Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding EL AL ISRAEL AIRLINES LTD. 2007 ANNUAL REPORT MESSAGE FROM THE CEO AND THE CHAIRMAN OF THE BOARD CHAPTER A - OVERVIEW OF THE ENTITY'S BUSINESS CHAPTER B - DIRECTORS' REPORT CHAPTER C - 2007 FINANCIAL STATEMENTS Greetings, The financial results of El Al for the year 2007, showing the highest level of revenues since the Company was established, are proof above all of El Al’s financial strength and its ability to deal with an ever intensifying competitive reality. In 2007, El Al achieved the targets it had set itself, including increasing revenues, reducing costs, and ensuring correct management of the Company’s inputs, all with the overall aim of continuing to operate as a profitable and financially robust company, one that puts its emphasis on attentive, high quality service for the benefit of its customers, staff and shareholders, while continuing with its investment plan. The Company continues to work towards greater efficiency, by cutting back on inefficient and unprofitable routes, expanding its activities in the Far East, and increasing flight frequencies to popular destinations, such as New York and Los Angeles. In 2007, the Company recorded a record income of 1.9 billion dollars, representing an increase of about 16% compared with the same period in the previous year. During 2007, El Al put the emphasis on efficient utilization of its fleet of aircraft, as shown by the very high load factor in the company aircrafts - 85%. All this was achieved in spite of growing competition, which is characterized by an increase in the number of seats offered by foreign companies and by competition in the freight business. Notwithstanding the numerous challenges and the exogenous influences that the Company faces, including record prices for jet fuel and changes in exchange rates, which together led to an increase of $112 million in costs, the Company’s ability to manage its revenues brought about an impressive growth in turnover, representing an all-time record high since the Company was established in 1948. Consequently, El Al is able to show an operating profit of $71.4 million, one of the highest it has ever achieved, compared with an operating loss in the previous year. This significant improvement in results is also reflected in the bottom line, with a net profit of some $31.7 million, compared with a loss of $33.9 million the previous year. The Company’s financial strength is reflected in a strong cash flow from current activity, amounting to $231.2 million, an impressive growth of 136% compared with 2006. As part of our strategic plan, this year we invested a total of $248.6 million in rejuvenating and renewing our fleet of aircraft and in fixed assets. El Al continues to invest considerable resources and effort with the aim of maintaining its leading position in the industry. The Company is continuing implementation of its "El Al 2010" strategic plan, which involves a whole range of actions aimed at implementing a policy of growth, including: introduction during the summer of two new Boeing 777 aircrafts - named "Sderot" and "Kiryat Shmona", which it purchased from the Boeing company. In addition, in early summer 2008, the Company expects to add two new 737-800 aircraft to its fleet, and three more at the beginning of 2009; this is in addition to the 747-400 Boeing plane that until now has been in the service of Singapore Airlines, and is expected to start operating in October 2008. All these aircraft are fitted with new seats and the latest entertainment systems. In March 2008, the Company signed an agreement with Boeing to purchase four 777-200 type aircraft at a cost of about $540 million, to be delivered in 2012. During 2007, the trends in competition and the introduction of the "Open Skies" policy found expression, among other things, in considerable growth in the capacity and frequency of foreign airlines, and the decision of the Government of Israel, in January 2008, to take away from El Al the exclusive status of Israeli designated carrier to international destinations, which was granted in 2003, while at the same time increasing the State’s participation in the security costs of Israeli airlines to 80% (instead of the previous 50%). In December 2007, the Company signed a code share agreement with American Airlines, which gives the Company’s passengers the option to book connecting flights to more than 20 central destinations of American Airlines all over the US. The transition from the Carmel system to the Amadeus system, which is currently being completed, is expected to bring about