El Al pays no tax on its record profits

dominance El Al Israel Airlines Ltd. (level:Ilal) in the skies over Israel, after many foreign airlines canceled flights to and from Israel over fears of an Iranian strike, resulting in a record net profit of $147 million in the second quarter of 2024. With El Al able to charge high prices, the net profit in the second quarter was 84% ​​higher than the net profit in the first quarter, which itself was “the best quarter in the company’s history.”

With geopolitical tensions still high, El Al, controlled by American businessman Kenny Rozenberg and led by CEO Dina Ben-Tal-Ganansia, is expected to post very strong earnings in the coming quarters. In the first half of the year, El Al reported revenues of $1.6 billion and net profit of $226 million, a tenfold increase from the first half of 2023.

It’s hard to believe that four years ago, in the wake of the Covid pandemic, the company’s very existence was under threat as scheduled flights were grounded around the world. Each new wave of Covid led to a drop in demand, huge losses, and liquidity difficulties, with auditors attaching a “continuing business” qualification to the company’s reports.

The state helped El Al, with hundreds of millions of dollars in support (along with a capital injection from new controlling owner Rosenberg), to plug cash gaps and allow the airline to meet its obligations despite the crisis.

An examination by Globes found that El Al currently pays no taxes on its profits. Although the company reported tax expenses of $45.8 million in the second quarter and $65 million in the first half of the year, a closer look reveals that the amounts actually transferred as tax payments to the state were much lower: $100,000 in the second quarter and $200,000 cumulatively in the first half of the year, when corporate tax on profits is 23 percent.

El Al explains this discrepancy by saying: “It has a high balance of losses that will be carried forward for tax purposes, and it does not actually pay tax.” So, despite the huge profits it has recorded in recent quarters, El Al’s balance of losses remains high, and at the end of the second quarter amounted to about $744 million (compared to $970 million at the end of 2023). This means that even in the coming quarters, El Al is not expected to pay tax on its profits.

“First, compensate for the losses, and only then pay the taxes.”

Thus, in good times El Al does not share its profits with the state, but in bad times the state helps it significantly. As part of an agreement with the state in 2021, at the height of its financial problems, El Al received $210 million as an advance payment from the state for the services of security personnel over the next 20 years.

The state also pumped an additional $100 million into El Al during that crisis period through the issuance of convertible bonds (about $45 million), shares ($37 million), in addition to advance payments on the state’s participation in security expenses and an advance payment on fuel expenses.

“This is the tax system in Israel,” a source familiar with the matter told Globes. “Any company that has losses carries them over for tax purposes, and when it starts making a profit, it first makes up for the losses and only then pays taxes. El Al lost nearly $1 billion in 2020 and 2021 ($531 million in 2021 and $413 million in 2022), which is unimaginable, so it is logical and reasonable for the company to first make up for the losses from the Covid period and then start paying taxes. It is no different from any other company.”

Referring to state aid, the source added: “The taxpayers did not directly help the company. There were bond options that the company paid down to the last dollar. The state also invested in El Al in an IPO in 2020 and later sold the shares at a profit, so the taxpayers made a profit. The additional aid was an advance payment for airline security guards – the state took a risk here, but the payment was capitalized at a high interest rate. It was not aid out of thin air, it was an advance payment, and the interest rate reflects the risk.”

Financial debt has been reduced, and stocks have risen.

The sharp improvement in El Al’s profits since the start of 2024 is due to the jump in ticket prices, as passengers often rely on a dominant carrier whose occupancy rates have risen to a level that El Al itself defines as exceptional — more than 92% in the second quarter of 2024, compared to 87% in the corresponding quarter of 2023.

Another number that points to the price increase is that revenue per seat in the second quarter was up 24% compared to the corresponding quarter of 2023. The company’s cash flow from current operations was $391 million in the quarter ($767 million in the first half), up from $119 million in the corresponding quarter — a 3.3x increase.

Among the results of the high profits is that El Al’s equity at the end of June this year amounted to about $200 million, compared to an equity deficit of more than $300 million at the end of the corresponding quarter of 2023. This improvement, in addition to the profits, stems from the capital raised by the company.

Meanwhile, El Al’s net financial debt has reportedly fallen significantly to $611 million, compared to $1.4 billion at the end of 2023. All of these figures are reflected in El Al’s market capitalization of NIS 2.3 billion, after the share price rose 123% from its low point at the end of October 2023, shortly after the war broke out. The main beneficiary of this is controlling shareholder Kenny Rozenberg, who owns a 47% stake in the airline worth about NIS 1 billion.

This article was published in Globes, Israeli Business News – en.globes.co.il – on August 18, 2024.

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