Our responsibility is to express a conclusion regarding the financial information for these interim periods based on our review.
We did not review the condensed financial information for the interim period of subsidiaries whose assets constitute 0.5% of the total consolidated assets as of March 31, 2018, and whose income constitutes 1.3% of the total consolidated income for the three-month period then ended. Additionally, we have been provided reports by the auditors of an associated company the investment in which is USD 15,918 thousands as of March 31, 2018, and the Group’s share in its results is USD 250 thousands for the three-month period then ended. The financial information for the condensed interim periods of said companies was reviewed by other auditors, whose review reports were provided to us, and our conclusion, inasmuch as it relates to the financial information in respect of the same companies, is based on the review reports prepared by the other auditors.
Scope of the Review We conducted our review in accordance with Review Standard No. 1 of the Institute of Certified Public Accountants in Israel, "Review of Financial Information for Interim Periods Prepared by the Entity's Auditor." A review of interim financial information includes making inquiries, particularly with the people responsible for financial and accounting matters, and performing analytic and other review procedures. A review is significantly limited in scope in comparison to an audit conducted in accordance with generally accepted accounting standards in Israel, and therefore does not allow us to reach an assurance that we have become aware of all material issues which may have been identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion Based on our review and on the review reports provided by other auditors, nothing has come to our attention which would lead us to believe that the aforementioned financial information was not prepared, in all material respects, in accordance with IAS 34.
In addition to previous paragraph, based on our review and on the review reports provided by other auditors, nothing has come to our attention which would lead us to believe that the above financial information does not comply, in all material respects, with the disclosure requirements set forth in Section D of the Securities Regulations (Periodic and Immediate Reports), 5730- 1970.
Without qualifying our opinion, we draw attention to note 6 of the financial statements regarding exposure to class actions certified against the Company and the Company’s exposure to these class actions.
Brightman Almagor Zohar & Co. Auditors Member of Deloitte Touche Tohmatsu Limited
Tel Aviv, May 28, 2018
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El Al Israel Airlines Ltd. Condensed Consolidated Statements of Financial Position
As of March 31 As of December 31 2018 2017 2017 USD thousands USD thousands (Unaudited) Assets
Current assets Cash and cash equivalents 175,686 203,051 239,347 Shorts term deposits 67,577 25,127 46,397 Trade and other receivables 222,725 *207,321 182,414 Derivative financial instruments 15,341 10,000 12,919 Prepaid expenses 30,943 29,206 22,687 Inventory 16,007 16,159 14,662
Total current assets 528,279 490,864 518,426
Non-current assets Long term deposits 25,228 *21,266 24,824 Long term investments 23,795 23,797 23,754 Fixed assets and intangible assets 1,319,424 1,201,925 1,199,748 Derivative financial instruments 7,502 1,180 5,366 Long term prepaid expenses 8,995 5,629 7,732 Assets in respect of employee benefits 70,648 63,232 71,558
Total non-current assets 1,455,592 1,317,029 1,332,982
Total assets 1,983,871 1,807,893 1,851,408
* Reclassified
The notes to the condensed consolidated financial statements constitute an integral part thereof.
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El Al Israel Airlines Ltd. Condensed Consolidated Statements of Financial Position
As of March 31 As of December 31 2018 2017 2017 USD thousands USD thousands (Unaudited) Liabilities and shareholders' equity
Current liabilities Short term credit and current maturities 166,352 145,164 195,924 Trade payables 170,408 128,474 176,173 Accounts payable 92,193 72,716 68,073 Provisions 19,054 20,734 39,006 Derivative financial instruments - 38 - Employee severance pay liabilities 94,273 94,438 114,856 Unearned revenue 410,893 425,607 362,326
Total current liabilities 953,173 887,171 956,358
Non-current liabilities Loans from banks and others 539,423 476,641 402,059 Employee severance pay liabilities 88,924 77,229 87,235 Derivative financial instruments - 283 - Accounts payable 7,863 4,042 5,736 Deferred tax liabilities 85,730 74,276 87,233 Unearned revenue 35,431 42,257 34,597
Total non-current liabilities 757,371 674,728 616,860
Total liabilities 1,710,544 1,561,899 1,573,218
Shareholders' equity Share capital 155,012 155,012 155,012 Premium and capital reserves 279,163 271,283 277,571 Accumulated deficit )161,076( )180,301( )154,599( Total equity attributable to the Company's owners 273,099 245,994 277,984 Non-controlling interests 228 - 206
Total equity 273,327 245,994 278,190
Total liabilities and shareholders' equity 1,983,871 1,807,893 1,851,408
Eli Defes Gonen Usishkin Dganit Palti Chairman of the Board CEO CFO
Date of approval of the financial statements: Ben Gurion Airport, May 28, 2018
The notes to the condensed consolidated financial statements constitute an integral part thereof.