significant improvements in the Company’s marketing methods and sales channels, to develop new options for managing inventory and to allow travel agents to work with just one booking system. It will also provide technological benefits thanks to its innovative system, such as a user-friendly interface, worldwide deployment, automation and adaptation of processes to Company policy, "Customer value" oriented automatic handling at all points of the customer’s interface with the Company, significant expansion of self service facilities, etc. The Company is also working to implement a solution for resource management (Back Office) systems using ERP technology. At this time the systems are being designed in preparation for the project, which is due to begin in 2008 and continue for two years. El Al is determined to continue promoting its vision – to be the leader of the aviation market in Israel and to be the first and preferred choice for all air traffic to and from Israel. The focus on meeting the needs of business travelers has consistently yielded growth in El Al’s share of the premium market. We want to thank all our customers for choosing El Al in spite of all the options available to them, and to thank all Company employees for their dedication and hard work this year. Prof. Israel (Izzy) Borovich Haim Romano Chairman of the Board of Directors CEO Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding ______________ 2007 ANNUAL REPORT CHAPTER A OVERVIEW OF THE ENTITY'S BUSINESS Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding TABLE OF CONTENTS Chapter 1: General 3 Chapter 2: Description of the general development of the Corporation’s business 4 1. The Corporation’s activities and a description of the development of its business 4 1.1 General 4 1.2 Holdings of the Company 5 1.3 Year and form of incorporation 6 1.4 Changes in the Corporation’s business 6 2. Operating areas 7 3. Investments in the Corporation’s capital 8 3.1 General 8 3.2 Options 8 3.3 Shares held by Company employees 9 3.4 Changes in holdings of interested parties 10 3.5 Table summarizing data on interested party holdings 12 4. Distribution of dividends 13 5. Financial data on the Corporation’s operating areas 14 5.1 Nature of consolidation adjustments 17 5.2 Explanation of developments occurring in operating fields 17 6. General environment and effect of external factors with regard to the Company 18 6.1 Traffic in the international aviation Industry 18 6.2 Traffic in the Israeli aviation Industry 19 6.3 Fluctuations in jet fuel prices 19 6.4 Currency rate fluctuations 20 6.5 Interest rate fluctuations 20 Chapter 3: Description of the Corporation’s business by operating fields 21 7. The field of Passenger aircraft 21 7.1 General information on the operating field 21 7.2 Services in the operating field 37 7.3 Analysis of revenues and profitability from services 43 7.4 New services 44 7.5 Customers 45 7.6 Marketing and distribution 45 a-1 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding 7.7 Reservations backlog 48 7.8 Competition 49 7.9 Seasonality 50 7.10 Productive capacity 51 7.11Aircraft Fleet 52 8. Cargo aircraft field 56 8.1 General information on the operating field 56 8.2 Services in the operating field 61 8.3 Analysis of revenues and profitability from services 63 8.4 New services 64 8.5 Customers, marketing and distribution 64 8.6 Reservations backlog 64 8.7 Competition 64 8.8 Seasonality 68 8.9 Productive capacity 68 8.10Aircraft Fleet 69 8.11 Raw materials and suppliers 70 9. Details on the two operating areas 70 9.1 Fixed assets and installations 70 9.2 Insurance 73 9.3 Intangible assets 74 9.4 Human resources 74 9.5 Raw materials and suppliers 91 9.6 Working capital 92 9.7 Investments 94 9.8 Financing 97 9.9 Taxation 100 9.10 Environmental matters 101 9.11 Restrictions and regulation of the Corporation’s business 106 9.12 Material agreements 136 9.13 Cooperation agreements 136 9.14 Legal proceedings 137 9.15 Goals and business strategy 141 9.16 Forecasted developments in the coming year 144 9.17 Financial data on geographical segments 145 9.18 Discussion of risk factors 145 a-2 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding CHAPTER 1: GENERAL El Al Israel Airlines Ltd. is pleased to present the description of the Corporation’s business for the fiscal year ended December 31, 2007, which surveys the Corporation in general and the development of its business, as they occurred during the year 2007. The report was prepared in accordance with the Securities Regulations (Periodic and Immediate Reports)- 1970. The financial data included in the report is in U.S.