El Al Israel Airlines Ltd
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Free Translation of the Hebrew Language Financial Report - Hebrew Wording Binding EL AL ISRAEL AIRLINES LTD. 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%( B-1 Free translation of the Hebrew Language – Hebrew Wording Binding 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 B-2 Free translation of the Hebrew Language – Hebrew Wording Binding 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 B-3 Free translation of the Hebrew Language – Hebrew Wording Binding 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: B-4 Free translation of the Hebrew Language – Hebrew Wording Binding 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. B-5 Free translation of the Hebrew Language – Hebrew Wording Binding 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 B-6 Free translation of the Hebrew Language – Hebrew Wording Binding 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.