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El Al Israel Airlines Ltd. Condensed Consolidated Income Statements
For the three-month period For the year ended on ended March 31 at December 31 2018 2017 2017 USD thousands USD thousands (Unaudited)
Operating revenues 463,774 417,691 2,096,998 Operating expenses )433,236( )376,808( )1,748,660(
Gross profit 30,538 40,883 348,338
Selling expenses )50,587( )46,427( )209,096( General and administrative expenses )33,563( )28,511( )113,536( Other income, net 995 - 3,271
)83,155( )74,938( )319,361(
Profit (loss) from ordinary operations )52,617( )34,055( 28,977
Financing expenses )5,769( )6,345( )23,985( Financing income 1,753 1,369 3,483
Net financing expenses )4,016( )4,976( )20,502(
Company’s share of the profits of associated companies and revaluation of options in respect thereof )257( 262 243
Profit (loss) before taxes on income )56,890( )38,769( 8,718
Tax benefit (income taxes) 12,918 8,808 )3,048(
Net profit (loss) for the period )43,972( )29,961( 5,670
Earnings (loss) per ordinary share of NIS 1 p.v. each (dollars) Earnings (loss) per share, basic and diluted )0.09( )0.06( 0.01
The weighted average number of shares (in thousands) used in calculating earnings (loss) per share: Basic and diluted 495,719 495,719 495,719
The notes to the condensed consolidated financial statements constitute an integral part thereof.
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El Al Israel Airlines Ltd. Condensed Consolidated Statements of Comprehensive Income
For the three-month For the year period ended on ended March 31 at December 31 2018 2017 2017 USD thousands USD thousand (Unaudited)
Profit (loss) for the period )43,972( )29,961( 5,670
Other comprehensive income (loss): Amounts that will not be classified in the future to profit and loss:
Profit (loss) due to re-measurements of defined benefit plans, net of tax )1,125( 66 )1,879(
Amounts that will be classified in the future to profit and loss:
Exchange rate differences due to translations of foreign operations (229) 1,039 1,767 Profit (loss) on cash flow hedges, net of tax 2,223 )5,947( )3,662( Profit (loss) on cash flow hedges - time value, net of tax 723 )3,254( 177
Other comprehensive income (loss) for the period: 1,592 )8,096( )3,597(
Total comprehensive income (loss) for the period )42,380( )38,057( 2,073
The notes to the condensed consolidated financial statements constitute an integral part thereof.
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El Al Israel Airlines Ltd. Condensed Consolidated Statements of Changes in Equity
For the three-month period ending on March 31, 2018 (unaudited) Retained Capital earnings reserve on (accumulated Capital re- loss) Capital reserve due Foreign measurement attributable Other reserve due to cash flow currency of defined to parent Non- Share Premium capital to cash flow hedges – translation benefit company's controlling capital on shares reserves hedges time value reserve liabilities owners interests Total USD, thousands
Balance as of January 1, 2018, prior to cumulative effect due to the application of IFRS 15 155,012 35,554 238,911 13,802 177 1,192 )12,065( )154,599( 206 278,190 Cumulative effect due to application of IFRS 15 (see note 7a) ------37,517 - 37,517
Balance as of January 1, 2018, following cumulative effect due to the application of IFRS 15 155,012 35,554 238,911 13,802 177 1,192 )12,065( )117,082( 206 315,707
Changes during the report period Profit (loss) for the period ------)43,994( 22 )43,972( Other comprehensive income (loss) - - - 2,223 723 )229( )1,125( - 1,592
Total comprehensive income (loss) for the period - - - 2,223 723 )229( )1,125( )43,994( 22 )42,380(
Total equity as of March 31, 2018 155,012 35,554 238,911 16,025 900 963 )13,190( )161,076( 228 273,327
The notes to the condensed consolidated financial statements constitute an integral part thereof.
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El Al Israel Airlines Ltd. Condensed Consolidated Statements of Changes in Equity
For the three-month period ending on March 31, 2017 (unaudited) Capital reserve Capital reserve from on re- transactions Capital Foreign measurement with former reserve due currency of defined Share Premium controlling to cash flow translation benefit Accumulated capital on shares shareholder hedges reserve liabilities, net loss Total USD, thousands
Balance as of January 1, 2017 155,012 35,554 237,122 17,464 )575( )10,186( )150,340( 284,051
Changes during the report period: Loss for the period ------)29,961( )29,961( Other comprehensive income (loss) - - - )9,201( 1,039 66 - )8,096(
Total comprehensive income (loss) for the period - - - )9,201( 1,039 66 )29,961( )38,057(
Total equity as of March 31, 2017 155,012 35,554 237,122 8,263 464 )10,120( )180,301( 245,994
The notes to the condensed consolidated financial statements constitute an integral part thereof.
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El Al Israel Airlines Ltd. Condensed Consolidated Statements of Changes in Equity (Cont.)
For the year ended on December 31, 2017 Retained Capital earnings reserve on (accumulated Capital re- loss) Capital reserve due Foreign measurement attributable to Other reserve due to cash flow currency of defined parent Non- Share Premium capital to cash flow hedges – translation benefit company's controlling capital on shares reserves hedges time value reserve liabilities owners interests Total USD, thousands
Balance as of January 1, 2017 155,012 35,554 237,122 17,464 - )575( )10,186( )150,340( - 284,051
Profit (loss) for the period ------5,676 )6( 5,670 Other comprehensive income (loss) - - - )3,662( 177 1,767 )1,879( - - )3,597(
Total comprehensive income (loss) for the year - - - )3,662( 177 1,767 )1,879( 5,676 )6( 2,073
Issue of shares by a subsidiary - - 1,789 - - - - - 212 2,001
Dividend paid ------)9,935( - )9,935(
Total equity as of December 31, 2017 155,012 35,554 238,911 13,802 177 1,192 )12,065( )154,599( 206 278,190
The notes to the condensed consolidated financial statements constitute an integral part thereof.
