El Al (ELAL) - 3x EV/EBITDA for the Most Profitable Airline in the World
Playing Israel Rerating Through the Cheapest and Most Profitable Airline on the Market
Summary:
El Al is the national carrier of Israel and is the most commonly used carrier for flights to and from the country. The airline operates a fleet of 44 planes, including Boeing 737s, 787 Dreamliners, and 777s, serving 36 destinations across Europe, the Middle East, the Americas, Africa, and the Far East. El Al carries over 6mm passengers annually, generating the majority of its revenue (~93%) from passenger services, with the remainder coming from cargo.
The Israeli air travel market is concentrated around Ben Gurion Airport (TLV), where El Al holds ~46% market share (9M2024), up from ~23% a year ago (9M2023). This increase over the past two years is attributed to other airlines withdrawing from the region following the events of October 7, 2023. While the share is expected to decline as competitors resume operations in throughout 2025, we believe El Al’s ability to retain customers through loyalty programs is now utilized by half of their passengers.
El Al has benefited from other airlines withdrawing, achieving as much as 81% market share in some months during 2023. This allowed it to dictate prices and more than double its free cash flow (FCF) margins, reaching nearly 23% and becoming the most profitable airline int the world. However, these elevated margins steadily normalise as competitors return and El Al invests in fleet modernization. Despite this, we believe they should stay elevated due to the fleet improvements, growing customer loyality and market leader position. After realizing its fleet modernization, we expect El Al's FCF margin to stabilize at ~16%. Meanwhile, United and Delta airlines are operating at ~5% and ~7% FCF margins, respectively…
Global air travel demand is projected to continue growing and is already significantly higher than pre-pandemic levels. Although local air travel in Israel experienced a 37% YoY decline in 2024, due to the war, a rapid recovery is expected in 2025, with us projecting exceeding the pre-war levels by 2026. Many tour operators report a nearly record pipeline of tourists waiting to travel to Israel.
A global aircraft shortage is affecting the supply side, which could lead to higher ticket prices due to limited global passenger capacity. In 2024, aircraft deliveries are expected to reach nearly 1.3k, representing a 30% shortfall of initial estimates and being 28% below the peak delivery level from 2018. COVID-19 and delays from Beoing and Airbus have increased the average age of the global fleet to 14.8 years, exceeding the 13.5-year average of the past 34 years.
El Al has been gradually issuing shares for the past three years to help deleverage and modernize its fleet. This practice is expected to cease as El Al's net debt is minimal (~$0.2bn), and the company has sufficient capital for the near term. Outisde of that, Capex will likely be funded through debt and cash flows, minimizing or eliminating further dilution.
The company aims to increase its maximum passenger capacity from 6.3mm currently to 8.8mm annually by 2031. Plans include replacing 24 aircraft (primarily 737s) and adding or restoring 14 more (mostly 737s and 787s). If fully executed, El Al will have a fleet of 58 aircraft. This new fleet will enhance passenger comfort, reduce jet fuel consumption, and lower the fleet's emissions.
El Al's management is well-aligned with shareholders, with ~47% insider ownership led by the Rozenberg family. Their leadership and focus on shareholder interests have enabled the company to navigate the challenges of the COVID-19 pandemic and the war period effectively, achieving a rapid deleverage (ND/EBITDA of 0.2x for 2024, compared to 8.1x in 2022).
A primary concern for El Al is the limited capital distribution due to agreements made during the COVID-19 era, which were essential for the airline's survival. However, as El Al begins to achieve record profitability, these limitations are becoming increasingly burdensome for investors. Negotiations with the state are underway to lower or erase these restrictions, potentially by the end of February, allowing for share buybacks and dividends. This, combined with the capital distribution announcement, could serve as a strong catalyst for the stock. Now let’s see how attractively valued is El Al.