Israel’s El Al and Arkia ink merger MOU

A memorandum of understanding (MOU) has been signed for a merger between two of Israel’s three scheduled passenger airlines, El Al Israel Airlines (LY, Tel Aviv Ben Gurion) and Arkia Israeli Airlines (IZ, Tel Aviv Ben Gurion), a deal that would be conditional on the consent of employees and the approval of both the government and the Israel Competition Authority, the flag carrier revealed in a filing on February 3.

The release of the statement followed a report the business daily Calcalist published earlier the same morning outlining some of the details of the MOU.

Under the proposed agreement, Arkia would become a fully-owned, low-cost, tourism-focused wing of the flag carrier. El Al has previously indicated that its own leisure and charter unit, Sun d’Or International Airlines, whose flights have been operated by the parent, could close soon. However, El Al chairman Amikam Ben Zvi clarified: “We still have a long way to go before the deal to acquire Arkia is completed.”

Sources at both airlines told Calcalist that Arkia’s ground services are more developed and its relative strength in the world of tourism, holidays, and packages combining flights with hotels, tours, and other add-ons is an opening for higher profitability at El Al.

A merger would also create a stronger fleet, they added. According to the ch-aviation fleets advanced module, Arkia would bring its Airbus aircraft (two leased A321-200NX(LR)s) and its owned Embraer jets (one E195AR and two E195LRs) to join El Al’s all-Boeing fleet of 45 aircraft, 32 of which are owned.

A more diversified fleet will allow the merged company to operate a greater variety of routes and give it a better bargaining position with aircraft manufacturers, the sources explained. Savings would also emerge as replicated costs are cut and staff unified.

Any job reductions would come from El Al’s workforce, not Arkia’s, the sources maintained, but any merger will need to have the consent of the majority of the employees. Calcalist learned that the Histadrut, Israel’s national trade union centre, has been involved in the emerging agreement.

Should a transaction take place, it would likely take the form of an exchange of shares, with El Al acquiring its rival’s shares in exchange for the allocation of its securities to Arkia shareholders. In this way, little or no cash would be needed to complete the deal.

The companies initially announced that they were examining the possibility of a merger last October. A Ministry of Finance official commented at the time that “the coronavirus has sharpened the need to optimise and maximise the benefits of size.”

As previously reported this week, another group of investors has been working on the idea of launching a new Israeli airline, a low-cost carrier.