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El Al Israel Airlines Ltd. Condensed Consolidated Statements of Cash Flows
For the three month period ended Year ended on March 31 on December 31 2018 2017 2017 USD thousands USD thousand (Unaudited)
Cash flow from operating activities Profit (loss) for the period )43,972( )29,961( 5,670 Adjustments required to present cash flows from operating activities - Appendix A 57,989 106,904 278,300
Cash provided by operating activities, net 14,017 76,943 283,970
Cash flow for investment activities Acquisitions of fixed assets (see note 3a) )160,818( )73,021( )179,264( Proceeds from the disposal of fixed assets 2,166 129 5,271 Investment in intangible assets )1,685( )3,107( )16,461( Change in deposits )23,404( 6,254 )17,731(
Cash used in investment activities, net )183,741( )69,745( )208,185(
Cash flow from (for) financing activities Payment in respect of loan-related costs )1,603( - - Receipt of loans from banks and others (see note 5(b)(1) and (2)) 172,000 33,501 74,250 Repayment of loans from banks and others (see note 5(b)(1)) )56,460( )25,928( )95,045( Increase (decrease) in short term credit, net )7,028( 5,892 7,874 Issue of shares in a subsidiary - - 2,000 Dividend paid - - )9,935(
Cash provided by (used in) financing activities, net 106,909 13,465 )20,856(
Effect of exchange rate fluctuations on cash balances held in foreign currency )846( 1,632 3,662
Increase (decrease) in cash and cash equivalents )63,661( 22,295 58,591
Balance of cash and cash equivalents at beginning of period 239,347 180,756 180,756
Balance of cash and cash equivalents at end of period 175,686 203,051 239,347
The notes to the condensed consolidated financial statements constitute an integral part thereof
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El Al Israel Airlines Ltd. Condensed Consolidated Statements of Cash Flows
For the three month period ended Year ended on March 31 on December 31 2018 2017 2017 USD thousands USD thousands (Unaudited) Appendix A - Adjustments required to present cash flows from operating activities:
Income and expenses not involving cash flows: Depreciation and amortization (including disposal of accessories, out-of-use components, consumption of consumables and a decrease in the value of fixed and intangible assets) 39,211 44,213 167,727 Changes in deferred taxes )13,254( )8,989( 1,733 Increase (decrease) in employee benefit liabilities and provisions (see note 6(f)) )38,331( 1,159 39,797 Capital gains from sale of fixed assets, net )1,110( )116( )3,998( Payment of premiums on derivatives net of cumulative changes in the time value, which were reclassified to profit and loss )732( - )130( Expenses (income) from exchange rate differences in respect of cash and cash equivalents 846 )1,632( )3,662( Other changes )127( )316( 1,708
Changes in asset and liability items: Increase in trade and other receivables )39,700( )39,385( )12,953( Increase in prepaid expenses )10,999( )8,661( )4,245( Decrease (increase) in inventory )1,345( 2,181 3,678 Increase in trade payables 26,883 5,677 46,813 Increase in income in advance 96,647 112,773 41,832
57,989 106,904 278,300
Appendix B Payment and receipt of interest, taxes and dividends, which are classified in cash flows from operating activities:
Interest payments 4,424 5,193 19,139
Interest receipts 414 466 2,100
Tax payments – advance payments on surplus expenses (see note 6(f) below) 611 57 493
Dividend receipts - - 1,138
The notes to the condensed consolidated financial statements constitute an integral part thereof.
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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements
Note 1 - General
a. El Al Israel Airlines Ltd. mainly operates in the field of transport of passengers and cargo, including luggage and mail, on scheduled flights and charter flights (through the subsidiary Sundor) between Israel and foreign countries.
` In addition, the Company is engaged in providing maintenance services at its home airport, sale of duty- free products and - through investees - in related activities, mainly the production and supply of airline meals and management of several travel agencies abroad. For information on the Group’s operating segments, see note 8.
Passenger traffic at Ben Gurion Airport (BGN) is characterized by strong seasonality. Most of the activity is during summer months and holidays, peaking in July-September. The winter months (January-March) are characterized by low passenger traffic.
b. These condensed financial statements should be read in conjunction with the Company’s annual consolidated financial statements as of December 31, 2017 and for the year then ended, and the accompanying notes (hereinafter: the “Annual Financial Statements”).
Note 2 - Significant Accounting Policies:
a. Basis of Preparation of the Condensed Financial Statements
The condensed financial statements (hereinafter: the “Interim Financial Statements”) of the Company are prepared in accordance with IAS 34, “Interim Financial Reporting” and in accordance with the provisions of Chapter D of the Securities Regulations (Periodic and Immediate Reports), 5730-1970.
In preparing these Interim Financial Statements, the Company applied an accounting policy, presentation rules and calculation methods that are identical to those used in the Annual Financial Statements of the Company for 2017, except implementation of IFRS 15 "Revenues from contracts with customers", which applied in the first time in these financial statements, as described in note 7 below.
