Is Dubai the pot of gold – or just the end of the road -- for El Al?
The new air service between Israel and the UAE and Bahrain represents a potential breakthrough moment for Israeli national carrier El Al. At the same time, it creates conditions that could pose an existential threat to the carrier.
There is rightfully much that El Al can celebrate with the recent developments. Almost overnight, it has gained access to the most consequential airports in the region – Dubai (DXB) and Abu Dhabi (AUH). And the acquiescence of Saudi Arabia to use its airspace on flights to Bahrain and the UAE is of enormous significance.
With these opportunities and threats in mind, I believe that El Al’s has four strategic options for managing under this new reality. Of course, all this assumes the company remains a going concern. That is not a given, as the airline is still in the midst of a COVID-induced fight for its very existence. The government bail-out is not done – the debt financing has not yet been completed, and the company is bleeding money fast. But we will assume, given Israel’s unique political and security considerations, that the government will see to it that the national airline does survive.
Option 1: Code share with Emirates and/or Etihad
The benefits to El Al are obvious here. Both Emirates and Etihad have extensive networks and can provide connections to far more city pairs than El Al can on its own. That would give El Al’s passengers attractive options and keep them, at least for part of the journey, on El Al’s metal. Revenue sharing agreements could be arranged to see that there’s enough in it to work for El Al.
This option assumes the two Emirati carriers are willing to play, and that they are not solely prioritizing the capture of Israeli travelers for their entire journey. Etihad’s and El Al’s recent announcement that the two airlines are looking into forming some sort of partnership would indicate that this is a viable approach, at least with Etihad.
Does Emirates need El Al? Not really. Before COVID, Turkish Airlines was the largest foreign operator into Tel Aviv (TLV), flying up to 9 flights daily – many of which were widebodies. Surely Emirates has plenty of underutilized airplanes at present and could do the same. But it’s Flydubai – not Emirates -- that’s currently operating between TLV and DXB. Emirates and Flydubai are separate entities but operate in close partnership. Both are owned by the government, and there is a well-coordinated strategy for growing the Israeli market, no matter which airline is assigned to the route.
Option 2: DXB or AUH for tech stops on selected routes
In this option, which is independent of Option 1, El Al strategically uses DXB or AUH for tech stops on select onward flights where it makes economical and operational sense. What do I mean?
El Al’s current Bombay (BOM) and Bangkok (BKK) flights have to track down the Red Sea and out the Gulf of Aden, adding several extra hours flight time. Both routes would likely save overall schedule time with a tech stop in DXB, and overall trip costs might be less. Of course, the flight ops department would need to calculate net time and cost impact, but it would likely be a net positive.
Some potential routes such as Delhi (DEL) and Bombay (BOM) would certainly be more efficient with a DXB stop than via the Red Sea. Farther destinations such as Singapore (SIN) could make sense. And El Al is exploring the Australian market and was going to operate four Melbourne (MEL) flights to test the market last Spring before COVID intervened. A DXB stop would resolve payload limitations and makes such an ultra-long-haul mission a year-round viable non-payload-penalized route.
The downside of this option is that, while perhaps saving time and money on certain routes over the non-stop alternative (counter-intuitive, as it may be), these flights could not be marketed as non-stop. And while the passenger might be better off with a 90 minute technical stop over a non-stop flight that requires three additional hours in flight, perceptions count. And with a one-stop flight to Bangkok, for example, El Al would be competing with Etihad, Emirates, Royal Jordanian, Gulf Air, and others also offering one-stop service. Not a very compelling marketing position.
Option 3: Status quo, plus the new Gulf routes
In this option, El Al continues with its current business model and route structure, but with the addition of new flights to the Gulf. A few more destinations on its route map – significant ones at that – and with growth potential – but also with loads of competition.
Under this scenario, El Al would need to continue to try to attract passengers through differentiation in the Israeli market. There are three real points of differentiation include a) the enhanced security component, b) operating non-stop flights on all routes from Israel, c) “the hometown advantage. That is, the cultural advantage that every flag carrier brings to its citizens.
Option 4: Leverage marketing agreements to end all east-bound flying beyond the Gulf
This is a radical approach that would see El Al hand over all east-bound flying from the Gulf to its new partner(s) who would operate the outbound flying from their hubs in AUH and/or DXB. The potential synergies are obvious – the Gulf carriers have the network and the feed and can operate at a lower cost base than El Al. It would offer Israeli travelers the greatest number of city-pair options. But it would also entail a paradigmatic shift in El Al’s business model, and assume a whole lot of risk.
