Via Wolf Street

Dogged by everything from bloated costs to corruption.

By MC01, a frequent commenter on WOLF STREET:

On July 1, Israel’s flag carrier El Al suspended all operations “indefinitely,” including cargo flights, ironically during a week when the Israeli government announced they will be lifting most restrictions on international travel on August 1.

This is not a sudden crisis, and the causes go back a very long way: El Al has long been operating at a loss, plagued by expensive aircraft leases, a bloated workforce, high wages, and poor financial management. For example, El Al lost $52 million in FY2018 and $60 million in FY2019, the “good times.”

Already at the beginning of the crisis, the Israeli government had announced their willingness to support the airline with $250 million to $400 million in bridge loans. But the Ministry of Finance has put several conditions on this rescue package, chief among which is to cut labor costs.

This is a serious problem. Though unions generally don’t wield as much power as in the 1960s and 1970s, they remain powerful in Israel, and as such El Al cannot cut labor costs without approval from all their employees’ unions.

As reminder of the risks associated with not finding some sort of compromise, after El Al announced they were suspending operations, all the 110 pilots still on payroll were immediately put on unpaid leave: either all parties agree to serious negotiations, or this sad situation will become the “new normal.”

As is usual with cash-strapped companies, El Al has been desperately trying to slash expenses and raise cash. Some measures make sense, such as immediately returning five Boeing 737-800s to lessors, while others don’t make sense: El Al has sold three other 737-800 to an unnamed “foreign leasing company” (widely suspected as being BOC Aviation) and immediately leased them back. While this gave El Al $76 million to burn through, it also removed quality collateral for loans and added a new fixed expense that cannot be skipped without losing the aircraft themselves.

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Air France is another company which has long been struggling with a bloated workforce and higher than industry-average personnel costs. And just like it happened with El Al, the present crisis is forcing the French airline group to finally tackle this delicate situation.

The present Air France-KLM CEO, Benjamin Smith (formerly of Air Canada) was given a clear mandate to reduce bloat and allow Air France at least to break even well before the present crisis.

Smith was the main driver behind the decision of shutting down JOON in early 2019, an ill-conceived low-cost subsidiary with a serious image problem, and absorbing the aircraft and crews back into main Air France operations.

Like so many post-2010 airline CEOs, Smith is not enamored with the massive Airbus A380 and was already making plans to get rid of them. The present crisis merely accelerated the process. Air France has never had any real love for the Airbus “doubledecker,” and their order for just five planes was the result of long and strenuous negotiations between the airline and the French government to pad A380 production numbers.

On July 3, Air France announced a massive staff reduction, which will take place from here to 2023. The HOP! subsidiary is slated to lose 1,020 jobs, or about 50% of its workforce.

HOP! is yet another money-losing Air France subsidiary that suffers not only from bloat but also from fierce competition: 2019 saw the arrival in force of low-cost behemoths EasyJet and Ryanair on the internal French market after they “dipped their toes” into it. And at the height of the pandemic, Hungarian-based low-cost powerhouse Wizz (backed by PE firm Indigo Partners) announced their intention to move in force into the Western European market.

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HOP! cannot survive, let alone compete against any of these low-cost carriers in its present money-losing form, and drastic measures are needed.

But all these troubles, as serious as they are, pale in comparison to the scandal which engulfed Pakistan International Airlines (PIA). Starting on July 1, EASA, the European aviation regulator, banned PIA from operating in the European air space for six months. This has nothing to do with the present healthcare crisis, but with “mounting concerns about the airline’s ability to operate safely,” following the deadly crash of a PIA Airbus A320 in Karachi on May 22 due to “human error.”

This is all part of an ongoing and rapidly expanding scandal which is engulfing Pakistani commercial aviation and which started in December 2016, when one of its ATR 42 planes crashed near Abbottabad killing all 47 on board. The investigation discovered the pilots’ licenses and type ratings had been issued in a “suspicious” manner.

The investigation proceeded slowly, uncovering a further 17 commercial licenses issued in “suspicious” manner in 2019. Following the May 22 Karachi crash, the Ministry of Aviation admitted to the Parliament of Pakistan that out of 860 commercial pilots active in Pakistan, 262 had “suspicious” or “forged” licenses and type ratings. Of these 262 pilots, 141 work for PIA.

While the Ministry assured all these pilots have been suspended pending an investigation into their licenses, this has raised alarming concerns about the safety of the Pakistani aviation sector which are unlikely to be solved in six months.

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Allegations of bribery, corruption and nepotism at Pakistan’s Civil Aviation Authority (CAA) have long been common, and this scandal confirms the worst suspicions.

PIA itself is another “financial black hole” in the mold of Alitalia and South African Airlines. Safe in the assumption it will be bailed out no matter what, it has operated at a loss every fiscal year from 2005 on, including a $191 million loss in FY2019. Revenues peaked in FY2011 at $695 million and have since declined to $563 million in FY2019.

The company is well known for costly shenanigans such as flying aircraft without a single passenger or parcel on board and is being crushed by competition from far better organized airlines such as Emirates and Qatar Airways. This scandal is exactly the last thing PIA needs. By MC01, a frequent commenter on WOLF STREET

It’s all about money, but whose money? Read… Alitalia, Lufthansa, Condor, Norwegian, Other European Airlines Try to Survive, But it Gets Complicated

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