In accordance with Article 4 of the Periodic and Immediate Reporting Regulations, the Company did not attach separate financial information to these Interim Financial Statements pursuant to Article 38d of the Securities Regulations (Periodic and Immediate Reports), 5730-1970, in light of the negligible impact that these financial statements of the investee companies have on the consolidated financial statements. The criteria used by the Company in this decision are the scope of data of subsidiaries from the total assets, income, profit and cash flows of the Company from current operations (less than 5%).
b. Accounting Considerations and Critical Estimates
In the application of the Company’s accounting policies, the Company’s management, in certain cases, was required to exercise broad accounting discretion regarding the estimates and assumptions that were used in determining the value of assets and liabilities in the financial statements. The related estimates and assumptions are based on past experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
For additional details regarding the critical accounting estimates used by the Company, see note 2.c of the Annual Financial Statements.
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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements
Note 3 - Aircrafts and Flight Equipment
a. Procurement plan for the acquisition and lease of 787 widebody aircraft:
(1) Further to note 9(d) of the annual financial statements, during the report period, the Company received 2 Boeing 787-9 aircraft, one of which is leased (operating lease) while the other is owned by the Company. On the date of reception of the owned aircraft, the Company paid a sum of USD 92.8 million, in addition to the advance payments that were paid for the aircraft in prior periods.
Additionally, in accordance with the terms of the procurement plan, during the first quarter the Company paid a sum of USD 43.6 million as advance payment for aircraft which are expected to be received in subsequent periods (from the end of the reported period to the date of publication of the financial statements, the Company paid an additional amount of USD 4.9 million).
Regarding loans taken to finance the procurement plan, see note 5 below.
(2) Due to difficulties in the manufacturing process of the Rolls Royce Trent 1000-TEN engines, which the Company purchased (as part of the plan to procure Boeing 787 aircraft), the Company installed Trent-1000 Pack C engines in the first two aircraft that arrived in 2017, which were to be replaced in the second quarter of 2018. During the report period, Rolls Royce informed the Company of a delay in the replacement of engines for these aircraft, due to malfunctions detected in several Pack C engines in other airlines (which performed a specific number of flight cycles), which affected Rolls Royce's ability to carry out the replacement on the scheduled date. It is also noted that according to information provided to the Company, as a result of the aforesaid situation, there may be delays in the supply of new Trent-1000 TEN engines for the new Boeing 787 aircraft. Nevertheless, as of the date of publication of the reports, the Company is unaware of a delay in the supply of Boeing 787 aircraft, which are planned to be received during 2018. At the same time, insofar as such delays and difficulties continue, this may impact the receipt of the aircraft and engines on time.
b. Decommissioning of engines in the 747 aircraft fleet:
During the report period, the Company sold two engines for a total sum of USD 2.3 million. The Company recognized a capital gain of USD 0.9 million, which was include under "other income".
c. Damage and termination of lease for the 767 aircraft:
In March 2018, a Germania airline plane collided with a leased 767-300 jet operated by El Al on the Ben Gurion Airport aircraft parking. As a result of the collision, the aircraft sustained damage and was subsequently grounded. Given the severity of the damage and the lengthy period required to repair the aircraft, the Company decided, with the consent of the lessor and the insurance companies, to convert the repair of the damage with payment by the insurers and terminate the term of lease of the jet in June 2018 ahead of the scheduled termination date in December 2020. The Company's decision, as stated, is subject to the signing of an agreement with the owners of the aircraft. As part of these agreements, the insurers will pay the Company a net amount of USD 8 million in respect of the said damage. On the date of signing of the agreement, this amount will be reflected in the Company's results.
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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements
Note 4 - Derivative Financial Instruments
Changes in the fair value of financial instruments measured at fair value:
Listed below are changes in the fair value of the Company's jet fuel hedging transactions, exchange rate hedging transactions and interest hedging transaction measured at fair value (level 2), and their impact on the income statement, other comprehensive income and the cash flow of the Company:
For the three month period ending on March 31, 2018 (unaudited) Increase in asset Impact on the Impact on other Total effect on Cash flow / decrease in liability income comprehensive the Company's from (decrease in asset/ statement income equity derivatives increase in liability) USD thousands Balance as of January 1, 2018 18,285
Jet fuel derivatives: Revaluation of transactions designated as hedging instruments for accounting purposes - 7,334 7,334 - 7,334 Proceeds from transactions designated as hedging instruments for accounting purposes 4,535 )4,535( - 4,535 )4,535( Changes in the fair value of the time value accumulated in options designated as hedges, which were reclassified to profit and loss )190( 190 - - - Payment of premiums for hedging instruments - - - )922( 922 Total changes in jet fuel derivatives 4,345 2,989 7,334 3,613 3,721
Interest rate derivatives: Revaluation of transactions designated as hedging instruments for accounting purposes - 857 857 - 857 Payment for transactions designated as hedging instruments for accounting purposes 20 )20( - 20 )20( Total changes in interest rate derivatives 20 837 857 20 837
Total derivatives 4,365 3,826 8,191 3,633 4,558
Balance as of March 31, 2018 22,843
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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements
Note 4 - Derivative Financial Instruments (cont.)