From a strictly commercial point of view, if El Al were to turn over its Asian operations to Emirates or Etihad, it would diminish the brand equity and along with it, the motivation of its frequent fliers to remain loyal. After all, Emirates and Etihad can take them there as well, so exactly what is the value of an international flag carrier whose network is diminished, where the competition can offer superior network, frequency, and scale – all with a highly competitive level of service? What exactly is the purpose of a national airline that does not operate international routes of strategic importance?
From the aeropolitical perspective, over the past two decades, Israel has increasingly pivoted toward Asia as the future engine for economic growth. Concurrently, it looks eastward with the objective of strengthening political and economic alliances while reducing its dependence on Europe, with which it still enjoys robust trade links but often rocky political relations. El Al has replicated that trend, with an increased focus toward Asia routes. The airline was about to start Tokyo flights last February before COVID interfered.
As the de facto national airline of Israel, for El Al to hand over these critical Asian routes to a foreign airline would be a major blow to national pride. It would also represent a strategic and political risk that would merit intense scrutiny. While El Al has been battered by the pandemic this year, it still exists today because, after all the bickering, the political leadership understands that Israel cannot be left without a flag carrier. The need was amply demonstrated when, earlier this year, El Al, along with Arkia and Israir, operated some innovative flights to bring home its citizens from far-flung destinations ranging from Peru to Australia.
So what is the likely outcome?
1. El Al will most likely engage in selective code-sharing with Etihad and/or Emirates. This option adds a lot of value to its customers by expanding its destinations that it would be unlikely to serve on its own and at a fraction of the cost.
2. El Al will leverage the advantage (or necessity) of using AUH or DXB as a technical stop for routes that are otherwise impractical (such as DEL) or uneconomical as a non-stop, such as Melbourne (MEL). This would be a net win for the airline and for its customers, although it does, to a degree, erode the advantage that El Al holds over its competitors who can also operate these routes with one-stop. (DEL is an exception in that Air India has been granted Saudi overflight routes for TLV and has been operating the route from DEL for the past two years).
3. Unless somehow faced with no other viable alternative, El Al will not turn over all eastbound flying to one or more Gulf airlines. It is a politically untenable proposition, as well as a highly questionable long-term strategy for the airline’s sustainability.
4. El Al will certainly take advantage of new route opportunities to the Gulf, focusing on the economic and tourism powerhouse that is Dubai. Presumably, Abu Dhabi will be also be served, along with Bahrain. But these new routes will not fundamentally alter the situation of the carrier. Prior to COVID, the airline was cautiously expanding into new routes. Finally able to offer a competitive product – a new fleet of 787s offering operational flexibility and state-of-the-art interiors, El Al was opening new routes in U.S., Europe, Tokyo (NRT) and trial flights to MEL.
Squeezed on all sides, El Al has found itself in search of a business model that will prove sustainable. While its route network is big enough to operate essential business and leisure and routes from its home market, it faces competition from all industry sectors – mega-international carriers, low-cost operators, and everyone in-between. The open skies treaty with Europe has led to a dramatic increase in airlines – especially low-cost operators like Ryanair and Wizz with which El Al has tried, but so far failed, to compete on a cost basis. El Al can hardly offer the range of network options that Turkish, British Airways, or Emirates can. And on its marquee North America routes it faces heavy competition from United, American, Delta, and Air Canada.
The underlying causes of El Al’s malaise are in part due to characteristics common with a state-owned legacy carrier – including entrenched labor rules and a bloated workforce. It must also cope with unique challenges – the burden of enhanced security, a six-day flying schedule, and the inability to use TLV as a connecting hub. None of these problems will be solved by adding a few more flights to the Gulf.
What El Al has going for it is the very nation it represents. Israel is a country that punches far above its weight in travel demand. Both incoming and outgoing traffic flows are strong and growing (at least they were before COVID and can be expected to return once the pandemic subsides). The airline has come a long way in developing an attractively competitive product with an increasingly modern fleet. Israel is becoming more integrated with the Middle East – that’s both an opportunity and a challenge to the airline. To succeed, El Al will need to strike the right balance between maintaining a viable and geographically balanced route structure, while collaborating with industry partners to offer more destinations to its customers. It won’t be easy. But what, in Israel, is?