Changes in the fair value of financial instruments measured at fair value (cont.):
For the three month period ending March 31, 2017 (unaudited) Impact on Increase in asset/ Impact on the other Total effect on Cash flow decrease in liability income comprehensive the Company's from (decrease in asset / statement income equity derivatives increase in liability) USD thousands
Balance as of January 1, 2017 22,919
Jet fuel derivatives: Revaluation of transactions designated as hedging instruments for accounting purposes - )13,320( )13,320( - )13,320( Proceeds from transactions designated as hedging instruments for accounting purposes 1,032 )1,032( - 1,032 )1,032( Total change in jet fuel derivatives 1,032 )14,352( )13,320( 1,032 )14,352(
Exchange rate derivatives: Revaluation of transactions designated as hedging instruments for accounting purposes - 3,997 3,997 - 3,997 Proceeds from transactions designated as hedging instruments for accounting purposes 1,830 )1,830( - 1,830 )1,830( Total change in foreign exchange derivatives 1,830 2,167 3,997 1,830 2,167
Interest rate derivatives: Revaluation of transactions designated as hedging instruments for accounting purposes - 84 84 - 84 Payment for transactions designated as hedging instruments for accounting purposes )41( 41 - )41( 41 Total changes in interest rate derivatives )41( 125 84 )41( 125
Total changes in derivatives 2,821 )12,060( )9,239( 2,821 )12,060(
Balance as of March 31, 2017 10,859
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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements
Note 4 - Derivative Financial Instruments (cont.) Changes in the fair value of financial instruments measured at fair value (cont.):
For the year that ended on December 31, 2017 Impact on Increase in asset/ Impact on the other Total effect on Cash flow decrease in liability income comprehensive the Company's from (decrease in asset / statement income equity derivatives increase in liability) USD thousands
Balance as of January 1, 2017 22,919
Jet fuel derivatives: Revaluation of transactions designated as hedging instruments for accounting purposes - 3,471 3,471 - 3,471 Payment for transactions designated as hedging instruments for accounting purposes 8,696 )8,696( - 8,696 )8,696( Payment of premiums for hedging instruments - - - )131( 131 Total change in jet fuel derivatives 8,696 )5,225( 3,471 8,565 )5,094(
Exchange rate derivatives: Revaluation of transactions designated as hedging instruments for accounting purposes - 4,600 4,600 - 4,600 Payment for transactions designated as hedging instruments for accounting purposes 4,805 )4,805( - 4,805 )4,805( Total change in foreign exchange derivatives 4,805 )205( 4,600 4,805 )205(
Interest rate derivatives: Revaluation of transactions designated as hedging instruments for accounting purposes - 641 641 - 641 Payment for transactions designated as hedging instruments for accounting purposes )24( 24 - )24( 24 Total changes in interest rate derivatives )24( 665 641 )24( 665
Total changes in derivatives 13,477 )4,765( 8,712 13,346 )4,634(
Balance as of December 31, 2017 18,285
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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements
Note 5 - Loans from Banks
a. Debt to collateral ratio
Further to note 13(c) of the annual financial statements, as of the financial position statement date and its publication date, the Company meets the debt to collateral ratio as required in agreements with the lending banks.
b. Loans for the financing of aircrafts:
(1) On February 23, 2018, the Company signed a USD 135 million financing agreement with foreign banks for the purchase of a Boeing 787-9 aircraft, which the Company received in March 2018. The financing is composed of a senior loan in the amount of USD 114 million, bearing a 3-month LIBOR plus a margin, to be repaid on a quarterly basis over a period of 12 from the date of receipt of the loan, and a junior loan in the amount of USD 21 million, bearing a 3-month LIBOR plus a margin, to be repaid on a quarterly basis over a period of 6 from the date of receipt of the loan. The weighted interest (margin) on the loans is between 1.50% and 2.50%.
The loans were taken by an SPC ("Special Purpose Company"), which was established as part of the financing agreement, as is customary with this type of transaction.
The loans are secured by a pledge on the aircraft, the assignment of the Company's rights in connection with the insurance on the aircraft and a warranty provided by Boeing for the aircraft and Rolls Royce for the engines.
In addition, the agreement includes customary clauses, such as the lenders' option to call the loans due and payable upon the occurrence of breach events by the Company. The Company has a right to an early or partial repayment (subject to a minimum amount) of the outstanding loans, subject to the terms stipulated by the parties in the agreements. The loans do not include an undertaking to comply with financial covenants.
Upon the receipt of this financing, the Company repaid loans taken to finance advance payments for the acquired aircraft, in the amount of USD 30 million.
(2) In March 2018, the Company signed an agreement with a foreign bank to finance advance payments for a Boeing 787-9 aircraft, which was purchased as part of the procurement plan (see note 9(d) of the annual financial statements), and which is expected to be supplied to the Company in June 2019.
The loan, totaling USD 37 million, was provided to the Company for the period ending on July 31, 2019, or until the receipt of the aircraft, whichever is earlier. The loan bears a floating interest of LIBOR plus a margin payable on a quarterly basis, and is to be repaid on the date of receipt of the aircraft by means of long-term financing. To secure repayment of the loan, the Company will assign its rights to the aircraft to the foreign bank, pursuant to the purchase agreement with Boeing.
(3) On May 7, 2018, subsequent to the financial position statement date, the Company signed a memorandum of understanding with a foreign bank and a Japanese company that serves as an underwriter for Japanese investors, to receive financing in the amount of USD 145 million for the purchase of a Boeing 787-9 aircraft. This is the second airplane purchased by the Company and the fifth of the same model to be received by El Al as part of the procurement plan.
The financing is composed of a senior loan in the amount of USD 95 million, with a 3-month LIBOR interest rate plus a margin over a period of 12 years, a junior loan in the sum of USD 21 million, with a 3-month LIBOR interest rate plus a margin, to be repaid over a period of 6 years from the date of receipt of the loan, and an additional amount of USD 29 million from the Japanese investors (hereinafter – "the financing"). The weighted interest spread for the financing deal is between 1% and 2%.
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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements
Note 5 - Loans from Banks (continued):
b. Loans for the financing of aircrafts (continued):
(3) Continued:
The structure of the financing is JOLCO (Japanese Operating Lease with a Call Option), pursuant to which ownership of the aircraft will be transferred to an SPC ("Special Purpose Company") in Japan. After a period of 10 years, the aircraft will in effect be transferred to the Company's ownership, subject to repayment of the outstanding debt, for a pre-determined price of USD 52 million.
The financing will be secured, among others, by a lien on the aircraft, assignment of the Company's rights in connection with the aircraft's insurance as well as the Company's rights in the agreement with the Japanese SPC, Boeing's warranty for the aircraft and Rolls Royce's warranty for the engines.
The memorandum of understanding includes standard clauses, such as an option for the foreign bank or the SPC to demand immediate repayment of the financing upon the occurrence of breach events by the Company. The memorandum of understanding does not include an undertaking to comply with financial covenants.
The Company does not have an option to prepay the financing, except in cases of increased costs to the bank or a change in the tax system, which would be sustained by the Company pursuant to the terms of the financing, in the event of a breach by the SPC towards the foreign bank or the Company, subject to an additional payment which was agreed on in the financing transaction.
The financing transaction is contingent, among others, on signing a detailed and mutually binding agreement, the creation of lien as stated, and the payment of customary fees and expenses.
c. Fair value of the loans:
As of March 31, 2018 As of Dec 31, 2017 Book Book value Fair value value Fair value USD, thousand Long-term dollar loans with fixed interest 225,871 216,402 234,167 225,646
The fair value of these loans is based on a calculation of the current value of the cash flows using an interest rate of 3.36% as of March 31, 2018 and 2.92% of December 31, 2017, which are the market rates for loans with similar characteristics (level 2).
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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements
Note 7 - Legal proceedings
As of March 31, 2018, legal claims were filed against the Company in the total amount of USD 1,310 million, as well as unquantified legal claims. For these claims, the Company recognized provisions in the amount of USD 19 million. In management's opinion, based on the opinion of its legal counsel, it is not expected that the Company will have exposure to additional loss in respect of the aforesaid claims above the amounts of provisions included in the financial statements.
The following describes material changes with respect to legal proceedings against the Company, further to note 15 (b) of the Annual Financial Statements:
a. Further to note 15(b)(1) of the annual financial statements, in connection with a motion to certify a class action, which was filed with 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.). As specified in the said note, the Company recognized a provision which, in management's assessment, based on the opinion of its legal counsels, reflects the financial resources that would be required to settle the claim.
b. In February 12, 2018, a motion to certify a class action was filed against the Company with the Lod Central District Court. The main allegations in the motion are that the Company abused its position as a monopoly in the Tel Aviv- Mumbai line, by charging an excessive and unfair price from time-sensitive passengers, and that the absence of an Indian airline from the Tel-Aviv-Mumbai line constitutes a restrictive agreement. In accordance with the motion, the court was asked to issue declaratory reliefs against the Company, requiring it to refund class members in respect of the Company's the unjust enrichment; to issue a mandatory injunction to amend the Tel Aviv-Mumbai flight ticket price, so that the Company will discontinue charging the "unreasonable price in the Tel Aviv - Mumbai line for time- sensitive businessmen and passengers"; and to order the Company compensate the entire class for monetary and non-monetary damages caused by the Company's conduct, as stated. The class group comprises customers who entered into agreement with the Company to purchase airline tickets and/or flight services, which the Company markets and/or sells, for the Tel Aviv-Mumbai line, and who paid an "unfair price", as it is defined in the motion, during the 7-year period preceding the date of the motion and until a verdict is issued by the court. The motion specifies a personal claim in the amount of NIS 11,250 and a total class claim in the amount of NIS 321 million, in accordance with the arguments made therein. The Company is reviewing the certification motion and will file its response as required. At this preliminary stage, it is impossible to assess the odds of the claim.
c. On March 27, 2018, a motion to certify a class action was filed against the Company and Israir Airlines and Tourism Ltd. and Arkia Israeli Airlines Ltd, with the Central District Court ("the airline companies" and "the motion", respectively). The claims made by the motion include an assertion that the airline companies are charging a "security fee" (as defined in the motion), allegedly in breach of the terms of a license and/or permit and with no authority, unjust enrichment, breach of statutory duty and breach of contract, as alleged by the motion. According to the plaintiffs, the permit to charge a "security fee" which El Al (and subsequently the other airline companies) received from the Ministry of Transportation in 2001 ("the permit") expired in 2013, due to the State's full funding of security expenses as well as indirect defense-related costs. The motion further alleged that the continued charging of "security fees", after 2013, is in violation of international aviation regulations that also apply to the Company, and in violation of the "open skies" agreement. According to the motion, the class group comprises passengers who, from 2013 and until the date in which the "security fee" will no longer be charged, paid the said security fee to any of the airline companies (directly or through travel agents) for a one-direction ticket from Israel. Pursuant to the motion, the amount of the personal claim is NIS 350 with respect to all the airline companies (of which NIS 226 for El Al alone), while the total class claim is estimated by the plaintiffs at NIS 697 million for all the airline companies (of which NIS 581 million for El Al alone). In addition, the court was asked to grant a declaratory relief, whereby the airline companies would not be permitted to charge a "security fee" based on the permit.
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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements
Note 7 - Legal proceedings (continued):
c. Continued:
It is noted that, at the Company's request, the court referred the hearing on this motion to a panel of judges that was determined for another class action, which was filed against the Company on February 28, 2018 (for additional details, see note 15(b)(22) of the annual financial statements) and which raises similar questions. The court was, therefore, requested to instruct that this motion be combined with the previous motion or that the previous motion be dismissed. The Company is reviewing the motion and will file its response as required. At this preliminary stage, it is impossible to assess the odds of the claim.
d. On April 17, 2018, subsequent to the financial position statement date, a motion to certify a class action was filed against the Company with the Tel-Aviv Labor Court by two aircrew members and one flight attendant – some of whom are no longer employed by the Company. According to the motion, the Company's payment to its aircrew members and flight attendants, in foreign currency, which is defined by the Company as reimbursement of meals and lodging expenses ("per-diem payments"), constitutes wages rather than reimbursement of costs. The motion further alleges that the terms of employment of Company employees are governed by collective agreements, which include provisions that define per-diem payments as the reimbursement of expenses that are not part of employees' wages and stipulate that they are not considered part of wages for purposes of social benefits etc.; pursuant to the motion, these are illegal provisions which should be cancelled. The motion states that the plaintiffs have contacted the Histadrut (National Labor Organization) twice in the past before filing the motion and have asked the Histadrut to take a stance in the matter. According to the plaintiffs, the Histadrut was either evasive or altogether unresponsive to their repeated requests. The class group was defined as all the aircrew members and flight attendants currently employed by the Company, as well as aircrew members that worked at El Al in the seven years that preceded the motion. The causes of action are breaches of statutory duties, unjust enrichment and nullification of a portion of the collective agreement, whose content is illegal and/or contradicts public policy pursuant to the Contracts Law (General Part), 1973. The motion specifies a personal claim in the amount of NIS 131,609 and a total class claim in the amount of NIS 205 million. According to the motion, this is a preliminary calculation, which would have to be revised once the Company provides the full and current data required for a more accurate calculation. As part of the total class claim, the court was requested to grant additional reliefs against the Company such as requiring the Company to make additional payments and contributions into pension funds, provident funds, executive insurance policies, study funds, sick days and redemption of vacation days in respect of per-diem amounts paid to the class members during the periods specified in the motion. The Company is reviewing the certification motion and will file its response as required. At this preliminary stage, it is impossible to assess the odds of the claim.
e. During April and May 2018, subsequent to the financial position statement date, additional motions to certify class actions totaling NIS 63 million (USD 18 million) were filed against the Company. The Company is reviewing the certification motions and will file its response as required. At this preliminary stage, it is impossible to assess the odds of the claims.
f. Further to note 15(b)(29) of the annual financial statements, during the reported quarter, the Company paid a total sum of NIS 75 million (USD 21.8 million), pursuant to a settlement agreement with the assessment officer, as detailed in said note, in respect of all the tax assessment for the years 2011-2013 and in respect of per-diem payments to aircrews in the years 2014 through 2017.
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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements
Note 7 - Revenue
a. IFRS 15 – "Revenue from Contracts with Customers:
Further to note 2(d) of the annual financial statements, commencing from the financial statements for the first quarter of 2018, the Company is applying IFRS 15 "Revenues from Contracts with Customers" (hereinafter – the Standard").
The table below presents the quantitative effect as a result of implementing the Standard by way of classifying its cumulative effect from prior periods to the opening balance of retained earnings, without adjusting comparative figures, in accordance with the Standard's transitional provisions that were chosen by the Company, as of January 1, 2018.
Total Liability Liability increase (asset) under (asset) under (decrease) in IAS 18 IFRS 15 equity Affected item USD, million
Unearned revenue from sale of airline tickets (1) 293.2 246.0 47.2 Prepaid expenses in respect of commissions and credit cards (2) )16.5( )15.0( )1.5( Short-term trade and accounts payable 68.1 65.1 3.0
Total decrease in liabilities, net 48.7
Tax effect )11.2(
Total positive effect, net, on the equity 37.5
(1) The decrease in the balance of unearned revenue from the sale of airline tickets stems from revenue recognition in respect of unused tickets, in line with the dates of use of the airline tickets, in lieu of recognizing revenue on their expiry date. For additional details, see note 2(d)(1)
(2) The decrease in assets stems from a decrease in the balance of prepaid expenses in respect of agents' fees, which is attributed to the balance of unearned revenue that was reduced as a result of the aforesaid in section (1) above.
Effect of implementing the Standard on the Company's profit and loss:
As a result of the first-time implementation of the Standard in these financial statements, the Company recognized an increase in cargo revenues in the amount of USD 1.4 million, as well as an increase in operating expenses in the same amount ("Interline Cargo" – for additional details, see note 2(d)(3)).
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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements
Note 7 - Revenue (continued):
b. Breakdown of operating income by segments:
For the three-month period ended on March 31, 2018 Of which: amounts attributed to reportable segments
Amount of Passenger Cargo income aircraft plane Others Unattributed segment segment segment revenue Types of revenue: USD, thousands
Passenger flights 403,747 391,533 - 12,368 )154( Cargo and mail transports 42,503 23,643 17,526 - 1,334 Total revenue from passenger flights and cargo transports (see (1) below) 446,250 415,176 17,526 12,368 1,180 Other income (2) 17,524 1,930 - 8,019 7,575 Total income 463,774 417,106 17,526 20,387 8,755
(1) Below is a breakdown of Company revenue from passenger and cargo transports by geographic regions:
Asia and America Europe Africa Total USD, thousands
Revenue from passenger and cargo transports 164,916 195,531 85,803 446,250
(2) These revenue mainly include income from the sale of duty free products, airline food services, outsourced maintenance services, passenger club member fees, loading and unloading services, etc.
Note 8 - Segment Reporting
a. General:
Operating segments are identified on the basis of internal reports, which are reviewed regularly by the main operating decision maker of the Company for the allocation of resources and the preparation of operating sector performances, as follows (the Company's Chief Operating Decision Maker does not receive reports regarding the measurement of the sector’s assets and therefore the same information is not included under segment reporting):
Sector A - activities of passenger airlines including income (without deducting discounts) from the transport of passengers, including luggage, flying cargo in passenger aircrafts, flying mail and the contribution from the sale of duty-free products.
Sector B - total cargo aircraft operations, including income from air transport of cargo. In the area of activity, the Company offers transport services of cargo through cargo planes (at times, through leased planes with their crews - “wet leases”) from Israel to destinations abroad and from overseas to Israel.
The Company’s other activities include income from the Sun d’Or subsidiary, income from providing maintenance services to foreign entities, and services and additional income such as the lease of equipment, membership fees of passenger clubs, loading and unloading services, and more
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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements
Note 8 - Segment Reporting (continued):
b. Analysis of income and expenses based on operating segment:
For the three-month period ended on March 31, 2018 Passenger Cargo airlines plane Other Adjustments Total USD thousands (Unaudited) Income: Income from external customers *417,106 17,526 20,387 8,755 463,774
Total segment revenue 417,106 17,526 20,387 8,755 463,774
Segment results 28,140 )775( 4,595 - 31,960 Unattributed expenses )84,577(
Operating loss )52,617( Financing expenses )5,769( Financing income 1,753 Company’s share in the profits of associated companies, and revaluation of options in respect thereof )257(
Loss before income tax )56,890(
* Includes revenue from belly cargo and mail in passenger aircraft in the amount of USD 23,643 thousand.
For the three-month period ended on March 31, 2017 Passenger Cargo airlines plane Other Adjustments Total USD thousands (Unaudited) Income: Income from external customers *378,953 14,175 17,474 7,089 417,691
Total segment revenue 378,953 14,175 17,474 7,089 417,691
Segment results 39,061 )216( 6,471 - 45,316 Unattributed expenses )79,371(
Operating loss )34,055( Financing expenses )6,345( Financing income 1,369 Company’s share in the profits of associated companies, and revaluation of options in respect thereof 262
Loss before income tax )38,769(
* Includes revenue from belly cargo and mail in passenger aircraft in the amount of USD 20,298 thousand.
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El Al Israel Airlines Ltd. Notes to the Condensed Consolidated Financial Statements
Note 8 - Segment Reporting (continued):
b. Analysis of income and expenses based on operating segment (cont.):
For the year ended on December 31, 2017 Passenger Cargo airlines plane Other Adjustments Total USD thousands (Unaudited) Income: Income from external customers *1,880,079 64,454 122,230 30,235 2,096,998
Total segment revenue 1,880,079 64,454 122,230 30,235 2,096,998
Segment results 325,839 729 27,148 - 353,716 Unattributed expenses )324,739(
Operating profit 28,977 Financing expenses )23,985( Financing income 3,483 Company’s share in the profits of associated companies, and revaluation of options in respect thereof 243
Profit before income tax 8,718
* Includes revenue from belly cargo and mail in passenger aircraft in the amount of USD 88,351 thousand.
In 2017, the Company attributed depreciation expenses in the amount of USD 122,274 thousands to the passenger aircraft segment. The cargo plane is leased and therefore the Company does not recognize depreciation expenses in respect thereof.
Note 9 - Transaction for the acquisition of Israir shares:
Further to note 22 of the annual financial statements, regarding a transaction to acquire the shares of Israir Flight and Tourism Ltd. by the Company's subsidiary, Sundor International Airlines Ltd. ("the Transaction"), and the Antitrust Authority's notice to the Company regarding its objection to the transaction ("the objection resolution"), on March 29, 2018, the Company filed an appeal with the Antitrust Tribunal regarding the said objection resolution. The Company has requested the court to cancel the objection resolution and approve the transaction and alternatively, approve the transaction subject to certain conditions.
Note 10 - Interested parties and related parties
Regarding the appointment of Mr. Gonen Usishkin as Company CEO and the terms of his employment, see note 23(e)(1) to the annual financial statements.
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